Audit Reports

PA’s Professional Responsibilities

When associated with information, responsibilities include the following:

• Applicable standards in the CPA Canada Handbook must be met.• The PA complies with

• There is appropriate communication

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Association with Financial StatementsA PA is associated with financial statements when:

• they consent to

• they have prepared or performed some other services with respect to the statements

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The concept of association is far reaching.• Statements are produced

• Statements result from

• A document containing financial statements

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Levels of Assurance

5

Level of assurance

6

High assurance

AuditPositive Assurance

“In our opinion...”

Middle assurance

No assurance

Compilation

“No attempt to verify accuracy or completeness of information.”

Review

Negative Assurance

“Nothing has come to our attention.”

Type of Assurance

Standard Unqualified Report

The standard unqualified report contains four basic segments:

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The Standard Report Introductory Paragraph

Auditor’s report

To the Shareholders of ………

We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as of December 31, 201x and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Remember:

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Management’s Responsibility ParagraphManagement is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

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Auditor’s Responsibility ParagraphsOur responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

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Auditor’s Responsibility Paragraphs

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

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Audit Report Opinion ParagraphIn our opinion, the financial statements present fairly, in all material respect the financial position of ABC Company as of December 31, 20x1, and of its financial performance and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles.

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City

Date

(Signed)

Public Accountant

Reservation in the Audit Report

1.Financial statements contain a departure from GAAP including inadequate disclosure.

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Qualified

Opinion

Adverse

OpinionMateriality

A GAAP departure requires a qualified report:• A material departure from GAAP in the statements

• A reservation paragraph is added

• “Except for” opinion with reference to reservation paragraph.• Introductory and scope paragraphs

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GAAP departure is material and pervasive result in an:

Adverse report:• Departures from GAAP in the statements are:

• Reservation paragraph added following scope paragraph.• Adverse opinion

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2. Scope limitation (extent of audit work has been limited) inability to obtain sufficient evidence

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Denial or Disclaimer of

Opinion

Qualified

OpinionMateriality

Scope limitation:

A reservation paragraph is added following the scope paragraph to explain the limitations in scope of audit procedures.

• Scope paragraph will be modified.

• Departures from GAAP should be explained in the denial and comparative years should be covered.

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Influence of Materiality

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Unqualified Unqualified Uncertainty

Denial of opinion

QualifiedScope limitation

AdverseQualified Departure from GAAP

Greater materiality

Lesser materiality

Circumstance

Report type required

Effects of Lack of Independence

If the auditor feels that they are not independent:

Auditor should resign or not accept the engagement.

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Problem 4-3, Page 116Scope Limitation, Auditor Independence

Crow Corporation, a public company, has set up a number of limited partnerships to pursue some risky development projects. The limited partnerships borrow money form various financial intuitions to support the development projects, and Crow guarantees these loans. Crow’s interest in each limited partnership is set at a level just below the percentage that would require the partnerships, and their debts to be included in Crow’s consolidated financial statements. Theses percentages are set specifically in the professional accounting recommendations that form the basis of GAAP for the purpose of Crow’s financial reporting.

Zilch Zulch, LLP (ZZ) has been the auditor of Crow since its incorporation thirty years ago. The current CFO of Crow was formerly and audit partner in ZZ and was in charge of the Crow audit for five years before Crow hired her as its CFO. Because of her familiarity with ZZ’s approach to setting materiality for its audits, the CFO was able to suggest the amount of a loan that could be guaranteed in each limited partnership without being material. If an individual loan was material, it would need to be disclosed as a contingency in Crow’s consolidated financial statements even if the partnership was not required to be consolidated. Approximately 1000 limited partnerships were set up, since a large sum of money was required to fund Crow’s development activities. Because of the way the limited partnerships were structured, none of them was consolidated and no disclosure of Crow’s loan guarantees to the partnerships was made in Crow’s 2000 financial statements, despite the fact that in total they exceeded the reported long-term debt and shareholder’s equity of Crow.

Zero Mustbe, the audit partner in charge of the audit of Crow’s 2000 consolidated financial statements, was somewhat puzzled as to why there were so many limited partnerships, since only one development project was being undertaken. However, he was assured by Crow’s CFO that the structure was appropriate and in accordance with GAAP because, in her words, “It was all set up by financial engineers with Ph.D.s in ZZ’s accounting group. These people know all about GAAP and are much smarter that you are, Zero, so there is nothing to be concerned about.”

As a result of his audit work, Zero provided a clean audit opinion on Crow’s 20X0 consolidated financial statements, During 20X1, adverse events resulted in Crow’s being unable to meet its obligations under loan guarantees and it went bankrupt.

Required:

Comment on the adequacy of Zero’s audit, the independence and scope issues raised, and the appropriateness of issuing a clean audit report in this scenario.

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Problem 4-6, Page 117Scope Limitation, Auditor Independence

The following audit report was drafted by an assistant at the completion of the audit of Cramdon Inc., on March 1, 20X5. The partner in charge of the engagement has decided the opinion on the 20X4 financial statements should be modified only with reference to the change in method of computing sales. Also, because of a litigation uncertainty, an uncertainty paragraph was included in the audit report on the 20X3 financial statements, which are included for comparative purposes. The 20X3 audit report (same audit firm) was dated March 5, 20X4, and on October 15, 20X4, the litigation was resolved in favour of Cramdon Inc.

Auditor’s Report

To the Board of Directors of Cramdon Inc.;

We have audited the accompanying financial statements of Cramdon Inc., as of December 31, 20X4 and 20X3. These financial statements are the responsibility of the Company’s Management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

As discussed in Note 7 to the financial statements, our previous report on the 20X3 financial statements contained an explanatory paragraph regarding a particular litigation uncertainty. Because of our lawyer’s meritorious defence in this litigation, our current report on these financial statements does not include such an explanatory paragraph.

In our opinion, based on the preceding, the financial statements referred to above present fairly, in all material respects, the financial position of Cramdon Inc., as of December 31, 20X4, and the results of its operations and its cash flows for the period then ended in conformity with generally accepted accounting principles consistently applied, except for the changes in the method of computing sales as described in Note 14 to the financial statements.

/s/ PA Firm

March 5, 20X5

Required:

Identify the deficiencies and errors in the draft report and write an explanation of the reasons they are errors and deficiencies. Do not write the report. 21

Problem 4-18, Page 118Going Concern Issue:

PA is the auditor of Jayhawk Inc. Jayhawk’s revenues and profitability have decreased in each of the past three years and, as of this year end, 20X3, its retained earnings will fall into a deficit balance. Jayhawk's long-term debt comes due in 20X4, and its management is currently renegotiating the repayment date and terms with its bondholders. According to PA’s discussions with management, the renegotiation is not going well and there is a significant risk that the bondholders will put Jayhawk into receivership and liquidate its assets. Jayhawk’s CFO has provided draft 20X3 financial statements to PA that are prepared in accordance with GAAP.

Required:

a)Discuss the audit reporting implications of the preceding situation.

b)Assume the long-term debt repayment date was not until 20X5. Would your response differ?

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