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Clarified Auditing Standards: Forming an Opinion and Reporting on Financial Statements – Part 3

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Dec 3rd 2015
CPA Firm Support Services, LLC
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The auditor's objective is to gather sufficient evident to form an opinion on the financial statements and to express clearly an opinion on the financial statements through a written audit report.

AU-C Section 700, Forming an Opinion and Reporting on Financial Statements, includes 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. An illustrative unmodified audit report is included below.

Form of Opinion

An 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.

A 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 the evidence indicates the financial statements as a whole are materially misstated, or when the auditor is unable to obtain appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.

AU-C Section 705 and AU-C Section 706, Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor's Report, are summarized in the next article.

Concepts of Report Preparation

The following are some basic concepts of audit report preparation:

Addressee. The audit report is normally addressed to the board of directors (trustees) and stockholders, unless the firm was engaged by others.

Report signing. The firm's name should be signed by the engagement partner. The signature can be manual or printed.

Report dating. The report should be dated when all audit work has been completed and reviewed, and when management has reviewed and taken responsibility for the final draft of the financial statements (the date financial statements are available for issue for nonpublic entities). The management representation letter should be dated as of the same date.

Modifications of the Standard Audit Report

Emphasis of a matter. Circumstances may require emphasis of a matter that doesn't cause a qualification of the standard audit report. The explanatory paragraph should be placed after the opinion paragraph. Significant changes in accounting principles; material uncertainties, such as threats to continued existence; and use of other auditors to audit part of the financial statements are a few examples of such circumstances.

Qualified opinion. Scope limitations and departures from Generally Accepted Accounting Principles (GAAP) or other reporting frameworks are common qualifications. When these situations arise, an explanatory paragraph referenced to a footnote should be inserted before the opinion paragraph.

Disclaimer of opinion. When scope limitations are so significant that the auditor cannot evaluate financial statement assertions, there may be an inadequate basis for expressing an opinion on the financial statements. No opinion would be expressed in these circumstances.

Adverse opinion. Departures from GAAP or the applicable reporting framework may have a material impact on the financial statements, and the statements may not be presented fairly. In such cases, an explanatory paragraph referenced to a footnote should be inserted before the opinion paragraph that describes all the reasons for the adverse opinion and their affects on the financial statements.

Illustrative Standard Audit Report

INDEPENDENT AUDITOR'S REPORT

To the Board of Directors (or appropriate management person) 
Always Best Corporation
Hometown, USA

Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Always Best Corporation, which comprise the balance sheets as of December 31, 20X2 and 20X1, and the related statements of comprehensive income, changes in stockholders' equity and cash flows for the years then ended, 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 these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated 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 based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. 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. 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. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the 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 appropriate to provide a basis for our audit opinion.

Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Always Best Corporation as of December 31, 20X2 and 20X1, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Largess, Ottiter & Co., CPAs

Hometown, USA
(Date financial statements are available for issue)

Note: Exhibit A to the clarified standard contains a number of modified report examples:

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

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Related articles:

Clarified Auditing Standards: Forming an Opinion and Reporting on Financial Statements – Part 1
Clarified Auditing Standards: Forming an Opinion and Reporting on Financial Statements – Part 2

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