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					The Auditor’s Report
 Types of Audit Reports
Correspondence
        YES        Unqualified Opinion
                    • Standard Report
                    • Modified Report
  YES, but...      Qualified Opinion
                    • Scope Qualification
                    • GAAP Departure Qualification
        NO         Adverse Opinion

    DON’T
    KNOW           Disclaimer of Opinion
    Types of Audit Reports
   Unqualified Opinion
    • Standard Report
    • Modified Report
       –Added explanatory language
         • without explanatory paragraph
         • with explanatory paragraph
 Added Explanatory Language
 Inaccordance with accounting
 principles of foreign nations
 Opinionbased in part on report of
 another auditor
          from a promulgated
 Departure
 accounting principle
 Uncertainties   (General)
 Going   Concern Uncertainties
     Added Explanatory
     Language (Continued)

             application of
 Inconsistent
 accounting principles
 Comparativefinancial statements -
 updated reports
 Information outside the basic
 financial statements
 Emphasis   of a matter
Updated Reports
                      In depen dent Au ditor's Rep ort

   [Sa me first and secon d parag rap hs as the stan dard repo rt]

   In o ur repo rt d ated March 1, 19X2, we expressed an o pinio n th at
   the 19X1 fin ancial state ments d id no t fairly p resent financial
   p osition , resu lts o f operation s, and cash flo ws in co nfor mity with
   generally accep ted acco u nting p rin cip les because of two
   dep artu res fro m such prin ciples: (1) the Co mp an y carried its
   pro perty, plan t, an d equ ip ment at ap praisal values, an d provided
   fo r d epreciation on the basis of su ch values, and (2) the Co mpan y
   d id n ot provid e for deferred in co me taxes with respect to
   d ifferences between inco me for financial repo rtin g purp o ses an d
   taxab le in co me. As described in Note X, th e Co mp an y has
   changed its metho d of acco un ting for these items an d restated its
   19X1 fin an cial statements to co nfo rm with generally accepted
   accou ntin g p rin cip les. Acco rding ly, o ur present op in io n o n the
   19X1 finan cial state ments, as presented herein , is d ifferent fro m
   th at exp ressed in o ur p revio us repo rt.

   In o ur opinion , th e fin an cial statements referred to ab ove present
   fairly, in all material respects, the finan cial position of X Co mpan y
   as of Decemb er 31, 19X2 and 19X1, and the resu lts o f its
   o peration s an d its cash flo ws for the years then ended in
   con for mity with generally accep ted accou nting princip les.
Explanatory Language-
Consistency
  As discussed in Note X to the financial statements, the
  Company changed its method of computing depreciation
  in 19X2.




             Effect on audit          Type of accounting               Accounting treatment
             report                   change or other change           of change
             ADD EXP L AN ATORY       • Chan ge in acco un tin g       Cu mu lative effect
             P AR AGR APH                 princip le                     adjustment o r
                                                                         restate ment
             (Bo th add itio n of   • Chan ge in repo rtin g           Restate ment
              an exp lan ator y         entity
              p aragraph and        • Correction o f an                Prio r perio d ad ju stment
              finan cial state ment     erro r in princip le
              d isclosure are       • Chan ge in p rincip le           Current or pro spective
              necessar y.)               in sep arable fro m chang e
                                         in estimate
             NO EXPL AN ATORY       • Chan ge in acco un tin g         Current or pro spective
              P AR AGR APH R EQUIRED    estimate
             (Disclo su re of the   • Error correctio n n ot           Prio r perio d ad ju stment
              matter in fin ancial        involving princip le
              statements may be     • Chan ge in classification        Restate ment
              necessar y.)          • Su bstantially different         No adju stment
                                          transactio n s o r even ts     necessary
                                    • Chan ges expected to h ave       No adju stment
                                           a material fu ture effect      necessar y
Explanatory Paragraph -
Uncertainty
                 In depen dent Au ditor's Rep ort

 [Sa me three parag rap hs as the stand ard repo rt]

 As d iscu ssed in No te X to the financial statemen ts, the
 Co mp an y is a d efendan t in a lawsu it alleging infringe ment of
 certain p aten t rig hts an d claimin g ro yalties an d p un itive
 d amages. The Co mpan y h as filed a cou nteraction , and
 prelimin ar y hearing s and discovery pro ceeding s o n b oth
 action s are in pro gress. The u ltimate o utco me of the
 litig ation cann ot p resently be determined. According ly n o
 pro vision for an y liab ility that may resu lt u po n adjud ication
 h as been made in the acco mp an ying financial statements.
Going Concern
Uncertainty
                In depen dent Au dit or's Rep ort

[Sa me t hree parag rap hs as the stand ard repo rt]

The acco mp an ying f inan cial st ate ments h ave been prepared
assu min g t hat the Co mp an y will co nt in ue as a go in g
con cern. As discussed in Note X to th e fin an cial st ate ments,
the Co mpan y has suffered recu rrin g losses fro m op eration s
and h as a net capital deficiency th at raise su bstant ial dou b t
abo ut its abilit y to co nt inu e as a g o ing con cern .
M anagemen t's p lans in regard to these matters are also
described in No te X. The finan cial statement s do not inclu de
an y adju stmen ts that mig ht result fro m th e ou tco me of t his
u ncertain t y.
Explanatory Paragraph - Rule
203 Departure
                          In depen dent Au ditor's Rep ort
     [Sa me first and secon d parag rap hs as the stan dard repo rt.]

     As explained in Note X to the fin an cial statemen ts, the Co mpan y has
     changed its meth od o f record in g revenues fro m the recog nitio n of
     revenue at the time o f sale to the reco gn ition o f revenue over the
     membersh ip term an d has ap p lied this ch ange retro actively in its
     financial state ments. Accou n tin g Prin ciples Bo ard [APB] Op in ion
     Nu mber 20, Accoun tin g Ch an ges, provides th at su ch a change be
     made b y inclu ding , as an element of net earn in gs d urin g the year of
     change, the cu mu lative effect of the ch an ge on prio r years. Had APB
     Op inion No . 20 been followed literally, th e cu mulative effect of th e
     accou ntin g chan ge wo uld h ave been inclu ded as a chang e in the
     19X2 in co me statement. Becau se o f the magn itu de and
     pervasiveness of th is ch an ge, we believe a literal ap plicatio n o f APB
     Op inion Nu mber 20 wo uld resu lt in a misleading presen tatio n, and
     th at th e chang e sho uld therefore be made on a retro active b asis.
     Acco rding ly, th e acco mpan yin g co nso lid ated financial statements
     fo r 19X1 h ave been restated .
     In o ur o pinio n, the fin an cial state ments referred to ab ove present
     fairly, in all material respects, th e con so lidated fin an cial p osition o f
     ABC Co rpo ration and co n so lid ated sub sidiaries as of December 31,
     19X2 and 19X1, an d the con so lidated resu lts o f their operation s an d
     their cash flows fo r the years then ended in con for mity with
     generally accepted accou ntin g p rin ciples.
            Types of Audit Reports
                     Unqualified Qualified Adverse Disclaimer
Accounting Issues
Departure from GAAP                X        X
Consistency               X
Auditing Issues
Lack of evidence
 By condition                       X                  X
 By client restriction              X                  X
Uncertainty
 General                  X
 Going concern            X                            X
Lack of independence                                   X
GAAP     Departures


Qualified opinion


Adverse opinion
GAAP Departures --
Qualified Opinion
                                            In depen dent Au ditor's Rep ort

                      [Sa me first and secon d parag rap hs as the stan dard repo rt]

                      The Co mpan y h as exclud ed, fro m p roperty and debt in the
                      acco mpan ying b alan ce sheets, certain lease o b lig ation s th at, in o ur
                      o pin io n, sho uld be cap italized in o rder to co nfor m with generally
                      accep ted acco u nting princip les. If these lease ob lig atio ns were
                      cap italized, p roperty wou ld b e increased b y $_ and $_, lon g-ter m debt
                      b y $_ an d $_, and retained earn in gs b y $_ an d $_ , as o f Dece mber 31,
                      19X2 an d 19X1, respectively. Add ition ally, net in co me wou ld be
                      in creased (decreased) b y $_ and $_ an d earnin g s p er sh are wo uld be
                      in creased (decreased) b y $_ an d $_, respectively, for the years then
                      ended .

                      In our o pinio n, except for the effects of n ot cap italizing certain lease
                      o bligatio ns as d iscussed in the p receding p aragraph , the fin ancial
                      state ments referred to ab ove present fairly, in all material resp ects, th e
                      financial po sitio n o f X Co mp an y as o f December 31, 1 9X2 an d 19X1,
                      and the results of its op eration s an d its cash flo ws for th e years then
                      ended in con fo rmity with generally accepted accou ntin g p rin ciples.




As mo re fu lly described in No te X to th e fin an cial statemen ts, the
Co mp an y h as exclu ded certain lease o b lig at ion s fro m p ropert y and
deb t in th e acco mp an ying balance sheets. In ou r o p inion , generally
accep ted accou nting p rin cip les requ ire th at su ch ob lig at ion s be
in cluded in t he b alan ce sheets.
Inadequate Disclosure -
Qualified Opinion

               In depen dent Au ditor's Rep ort

       [Sa me first an d secon d p aragraph s as
       stan d ard report]

       The Co mpan y's financial statements do no t
       d isclo se [describ e the n atu re of th e o mitted
       d isclo sures]. In ou r op in ion , d isclosure o f
       th is infor mation is requ ired b y generally
       accep ted accou nting princip les.

       In ou r op in ion , except for the omissio n of the
       in for matio n discussed in the preced in g
       p aragraph , the finan cial statements referred
       to ab ove presen t fairly, in all material
       respects, the finan cial po sitio n o f X
       Co mp an y as of Decemb er 31, 19XX, and the
       resu lts o f its o peration s and its cash flo ws
       fo r the year then ended in co nfor mity with
       generally accepted accou ntin g p rin ciples.
GAAP Departures --
Adverse Opinion
                                 In depen dent Au ditor's Rep ort

    [Sa me first and secon d parag rap hs as the stan dard repo rt]

    As discussed in Note X to the financial statements, the Co mp an y carries its
    pro perty, p lant and equ ip men t acco un ts at app raisal values, an d pro vides
    dep reciatio n on th e b asis o f such values. F urther, the Co mpan y does n ot pro vide
    fo r inco me taxes with resp ect to differences between fin an cial inco me an d taxable
    in co me arising becau se o f the u se, for in co me tax pu rpo ses, o f the installment
    meth od o f reportin g g ross pro fit fro m certain types of sales. Gen erally accepted
    accou ntin g princip les requ ire th at p rop erty, plan t an d eq uip ment be stated at an
    amo un t not in excess o f co st, redu ced b y depreciatio n based o n su ch amo un t, and
    th at deferred in co me taxes be pro vided .

    Because o f the dep artures fro m g enerally accep ted accou nting p rincip les iden tified
    above, as of Decemb er 31, 19X2 an d 19X1, inventories h ave been in creased $_ an d
    $_ b y in clusio n in manu factu rin g overhead of dep reciatio n in excess o f that b ased
    o n co st; pro perty, p lant an d equ ip ment, less accu mu lated d epreciation , is carried
    at $_ an d $_ in excess o f an amo un t b ased on the cost to the Co mpan y; d eferred
    in co me taxes o f $_ and $_ h ave no t been recorded ; resu ltin g in an in crease of $_
    and $_ in retained earn ing s an d in ap praisal surplus o f $_ an d $_, respectively. For
    the years end ed Decemb er 31, 19X2 an d 19X1, cost of g o od s sold has b een
    in creased $_ an d $_ , respectively, because of the effects o f the depreciation
    accou ntin g referred to ab ove an d deferred in co me taxes o f $_ an d $_ h ave n ot
    been provid ed, resultin g in an increase in n et in co me of $_ and $_ , resp ectively.

    In o ur op in io n becau se of the effects of the matters d iscu ssed in th e p recedin g
    p aragraph s, the fin ancial statements referred to ab ove do n ot presen t fairly, in
    con for mity with generally accepted accou n tin g prin ciples, the financial po sitio n of
    X Co mpan y as of Dece mber 31, 19X2 and 19X1, or the results of its operatio ns o r its
    cash flo ws for the years then ended .
Scope Limitations



  Qualified opinion



    Disclaimer of
Scope Limitation --
Qualified Opinion
                             In depen dent Au ditor's Rep ort
    [Sa me first p aragraph as the stand ard report]

    Excep t as d iscu ssed in the follo wing parag rap h, we co nd ucted o ur au dits in
    accord an ce with g enerally accepted aud itin g stan dards. Tho se stand ard s
    requ ire th at we p lan and perfor m the aud it to o btain reason ab le assu ran ce
    abo ut whether the finan cial state ments are free of material misstate ment. An
    aud it in cludes examinin g, on a test b asis, evid ence sup po rtin g th e amo u nts
    and d isclosures in the fin an cial statements. An au dit also in clud es assessing
    the acco un tin g princip les u sed and sign ificant estimates made b y
    man age ment, as well as evalu atin g the o verall financial statement
    presen tatio n. We believe th at o ur au dits provide a reaso nab le b asis for o ur
    o pin io n.
    We were un ab le to o btain au dited fin an cial statemen ts sup po rtin g th e
    Co mp an y's investment in a fo reig n affiliate stated at $ an d $ at Dece mber
    31, 19X2 and 19X1, respectively, or its equ ity in earnin g s of that affiliate of $_
    and $_, which is in clud ed in n et inco me for the years then ended as described
    in No te X to th e financial state ments; n or were we ab le to satisfy o urselves
    as to the carr ying value of the investment in the foreig n affiliate or the eq uity
    in its earning s b y o ther aud iting pro ced ures.
    In ou r op in ion , except for the effects o f such adjustments, if an y, as mig h t
    h ave been determined to be necessar y h ad we been ab le to examine evid ence
    regard in g th e foreig n affiliate investment and earning s, the fin an cial
    state ments referred to in the first parag rap h above p resent fairly, in all
    material respects, th e fin an cial po sitio n o f X Co mpan y as o f Dece mber 31,
    19X2 and 19X1, and the results o f its operatio ns and its cash flo ws for the
    years then ended in co nfo rmity with g enerally accep ted acco u nting
    princip les.
Scope Limitation --
Disclaimer of Opinion

                        In depen dent Au ditor's Rep ort

     We were en gaged to aud it the acco mp an ying b alance sheets o f
     X Co mp an y as o f December 31, 19X2 and 19X1, and the related
     state ments o f inco me, retained earn in gs, an d cash flo ws for the
     years then ended . These finan cial statements are the
     resp on sibility o f the Co mp an y's man ag ement.

     [Secon d parag rap h of stan dard repo rt sh ou ld be o mitted]

     The Co mpan y d id no t make a cou nt of its ph ysical inven tor y in
     19X2 o r 19X1, stated in the acco mp an ying financial statements at
     $__     as o f Dece mber 31, 19X2, an d at $__ as o f Dece mber 31,
     19X1. F urth er, eviden ce sup po rtin g th e co st o f p roperty and
     equ ip ment acqu ired prior to Dece mber 31, 19X1, is n o lon ger
     availab le. The Co mp an y's reco rds do n ot per mit the app licatio n
     o f o ther au ditin g pro ced ures to invento ries or pro perty and
     equ ip ment.

     Sin ce th e Co mpan y did not take ph ysical invento ries and we were
     n ot ab le to ap ply other au ditin g pro ced ures to satisfy ourselves
     as to invento ry q uan tities an d th e co st o f pro perty an d
     equ ip ment, the scope of o ur work was no t su fficien t to enable us
     to express, and we d o n ot exp ress, an op in ion on these financial
     state ments.
Old Terms
Short-form audit report
Piecemeal opinions
Certificate and certified audit
Subject to qualification
Clean opinion
Clean audits
 Communicating with
 Stockholders


Other information in an annual
 report

Stockholders’ meetings
Communicating with
Audit Committees

Internal control structure
 related matters
Material weaknesses
Other audit committee
 communications
Communicating with
Management


 Management letter

 Conferences with
  management
Ethics


Professional Ethics
 and the Auditing
 Environment
Elements of a
Profession
Systematic Theory
Professional Authority
Community Sanction
Regulative Codes
Culture
Organizations, Standards, and
Enforcement

   Organizations                  Standards and rules             Monitoring and enforcement


   Self-regulation


   AICPA                          Code of Professional Conduct    Trial Board—A ICPA Ethics Division
   Individual membership          Generally accepted auditing     Audit failure inquiries by the Quality Control
   Fir m membership                 standards                       Inquiry Committee
   • SEC Practice Section         Mandatory continuing            Public Oversight Board
   • Private Companies Practice     professional education        Peer review requirements
       Section                      requirements
                                  Quality control standards

   FASB                           Generally accepted accounting   Auditors
   GASB                             principles

   State societies of CPAs        State codes of ethics           State ethics enforce ment is usually handled
                                                                    jointly with the AICPA Trial Board



   External regulation


   SEC                            SEC rules and regulations       Censure
                                  Financial reporting releases    Disbarment fro m practice before the SEC
                                  Staff accounting bulletins

   Courts                         Civil law                       Fines
                                  Cri minal law                   Da mages to those injured
                                  Previously tried cases          Injunctions
                                                                  Imprison ment

   State boards of accountancy    State Licensing laws            Temporary or per manent loss of license
Organizations
AICPA
FASB
GASB
State Boards of Accountancy
State Societies of CPAs
Code of Professional
Conduct

Section I - Principles
Section II - Rules,
 Interpretations, and Rulings
Rule Sections:
  Responsibilities to the public (100
   and 200)
  Responsibilities to the client (300)
  Responsibilities to colleagues
   (400)
  Other responsibilities (500)
Responsibilities to the Public:
Independence, Integrity, and
Objectivity
                 Example of Organization of the Rules of Conduct:
                                Rule Section on
                     Independence, Integrity and Objectivity
                                                         Principles




                                            Ruling 101                                             Ruling 102
                                          Independence                                            Integrity and
                                                                                                   Objectivity




     Interpretation 101-1              Interpretation 101-3           Other Interpretations   Other Interpretations
       Impairment of                   Accounting Services
        Independence




        Other Rulings             Ruling             Other Rulings        Other Rulings           Other Rulings
                            Payroll Preparation
                                 Services
Responsibilities to the Public:
General and Technical
Standards



                                  Principles


             Rule 201              Rule 202           Rule 203
     Competence, Due Care,        Compliance     Accounting Principles
     Planning and Supervision   with Standards
     Sufficient Relevant Data
Responsibilities
to Clients


                  Principles



       Rule 301                Rule 302
       Confidential       Contingent Fees
   Client Information
Other Responsibilities



                                      Principles



        Rule 501           Rule 502              Rule 503          Rule 505
   Acts Discreditable   Advertising and       Commissions and   Form of Practice
                          Solicitation         Referral Fees       and Name
Quality Control

Independence
Assigning personnel to engagements
Consultation
Supervision
Hiring
Professional development
Acceptance and continuance of clients
Monitoring and
Enforcement


 Peer review
 Ethics enforcement
 Public Oversight Board
External Regulation

 SEC

 Legal Liability
Organizations
AICPA
FASB
GASB
State Boards of Accountancy
State Societies of CPAs

				
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