ACC 450 Chapter 17

Unmodified Opinions- standard

"clean opinion" (1) FS presented in conformity with GAAP, (2) audit was performed in accordance with GAAS (or PCAOB standards, for publicly traded companies), including no scope limitations so significant as to prevent the auditors from gathering the evidence necessary to support their opinion (3) when no conditions resulting in explanatory language exist.

What Information to Include in Describing CAM

- Identification of the matter. • Description of the principal considerations that led the auditor to determine that the matter is a CAM. • Description of how the CAM was addressed in the audit. • Reference to the relevant financial statement accounts and disclosures that relate to the CAM.

Situations that will NOT result in explanatory information on consistency:

1. Change in estimate (e.g., changing the life or salvage value of fixed assets) 2. Changes in classification (e.g., dividing one expense into two line items on the income statement) 3. Change in principle immaterial this year but expected to be material in future. 4. Client uses one method for part of its inventory (e.g., LIFO) and another method (e.g., FIFO) for another part of it.

Scope limitations arise from 3 circumstances

1. Circumstances beyond the control of the client (e.g., important accounting records were destroyed). 2. Circumstances relating to the nature and timing of the auditors' work (e.g., the auditors are hired too late to observe the client's beginning inventory). 3. Think of client imposed as the auditor asks for information that is available and the client refuses.

Explanatory Paragraphs

1. Emphasis of matter- after opinion section 2. other matter- after Op and E of Matter 3. Basis of modification- immediately preceding Op

If scope limitation-> alternative procedures

1. If successful—a standard unmodified report may be issued. 2. If not successful, either a qualified opinion or a disclaimer is appropriate - based upon the pervasiveness

Situations that WILL result in an UM w/ e of matter

1. Material change in principle (e.g., FIFO to LIFO) 2. Change in reporting entity—change in method of accounting for subsidiaries 3. Correction of an error in principle 4. Change in principle inseparable from change in estimate (e.g., change in depreciation method from straight line to double declining balance method)

International Audit Report

1. PCAOB-> ISAs 2. Key Audit Matters 3. For public company audit reports, the engagement partner's name ordinarily is also included in auditor's responsibility section 4. For public companies, the international audit report requires the communication of existing key audit matters

Unmodified Opinions- with an emphasis of matter paragraph

1. refers to a matter appropriately presented or disclosed in the financial statements. 2. In certain circumstances an emphasis of matter paragraph is required. (going concern doubts and inconsistently applied GAAP) 3. In other circumstances an emphasis of matter paragraph is included at the auditor's discretion ( uncertainties)

Unmodified Opinions- on group FS

1. two or more CPA firms are involved in the audit of components of group financial statements 2. The key to this opinion is whether the group auditor chooses to (or not to) take responsibility for the work of the component auditor 3. if group auditor doesn't take responsibility for the component auditor's-> um w/modification, if take-> standard

Uncertainties

A. Report: Unmodified opinion, or unmodified opinion with an emphasis of matter paragraph, or disclaimer of opinion. B. A situation where conclusive audit evidence regarding the ultimate outcome cannot be expected to exist at the time of the audit because the outcome will occur in the future. C: if not properly disclosed and accounted for-> Qualified or adverse-> departure from GAAP

Going concern

A. Report: Unmodified with emphasis of matter paragraph or disclaimer of opinion. B. Audit should evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a year beyond FS date C. Overall approach: are there conditions and events indicating substantial doubt-> obtain management's plans and assess likelihood of effectiveness-> does CPA still have s-doubt?-> (Y) UM w/e of matter or disclaimer, (N) Standard D. Self-fulfilling prophecy E. presume properly discloses everything, if not qualified or adverse

Types of Audit Reports

A. Standard unmodified for a nonpublic company B. Standard unqualified for a public company

Unmodified Opinions with an Emphasis of a Matter Paragraph and Group Fin. Stmts

A. Substantial Doubt about a Company's Going-Concern Status (required) B. GAAP Not Consistently Applied (required) C. Uncertainties (not required) D. Other Circumstances that Result in an Emphasis of Matter Paragraph (not required) E. Group Financial Statements

Types of Opinions

A. Unmodified Opinions 1. Unmodified standard 2. Unmodified with an emphasis of matter paragraph- refers to what's in the FS or notes (going concern is in doubt or GAAP not consistently applied) 3. Unmodified with an other matter paragraph- refers to sth other than what's in the FS or notes (limited intended use) 4. Unmodified on group financial statements (a component audited by another auditor) B. Modified Opinions 1. Qualified opinion- limited GAAP departure or scope limitation 2. Adverse opinion- pervasive GAAP departure 3. Disclaimer of opinion- pervasive scope limitation

Adverse Opinion

An adverse opinion states that the FS are NOT presented fairly in conformity with GAAP. Auditors issue an adverse opinion when the departures from GAAP are both material and pervasive

Disclaimer of opinion

Due to a significant scope limitation (or very major uncertainties, including going concern uncertainties), the auditor was unable to obtain sufficient appropriate audit evidence (a scope limitation) on which to base the opinion, and the auditor concludes that the possible effects on the FS of undetected misstatements, if any, could be both material and pervasive. A disclaimer is not an opinion; it simply states that the auditor does not express an opinion on the FS.

GAAP Not Consistently Applied

If properly handled-> UM w/ e of matter, otherwise qualified or adverse (doesn't believe that the change is justified).

Comparative F/S

Situation: Public clients are required to, and many private companies choose to include comparative financial statements on more than one year together. can have different op, updated op from original op,

Audit Report public vs non-public

The public company report: 1. Includes the words "Registered" and "Independent" in the title. 2. References standards of the PCAOB rather than GAAP 3. Includes less detailed discussions of management responsibilities. 4. Includes an additional paragraph indicating that the auditors have also issued a report on the client's internal control over financial reporting. 5. Includes additional paragraphs describing Critical Audit Matters (CAM), if applicable.

PCAOB Form AP

disclosure of the engagement partner's name and certain information about other CPA firms that participated in the audit, filed within 35 days of the date the audit report is first included in a document filed with the SEC; 10 days for new securities, requires disclosure of total audit hours spent on the FS audit, reviews, and the audit of internal control over financial reporting, primarily to potential liability consequences of naming persons in the auditor's report

Critical Audit Matters (CAM)

matter communicated or required to be communicated to the Audit Committee-> matter relates to accounts or disclosures that are material to the FS->Matter involves especially challenging, subjective or complex auditor judgment; required only for current audit period, not in adverse/disclaim and internal control, PCAOB-> at least one/audit report,

Key Audit Matters (KAM)

matters that, in our professional judgment, were of most significance in our audit of FS of the current period. These matters were addressed in the context of our audit of the FS as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Basis for modification paragraph

not exist but basis for Qualified Op, basis for Adverse Op, basis for disclaimer Op, all bef Op paragraph

Unmodified Opinions- with an other matter paragraph

refers to a matter other than those presented or disclosed in the financial statements that, in the auditor's judgment, is relevant to users' understanding of the audit, the auditor's responsibilities, or the auditor's report. (eg. alerting to comparative FS, restricted use)

Examine consistency

required for first year audit of an entity which has been in existence for more than one period

Modified Op

required in two circumstances: A. Materially misstated financial statements (a "departure from GAAP") B. Inability to obtain sufficient appropriate audit evidence (a "scope limitation")

Qualified Opinion

the opinion states that the FS are presented fairly in conformity with GAAP "except for" the effects of some matter. The effects, while material, are not considered pervasive. departure from GAAP or scope limitation