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Clarified Auditing Standards: Forming an Opinion and Reporting on Financial Statements – Part 1

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Oct 29th 2015
CPA Firm Support Services, LLC
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AU-C Section 700, Forming an Opinion and Reporting on Financial Statements, is an important Statement on Auditing Standards (SAS) because it is the foundation for reporting on audits. This article will summarize its key points in two parts.

Consistency
This SAS promotes consistency in the auditor's report. Consistency occurs when the audit has been conducted in accordance with Generally Accepted Auditing Standards and promotes credibility in the marketplace. Also, consistency helps promote users' understanding and identification of unusual circumstances when they occur.

Objectives
Objectives of the auditor are to form an opinion on the financial statements based on an evaluation of the audit evidence obtained, including evidence obtained about comparative financial statements or comparative financial information, and to express clearly that opinion on the financial statements through a written report that also describes the basis for that opinion.

Significant Changes
This clarified standard lists the most significant changes as:

1. A requirement to describe management's responsibility for the preparation and fair presentation of the financial statements in more detail than what was required in previous AU Section 508.

2. The description includes an explanation that management is responsible for:

  • The preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework.
  • The design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement – whether due to fraud or error.

3. The Auditing Standards Board believes this addition to the auditor's report will communicate more clearly the responsibilities of management for the preparation of the financial statements.

4. The SAS requires the use of headings throughout the auditor's report to clearly distinguish each section of the report.

This clarified standard contains sections on requirements, including such things as:

  • Forming an opinion on the financial statements.
  • The auditor's evaluations of the financial statements.

Form of Opinion
The standard explains when and how the auditor should express his or her opinion on the financial statements, specifically:

1. Unmodified opinion. Is expressed when the auditor concludes that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

2. Modified opinion. Is expressed when in the auditor's report, in accordance with AU-C Section 705, Modifications to the Opinion in the Independent Auditor's Report, the auditor:

  • Concludes that, based on the audit evidence obtained, the financial statements as a whole are materially misstated; or
  • Is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.

If the auditor concludes that the financial statements do not achieve fair presentation, he or she should discuss the matter with management and, depending on how the matter is resolved, should determine whether it is necessary to modify the opinion in the auditor's report in accordance with AU-C Section 705.

The contents of the auditor's report will be discussed in Part 2 of this article.

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