Communicating Levels of Assurance

1
Chapter 16

• Communicating Levels of Assurance

2
Discuss Audit Reports

• Designed to promote clear communication between
  auditor and financial statement reader by clearly
  stating
• What was audited and the division of
  responsibility management for the financial
  statements and the auditor for expressing an
  opinion (introductory paragraph)
• The nature of the audit process (scope paragraph)
• Auditor's opinion on the fair presentation of the
  financial statements (opinion paragraph)
• If an unqualified opinion cannot be expressed,
  reasons why (explanatory paragraph)
• The fourth reporting standard requires auditors
  to either express an opinion or state why an
  opinion cannot be expressed

3
What are the types of audit reports?

• Standard unqualified
• Unqualified opinion with modified wording
• Qualified
• Adverse
• Disclaimer

4
Explain the Standard Unqualified Report

• Statements present fairly
• No material departures from GAAP
• Disclosures are adequate
• All necessary audit procedures performed (no
  scope limitation)
• No change in GAAP with material impact
• Auditor is independent
• No going concern problems

5
Explain the Unqualified Report with Modified
Wording

• Statements present fairly, but auditor wishes to
  disclose additional information
• Substantial doubt about client being a going
  concern
• Change in accounting principles
• Justified departure from GAAP
• Auditor wishes to emphasize particular event,
  transaction, or subsequent occurrence
• Reference to other auditors
• Changes in comparative statements, such as
  differences in the level of audit report or a
  change in auditors where the predecessor's
  opinion will not be reissued

6
Explain the Qualified Report

• Statements present fairly except for....
• Material unjustified departure from GAAP
• Inadequate disclosure
• Scope limitation

7
Explain the Adverse Report

• Statements as a whole, do NOT present fairly
• Pervasive and material unjustified departure from
  GAAP
• Lack of important disclosure

8
Explain the Disclaimer of Opinion

• Auditor lacks independence
• Scope limitation
• Substantial going concern problem

9
Discuss Modifications Affecting the Opinion

• Departure from GAAP - whether the departure is
  justified or unjustified, amount and
  pervasiveness of the misstatement, and potential
  impact of misstatements on statement users
  determines whether an unqualified, qualified, or
  adverse opinion is issued.
• Scope limitation - imposed by client or
  circumstance, materiality of the amounts
  involved, auditor's ability to form an opinion on
  the statements without the evidence determines
  whether qualified or disclaimer is issued
• Going concern - depending on auditor's assessment
  of client's ability to remain a going concern,
  auditor may issue unqualified opinion with
  modified wording, qualified opinion, or disclaim

10
Financial Statement Reviews

• Sometimes a client does not need an audit.
  Practitioners can perform fewer procedures and
  report a lower, or no, level of assurance on the
  financial statements. The most common of these
  financial statement services are compilations and
  reviews.
• The standards for compilations and reviews of
  financial statements of non-public entities are
  called Statements on Standards for Accounting and
  Review Services (SSARS)

11
Financial Statement Reviews

• Inquiry and analytical procedures are performed
  for each significant account balance
• Accountant does NOT assess internal control or
  perform substantive tests
• Provides limited assurance that accountant is not
  aware of any reporting problems
• Accountant must be independent

12
Define Compilation

• Presents management information in financial
  statement form without any form of assurance
• Accountant must have general knowledge of client
  accounting records, accounting methods, and form
  and content of statements
• Accountant is not required to perform procedures
  to verify, corroborate, or review client
  information
• Accountant must read the statements to make sure
  they are free from obvious material misstatement

13
Define Compilation

• If accountant believes the statements are
  incorrect, incomplete, or misleading, s/he must
  obtain any additional information necessary to
  prepare accurate statements
• Compiled statements may omit disclosures if the
  accountant believes the omission is not done to
  mislead, and it is noted in the compilation
  report
• If accountant is not independent of client, a
  separate paragraph is added to the compilation
  report stating lack of independence
• Compiled statements may only be prepared for
  nonpublic entities.

14
Reports on Other Financial Information Special
Reports

• Statements prepared on a comprehensive basis
  other than GAAP (OCBOA)
• Reporting on specified elements, accounts, or
  items of financial statements
• Reporting on compliance with aspects of
  contractual agreements or regulatory requirements
  related to audited financial statements
• Reporting on special-purpose financial
  presentations to comply with contractual
  agreements or regulatory provisions
• Reporting on financial information presented in
  prescribed forms or schedules

15
Comment on Interim Financial Information

• SEC requires publicly traded companies to have
  their quarterly financial information reviewed by
  their independent auditors
• Review procedures much the same as required by
  SSARS
• Reporting on interim statements presented
  separately
• Reporting on interim information accompanying
  audited annual financial statements

16
Reports on Other Financial and Non-Financial
Information

• Prospective Financial Statements
• Forecasts and projections
• May compile (no assurance) or examine (positive
  assurance)
• Pro forma financial information
• Historical information adjusted for proposed or
  actual transactions
• Compliance with laws and regulations
• Compliance with requirements of specified laws,
  regulations, rules, contracts, or grants
• Effectiveness of entity's internal control over
  compliance with specified requirements

17
Discuss Evolving Assurance Services

• In 1994, the AICPA established the Special
  Committee on Assurance Services to identify new
  assurance services. The SCAS identified six
  services
• Electronic Commerce
• Business Performance Management
• Health Care Performance Management
• Risk Assessment
• Information Systems Reliability
• Elder Care Assurance