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Forming an Opinion and Reporting on Financial Statements 951

AU-C Section 9700A

Forming an Opinion and Reporting onFinancial Statements: Auditing Interpretationsof Section 700A

1. Reporting on Financial Statements Prepared on a LiquidationBasis of Accounting

.01 Question—An entity prepares its financial statements using the liqui-dation basis of accounting in accordance with Financial Accounting StandardsBoard (FASB) Accounting Standards Codification (ASC) 205, Presentation ofFinancial Statements, because the entity is either in liquidation or liquidationis imminent. Is the auditor permitted to issue an unmodified opinion on suchfinancial statements?

.02 Interpretation—Yes. A liquidation basis of accounting is consideredgenerally accepted accounting principles (GAAP) for entities in liquidation orfor which liquidation is imminent. Therefore, the auditor is permitted to issuean unmodified opinion on such financial statements, provided that the liqui-dation basis of accounting has been properly applied and that adequate dis-closures are made in the financial statements in accordance with FASB ASC205-30.

.03 Typically, the financial statements of entities using the liquidation ba-sis of accounting are presented along with financial statements of a period priorto adoption of a liquidation basis that were prepared on the going concern ba-sis in accordance with GAAP. Section 706A, Emphasis-of-Matter Paragraphsand Other-Matter Paragraphs in the Independent Auditor's Report, requiresthe auditor to include an emphasis-of-matter paragraph when a matter thatis appropriately presented or disclosed in the financial statements is of suchimportance, in the auditor's professional judgment, that it is fundamental tousers' understanding of the financial statements. If the auditor determines anemphasis-of-matter paragraph is appropriate, the emphasis-of-matter para-graph would state that the entity has changed the basis of accounting usedto determine the amounts at which assets and liabilities are carried from thegoing concern basis to a liquidation basis.

.04 Two examples of auditor's reports with such an emphasis-of-matterparagraph follow.

Example 1

Report on Single-Year Financial Statements in Year of Adoption ofLiquidation Basis

We have audited the accompanying financial statements of XYZ Company,which comprise the statement of net assets in liquidation as of December 31,20X2, the related statement of changes in net assets in liquidation for the pe-riod from April 26, 20X2 to December 31, 20X2, and the statements of income,changes in stockholders' equity, and cash flows for the period from January 1,20X2 to April 25, 20X2, and the related notes to the financial statements.

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952 Audit Conclusions and Reporting

Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of thesefinancial statements in accordance with accounting principles generally ac-cepted in the United States of America; this includes the design, implementa-tion, and maintenance of internal control relevant to the preparation and fairpresentation of financial statements that are free from material misstatement,whether due to fraud or error.

Auditor’s ResponsibilityOur responsibility is to express an opinion on these financial statements basedon our audit. We conducted our audit in accordance with auditing standardsgenerally accepted in the United States of America. Those standards requirethat we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about theamounts and disclosures in the financial statements. The procedures selecteddepend on the auditor's judgment, including the assessment of the risks of ma-terial misstatement of the financial statements, whether due to fraud or error.In making those risk assessments, the auditor considers internal control rel-evant to the entity's preparation and fair presentation of the financial state-ments in order to design audit procedures that are appropriate in the circum-stances, but not for the purpose of expressing an opinion on the effectiveness ofthe entity's internal control.1 Accordingly, we express no such opinion. An au-dit also includes evaluating the appropriateness of accounting policies used andthe reasonableness of significant accounting estimates made by management,as well as evaluating the overall presentation of the financial statements.

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

OpinionIn our opinion, the financial statements referred to above present fairly, in allmaterial respects, the net assets in liquidation of XYZ Company as of December31, 20X2, the changes in its net assets in liquidation for the period from April26, 20X2 to December 31, 20X2, and the results of its operations and its cashflows for the period from January 1, 20X2 to April 25, 20X2, in accordance withaccounting principles generally accepted in the United States of America.

Emphasis of MatterAs discussed in Note X to the financial statements, the stockholders of XYZCompany approved a plan of liquidation on April 25, 20X2, and the Companydetermined liquidation is imminent. As a result, the Company changed its basisof accounting on April 25, 20X2 from the going concern basis to a liquidationbasis. Our opinion is not modified with respect to this matter.

Example 2Report on Comparative Financial Statements in Year of Adoption ofLiquidation Basis

We have audited the accompanying financial statements of XYZ Company,which comprise the balance sheet as of December 31, 20X1, the relatedstatements of income, changes in stockholders' equity, and cash flows for the

1 In circumstances when the auditor also has responsibility to express an opinion on the effec-tiveness of internal control in conjunction with the audit of the financial statements, this sentencewould be worded as follows: "In making those risk assessments, the auditor considers internal con-trol relevant to the entity's preparation and fair presentation of the financial statements in order todesign audit procedures that are appropriate in the circumstances." In addition, the next sentence,"Accordingly, we express no such opinion." would not be included.

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year then ended, the statements of income, changes in stockholders' equity, andcash flows for the period from January 1, 20X2 to April 25, 20X2, the statementof net assets in liquidation as of December 31, 20X2, the related statement ofchanges in net assets in liquidation for the period from April 26, 20X2 to De-cember 31, 20X2, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of thesefinancial statements in accordance with accounting principles generally ac-cepted in the United States of America; this includes the design, implementa-tion, and maintenance of internal control relevant to the preparation and fairpresentation of financial statements that are free from material misstatement,whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements basedon our audits. We conducted our audits in accordance with auditing standardsgenerally accepted in the United States of America. Those standards requirethat we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about theamounts and disclosures in the financial statements. The procedures selecteddepend on the auditor's judgment, including the assessment of the risks of ma-terial misstatement of the financial statements, whether due to fraud or error.In making those risk assessments, the auditor considers internal control rel-evant to the entity's preparation and fair presentation of the financial state-ments in order to design audit procedures that are appropriate in the circum-stances, but not for the purpose of expressing an opinion on the effectiveness ofthe entity's internal control.2 Accordingly, we express no such opinion. An au-dit also includes evaluating the appropriateness of accounting policies used andthe reasonableness of significant accounting estimates made by management,as well as evaluating the overall presentation of the financial statements.


Opinion

In our opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of XYZ Company as of December 31,20X1, the results of its operations and its cash flows for the year then endedand for the period from January 1, 20X2 to April 25, 20X2, its net assets inliquidation as of December 31, 20X2, and the changes in its net assets in liqui-dation for the period from April 26, 20X2 to December 31, 20X2, in accordancewith accounting principles generally accepted in the United States of America.

Emphasis of Matter

As discussed in Note X to the financial statements, the stockholders of XYZCompany approved a plan of liquidation on April 25, 20X2, and the Companydetermined liquidation is imminent. As a result, the Company changed its basis

2 In circumstances when the auditor also has responsibility to express an opinion on the effec-tiveness of internal control in conjunction with the audit of the financial statements, this sentencewould be worded as follows: "In making those risk assessments, the auditor considers internal con-trol relevant to the entity's preparation and fair presentation of the financial statements in order todesign audit procedures that are appropriate in the circumstances." In addition, the next sentence,"Accordingly, we express no such opinion." would not be included.

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of accounting on April 25, 20X2 from the going concern basis to a liquidationbasis. Our opinion is not modified with respect to this matter.

.05 The auditor may, in subsequent years, continue to include an emphasis-of-matter paragraph in the auditor's report to emphasize that the financialstatements are presented on a liquidation basis of accounting.

[Issue Date: December 1984; Revised: June 1993; Revised: February 1997;Revised: October 2000; Revised: June 2009; Revised: October 2011, effective

for audits of financial statements for periods ending on or after December 15,2012; Revised: May 2014; Revised: September 2014.]

2. Sustainability Financial Statements Under Federal FinancialAccounting Standards—Auditor Reporting

.06 Question—The Federal Accounting Standards Advisory Board issuedStatement of Federal Financial Accounting Standards (SFFAS) No. 36, Re-porting Comprehensive Long-Term Fiscal Projections for the U.S. Government.SFFAS No. 36, as amended, requires that the statement of long-term fiscal pro-jections be presented in the consolidated financial report of the U.S. govern-ment as a basic financial statement starting in fiscal year 2015. The focus ofthis standard is on forward-looking information intended to aid users in assess-ing whether future resources will likely be sufficient to sustain public servicesand to meet obligations as they come due. The statement of long-term fiscalprojections presents the actuarial present value of the U.S. government's es-timated future income to be received and future expenditures to be paid. Thestatement of long-term fiscal projections includes information drawn from thecurrent statement of social insurance (SFFAS No. 17, Accounting for Social In-surance, as amended, a basic statement since fiscal year 2006) and statementof changes in social insurance amounts (SFFAS No. 37, Social Insurance: Ad-ditional Requirements for Management's Discussion and Analysis and BasicFinancial Statements, a basic statement since fiscal year 2011). Collectively,the statement of long-term fiscal projections, the statement of social insurance,and the statement of changes in social insurance amounts are referred to hereinas sustainability financial statements. May an auditor report on these basic fi-nancial statements in accordance with auditing standards generally acceptedin the United States of America (GAAS)? If so, how would an auditor report onthese statements?

.07 Interpretation—Yes, consistent with Statement of Position 04-1, Au-diting the Statement of Social Insurance (AUD sec. 35), an auditor may reporton the basic financial statements, which include the statements of social in-surance, changes in social insurance amounts, and long-term fiscal projections,in accordance with GAAS. Section 700A, Forming an Opinion and Reportingon Financial Statements, provides requirements and guidance on forming anopinion on the basic financial statements. An illustration of an auditor's re-port containing an unmodified opinion on the U.S. government-wide financialstatements follows3 (footnotes are provided for necessary adjustments when re-porting on component financial statements containing sustainability financialstatements):

3 The sustainability financial statements do not articulate with the consolidated financial state-ments. For that reason, the opinion on the sustainability financial statements ordinarily will not affectthe opinion on the consolidated financial statements. For example, the opinion on the sustainabilityfinancial statements may be modified, whereas the opinion on the consolidated financial statementsmay be unmodified.

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Independent Auditor's Report

[Appropriate Addressee]

Report on the Financial StatementsWe have audited the accompanying financial statements of the U.S. govern-ment, 4 which comprise the consolidated financial statements and the sustain-ability financial statements. The consolidated financial statements comprisethe consolidated balance sheets as of September 30, 20XX and 20YY, and therelated consolidated statements of net cost, of operations and changes in netposition, reconciliations of net operating cost and unified budget deficit, andchanges in cash balance from unified budget and other activities 5 for the yearsthen ended, and the related notes to the consolidated financial statements.The sustainability financial statements comprise the statements of social in-surance as of [dates—five years presented], the statements of changes in socialinsurance amounts for the periods [dates—two periods presented], and the state-ments of long-term fiscal projections as of September 30, 20XX and 20YY, andthe related notes to the sustainability financial statements.

Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of thefinancial statements in accordance with accounting principles generally ac-cepted in the United States of America; this includes the design, implementa-tion, and maintenance of internal control relevant to the preparation and fairpresentation of financial statements that are free from material misstatement,whether due to fraud or error.

Auditor’s ResponsibilityOur responsibility is to express opinions on these financial statements basedon our audits. We conducted our audits in accordance with auditing standardsgenerally accepted in the United States of America; the standards applicableto financial audits contained in Government Auditing Standards, issued bythe Comptroller General of the United States; and Office of Management andBudget (OMB) Bulletin No. 15-02, Audit Requirements for Federal FinancialStatements. 6 Those standards and OMB Bulletin No. 15-02 require that weplan and perform the audits to obtain reasonable assurance about whether thefinancial statements are free from material misstatement.An audit involves performing procedures to obtain audit evidence about theamounts and disclosures in the financial statements. The procedures selecteddepend on the auditor's judgment, including the assessment of the risks of ma-terial misstatement of the financial statements, whether due to fraud or error.In making those risk assessments, the auditor considers internal control rele-vant to the entity's preparation and fair presentation of the financial statementsin 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 en-tity's internal control. Accordingly, we express no such opinion. An audit alsoincludes evaluating the appropriateness of accounting policies used and the

4 Italicized text would be applicable only to reports on the consolidated financial statements ofthe U.S. government. Where appropriate, alternative text applicable to reports on component entityfinancial statements are provided in other footnotes.

5 For reports on component entity financial statements, the financial statements would be tai-lored to the financial statements presented, for example "...the balance sheets as of September 30,20XX and 20YY and the related statements of net cost, (and) changes in net position, (and custodialactivity), and combined statements of budgetary resources...".

6 Update the Office of Management and Budget bulletin number as applicable.

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reasonableness of significant accounting estimates made by management, aswell as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropri-ate to provide a basis for our audit opinions.

Opinions on the Financial Statements

In our opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of the U.S. government asof September 30, 20XX and 20YY, and its net costs, operations, and changes innet position; reconciliations of net operating cost and unified budget deficit, andchanges in cash balance from unified budget and other activities 7 for the yearsthen ended in accordance with accounting principles generally accepted in theUnited States of America.

Also, in our opinion, the sustainability financial statements referred to abovepresent fairly, in all material respects, the U.S. government's social insuranceinformation as of [dates—five years presented], its changes in social insuranceamounts for the periods [dates—two periods presented], and the long-term fiscalprojections as of September 30, 20XX and 20YY, in accordance with accountingprinciples generally accepted in the United States of America.

Emphasis of Matter

As discussed in Note X to the financial statements, the sustainability financialstatements are based on management's assumptions. These sustainability fi-nancial statements present the actuarial present value of the U.S. government'sestimated future income to be received and future expenditures to be paid us-ing a projection period sufficient to illustrate long-term sustainability. The sus-tainability financial statements are intended to aid users in assessing whetherfuture resources will likely be sufficient to sustain public services and to meetobligations as they come due. The statements of social insurance and changesin social insurance amounts are based on income and benefit formulas in cur-rent law and assume that scheduled benefits will continue after any relatedtrust funds are exhausted. The statements of long-term fiscal projections arebased on the continuation of current policy. The sustainability financial state-ments are not forecasts or predictions. The sustainability financial statementsare not intended to imply that current policy or law is sustainable. In prepar-ing the sustainability financial statements, management considers and selectsassumptions and data that it believes provide a reasonable basis to illustratewhether current policy or law is sustainable. Assumptions underlying such sus-tainability information do not consider changes in policy or all potential futureevents that could affect future income, future expenditures, and sustainability,for example, implementation of policy changes to avoid trust fund exhaustion orunsustainable debt levels. Because of the large number of factors that affect thesustainability financial statements and the fact that future events and circum-stances cannot be estimated with certainty, even if current policy is continued,there will be differences between the estimates in the sustainability financialstatements and the actual results, and those differences may be material. Ouropinion is not modified with respect to this matter.

7 For reports on component entity financial statements, this language would be tailored to thefinancial statements presented, for example "…the financial position of [name of entity] as of Septem-ber 30, 20XX and 20YY, and its net costs, changes in net position, (and) and budgetary resources,(and custodial activity)…."

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Other Matters

Required Supplementary Information

Accounting principles generally accepted in the United States of America re-quire that the information in the Management's Discussion and Analysis, Re-quired Supplementary Information, and Required Supplemental StewardshipInformation sections (collectively referred to as RSI) be presented to supple-ment the basic financial statements. Such information, although not a part ofthe basic financial statements, is required by the Federal Accounting StandardsAdvisory Board, who considers it to be an essential part of financial reportingfor placing the financial statements in an appropriate operational, economic,or historical context. We have applied certain limited procedures to the RSI inaccordance with auditing standards generally accepted in the United Statesof America, which consisted of inquiries of management about the methods ofpreparing the information and comparing the information for consistency withmanagement's responses to our inquiries, the basic financial statements, andother knowledge we obtained during our audits of the basic financial state-ments. We do not express an opinion or provide any assurance on the informa-tion because the limited procedures do not provide us with sufficient evidenceto express an opinion or provide any assurance.

Other Information

Our audits were conducted for the purpose of forming an opinion on the basicfinancial statements as a whole. The [identify the other information, such as taxburden] is presented for purposes of additional analysis and is not a requiredpart of the basic financial statements. Such information has not been subjectedto the auditing procedures applied in the audits of the basic financial state-ments, and, accordingly, we do not express an opinion or provide any assuranceon it.

Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued ourreport dated [date of report] on our consideration of the U.S. government's in-ternal control over financial reporting and our report dated [report date] on ourtests of its compliance with certain provisions of laws, regulations, contracts,and grant agreements and other matters. The purpose of those reports is to de-scribe the scope of our testing of internal control over financial reporting andcompliance and the results of that testing, and not to provide an opinion on theinternal control over financial reporting or on compliance. Those reports are anintegral part of an audit performed in accordance with Government AuditingStandards in considering the U.S. government's internal control over financialreporting and compliance.

[Auditor's signature][Auditor's city and state][Date of the auditor's report]

[Issue Date: October 2015.]

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New and Revised IAASB Auditor Reporting Standards

In January 2015, the International Auditing and Assurance Standards Board(IAASB) issued new and revised International Standards on Auditing (ISA)relating to reporting on audited financial statements (hereinafter referred toas the new and revised ISAs). In April 2015, the IAASB issued ISA 720 (Re-vised), The Auditor's Responsibilities Relating to Other Information, whichcontained conforming amendments to certain of the reporting ISAs. The fol-lowing is a list of the significant new and revised ISAs relating to reportingon a complete set of general purpose financial statements.

• ISA 700 (Revised), Forming an Opinion and Reporting on Finan-cial Statements

• New ISA 701, Communicating Key Audit Matters in the Inde-pendent Auditor's Report

• ISA 705 (Revised), Modifications to the Opinion in the Indepen-dent Auditor's Report

• ISA 706 (Revised), Emphasis of Matter Paragraphs and OtherMatter Paragraphs in the Independent Auditor's Report

• ISA 720 (Revised), The Auditor's Responsibilities Relating toOther Information

• ISA 570 (Revised), Going Concern

The new and revised standards are effective for audits of financial statementsfor periods ending on or after December 15, 2016.

The following is a brief summary of the key changes in the auditor report-ing requirements under the new and revised ISAs. Appendix B, SubstantiveDifferences Between the International Standards on Auditing and GenerallyAccepted Auditing Standards, will be updated to reflect the issuance of thenew and revised ISAs after their effective date.

For all audits of financial statements:

a. Requires use of a specific form of report, unless law or regulationof a local jurisdiction prescribe otherwise

b. Requires the "Basis for Opinion" section of the auditor's reportto include an affirmative statement about the auditor's indepen-dence and fulfillment of relevant ethical responsibilities, withdisclosure of the origin of those requirements

c. Expands the description of the responsibilities of management,including when those responsible for the oversight of the fi-nancial reporting process differ from those responsible for thepreparation of the financial statements

d. Expands the description of the responsibilities of the auditorand key features of an audit with the provision that certain com-ponents of this description may be presented in an appendix tothe auditor's report or referenced to a website of an appropriateauthority when law or regulation or auditing standards of a spe-cific jurisdiction (national auditing standards) expressly permitsuch reference

e. Requires a description of the respective responsibilities of man-agement and the auditor related to going concern

f. Requires, when applicable, a section that addresses the report-ing requirements in ISA 720 (Revised)

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For audits of financial statements of listed entities (voluntary forother than listed entities):

a. Requires key audit matters (KAM) to be communicated for au-dits of complete sets of general purpose financial statements.When KAM are communicated on a voluntary basis in audits ofother than listed entities, ISA 701 should be followed.

b. Requires the name of the engagement partner to be includedin the auditor's report, unless, in rare circumstances, such dis-closure is reasonably expected to lead to a significant personalsecurity threat.

Interpretation No. 3, "Reporting on Audits Conducted in Accordance With Au-diting Standards Generally Accepted in the United States of America and In-ternational Standards on Auditing" (paragraphs .08–.13), addresses how theauditor might report when the audit is conducted in accordance with GAASand the ISAs, and the new and revised ISAs have been adopted.

3. Reporting on Audits Conducted in Accordance With AuditingStandards Generally Accepted in the United States of Americaand International Standards on Auditing

.08 Question—Section 700A requires the auditor's report to state that theaudit was conducted in accordance with GAAS and identifies the United Statesof America as the country of origin of those standards. 8 They also state that anauditor may indicate that the audit was also conducted in accordance with an-other set of auditing standards (for example, ISAs, the standards of the PCAOB,or Government Auditing Standards). The auditor should not refer to havingconducted an audit in accordance with another set of auditing standards in ad-dition to GAAS unless the audit was conducted in accordance with both sets ofstandards in their entirety. 9 In accordance with section 700A, when the audi-tor's report refers to GAAS and another set of auditing standards, the auditor'sreport should identify the other set of auditing standards as well as their ori-gin. 10 In January 2015, the IAASB released new and revised standards relatedto auditor reporting. The new and revised ISAs include several revisions to thelayout and wording of the auditor's report. Accordingly, what are the implica-tions for the auditor's report when reporting on an audit conducted in accor-dance with both GAAS and the new and revised ISAs when the auditor intendsto refer to both sets of standards?

.09 Interpretation—When the auditor has conducted an audit in accor-dance with both GAAS and the new and revised ISAs in their entirety, theauditor may refer to both sets of standards in the auditor's report, provided theauditor complies with the requirements of those standards.

.10 In accordance with paragraph 51 of ISA 700 (Revised), the auditor'sreport may refer to the ISAs in addition to the national auditing standards, butthe auditor should do so only if

a. there is no conflict between the requirements in the nationalauditing standards and those in the ISAs that would lead theauditor (i) to form a different opinion, or (ii) not to include an

8 Paragraph .42 of section 700A, Forming an Opinion and Reporting on Financial Statements.9 See footnote 8.10 Paragraph .43 of section 700A.

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emphasis-of-matter paragraph or other-matter paragraph that,in the particular circumstances, is required by the ISAs; and

b. the auditor's report includes, at a minimum, each of the elementsset out in paragraph 50(a)–(o) of ISA 700 (Revised) when the au-ditor uses the layout or wording specified by the national audit-ing standards. However, reference to "law or regulation" in para-graph 50(k) of ISA 700 (Revised) should be read as reference to thenational auditing standards. The auditor's report should therebyidentify such national auditing standards.

.11 Accordingly, paragraph 50 of ISA 700 (Revised) allows the auditor touse the layout or wording of the national auditing standards, provided that (1)there are no conflicts between the requirements in GAAS and the ISAs thatwould lead to a different conclusion with respect to the opinion, and (2) it ad-dresses, and is not inconsistent with, certain of the required minimum report-ing elements in ISA 700 (Revised). The minimum elements exclude certain ISA700 (Revised) requirements, such as placing the opinion paragraph first in thereport.

.12 The following list summarizes the minimum elements set out in para-graph 50 of ISA 700 (Revised) that are required to be included in the auditor'sreport, if applicable, when reporting in accordance with GAAS and the ISA (em-phasis added to highlight those elements that allow flexibility in meeting therequired elements). The following reporting examples illustrate how an auditormight include these elements in a GAAS form of report:

a. A title.

b. An addressee, as required by the circumstances of the engage-ment.

c. An "Opinion" section containing an expression of opinion on thefinancial statements and a reference to the applicable financial re-porting framework used to prepare the financial statements (in-cluding identifying the jurisdiction of origin of the financial re-porting framework that is not International Financial ReportingStandards or International Public Sector Accounting Standards).

d. An identification of the entity's financial statements that havebeen audited.

e. A statement that the auditor is independent of the entity in accor-dance with the relevant ethical requirements relating to the au-dit and has fulfilled the auditor's other ethical responsibilities inaccordance with these requirements. The statement should iden-tify the jurisdiction of origin of the relevant ethical requirementsor refer to the International Ethics Standards Board for Accoun-tants' Code of Ethics for Professional Accountants (IESBA Code).

f. When applicable, a section that addresses, and is not inconsistentwith, the reporting requirements in paragraph 22 of ISA 570 (Re-vised)

g. When applicable, a "Basis for Qualified (or "Adverse") Opinion"section that addresses, and is not inconsistent with, the reportingrequirements in paragraph 23 of ISA 570 (Revised).

h. When applicable, a section that includes the information requiredby ISA 701, or additional information about the audit that is

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prescribed by law or regulation and that addresses, and is notinconsistent with, the reporting requirements in that ISA. 11

i. When applicable, a section that addresses the reporting require-ments in paragraph 24 of ISA 720 (Revised).

j. A description of management's responsibilities for the prepara-tion of the financial statements and an identification of those re-sponsible for the oversight of the financial reporting process thataddresses, and is not inconsistent with, the requirements in para-graphs 33–36 of ISA 700 (Revised).

k. A reference to the ISAs and the law or regulation, and a descrip-tion of the auditor's responsibilities for an audit of the financialstatements that addresses, and is not inconsistent with, the re-quirements in paragraphs 37–40 of ISA 700 (Revised).

l. For audits of complete sets of general purpose financial state-ments of listed entities, the name of the engagement partner un-less, in rare circumstances, such disclosure is reasonably expectedto lead to a significant personal security threat.

m. The auditor's signature.

n. The auditor's address.

o. The date of the auditor's report.

.13 The following are two examples of auditor's reports on consolidatedcomparative financial statements when the audits are conducted in accordancewith GAAS and the new and revised ISAs, and the auditor is referencing bothstandards in the report.

Example 3

Auditor's Report in Accordance With GAAS and ISAs When the Finan-cial Statements Are Prepared in Accordance With International Finan-cial Reporting Standards as Issued by the International AccountingStandards Board

Circumstances include the following:

• Audit of a complete set of general purpose consolidated financialstatements (comparative) of a nonissuer. The audit is a group au-dit of an entity with subsidiaries. (ISA 600 and section 600, SpecialConsiderations—Audits of Group Financial Statements (Includ-ing the Work of Component Auditors) apply.)

• The consolidated financial statements are prepared by manage-ment in accordance with International Financial Reporting Stan-dards (IFRSs), as issued by the International Accounting Stan-dards Board.

• The auditor has concluded that an unmodified opinion is appro-priate based on the audit evidence obtained, and no emphasis-of-matter or other-matter paragraphs are included.

• The relevant ethical requirements that apply to the audit com-prise AICPA's ethical requirements and the IESBA Code.

11 See paragraphs 11–16 of ISA 701, Communicating Key Audit Matters in the Independent Au-ditor's Report.

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• Based on the audit evidence obtained, the auditor has concludedthat a material uncertainty does not exist related to events or con-ditions that may cast significant doubt on the entity's ability tocontinue as a going concern.Note: If the auditor were to have concluded that a material un-certainty exists and adequate disclosure about the material un-certainty is made in the financial statements, then the auditorwould be required to include a separate section under the heading"Material Uncertainty Related to Going Concern" in accordancewith paragraph 22 of ISA 570 (Revised). When reporting in accor-dance with GAAS and the ISAs, this may be achieved by adding anemphasis-of-matter paragraph to the auditor's report with such aheading and appropriate content.

• KAM are not required to be communicated and have not been com-municated as permitted by ISA 701.Note: When key audit matters are included in the auditor's report,a section that includes the information required by ISA 701 wouldneed to be added to the auditor's report. This may be achieved byplacing the information under the heading "Key Audit Matters" ina location that, in the auditor's judgment, is appropriate. In addi-tion, information would be added to the auditor's responsibilitiessection relating to KAM, in accordance with paragraph 40(c) ofISA 700 (Revised).

• Those responsible for the oversight of the financial reporting pro-cess differ from those responsible for the preparation of the finan-cial statements.

• No other information has been obtained as of the date of the au-ditor's report and, therefore, ISA 720 (Revised) does not apply.Note: When other information has been obtained prior to the dateof the auditor's report, a section that reports in accordance withthe reporting requirements in ISA 720 (Revised) would need to beadded to the auditor's report. This may be achieved by adding another-matter paragraph to the auditor's report with an appropri-ate heading and content.


[Appropriate Addressee]Report on the Financial Statements 12

We have audited the accompanying consolidated financial statements of ABCCompany and its subsidiaries (the Group), which comprise the consolidatedstatements of financial position as of December 31, 20X1 and 20X0, and therelated consolidated statements of comprehensive income, changes in equityand cash flows for the years then ended, and the related notes to the financialstatements.We are independent of the Group in accordance with the ethical requirementsthat are relevant to our audit of the financial statements in the United States ofAmerica, together with the International Ethics Standards Board for Accoun-tants' Code of Ethics for Professional Accountants, and we have fulfilled ourother ethical responsibilities in accordance with these requirements, respec-tively.

12 The subtitle "Report on the Financial Statements" is unnecessary in circumstances when thesecond subtitle "Report on Other Legal and Regulatory Requirements" is not applicable.

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Responsibilities of Management and Those Charged With Governancefor the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of theseconsolidated financial statements in accordance with International FinancialReporting Standards issued by the International Accounting Standards Board;this includes the design, implementation, and maintenance of internal con-trol relevant to the preparation and fair presentation of consolidated financialstatements that are free from material misstatement, whether due to fraud orerror.

In preparing the consolidated financial statements, management is responsiblefor assessing the Group's ability to continue as a going concern, disclosing, asapplicable, matters related to going concern and using the going concern basisof accounting, unless management either intends to liquidate the Group or tocease operations or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group's fi-nancial reporting process.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial state-ments based on our audits. We conducted our audits in accordance with audit-ing standards generally accepted in the United States of America and the In-ternational Standards on Auditing. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the consoli-dated financial statements are free from material misstatement, whether dueto fraud or error. Reasonable assurance is a high level of assurance but is nota guarantee that an audit will always detect a material misstatement when itexists. Misstatements can arise from fraud or error and are considered materialif, individually or in the aggregate, they could reasonably be expected to influ-ence the economic decisions of users taken on the basis of these consolidatedfinancial statements.

An audit involves performing procedures to obtain audit evidence about theamounts and disclosures in the consolidated financial statements. The proce-dures selected depend on the auditor's judgment, including the assessment ofthe risks of material misstatement of the consolidated financial statements,whether due to fraud or error. We design audit procedures responsive to thoserisks and obtain audit evidence that is sufficient and appropriate to providea basis for our opinion. The risk of not detecting a material misstatement re-sulting from fraud is higher than for one resulting from error because fraudmay involve collusion, forgery, intentional omissions, misrepresentations, or theoverride of internal control.

In making those risk assessments, the auditor considers internal control rele-vant to the entity's preparation and fair presentation of the consolidated finan-cial statements in order to design audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effective-ness of the Group's internal control. Accordingly, we express no such opinion. Anaudit also includes evaluating the appropriateness of accounting policies usedand the reasonableness of significant accounting estimates made by manage-ment, as well as evaluating the overall presentation, structure, and content ofthe consolidated financial statements, including disclosures, and whether theconsolidated financial statements represent the underlying transactions andevents in a manner that achieves fair presentation.

As part of an audit, we exercise professional judgment and maintain profes-sional skepticism throughout the audit. We also

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• conclude on the appropriateness of management's use of the go-ing concern basis of accounting and based on the audit evidenceobtained, whether a material uncertainty exists related to eventsor conditions that may cast significant doubt on the Group's abil-ity to continue as a going concern. If we conclude that a materialuncertainty exists, we are required to draw attention in our audi-tor's report to the related disclosures in the consolidated financialstatements or, if such disclosures are inadequate, to modify ouropinion. Our conclusions are based on the audit evidence obtainedup to the date of our auditor's report. However, future events orconditions may cause the Group to cease to continue as a goingconcern.

• obtain sufficient appropriate audit evidence regarding the finan-cial information of the entities or business activities within theGroup to express an opinion on the consolidated financial state-ments. We are responsible for the direction, supervision, and per-formance of the group audit. We remain solely responsible for ouraudit opinion.

We communicate with those charged with governance regarding, among othermatters, the planned scope and timing of the audit and significant audit find-ings, including any significant deficiencies or material weaknesses in internalcontrol that we identify during our audit.


Opinion

In our opinion, the accompanying consolidated financial statements referred toabove present fairly, in all material respects, the consolidated financial posi-tion of ABC Company and its subsidiaries as of December 31, 20X1 and 20X0,and the consolidated financial performance and their consolidated cash flowsfor the years then ended in accordance with International Financial ReportingStandards issued by the International Accounting Standards Board.

Report on Other Legal and Regulatory Requirements

[Form and content of this section of the auditor's report will vary depending onthe nature of the auditor's other reporting responsibilities.]


Example 4

Auditor's Report in Accordance With GAAS and ISAs When the Finan-cial Statements Are Prepared in Accordance With Accounting Princi-ples Generally Accepted in the United States of America


• Audit of a complete set of general purpose consolidated financialstatements (comparative) of a nonissuer. The audit is a group au-dit of an entity with subsidiaries. (ISA 600 and section 600 apply.)

• The consolidated financial statements are prepared by manage-ment in accordance with GAAP.

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• The auditor has concluded an unmodified opinion is appropriatebased on the audit evidence obtained, and no emphasis-of-matteror other-matter paragraphs are included.

• The relevant ethical requirements that apply to the audit com-prise AICPA's ethical requirements and the IESBA Code.

• FASB ASC 205-40 has not been adopted.Note: If FASB ASC 205-40 has been adopted, then managementis expressly required to evaluate whether there are conditions orevents in the aggregate that raise substantial doubt about the en-tity's ability to continue as a going concern within one year afterthe date that the financial statements are issued (or available tobe issued). Accordingly, the information under "Responsibilitiesof Management and Those Charged with Governance for the Con-solidated Financial Statements" that addresses management's re-sponsibilities for assessing the use of the going concern basis ofaccounting would be revised to reflect the requirements in FASBASC 205-40. The following is an example of such a paragraph.In preparing the consolidated financial statements, management isresponsible for evaluating whether there are conditions and events,considered in the aggregate, that raise substantial doubt about theentity's ability to continue as a going concern within one year afterthe date that the financial statements are issued, or available to beissued, and disclosing, as applicable, matters related to this eval-uation unless the liquidation basis of accounting is being used bythe entity.

• Based on the audit evidence obtained, the auditor has concludedthat there is no substantial doubt about the entity's ability to con-tinue as a going concern. [The information contained in this illus-tration relating to going concern is not inconsistent with the re-quirements in ISA 570 (Revised) and has been presented to alignwith the accounting framework, in this case, GAAP.]Note: If, after considering identified conditions or events and man-agement's plans, the auditor were to have concluded that there issubstantial doubt about the entity's ability to continue as a goingconcern for a reasonable period of time and adequate disclosurewith respect to the entity's ability to continue as a going concernis made in the financial statements, then the auditor would be re-quired to include a separate section in the auditor's report. Whenreporting in accordance with GAAS and the ISAs, this may beachieved by adding an emphasis-of-matter paragraph to the audi-tor's report with an appropriate heading and appropriate content.If adequate disclosure about the entity's ability to continue as agoing concern for a reasonable period of time is not made in thefinancial statements, the auditor would modify the opinion on thefinancial statements, as appropriate.

• KAM are not required to be communicated and have not been com-municated as permitted by ISA 701.Note: When key audit matters are included in the auditor's report,a section that includes the information required by ISA 701 wouldneed to be added to the auditor's report. This may be achieved byplacing the information under the heading "Key Audit Matters" ina location that, in the auditor's judgment, is appropriate. In addi-tion, information would be added to the auditor's responsibilities

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section relating to KAM, in accordance with paragraph 40(c) ofISA 700 (Revised).

• Those responsible for the oversight of the financial reporting pro-cess differ from those responsible for the preparation of the finan-cial statements.

• No other information has been obtained as of the date of the au-ditor's report and, therefore, ISA 720 (Revised) does not apply.Note: When other information has been obtained prior to the dateof the auditor's report, a section that reports in accordance withthe reporting requirements in ISA 720 (Revised) would need to beadded to the auditor's report. This may be achieved by adding another-matter paragraph to the auditor's report with an appropri-ate heading and content.


[Appropriate Addressee]Report on the Financial Statements 13

We have audited the accompanying consolidated financial statements of ABCCompany and its subsidiaries (the Group), which comprise the consolidatedbalance sheets as of December 31, 20X1 and 20X0, and the related consolidatedstatements of income, changes in stockholders' equity and cash flows for theyears then ended, and the related notes to the financial statements.We are independent of the Group in accordance with the ethical requirementsthat are relevant to our audit of the financial statements in the United States ofAmerica together with the International Ethics Standards Board for Accoun-tants' Code of Ethics for Professional Accountants and we have fulfilled ourother ethical responsibilities in accordance with these requirements, respec-tively.Responsibilities of Management and Those Charged With Governancefor the Consolidated Financial StatementsManagement is responsible for the preparation and fair presentation of theseconsolidated financial statements in accordance with accounting principlesgenerally accepted in the United States of America; this includes the design,implementation, and maintenance of internal control relevant to the prepara-tion and fair presentation of consolidated financial statements that are freefrom material misstatement, whether due to fraud or error. This also includesassessing that the consolidated financial statements are prepared using theappropriate basis of accounting.Those charged with governance are responsible for overseeing the Group's fi-nancial reporting process.Auditor’s ResponsibilityOur responsibility is to express an opinion on these consolidated financial state-ments based on our audits. We conducted our audits in accordance with audit-ing standards generally accepted in the United States of America and the In-ternational Standards on Auditing. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the consoli-dated financial statements are free from material misstatement, whether dueto fraud or error. Reasonable assurance is a high level of assurance but is not

13 The subtitle "Report on the Financial Statements" is unnecessary in circumstances when thesecond subtitle "Report on Other Legal and Regulatory Requirements" is not applicable.

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a guarantee that an audit will always detect a material misstatement when itexists. Misstatements can arise from fraud or error and are considered materialif, individually or in the aggregate, they could reasonably be expected to influ-ence the economic decisions of users taken on the basis of these consolidatedfinancial statements.

An audit involves performing procedures to obtain audit evidence about theamounts and disclosures in the consolidated financial statements. The proce-dures selected depend on the auditor's judgment, including the assessment ofthe risks of material misstatement of the consolidated financial statements,whether due to fraud or error. We design audit procedures responsive to thoserisks and obtain audit evidence that is sufficient and appropriate to providea basis for our opinion. The risk of not detecting a material misstatement re-sulting from fraud is higher than for one resulting from error because fraudmay involve collusion, forgery, intentional omissions, misrepresentations, or theoverride of internal control.

In making those risk assessments, the auditor considers internal control rele-vant to the entity's preparation and fair presentation of the consolidated finan-cial statements in order to design audit procedures that are appropriate in thecircumstances but not for the purpose of expressing an opinion on the effective-ness of the Group's internal control. Accordingly, we express no such opinion. Anaudit also includes evaluating the appropriateness of accounting policies usedand the reasonableness of significant accounting estimates made by manage-ment, as well as evaluating the overall presentation, structure, and content ofthe consolidated financial statements, including disclosures, and whether theconsolidated financial statements represent the underlying transactions andevents in a manner that achieves fair presentation.

As part of an audit, we exercise professional judgment and maintain profes-sional skepticism throughout the audit. We also

• conclude on the appropriateness of management's use of the go-ing concern basis of accounting and based on the audit evidenceobtained, whether substantial doubt exists related to the Group'sability to continue as a going concern. If we conclude that sub-stantial doubt exists, we are required to draw attention in ourauditor's report to the related disclosures in the consolidated fi-nancial statements or, if such disclosures are inadequate, to mod-ify our opinion. Our conclusions are based on the audit evidenceobtained up to the date of our auditor's report. However, futureevents or conditions may cause the Group to cease to continue asa going concern.

• obtain sufficient appropriate audit evidence regarding the finan-cial information of the entities or business activities within theGroup to express an opinion on the consolidated financial state-ments. We are responsible for the direction, supervision, and per-formance of the group audit. We remain solely responsible for ouraudit opinion.

We communicate with those charged with governance regarding, among othermatters, the planned scope and timing of the audit and significant audit find-ings, including any significant deficiencies or material weaknesses in internalcontrol that we identify during our audit.


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OpinionIn our opinion, the accompanying consolidated financial statements referred toabove present fairly, in all material respects, the consolidated financial positionof ABC Company and its subsidiaries as of December 31, 20X1 and 20X0, andthe results of their operations and their cash flows for the years then ended inaccordance with accounting principles generally accepted in the United Statesof America.Report on Other Legal and Regulatory Requirements[Form and content of this section of the auditor's report will vary depending onthe nature of the auditor's other reporting responsibilities.]


[Issue Date: April 2016.]

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Introduction

On June 1, 2017, the PCAOB adopted AS 3101, The Auditor's Report on anAudit of Financial Statements When the Auditor Expresses an UnqualifiedOpinion.14 The SEC approved AS 3101 and related amendments on October23, 2017. AS 3101 retains the pass or fail opinion of the existing PCAOB au-ditor's report but makes significant changes to the existing PCAOB auditor'sreport, including the following:

• Requiring communication of critical audit matters (CAMs). Anymatter arising from the audit of the financial statements thatwas communicated or required to be communicated to the auditcommittee and that

— relates to accounts or disclosures that are material to thefinancial statements and

— involved especially challenging, subjective, or complexauditor judgment

• Requiring disclosure of auditor tenure. The year in which theauditor began serving consecutively as the company's auditor

• Other improvements to the auditor's report. Clarification of theauditor's role and responsibilities, such as a statement regard-ing the requirement for the auditor to be independent with re-spect to the company, and making the auditor's report easier toread

Among the other revisions, AS 3101 specifies the form of the report, includingrequirements related to the order of presentation and section titles. All thechanges, except those relating to CAMs, are effective for audits of fiscal yearsending on or after December 15, 2017.15

As noted in PCAOB Release No. 2017-001, The Auditor's Report on an Auditof Financial Statements When the Auditor Expresses an Unqualified Opinionand Related Amendments to PCAOB Standards,

There are situations in which an auditor may be required by law or regu-lation, or voluntarily agrees, to perform an audit engagement in accordancewith PCAOB standards for a company whose audit is not subject to PCAOBoversight.112 For example, SEC rules permit audits under PCAOB standardsin connection with offerings under Regulation A and Regulation Crowdfund-ing. In these situations, certain elements of the auditor's report required un-der the final standard, such as the use of "registered public accounting firm"in the title or the statement regarding independence requirements, may notapply.

112 Under the Sarbanes-Oxley Act, as amended by the Dodd-Frank WallStreet Reform and Consumer Protection Act, the PCAOB oversees the au-dits of "issuers" and brokers and dealers reporting under Exchange Act Rule17a-5. See Sarbanes-Oxley Act Section 101. An "issuer" under the Sarbanes-Oxley Act is an entity whose securities are registered under Section 12 of the

14 All PCAOB auditing standards can be found in AICPA PCAOB Standards and Related Rules.15 PCAOB Release No. 2017-001, The Auditor's Report on an Audit of Financial Statements When

the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards, wasissued June 1, 2017, and was approved by the SEC on October 23, 2017. Staff Guidance Changes tothe Auditor's Report Effective for Audits of Fiscal Years Ending on or After December 15, 2017 (PCAOBStaff Guidance, sec. 300.04) (updated as of December 28, 2017), was prepared by PCAOB staff to helpfirms when implementing changes to the auditor's report effective for audits of fiscal years ending onor after December 15, 2017.

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Exchange Act, or that is required to file reports under Section 15(d) of theExchange Act, or that files or has filed a Securities Act registration state-ment that has not yet become effective and that it has not withdrawn. SeeSarbanes-Oxley Section 2(a).

Generally accepted auditing standards (GAAS) currently address the appro-priate form of report when an auditor issues a report referencing both GAASand the standards of the PCAOB. Section 700A, Forming an Opinion and Re-porting on Financial Statements,16 states

When conducting an audit of financial statements in accordance with thestandards of the PCAOB and the audit is not within the jurisdiction of thePCAOB as defined by the Sarbanes-Oxley Act of 2002 (the Act), as amended,the auditor is required to also conduct the audit in accordance with GAAS. Insuch circumstances, when the auditor refers to the standards of the PCAOBin addition to GAAS in the auditor's report, the auditor should use the formof report required by the standards of the PCAOB, amended to state that theaudit was also conducted in accordance with GAAS.

Interpretation No. 4, "Reporting on Audits Conducted in Accordance With Au-diting Standards Generally Accepted in the United States of America and theStandards of the PCAOB" (paragraphs .14–.21), provides guidance on how anauditor complies with section 700A17 in the context of the revised reportingstandards adopted by the PCAOB and approved by the SEC. Because of thephased approach of the effective dates of AS 3101, Interpretation No. 4 doesnot address the changes relating to CAMs. The AICPA Auditing StandardsBoard will continue to assess whether it will be necessary to develop addi-tional auditing interpretations.

Although Interpretation No. 4 has been determined to be consistent withGAAS, the interpretation should not be construed to be an interpretation ofPCAOB standards. Moreover, Interpretation No. 4 has not been approved oracted upon by the PCAOB.

4. Reporting on Audits Conducted in Accordance With AuditingStandards Generally Accepted in the United States of Americaand the Standards of the PCAOB

.14 Question—Section 700A18 states, in part, that the auditor should usethe form of report required by the standards of the PCAOB. Are there any el-ements of the auditor's report required by the standards of the PCAOB whosepresentation may need to be revised in order to comply with the PCAOB re-porting requirements?

.15 Interpretation—Yes. To appropriately apply the requirement in section700A19 to follow the PCAOB form of the report, the auditor will need to evaluatethe circumstances of the engagement and also may need to modify the reportas described in the following paragraphs to avoid making an untrue statement.

16 Paragraph .44 of section 700A.17 See footnote 16.18 See footnote 16.19 See footnote 16.

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.16 Question—Paragraph .06 of AS 3101 states that the auditor "must in-clude the title, 'Report of Independent Registered Public Accounting Firm'" andthe related description in the "Basis for Opinion" section of the report requiredby paragraph .09g of AS 3101. Is it appropriate for an auditor to revise the re-port by removing the references to "registered" if the firm is not registered withthe PCAOB?

.17 Interpretation—Yes, removing the reference to "registered" from the ti-tle and from the "Basis for Opinion" section of the report is appropriate if thefirm is not registered with the PCAOB. As noted in Staff Questions and AnswersAudits of Financial Statements of Non-Issuers Performed Pursuant to the Stan-dards of the Public Company Accounting Oversight Board,20 dated June 30,2004, a public accounting firm does not need to be registered with the PCAOBto perform an audit of a nonissuer in accordance with PCAOB standards.

.18 Question—How should the auditor address the requirement in para-graph .09g of AS 3101 that notes that the auditor "is required to be independentwith respect to the company in accordance with the U.S. federal securities lawsand the applicable rules and regulations of the SEC and the PCAOB"?

.19 Interpretation—Generally, GAAS do not require the auditor to be inde-pendent under SEC and PCAOB standards unless required by law or regula-tion. Therefore, it would be appropriate in those circumstances for the auditorto revise the statement in the report regarding independence to reflect the cir-cumstances of the engagement. For example, if the auditor is not required tobe independent under U.S. federal securities laws and the applicable rules andregulations of the SEC and the PCAOB, this statement may be amended to read,"We are required to be independent with respect to the Company in accordancewith the relevant ethical requirements relating to our audit" (see example 6).Section 200, Overall Objectives of the Independent Auditor and the Conduct ofan Audit in Accordance With Generally Accepted Auditing Standards, explainsthat relevant ethical requirements consist of the AICPA Code of ProfessionalConduct together with rules of state boards of accountancy and applicable regu-latory agencies that are more restrictive.21 Relevant ethical requirements mayexist in several different sources, such as ethical codes and additional rules andrequirements within law and regulation. Depending on the circumstances, forexample, when independence and ethical requirements are contained in a lim-ited number of sources, the auditor may choose to name the relevant sources(such as the AICPA Code of Professional Conduct) or rule or applicable regula-tion or may refer to a term that appropriately describes those sources.

.20 In addition, the auditor may need to revise the reference to "the stan-dards" of the PCAOB as described in section 700A.22 As noted in section 700A,23

reference to "the standards" of the PCAOB indicates that the auditor has com-plied not only with the PCAOB's auditing standards but also with the re-lated professional practice standards of the PCAOB, including its independencerules, whereas a reference to "the auditing standards of the Public CompanyAccounting Oversight Board (United States)" is limited to compliance with theauditing standards of the PCAOB. The auditor of financial statements of anentity whose audits are not within the jurisdiction of the PCAOB may, never-theless, be responsible for complying with the independence and other related

20 AICPA, PCAOB Standards and Related Rules, PCAOB Staff Guidance, sec. 100.01.21 Paragraph .A15 of section 200, Overall Objectives of the Independent Auditor and the Conduct

of an Audit in Accordance With Generally Accepted Auditing Standards.22 Paragraph .A45 of section 700A.23 See footnote 10.

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professional practice standards of the PCAOB if, for example, the engagementis subject to regulatory oversight that requires compliance with those rules.Whether the auditor conducts an audit of financial statements in accordancewith the standards of the PCAOB or the auditing standards of the PCAOB de-pends on the circumstances of the engagement.

.21 The following are two examples of auditor's reports on comparativefinancial statements when the audits are conducted in accordance with bothGAAS and either the standards of the PCAOB or the auditing standards of thePCAOB.

Example 5

An Auditor's Report on Comparative Financial Statements Preparedin Accordance With Accounting Principles Generally Accepted in theUnited States of America When the Audit Has Been Conducted by aRegistered Firm in Accordance With Both Auditing Standards Gener-ally Accepted in the United States of America and the Auditing andProfessional Practice Standards of the Public Company AccountingOversight Board


• Audit of a complete set of general purpose financial statements(comparative) of an entity whose audit is not within the jurisdic-tion of the PCAOB as defined by the Sarbanes-Oxley Act of 2002,as amended.

• The firm is registered with the PCAOB and for purposes of thisengagement is required by regulation to be in compliance withthe independence standards and other professional practice stan-dards of the PCAOB and SEC.

• Management is not required to report on the entity's internal con-trol over financial reporting.

• The financial statements are prepared in accordance with ac-counting principles generally accepted in the United States ofAmerica.

Report of Independent Registered Public Accounting Firm

[To the Shareholders and the Board of Directors of X Company]24

Opinion on the Financial StatementsWe have audited the accompanying balance sheets of X Company (the Com-pany) as of December 31, 20X2 and 20X1, the related statements of income,changes in stockholders' equity, and cash flows for each of the three years inthe period ended December 31, 20X2, and the related notes [and schedules]

24 See paragraph .07 of PCAOB AS 3101, The Auditor's Report on an Audit of Financial State-ments When the Auditor Expresses an Unqualified Opinion. Staff Guidance Changes to the Auditor'sReport Effective for Audits of Fiscal Years Ending on or After December 15, 2017, states that

AS 3101 requires the auditor's report to be addressed to the shareholders and the board ofdirectors, or equivalents for companies not organized as corporations. For example, if a companyis not organized as a corporation, the auditor's report would generally be addressed to (1) theplan administrator and plan participants for a benefit plan; (2) the directors (or equivalent) andequity owners for a broker or dealer; and (3) the trustees and unit holders or other investorsfor an investment company organized as a trust. The auditor's report may include additionaladdressees. Since inclusion of additional addressees is voluntary, auditors can assess, based onthe individual circumstances, whether to include additional addressees in the auditor's report.

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(collectively referred to as the "financial statements"). In our opinion, the fi-nancial statements present fairly, in all material respects, the financial positionof the Company as of [at] December 31, 20X2 and 20X1, and the results of itsoperations and its cash flows for each of the three years in the period ended De-cember 31, 20X2, in conformity with accounting principles generally acceptedin the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's manage-ment. Our responsibility is to express an opinion on the Company's financialstatements based on our audits. We are a public accounting firm registered withthe Public Company Accounting Oversight Board (United States) ("PCAOB")and are required to be independent with respect to the Company in accordancewith the U.S. federal securities laws and the applicable rules and regulationsof the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB andin accordance with auditing standards generally accepted in the United Statesof America. Those standards require that we plan and perform the audit to ob-tain reasonable assurance about whether the financial statements are free ofmaterial misstatement, whether due to error or fraud. Our audits included per-forming procedures to assess the risks of material misstatement of the finan-cial statements, whether due to error or fraud, and performing procedures thatrespond to those risks. Such procedures included examining, on a test basis, ev-idence regarding the amounts and disclosures in the financial statements. Ouraudits also included evaluating the accounting principles used and significantestimates made by management, as well as evaluating the overall presentationof the financial statements. We believe that our audits provide a reasonable ba-sis for our opinion.25

Critical Audit Matters (if applicable)

The critical audit matters communicated below are matters arising from thecurrent period audit of the financial statements that were communicated or

25 As described in paragraphs .59–.60 of AS 3105, Departures from Unqualified Opinions andOther Reporting Circumstances, this section should be revised in situations in which management isrequired to report on the effectiveness of internal control over financial reporting but such report isnot required to be audited, and the auditor has not been engaged to perform an audit of management'sassessment of the effectiveness of internal control over financial reporting. The following paragraphsshould replace the second paragraph in the "Basis for Opinion" section in those circumstances. A sim-ilar paragraph may voluntarily be included in the auditor's report in situations in which managementis not required to report on internal control over financial reporting and neither is the auditor.

We conducted our audits in accordance with the standards of the PCAOB and in accordance withauditing standards generally accepted in the United States of America. Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement, whether due to error or fraud. The Company is notrequired to have, nor were we engaged to perform, an audit of its internal control over financialreporting. As part of our audits, we are required to obtain an understanding of internal controlover financial reporting but not for the purpose of expressing an opinion on the effectiveness ofthe Company's internal control over financial reporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of thefinancial statements, whether due to error or fraud, and performing procedures that respondto those risks. Such procedures included examining, on a test basis, evidence regarding theamounts and disclosures in the financial statements. Our audits also included evaluating theaccounting principles used and significant estimates made by management, as well as evalu-ating the overall presentation of the financial statements. We believe that our audits provide areasonable basis for our opinion.

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required to be communicated to the audit committee26 and that: (1) relate toaccounts or disclosures that are material to the financial statements and (2)involved our especially challenging, subjective, or complex judgments. The com-munication of critical audit matters does not alter in any way our opinion on thefinancial statements, taken as a whole, and we are not, by communicating thecritical audit matters below, providing separate opinions on the critical auditmatters or on the accounts or disclosures to which they relate.

[Include critical audit matters]

[Signature]

We have served as the Company's auditor since [year].27

[City and State or Country]

[Date]

Example 6

An Auditor's Report on Comparative Financial Statements Preparedin Accordance With Accounting Principles Generally Accepted in theUnited States of America When the Audit Has Been Conducted by aNon-Registered Firm in Accordance With Both Auditing StandardsGenerally Accepted in the United States of America and the AuditingStandards of the Public Company Accounting Oversight Board


• Audit of a complete set of general purpose financial statements(comparative) of an entity whose audit is not within the jurisdic-tion of the PCAOB as defined by the Sarbanes-Oxley Act of 2002,as amended.

• The firm is not registered with the PCAOB and for purposes ofthis engagement is not required to be in compliance with the in-dependence standards and other professional practice standardsof the PCAOB and SEC.

• Management is not required to report on the entity's internal con-trol over financial reporting.

• The financial statements are prepared in accordance with ac-counting principles generally accepted in the United States ofAmerica.

26 AS 1301, Communications with Audit Committees, defines "audit committee" as

A committee (or equivalent body) established by and among the board of directors of a companyfor the purpose of overseeing the accounting and financial reporting processes of the companyand audits of the financial statements of the company; if no such committee exists with respectto the company, the entire board of directors of the company.For audits of nonissuers, if no such committee or board of directors (or equivalent body) existswith respect to the company, the person(s) who oversee the accounting and financial reportingprocesses of the company and audits of the financial statements of the company.

27 As discussed in Staff Guidance Changes to the Auditor's Report Effective for Audits of FiscalYears Ending on or After December 15, 2017, AS 3101 does not specify a required location withinthe auditor's report for the statement on auditor tenure. The sample auditor's report includes thestatement on auditor tenure at the end of the report; however, auditors have discretion to presentauditor tenure in the part of the auditor's report they consider appropriate.

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Report of Independent Public Accounting Firm

[To the Shareholders and the Board of Directors of X Company]28

Opinion on the Financial StatementsWe have audited the accompanying balance sheets of X Company (the Com-pany) as of December 31, 20X2 and 20X1, the related statements of income,changes in stockholders' equity, and cash flows for each of the three years inthe period ended December 31, 20X2, and the related notes [and schedules](collectively referred to as the "financial statements"). In our opinion, the fi-nancial statements present fairly, in all material respects, the financial positionof the Company as of [at] December 31, 20X2 and 20X1, and the results of itsoperations and its cash flows for each of the three years in the period ended De-cember 31, 20X2, in conformity with accounting principles generally acceptedin the United States of America.

Basis for OpinionThese financial statements are the responsibility of the Company's manage-ment. Our responsibility is to express an opinion on the Company's financialstatements based on our audits. We are required to be independent with re-spect to the Company in accordance with the relevant ethical requirementsrelating to our audit.

We conducted our audits in accordance with the auditing standards of the Pub-lic Company Accounting Oversight Board (United States) and in accordancewith auditing standards generally accepted in the United States of America.Those standards require that we plan and perform the audit to obtain rea-sonable assurance about whether the financial statements are free of materialmisstatement, whether due to error or fraud. Our audits included performingprocedures to assess the risks of material misstatement of the financial state-ments, whether due to error or fraud, and performing procedures that respondto those risks. Such procedures included examining, on a test basis, evidenceregarding the amounts and disclosures in the financial statements. Our auditsalso included evaluating the accounting principles used and significant esti-mates made by management, as well as evaluating the overall presentation ofthe financial statements. We believe that our audits provide a reasonable basisfor our opinion.29

28 See paragraph .07 of PCAOB AS 3101. Staff Guidance Changes to the Auditor's Report Effectivefor Audits of Fiscal Years Ending on or After December 15, 2017, states that

AS 3101 requires the auditor's report to be addressed to the shareholders and the board ofdirectors, or equivalents for companies not organized as corporations. For example, if a com-pany is not organized as a corporation, the auditor's report would generally be addressed to(1) the plan administrator and plan participants for a benefit plan, (2) the directors (or equiv-alent) and equity owners for a broker or dealer, and (3) the trustees and unit holders or otherinvestors for an investment company organized as a trust. The auditor's report may include ad-ditional addressees. Since inclusion of additional addressees is voluntary, auditors can assess,based on the individual circumstances, whether to include additional addressees in the auditor'sreport.

29 As described in paragraphs .59–.60 of AS 3105, this section should be revised in situationsin which management is required to report on the effectiveness of internal control over financialreporting but such report is not required to be audited, and the auditor has not been engaged toperform an audit of management's assessment of the effectiveness of internal control over financialreporting. The following paragraphs should replace the second paragraph in the "Basis for Opinion"section in those circumstances. A similar paragraph may voluntarily be included in the auditor'sreport in situations in which management is not required to report on internal control over financialreporting and neither is the auditor.

(continued)

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Critical Audit Matters (if applicable)The critical audit matters communicated below are matters arising from thecurrent period audit of the financial statements that were communicated orrequired to be communicated to the audit committee30 and that: (1) relate toaccounts or disclosures that are material to the financial statements and (2)involved our especially challenging, subjective, or complex judgments. The com-munication of critical audit matters does not alter in any way our opinion on thefinancial statements, taken as a whole, and we are not, by communicating thecritical audit matters below, providing separate opinions on the critical auditmatters or on the accounts or disclosures to which they relate.[Include critical audit matters][Signature]We have served as the Company's auditor since [year].31

[City and State or Country][Date]

[Issue Date: March 2018.]

(footnote continued)

We conducted our audits in accordance with the auditing standards of the Public Company Ac-counting Oversight Board (United States) and in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements are free of mate-rial misstatement, whether due to error or fraud. The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financial reporting. As part of ouraudits, we are required to obtain an understanding of internal control over financial reportingbut not for the purpose of expressing an opinion on the effectiveness of the Company's internalcontrol over financial reporting.Our audits included performing procedures to assess the risks of material misstatement of thefinancial statements, whether due to error or fraud, and performing procedures that respondto those risks. Such procedures included examining, on a test basis, evidence regarding theamounts and disclosures in the financial statements. Our audits also included evaluating theaccounting principles used and significant estimates made by management, as well as evalu-ating the overall presentation of the financial statements. We believe that our audits provide areasonable basis for our opinion.

30 AS 1301, defines "audit committee" as

A committee (or equivalent body) established by and among the board of directors of a companyfor the purpose of overseeing the accounting and financial reporting processes of the companyand audits of the financial statements of the company; if no such committee exists with respectto the company, the entire board of directors of the company.For audits of nonissuers, if no such committee or board of directors (or equivalent body) existswith respect to the company, the person(s) who oversee the accounting and financial reportingprocesses of the company and audits of the financial statements of the company.

31 As discussed in Staff Guidance Changes To The Auditor's Report Effective For Audits of FiscalYears Ending On or After December 15, 2017, AS 3101 does not specify a required location withinthe auditor's report for the statement on auditor tenure. The example auditor's report includes thestatement on auditor tenure at the end of the report; however, auditors have discretion to presentauditor tenure in the part of the auditor's report they consider appropriate.

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