Reports Opinions and Disclaimers

Fall 2011

Unqualified Opinion
Standard Format:
Title Addressee Introductory Paragraph Scope Paragraph Opinion Paragraph Signature of the Firm Report Date

Unqualified Opinion with An Explanatory Paragraph

Four situations:
1. Opinion based in part on the report of another auditor 2. Going concern 3. Lack of consistency in the financial statements due to accounting changes 4. Emphasis of a matter

Case 1 Modify the wording for the introductory, scope, and opinion paragraphs Case 2, 3, and 4 - Add an explanatory paragraph following the opinion paragraph without any modification to the wording of the introductory, scope, or opinion paragraphs.

Consistency
Changes Affecting Consistency
1. Change in accounting principle 2. Change in reporting entity 3. Correction of an error in principle

Changes Not Affecting consistency

1. Change in accounting estimates 2. Correction of an error that does not involve an accounting principle 3. Change in classification and reclassification 4. Change expected to have a material future effect

Departure from an Unqualified Opinion

Three cases:
Scope Limitation
unable to collect sufficient competent evidence such as when management or some set of circumstances prevents the auditor from conducting an audit procedure that the auditor considers necessary. Issue a qualified opinion or disclaimer

Departure from GAAP

the financial statements are prepared or presented in a manner that conflicts with GAAP whether due to error or fraud. Issue a qualified opinion or adverse opinion

Lack of Independence of the Auditor

the auditor and the client have any business, financial, or personal relationship prohibited by professional standards. The auditor must comply with the second general standard and Rule 101 of the Code of Professional Conduct in order to issue an unqualified opinion. Issue a disclaimer

Qualified Opinion
Reasons for Qualified Opinion:
a scope limitation a specific departure from GAAP exists
overall the financial statements present fairly in conformity with GAAP

Auditors Report for Qualified Opinion

a scope limitation
the report describes why the limitation arose, and indicates that the financial statements present fairly except for the possible effects of the limitation.

a GAAP departure
the report describes the nature and impact of the faulty accounting, and indicates that the financial statements present fairly except for the effects of the departure.

Disclaimer
Reasons for disclaimer
1. Scope limitation
Unwillingness to sign a management representative letter When the auditor is unable to determine amounts associated with an employee fraud scheme If an auditor is precluded from applying necessary procedures or, after applying extended procedures, (s)he is unable to determine whether fraud or illegal acts may materially affect the statements. (s)he should disclaim or qualify an opinion. When the auditor cannot determine the role of management in the events, the auditor ordinarily should disclaim an opinion.

2.

Lack of independence by the auditor

Auditors Report for Disclaimer (AU 504)

the introductory and opinion paragraphs are modified and the scope paragraph is omitted.

Adverse Opinion
Reason for Adverse Opinion
GAAP Departure
the financial statements do not present fairly due to a GAAP departure that materially affects the financial statements overall

Auditors Report for Adverse Opinion

Explain the nature and size of the misstatement and states that opinion that the financial statement do not present fairly in accordance with GAAP. When an adverse opinion is expressed, the opinion paragraph should include a direct reference to a separate paragraph that discloses the basis for the adverse opinion. This paragraph should precede the opinion paragraph and state (1) all the substantive reasons for the adverse opinion and (2) the principal effects of the subject matter of the adverse opinion, if practicable (AU 508).

Special Reporting Issues

Different reports on comparative financial statements Change in report on prior-period financial statements Report by a predecessor auditor

Different Reports on Comparative Financial Statements

Different reports
Prior Years Unqualified Opinion Current Year Qualified Opinion

Reporting requirement
Standard wording for Introductory and scope paragraphs Add explanatory paragraph Modified opinion paragraph except for

Different Reports on Comparative Financial Statements

Different reports
Prior Years Qualified Opinion or Disclaimer Current Year Unqualified Opinion

Reporting requirement

Restated Prior-Period
Llllll

Report by a Predecessor Auditor

The predecessor auditor should do in following before re-issuing a report on prior-year financial statements published a comparative financial statements
Read the current period financial statements Compare the prior-period financial statements reported on with the current-year financial statements Obtain a letter of representation from current-year auditor or successor auditor

Other Information in Documents Containing Audited Financial Statements

Annual Reports
The auditor has no responsibility beyond the financial information contained in the report, and he or she has no obligation to perform any audit procedures to corroborate the other information. However, the auditor is required to read the other information and consider whether it is consistent with the information contained in the audited financial statements.

Registration Statements