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Audited F/S – The Basics
Company’s mgmt responsible to prepare the F/S
Auditors responsible to express an opinion on the F/S and on mgmt’s assertion on internal controls (if public)
The primary assertion is whether the statements are “presented fairly” in accordance with GAAP
Professional Standards
Generally Accepted Accounting Standards – GAAS
Generally Accepted Government Auditing Standards – GAGAS
The Public Company Accounting Oversight Board – PCAOB
- Public accounting firms must register with PCAOB in order to audit public companies
- Registered firms are subject to board inspection, disciplinary proceedings, and sanctions
Unqualified opinion – clean; F/S presented fairly in all material respects, doesn’t mean good investment
Modified Unqualified opinion – additional explanatory language
Qualified opinion – states “except for”; material GAAP or GASS problem
Adverse opinions – very material GAAP problems
Disclaimer of opinion – significant GAAS problem
If mgmt’s analysis is supported and properly reported or disclosed, the auditor issues and unqualified opinion
with no reference to the uncertainty in the report
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Unqualified opinion: GAAP = ok; GAAS = ok
If the auditor is unable to obtain sufficient evidential matter involving an uncertainty and its presentation or
disclosure, the auditor should consider expressing a qualified (GAAS) opinion or to disclaim an opinion to
scope limitation.
Qualified or Disclaimer: GAAP = ?; GAAS = Problem
If the auditor concludes that the F/S are materially misstated due to a departure from GAAP related to
uncertainty, the auditor should express a qualified (GAAP) or adverse opinion. GAAP departures include
inadequate disclosures, use of inappropriate accounting principles, and use of unreasonable acctg estimates
Qualified of Adverse: GAAP = problem; GAAS = ok
Modified Unqualified opinion – still represents an unqualified opinion. The additional language (modified
wording or explanatory paragraph) used to highlight the certain circumstances
Modified wording
• Division of responsibility; auditors opinion is based in part on the report of another
Explanatory paragraph
• Justified departure from GAAP
• Going concern
• To emphasize a matter
• Lack of consistency
• Other;
- Required SEC regulation S-K quarterly financial data has been omitted or has not been reviewed
- Supplementary information required by GAAP has been omitted
- Other information (stuff in 10-K) is inconsistent with F/S
Division of Responsibility (reference in report) – The principal auditor decides to mention the work done by
other auditors, the report will express a division of responsibility. The principal auditor will mention this
division in all three paragraphs. The name of the other auditor is not mentioned unless the auditor gives express
permission and the report of the other auditor is presented. Make other CPA responsible by mentioning them in
the Intro, Scope, and Opinion paragraph.
Assumption of Responsibility (no reference to other CPA) – The principal auditor must assure on the other
auditors, reputation, independence, professional competency, program steps (RIPP). Visit the other auditor to
discuss audit procedures and review audit program, documentation, and evaluation of internal controls
performed by the other auditor
Justified departure from GAAP – The explanatory paragraph should contain a description of the departure, its
approximate effects (if possible) and the reasons why adherence to GAAP would make the F/S misleading
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N – Negative trends
E – External matters, legal proceedings, new legislation, loss or expiration of intellectual property
The auditor is not precluded from choosing to disclaim an opinion in cases involving uncertainties
If, in the auditor’s judgement, the entity’s disclosures are inadequate, a departure from GAAP exists. This may
result in either a qualified or adverse opinion
Emphasis of a matter – auditor may wish to emphasis a particular matter but still express an unqualified
opinion. Emphasis when a company is a RECC
• A related party transaction
• Significant subsequent events
• Entity is a component of a larger business
• Items that affect the comparability (except changes in accounting principles)
An explanatory paragraph is not required
Lack of consistency (justified changes) ACDO – if a change is GAAP has occurred between accounting periods
and the effect is material, the auditor should add an explanatory paragraph to the unqualified report. The
explanatory paragraph comes after the opinion paragraph
When selecting the type of opinion because of a lack of consistency, determine is the change is justified
GAAP: Acceptable/Justified = Modified Unqualified
Not GAAP: Unacceptable/Unjustified = Qualified or Adverse
Qualified “except for” Opinion and Adverse Opinion for very material GAAP problems
1. Non GAAP unjustified/unacceptable change – Issue is consistency (ACDO); an explanatory paragraph
should appear before the opinion paragraph to describe the non-GAAP acctg change and the financial impact
2. Inadequate disclosure – when the auditor believes that the omitted items cause the F/S to be deceptive
3. Departure from GAAP
GAAP: Acceptable/Justified = Modified Unqualified
Not GAAP: Unacceptable/Unjustified = “except for” or Adverse
4. Unreasonable accounting estimates
When updating (changing prior) periods the explanatory should disclose the:
D – Date of the auditor’s previous report
O – Opinion type previously issued
R – Reason for prior opinion
C – Changes that have occurred
S – Statement “opinion…is different”
Only DORCS change their mind
Update or change opinion when now in conformity with GAAP (restate prior yr F/S)
Subsequent Events
Type I events – conditions on or before balance sheet date, accrue, looking backward
Requires a F/S adjustment
Type II events – conditions existing after the balance sheet date, disclose in footnotes, looking forward
May require footnote disclosure
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Omitted audit procedures discovered after submission of the audit program (we forgot to do it)
• Auditor should determine whether other audit procedures tended to compensate for the omitted procedures
• Apply the omitted procedures (or alternative procedures)
When an auditor submits a document containing audited F/S to a client or others, the auditor has a
responsibility to report on all information in the document
The auditor must indicate in the report whether the accompanying information is fairly stated in all material
respects in relation to the basic F/S taken as a whole. The report should also describe the character of the
auditor examination and the degree of responsibility the auditor is assuming.
Condensed F/S
The Auditor must indicate:
• That the auditor audited and expresses an opinion on the complete F/S
• Date of the auditors report on the complete F/S
• Type of opinion expressed
• Whether the information in the condensed statements is fairly stated, in all material respects
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2. Statement that the engagement was performed in accordance with AICPA standards
3. Identification specific entity, descriptions of the transactions, statement about the source of the information
4. A statement describing the appropriate acctg principles (including country of origin) to be applied
5. Statement that mgmt is responsible
6. A statement that any differences in the facts, circumstances or assumptions may change the report
7. Restrict use of report to mgmt, board of directors, prior and current auditors