Auditors and Their

1. Auditors and Their Opinions UAA - ACCT 650 Seminar in Executive Uses of Accounting Dr. Fred Barbee

2. The Auditor’s Role - According to Mother-in-Law

3. I’m an auditor! Jack, what do you do? Jack, the Auditor Mother-in-Law

4. He snoops around in other peoples books. What does Jack do? Friend of Mother-in-Law Mother-in-Law

5. Audit Reports

6. Audit Reports • The auditor’s report is the CPA’s end product, which is intended to describe the results of the examination.

7. Audit Reports Historical Perspective

8. Historical Perspective • The accounting profession was introduced in the US by British accountants. • Thus, early audit reports were heavily influenced by the reports used in Britain.

9. Historical Perspective • The wording of these reports was not uniform, but they were generally referred to as “Auditor’s Certificates.”

10. Early Audit Report We have examined the above accounts with the books and vouchers of the company and find the same to be correct. We approve and certify the above balance sheet correctly sets forth the position of the company. Price Waterhouse and Company For St. Louis Breweries, Ltd, 1900

11. Historical Perspective • In the absence of statutory requirements for audits, early public accounting practitioners had to justify each engagement on the basis of its economic benefit to the client.

12. Historical Perspective • Because auditing standards had not been developed, audits were not uniform.

13. Historical Perspective • Both the Federal Reserve Board (FRB) and the Federal Trade Commission (FTC) were dissatisfied with public accounting practice because of the quality of statements being issued.

14. Historical Perspective • As a result of discussions between the FRB, the FTC and the American Institute of Accountants (AIA), the forerunner of the AICPA, the FRB issued a suggested auditors report in 1917.

15. I have audited the accounts of Blank and Company for the period from … to … and I certify that the above balance sheet and statement of profit and loss have been made in accordance with the plan suggested and advised by the Federal Reserve Board and in my opinion set forth the financial condition of the firm at … and the results of its operations for the period. /s/ Auditor

16. Historical Perspective • This report marked the beginning of a series of recommended reports that ultimately led to today’s standard audit report. • Since 1917, the wording of the standard auditor’s report has been revised eight times.

17. Audit Report Revisions • The development of GAAS; • An evolution in the types of procedures auditors perform; • Added efforts to describe the nature of an audit; and • The development of GAAP.

18. Today’s Report . . . • Emphasize management’s responsibility for the statements; • Briefly describe an audit; and • Express an opinion about management’s presentation (the financial statements).

19. Historical Perspective • Before 1934, the auditor’s report read “We certify that in our opinion . . .” • This led to reports being referred to as auditor’s certificates.

20. Historical Perspective • However, the word certificate seemed to imply more exactness than could be achieved in the financial statements, and • The profession has shifted to the more appropriate term auditor’s report.

21. Historical Perspective • The term auditor’s report is more consistent with the idea that the auditor is . . . • expressing an opinion on, rather • than certifying the financial statements.

22. Historical Perspective • By permitting auditors to exercise judgment (express an opinion on), • users can expect to be able to rely on the auditor’s reports. . . • as providing reasonable assurance that no material misstatements have been included in the accounts.

23. Historical Perspective • Material misstatements are those errors that are sufficiently important that they could alter a prudent investor’s decision. • Materiality pertains to both . . . • Quantitative, and • Qualitative judgments.

24. Audit Reports An Overview

25. An Overview • Exhibit 1 (p. 3-9) shows a standard auditor’s report. • This exhibit is sometimes called a short-form report and is the most common report issued for inclusion in clients’ annual reports.

26. Generally Accepted Auditing Standards (GAAS) The Standards of Reporting

27. Audit Reports The General Format

28. Format of Audit Reports • The most common standard (short-form) audit report has three components . . . • The introductory paragraph; • The scope section; and • The opinion section

29. Report Title . . . • Auditing standards require the report be titled and include the word “independent” which conveys to users that the audit is unbiased. • Independent auditor’s report; • Report of independent auditor; • Independent accountant’s opinion.

30. Audit Report Address • Auditor’s reports may be addressed to: • The company; • The stockholders; or • The Board of Directors Typically addressed to one of these.

31. Introductory Paragraph We have audited the accompanying Balance Sheet of XYZ Company as of December 31, 1995, and 1994, and the related Statements of Income, Retained Earnings, and Cash Flows for the years then ended. Refer to Exhibit 1 (p. 3-9)

32. Introductory Paragraph 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.

33. Applicable Dates and Periods of Financial Statements . . . • The report is typically issued for comparative financial statements, as reflected by the dates of the reports cited in the first sentence of the first paragraph. (SAS 58, Section 5081).

34. Applicable Dates and Periods of Financial Statements . . . • The profession’s reporting standards require an expression of opinion regarding the financial statements taken as a whole.

35. Basic Financial Statements • The term basic financial statements is used in the professional literature to refer to . . . • The four main statements; • Descriptions of accounting policies; • Notes to the financial statements; • Schedules and explanatory material.

36. The Scope Paragraph • The scope paragraph is a factual statement about what the auditor did in the audit. • The paragraph begins with reference to the generally accepted auditing standards.

37. The Scope Paragraph We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements.

38. The Scope Paragraph An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

39. The Scope Paragraph An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

40. The Opinion Paragraph In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of X Company as of [at] December 31, 1995, and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.

41. Present Fairly . . . • Present fairly, in all material respects, means . . . . . . That the statements provide an objective, candid, and equitable representation of the entity’s financial position.

42. Types of Opinions Unqualified

43. Unqualified Opinion • Two types of opinions contain the “unqualified” opinion. • The standard unqualified audit report; and • The standard unqualified report with explanatory language or an explanatory paragraph.

44. Standard Unqualified Report • The auditor has audited a set of financial reports (statements). • The auditor accepts responsibility for expressing an opinion on these reports.

45. Standard Unqualified Report • The auditor has conducted an audit in accordance with GAAS • The statements are presented in accordance with GAAP.

46. Standard Unqualified Report • The report basically implies that the audited financial statements contain no significant problems or deficiencies • Hence, it is often referred to as a “Clean Opinion.”

47. Types of Opinions Qualified

48. Qualified Opinion . . . • Three conditions require a departure from the “unqualified” report . .. • The scope of the audit has been restricted; • The financial statements have not been prepared in accordance with GAAP; and • The auditor is not independent.

49. Qualified Opinion . . . • Another way of saying this is that a qualified opinion arises from either: • The auditor’s being unable to gather sufficient evidence to serve as a basis for an opinion; or • The client’s failure to follow GAAP in preparing the financial statements.

50. The Qualified Opinion says: . . . Except for the effects of the matter(s) to which the qualification relates, the financial statements presented fairly, in all material respects, the financial position, results of operations, and cash flows of the entity in conformity with GAAP.