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Clarified Auditing Standards: Forming an Opinion and Reporting on Financial Statements – Part 2

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Nov 5th 2015
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The first part of this article discussed the basic requirements of AU-C Section 700, Forming an Opinion and Reporting on Financial Statements. This part outlines the content of auditors' reports and makes reference to the illustrative reports in the application section of the standard.

Auditor's Report

This clarified standard contains the requirements for the form of the auditor's report, including the sections of the report and that it should be in writing.

Form of Auditor's Report for Audits Conducted in Accordance with GAAS

Title. Includes the word “independent” to clearly indicate that it is the report of an independent auditor.

Addressee. Addressed as required by the circumstances of the engagement (to the engaging person or body).

Introductory paragraph. This should identify the entity whose financial statements have been audited, state that the financial statements have been audited, identify the title of each statement that the financial statements comprise, and specify the date or period covered by each financial statement that the financial statements comprise.

Management's responsibility for the financial statements. Describes management's responsibility for the preparation and fair presentation of the financial statements, including:

  • 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.

Auditor's responsibility. The auditor's report should state:

1. That the responsibility of the auditor is to express an opinion on the financial statements based on the audit.

2. That the audit was conducted in accordance with GAAS and should identify the United States as the country of origin of those standards.

3. That those standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

4. That an audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements, and the procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error (unless the auditor has a responsibility to opine on the effectiveness of internal control).

  • In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control, and accordingly, no such opinion is expressed.
  • An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of significant accounting estimates made by management, as well as the overall presentation of the financial statements.

Internal control. If the auditor also has a responsibility to express an opinion on the effectiveness of internal control in conjunction with the audit of the financial statements, he or she should omit the phrase concerning internal control above that the auditor's consideration of internal control is not for the purpose of expressing an opinion on the effectiveness of internal control, and accordingly, no such opinion is expressed.

Sufficient audit evidence. The auditor's report should state whether the auditor believes that the audit evidence the auditor has obtained is sufficient and appropriate to provide a basis for the auditor's opinion.

Auditor's Opinion: The Section with the Heading ‘Opinion'

Unmodified opinion on financial statements. The auditor's opinion should state that the financial statements present fairly, in all material respects, the financial position of the entity as of the balance sheet date and the results of its operations and its cash flows for the period then ended, in accordance with the applicable financial reporting framework. The auditor's opinion should identify the applicable financial reporting framework and its origin.

Practical note: If the auditor's report contains a separate section on other reporting responsibilities, the headings, statements, and explanations referred to above should be under the subtitle “Report on the Financial Statements,” and the “Report on Other Legal and Regulatory Requirements” should follow the “Report on the Financial Statements.”

Other Matters

Signature of the auditor. Should include the manual or printed signature of the auditor's firm.

Auditor's address. Should name the city and state where the auditor practices.

Date of the auditor's report. Dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the auditor's opinion on the financial statements, including evidence that:

  • The audit documentation has been reviewed.
  • All the statements that the financial statements comprise, including the related notes, have been prepared.
  • Management has asserted that they have taken responsibility for those financial statements.

This clarified standard also contains the following sections:

  • Auditor's report for audits conducted in accordance with both GAAS and another set of auditing standards.
  • Comparative financial statements and comparative information.
  • Audit procedures.
  • Prior-period financial statements audited by a predecessor auditor.
  • Prior-period financial statements not audited.

Application and Other Explanatory Material

This clarified standard contains a section devoted to application of the requirements of the standard and additional explanatory material. It contains these examples of the auditor's opinion:

Illustration 1. An Auditor's Report on Consolidated Comparative Financial Statements Prepared in Accordance with Accounting Principles Generally Accepted in the United States of America

Illustration 2. An Auditor's Report on a Single Year Prepared in Accordance with Accounting Principles Generally Accepted in the United States of America

Illustration 3. An Auditor's Report on Consolidated Comparative Financial Statements Prepared in Accordance with Accounting Principles Generally Accepted in the United States of America When the Audit Has Been Conducted in Accordance with Both Auditing Standards Generally Accepted in the United States of America and International Standards on Auditing

Illustration 4. An Auditor's Report on a Single Year Prepared in Accordance with Accounting Principles Generally Accepted in the United States of America When Comparative Summarized Financial Information Derived From Audited Financial Statements for the Prior Year is Presented

Illustration 5. An Auditor's Report on a Single Year Prepared in Accordance with Accounting Principles Generally Accepted in the United States of America When Comparative Summarized Financial Information Derived From Unaudited Financial Statements for the Prior Year is Presented

This standard, along with all clarified auditing standards, is available for download from the AICPA website. Live webcasts and self-study courses on this and other subjects are available through my home page.

Related article:

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

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