the auditors report. types of audit reports n unqualified opinion standard report modified report n...

The Auditor’s Report

Types of Audit Reports

Unqualified Opinion• Standard Report• Modified Report

Qualified Opinion• Scope Qualification• GAAP Departure Qualification

Adverse Opinion

Disclaimer of Opinion

CorrespondenceYES

YES, but...

NO

DON’T KNOW

Types of Audit Reports Unqualified Opinion

• Standard Report• Modified Report

–Added explanatory language• without explanatory paragraph• with explanatory paragraph

Added Explanatory Language In accordance with accounting

principles of foreign nations Opinion based in part on report of

another auditor Departure from a promulgated

accounting principle Uncertainties (General) Going Concern Uncertainties

Added Explanatory Language (Continued)

Inconsistent application of accounting principles

Comparative financial statements - updated reports

Information outside the basic financial statements

Emphasis of a matter

Updated ReportsIndependent Auditor's Report

[Sa me first and second paragraphs as the standard report]

In our report dated March 1, 19X2, we expressed an opinion thatthe 19X1 financial state ments did not fairly present financialposition, results of operations, and cash flows in conformity withgenerally accepted accounting principles because of twodepartures fro m such principles: (1) the Company carried itsproperty, plant, and equipment at appraisal values, and providedfor depreciation on the basis of such values, and (2) the Companydid not provide for deferred income taxes with respect todifferences between income for financial reporting purposes andtaxable income. As described in Note X, the Company haschanged its method of accounting for these items and restated its19X1 financial statements to conform with generally acceptedaccounting principles. Accordingly, our present opinion on the19X1 financial state ments, as presented herein, is dif ferent fromthat expressed in our previous report.

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial posit ion of X Companyas of December 31, 19X2 and 19X1, and the results of itsoperations and its cash flows for the years then ended inconformity with generally accepted accounting principles.

In our report dated March 1, 19X2, we expressed an opinion that

In our opinion, the financial statements referred to above present

Explanatory Language- Consistency

As discussed in Note X to the financial statements, the Company changed its method of computing depreciation in 19X2.

Effect on audit Type of accounting Accounting treatmentreport change or other change of changeADD EXPLANATORY • Change in accounting Cumulative effect PARAGRAPH principle adjustment or

restate ment(Both addition of • Change in reporting Restate ment an explanatory entity paragraph and • Correction of an Prior period adjustment f inancial state ment error in principle disclosure are • Change in principle Current or prospective necessary.) inseparable from change

in estimateNO EXPLAN ATORY • Change in accounting Current or prospective PARAGRAPH R EQUIRED estimate(Disclosure of the • Error correction not Prior period adjustment matter in financial involving principle statements may be • Change in classif ication Restate ment necessary.) • Substantially different No adjustment

transactions or events necessary• Changes expected to have No adjustment a material future effect necessary

report change or other change of changeADD EXPLANATORY • Change in accounting Cumulative effect

in estimateNO EXPLAN ATORY • Change in accounting Current or prospective

Explanatory Paragraph -Uncertainty

Independent Auditor's Report

[Sa me three paragraphs as the standard report]

As discussed in Note X to the financial statements, theCompany is a defendant in a lawsuit alleging infringe ment ofcertain patent rights and claiming royalt ies and punitivedamages. The Company has filed a counteraction, andpreliminary hearings and discovery proceedings on bothactions are in progress. The ultimate outcome of thelitigation cannot presently be determined. Accordingly noprovision for any liability that may result upon adjudicationhas been made in the accompanying financial statements.

Going Concern Uncertainty


[Sa me three paragraphs as the standard report]

The accompanying financial state ments have been preparedassuming that the Company will continue as a goingconcern. As discussed in Note X to the financial state ments,the Company has suffered recurring losses from operationsand has a net capital deficiency that raise substantial doubtabout its ability to continue as a going concern.Management's plans in regard to these matters are alsodescribed in Note X. The financial statements do not includeany adjustments that might result from the outcome of thisuncertainty.

Explanatory Paragraph - Rule 203 Departure


[Sa me f irst and second paragraphs as the standard report.]

As explained in Note X to the financial statements, the Company haschanged its method of recording revenues from the recognition ofrevenue at the time of sale to the recognition of revenue over themembership term and has applied this change retroactively in itsfinancial state ments. Accounting Principles Board [APB] OpinionNumber 20, Accountin g Changes, provides that such a change bemade by including, as an element of net earnings during the year ofchange, the cumulative effect of the change on prior years. Had APBOpinion No. 20 been followed literally, the cumulative effect of theaccounting change would have been included as a change in the19X2 income statement. Because of the magnitude andpervasiveness of this change, we believe a literal application of APBOpinion Number 20 would result in a misleading presentation, andthat the change should therefore be made on a retroactive basis.Accordingly, the accompanying consolidated financial statementsfor 19X1 have been restated.

In our opinion, the financial state ments referred to above presentfairly, in all material respects, the consolidated financial position ofABC Corporation and consolidated subsidiaries as of December 31,19X2 and 19X1, and the consolidated results of their operations andtheir cash flows for the years then ended in conformity withgenerally accepted accounting principles.


As explained in Note X to the financial statements, the Company has

In our opinion, the financial state ments referred to above present

Accounting IssuesDeparture from GAAPConsistency

Unqualified Qualified Adverse Disclaimer

Auditing IssuesLack of evidence By condition By client restrictionUncertainty General Going concernLack of independence

X XX

X X X X

XX X X

Types of Audit Reports

GAAP Departures

Qualified opinion

Adverse opinion

GAAP Departures --Qualified Opinion

As more fully described in Note X to the financial statements, theCompany has excluded certain lease obligations fro m property anddebt in the accompanying balance sheets. In our opinion, generallyaccepted accounting principles require that such obligations beincluded in the balance sheets.



The Company has excluded, from property and debt in theaccompanying balance sheets, certain lease obligations that, in ouropinion, should be capitalized in order to conform with generallyaccepted accounting princip les. If these lease obligations werecapitalized, property would be increased by $_ and $_, long-term debtby $_ and $_, and retained earnings by $_ and $_ , as of Dece mber 31,19X2 and 19X1, respectively. Additionally, net inco me would beincreased (decreased) by $_ and $_ and earnings per share would beincreased (decreased) by $_ and $_, respectively, for the years thenended.

In our opinion, except for the effects of not capitalizing certain leaseobligations as d iscussed in the preceding paragraph, the financialstate ments referred to above present fairly, in all material respects, thefinancial position of X Company as of December 31, 1 9X2 and 19X1,and the results of its operations and its cash flows for the years thenended in conformity with generally accepted accounting principles.

Inadequate Disclosure -Qualified Opinion


[Sa me first and second paragraphs asstandard report]

The Company's financial statements do notdisclose [describe the nature of the omitteddisclosures]. In our opinion, disclosure ofthis information is required by generallyaccepted accounting principles.

In our opinion, except for the omission of theinformation discussed in the precedingparagraph, the f inancial statements referredto above present fairly, in all materialrespects, the f inancial position of XCompany as of December 31, 19XX, and theresults of its operations and its cash flowsfor the year then ended in conformity withgenerally accepted accounting principles.

GAAP Departures --Adverse Opinion



As discussed in Note X to the financial statements, the Company carries itsproperty, p lant and equipment accounts at appraisal values, and providesdepreciation on the basis of such values. Further, the Company does not providefor income taxes with respect to dif ferences between financial income and taxableinco me arising because of the use, for income tax purposes, of the installmentmethod of reporting gross profit from certain types of sales. Generally acceptedaccounting principles require that property, plant and equipment be stated at anamount not in excess of cost, reduced by depreciation based on such amount, andthat deferred income taxes be provided.

Because of the departures from generally accepted accounting principles identif iedabove, as of December 31, 19X2 and 19X1, inventories have been increased $_ and$_ by inclusion in manufacturing overhead of depreciation in excess of that basedon cost; property, plant and equipment, less accumulated depreciation, is carriedat $_ and $_ in excess of an amount based on the cost to the Company; deferredinco me taxes of $_ and $_ have not been recorded; resulting in an increase of $_and $_ in retained earnings and in appraisal surplus of $_ and $_, respectively. Forthe years ended December 31, 19X2 and 19X1, cost of goods sold has beenincreased $_ and $_ , respectively, because of the effects of the depreciat ionaccounting referred to above and deferred income taxes of $_ and $_ have notbeen provided, resulting in an increase in net income of $_ and $_ , respectively.

In our opinion because of the effects of the matters discussed in the precedingparagraphs, the financial statements referred to above do not present fairly, inconformity with generally accepted accounting principles, the financial position ofX Co mpany as of Dece mber 31, 19X2 and 19X1, or the results of its operations or itscash flows for the years then ended.

Scope Limitations

Qualified opinion

Disclaimer of opinion

Scope Limitation --Qualified Opinion


[Sa me f irst paragraph as the standard report]

Except as discussed in the following paragraph, we conducted our audits inaccordance with generally accepted auditing standards. Those standardsrequire that we plan and perform the audit to obtain reasonable assuranceabout whether the financial state ments are free of material misstate ment. Anaudit includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made bymanage ment, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

We were unable to obtain audited financial statements supporting theCompany's investment in a foreign affiliate stated at $ and $ at Dece mber31, 19X2 and 19X1, respectively, or its equity in earnings of that aff iliate of $_and $_, which is included in net income for the years then ended as describedin Note X to the financial state ments; nor were we able to satisfy ourselvesas to the carrying value of the investment in the foreign affiliate or the equityin its earnings by other auditing procedures.

In our opinion, except for the effects of such adjustments, if any, as mighthave been determined to be necessary had we been able to examine evidenceregarding the foreign affiliate investment and earnings, the financialstate ments referred to in the first paragraph above present fairly, in allmaterial respects, the financial position of X Company as of Dece mber 31,19X2 and 19X1, and the results of its operations and its cash flows for theyears then ended in conformity with generally accepted accountingprinciples.

[Sa me f irst paragraph as the standard report]

Except as discussed in the following paragraph, we conducted our audits in

We were unable to obtain audited financial statements supporting the

In our opinion, except for the effects of such adjustments, if any, as might

Scope Limitation --Disclaimer of Opinion


We were engaged to audit the accompanying balance sheets ofX Compan y as of December 31, 19X2 and 19X1, and the relatedstate ments of income, retained earnings, and cash flows for theyears then ended. These f inancial statements are theresponsibility of the Company's management.

[Second paragraph of standard report should be omitted]

The Company did not make a count of its physical inventory in19X2 or 19X1, stated in the accompanying financial statements at$__ as of Dece mber 31, 19X2, and at $__ as of Dece mber 31,19X1. Further, evidence supporting the cost of property andequipment acquired prior to Dece mber 31, 19X1, is no longeravailable. The Company's records do not permit the applicationof other auditing procedures to inventories or property andequipment.

Since the Company did not take physical inventories and we werenot able to apply other auditing procedures to satisfy ourselvesas to inventory quantities and the cost of property andequipment, the scope of our work was not sufficient to enable usto express, and we do not express, an opinion on these financialstate ments.

[Second paragraph of standard report should be omitted]

The Company did not make a count of its physical inventory in

Since the Company did not take physical inventories and we were

Old TermsShort-form audit reportPiecemeal opinionsCertificate and certified auditSubject to qualificationClean opinionClean audits

Communicating with Stockholders

Other information in an annual report

Stockholders’ meetings

Communicating with Audit Committees

Internal control structure related matters

Material weaknessesOther audit committee communications

Communicating with Management

Management letterConferences with management

Ethics

Professional Ethics and the Auditing Environment

Elements of a ProfessionSystematic TheoryProfessional AuthorityCommunity SanctionRegulative CodesCulture

Organizations, Standards, and Enforcement

Organizations Standards and rules Monitoring and enforcement

Self-regulation

AICPA Code of Professional Conduct Trial Board—A ICPA Ethics Division Individual membership Generally accepted auditing Audit failure inquiries by the Quality Control Firm membership standards Inquiry Committee • SEC Practice Section Mandatory continuing Public Oversight Board • Private Companies Practice professional education Peer review requirements Section requirements

Quality control standards

FASB Generally accepted accounting AuditorsGASB principles

State societies of CPAs State codes of ethics State ethics enforce ment is usually handled joint ly with the AICPA Trial Board

External regulation

SEC SEC rules and regulations CensureFinancial reporting releases Disbarment fro m practice before the SECStaff accounting bulletins

Courts Civil law FinesCriminal law Da mages to those injuredPreviously tried cases Injunctions

Imprison ment

State boards of accountancy State Licensing laws Temporary or permanent loss of license

Organizations Standards and rules Monitoring and enforcement

Self-regulation

AICPA Code of Professional Conduct Trial Board—A ICPA Ethics Division Individual membership Generally accepted auditing Audit failure inquiries by the Quality Control Firm membership standards Inquiry Committee • SEC Practice Section Mandatory continuing Public Oversight Board • Private Companies Practice professional education Peer review requirements Section requirements

Quality control standards

FASB Generally accepted accounting AuditorsGASB principles

State societies of CPAs State codes of ethics State ethics enforce ment is usually handled joint ly with the AICPA Trial Board

External regulation

SEC SEC rules and regulations CensureFinancial reporting releases Disbarment fro m practice before the SECStaff accounting bulletins

Courts Civil law FinesCriminal law Da mages to those injuredPreviously tried cases Injunctions

Imprison ment

State boards of accountancy State Licensing laws Temporary or permanent loss of license

OrganizationsAICPAFASBGASBState Boards of AccountancyState Societies of CPAs

Code of Professional Conduct

Section I - PrinciplesSection II - Rules,

Interpretations, and RulingsRule Sections:

Responsibilities to the public (100 and 200)

Responsibilities to the client (300) Responsibilities to colleagues

(400) Other responsibilities (500)

Responsibilities to the Public: Independence, Integrity, and Objectivity

O t her R ulings

I nt er pr et at ion 10 1- 1I mpai r ment of I nd epend ence

R ul ingPayr ol l Pr epar at ion

S er vic es

O t her R ulings

I nt er pr et at ion 10 1- 3A c count ing S er vic es

O t her R ulings

O t her I nt er pr et at ions

R uling 101I nd epend ence

O t her R ulings

O t her I nt e r pr et at ions

R uling 102I nt egr i t y and O b j ec t ivi t y

Pr inc iples

Example of Organization of the Rules of Conduct: Rule Section on

Independence, Integrity and Objectivity

Responsibilities to the Public: General and Technical Standards

Rule 201Competence, Due Care,Planning and S uper visionS uffi cient Relevant Data

Rule 202Compliance

with S tandards

Rule 203A ccounting Principles

Pr inciples

Responsibilities to Clients

R ule 3 01Confi dent ial

C l ient I nf or mat ion

R ule 302Cont ingent F ees

Pr inciples

Other Responsibilities

R ule 5 01A c t s D iscr ed it ab le

R ule 502A dver t ising and

S olic it at ion

R ule 503Commis sions and

R ef er r al F ees

R ule 505F or m of Pr ac t ice

and N ame

Pr inc iples

Quality ControlIndependenceAssigning personnel to engagementsConsultationSupervisionHiringProfessional developmentAcceptance and continuance of clientsInspection

Monitoring and Enforcement

Peer reviewEthics enforcementPublic Oversight Board

External Regulation

SECLegal Liability

OrganizationsAICPAFASBGASBState Boards of AccountancyState Societies of CPAs

the auditors report. types of audit reports n unqualified opinion standard report modified report n...

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