CHAPTER 2 The Auditor’s Reports

1. CHAPTER 2 The Auditor’s Reports

2. What is thepurposeof theaudit report? Ace Corp. Audit Report

3. What is the purpose of the audit report? The audit report is an explanation of the audit process and conclusions reached. The report is the formal communica- tion between the auditor and the external users of the financial state- ments, primarily the shareholders.

4. Footnotes Ace Company 2004 Financial Statements Generally Accepted Auditing Standards REPORTING STANDARDS 1. The report should identify the financial statements & distinguish between the responsibilitiesof management and the auditor.

5. REPORTING STANDARDS 1. The report should identify the financial statements. What financial statements are required by GAAP?

6. What financial statements are required by GAAP? - balance sheet - income statement - statement of retained earnings - statement of changes in financial position

7. REPORTING STANDARDS 1. The report should identify the financial statements. Could an auditor accept an engagement to audit only one (or more) financial statement?

8. Could an auditor accept an engagement to audit only one (or more) financial statement? yes - however, the auditor’s report would have to be qualified because of non- compliance with GAAP

9. REPORTING STANDARDS 2. The report should describe the scope of the auditor’s examination. • GAAS • plan & perform • reasonable assurance • examine evidence on test basis • assess accounting principles • assess significant estimates • evaluate overall statement presentation

10. Ace Company 2004 Financial Statements opinion? REPORTING STANDARDS 3. The report should contain either an expression of opinion on the financial statements or an assertion that an opinion cannot be expressed. In the latter case, the reasons therefor should be stated.

11. ? Ace Company G A A P 2004 Financial Statements REPORTING STANDARDS 4. Where an opinion is expressed, it should indicate whether the financial statements, present fairly, in all material respects, the financial position, results of operations and changes in financial position in accordance with an appropriate disclosed basis of accounting, which except in special circumstances should be GAAP. The report should provide adequate explanation with respect to any reservation contained in such opinion.

12. Report title: Auditor’s Report The Standard Unqualified Audit Report

13. Report title: Auditor’s Report Address: To the Shareholders of Ace Corporation: report may also be addressed to company or board of directors, not management

14. Report title: Auditor’s Report Address: To the Shareholders of Ace Company: Introductory paragraph: What statements were audited? What time period? What are client and auditor responsibilities?

15. Report title: Auditor’s Report Address: To the Shareholders of Ace Company: Introductory paragraph: We have audited the balance sheets of Ace Company as at December 31, 2004 and the statements of income, retained earnings, and changes in financial position for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

16. Scope paragraph: What is an audit?

17. Scope paragraph: We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

18. Opinion paragraph: What opinion did the auditor form?

19. Opinion paragraph: In our opinion, these financial statements present fairly, in all material respects, the financial position of Ace Company as at December 31, 2004 and the results of its operations and the changes in its financial position for the year then ended in accordance with generally accepted accounting principles.

20. Opinion paragraph: In our opinion, these financial statements present fairly, in all material respects, the financial position of Ace Company as at December 31, 2004 and the results of its operations and the changes in its financial position for the year then ended in accordance with generally accepted accounting principles. Name of firm: Taylor & Tower, CAs

21. Opinion paragraph: In our opinion, these financial statements present fairly, in all material respects, the financial position of Ace Company as at December 31, 2004 and the results of its operations and the changes in its financial position for the year then ended in accordance with generally accepted accounting principles. Name of firm: Taylor & Tower, CAs City: Anywhere, any province

22. Opinion paragraph: In our opinion, these financial statements present fairly, in all material respects, the financial position of Ace Company as at December 31, 2004 and the results of its operations and the changes in its financial position for the years then ended in accordance with generally accepted accounting principles. Name of firm: Taylor & Tower, CAs City: Anywhere, any province Audit report date: February 27, 2005 field work completion date

23. Types of Audit Reports

24. client Types of Audit Reports - unqualified - “statements present fairly”

25. client - qualified - “except for one or more exceptions, statements present fairly” Types of Audit Reports

26. Qualified Audit Report(GAAP Departure) Same introductory paragraph Same scope paragraph Explanatory third paragraph including $-effect In our opinion,except for the effects of ..., as discussed in the preceding paragraph, the financial statements present fairly, in all material respects, the financial position of Ace Company as of December 31, 2004 and the results of its operations and the changes in its financial position for the year then ended in accordance with generally accepted accounting principles.

27. Qualified Audit Report(Scope Limitation) Same introductory paragraph Except as explained in the following paragraph, I conductedmy audit in accordance with generally accepted auditing standards... Explanatory third paragraph In our opinion,except for the effects of adjustments, if any,which I might have determined to be necessary had I been able to ... asdiscussed in the preceding paragraph,the financial statements present fairly, in all material respects, the financial position of Ace Company as of December 31, 2004 and the results of its operations and the changes in its financial position for the year then ended in accordance with generally accepted accounting principles.

28. client Types of Audit Reports - adverse - “statements do not present fairly”

29. Adverse Audit Report Same introductory paragraph Same scope paragraph Explanatory third paragraph including $-effect In our opinion,because ... as explained in the preceding paragraph, the financial statements do notpresent fairly the financial position of Ace Company as at December 31, 2004 and the results of its operations and the changes in its financial position for the year then ended in accordance with generally accepted accounting principles.

30. client Types of Audit Reports - denial - “no opinion”

31. Denial(Scope Restriction) Same introductory paragraph Except as explained in the following paragraph, we conducted our audit in accordance with generally accepted auditing standards... Explanatory third paragraph including $-effect In view of the possible material effects on the financial statements of the matters described in the preceding paragraph, we are unable to express an opinion whether these financial statements are presented fairly in accordance with generally accepted accounting principles.

32. Unqualified Reports with Explanatory Paragraphs or Modified Wording

33. client In some circumstances, a change in the financial statements may result in a qualified or adverse opinion:

34. client In some circumstances, a change in the financial statements may result in a qualified or adverse opinion: - a change in accounting principle orapplication thereof not in accordancewith GAAP

35. client Changes in accounting principles or in their application excludes: - change in an estimate

36. client Changes in accounting principles or in their application excludes: - change in an estimate - error corrections not involving principles

37. client Changes in accounting principles or in their application excludes: - change in an estimate - error corrections not involving principles - changes in format and presentation

38. client Changes in accounting principles or in their application excludes: - change in an estimate - error corrections not involving principles - changes in format and presentation - changes due to substantially different events

39. Unqualified Reports with Explanatory Paragraphs or Modified Wording Treatment of an uncertainty about the client’s ability to continue to operate as a going concern depends on the accounting treatment used.

40. Unqualified Reports with Explanatory Paragraphs or Modified Wording Treatment of an uncertainty about the client’s ability to continue to operate as a going concern depends on the accounting treatment used. - if accounting treatment, disclosure and presentation comply with GAAP, no impact on auditor’s report

41. Unqualified Reports with Explanatory Paragraphs or Modified Wording Treatment of an uncertainty about the client’s ability to continue to operate as a going concern depends on the accounting treatment used.- if accounting treatment, disclosure and presentation comply with GAAP, no impact on auditor’s report - if do not comply with GAAP, a qualified or adverse report would be issued

42. Unqualified Reports with Explanatory Paragraphs or Modified Wording Inclusion of a fourth paragraph in the auditor’s report is necessary if prior financial statements were unaudited or were audited by another auditor, and these conditions are not disclosed in the notes to the financial statements.

43. Unqualified Reports with Explanatory Paragraphs or Modified Wording Opinion paragraph is revised if financial statements are prepared in accordance with an appropriate disclosed basis of accounting other than GAAP.

44. Unqualified Reports with Explanatory Paragraphs or Modified Wording Opinion paragraph is revised if financial statements are prepared in accordance with an appropriate disclosed basis of accounting other than GAAP. In my opinion, these financial statements present fairly … in accordance with the basis of accounting required by … as disclosed in note … to the financial statements.

45. Conditions Requiring a Departure From the Unqualified Report

46. Conditions Requiring a Departure From the Unqualified Report Scope limitation - the auditors were unable to perform some aspect of the audit that they considered necessary: Client-imposed - the client will not allow the auditor to perform an audit procedure Circumstance-imposed - because of some circumstance other than a client-imposed restriction, the auditor could not perform an audit procedure

47. Client-Imposed Scope Limitation audit scope is significantly limited audit scope is not significantly limited probably deny pursue alternative procedures

48. Circumstance-Imposed Scope Limitation adequate alternative procedures are not available adequate alternative procedures are available no audit report effect qualify or deny

49. balance sheet income statement Scope limitations may result in different opinions on individual statements. EXAMPLE: an auditor cannot adequately verify beginning inventory of a first-year client opinions?

50. unqualified income statement balance sheet Scope limitations may result in different opinions on individual statements. EXAMPLE: An auditor cannot adequately verify beginning inventory of a first-year client denial