Audit Reports under Various Circumstances

1
Audit Reports under Various Circumstances
Standard Audit Report 1. Standard
Responsibility Paragraph 2. Standard Scope
Paragraph 3. Standard (Unqualified) Opinion
Paragraph
Immaterial exception
2
Certification (source chooses measurement
criteria and auditor -- will it work?)
Auditor
Audit Report



Management
Investors
Audited Financials
3
Accounting Measurement Types

• Hard numbers - attached to physical (fiscal)
  quantities of primary transactions cash,
  receivables, inventory, fixed asset additions,
  payables, related sales and cost of sales
• Allocations - spread hard numbers over time,
  segments, units produced depreciation expense,
  accumulated depreciation, goodwill amortization,
  overhead assignment.
• Accounting estimates - approximate value of
  transactions or losses that may occur in the
  future or have occurred bad debts, warranty
  expense, for inventory obsolescence losses
• Uncertainties - disclosure of possible losses
  that cannot yet be quantified as a point
  estimate, but affect interpretation of current
  financial statements.

4
Probability that an event or condition has or
will occur
5
Three Loss Contingency Distributions
a. Pending warranty costs
of possible loss
3.0
1.5M
M
0
6
Conditions and Events That May Indicate
Substantial Doubt about an Entitys Ability to
Remain a Going Concern

• Negative (financial) trends
• Other indications of possible financial
  difficulties
• (loan defaults, refinancing, lack of compliance)
• Internal matters (labor problems, unfavorable
  long-term commitments, dependence on particular
  project success)
• External matters that have occurred

Source SAS No. 59 (ACIPA, 1988), para. 6
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Going-Concern Auditing and Reporting--U.S. GAAS
Review Conditions, Events, and Audit Findings
8
Auditors Reporting Decision Model
Real-world conditions of client related to
Fee potential
Personal observation and audit firms client
selection/ retention policies
Auditing Procedures
General Guidance and criteria
Auditor
GAAP
Mental image of client conditions
GAAS and professional ethics
Utility function
Knowledge and skills
Processing
CPA firm policies
Laws and regulations
Decision (adjust, disclose modify report, resign)
Audit contract
Audited financial statements
Audit report
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World Wide Acquisitions, Inc.(reverse the
reporting process)

• Co. A - divided audit report
• Co. B - going concern paragraph
• Co. C - except for (unjustified acctg. change)

• Co. D - accounting change paragraph (D has none)
• Co. E - related party paragraph
• Co. F - standard report -- any problems?