Additional information regarding auditing:
18-1 The three paragraphs of the standard audit report are the (1) introductory paragraph, (2) scope paragraph, and (3) opinion paragraph.
18-2 The function of notes to financial statements is to provide adequate disclosure when information in the financial statements is insufficient to attain this objective.
18-3 Auditors may issue unqualified reports when the following conditions have been met:
(1) The financial statements are presented in conformity with generally accepted accounting principles, including adequate disclosure.
(2) The audit was performed in accordance with generally accepted auditing standards, including no significant scope limitations preventing the auditors from gathering the evidence necessary to support their opinion.
18-4 (1) Unqualified opinion?standard report. This report represents a "clean bill of health" and may be issued when there are no material departures from generally accepted accounting principles, no significant scope limitations preventing the gathering of necessary evidence, and when no conditions requiring explanatory language exist.
(2) Unqualified opinion?with explanatory language added to report. This is an audit report with an unqualified opinion, but with circumstances that result in the auditors adding certain explanatory language to the report. Examples of such circumstances are those in which other auditors have performed a portion of the audit, or when a question concerning an entity's ability to continue as a going concern exist.
(3) Qualified opinion. A qualified opinion is issued when the auditors' examination is restricted as to its scope or the financial statements depart from generally accepted accounting principles. A qualified opinion is still a positive opinion; it asserts that the presentation in the financial statements, viewed as a whole, is fair.
(4) Adverse opinion. This is a negative opinion, asserting that the financial statements are not a fair presentation. It is issued when the auditors' exceptions to the presentation in the financial statements are so significant that a qualified opinion would be an inadequate warning to users of those statements.
(5) Disclaimer of opinion. A disclaimer of opinion means that the auditors were unable to form an opinion. It is issued whenever there are such significant scope limitations that the auditors were unable to obtain sufficient evidence to form an opinion of the statements viewed as a whole, or a significant scope limitation imposed by the client.
18-5 Green should sign the report with the firm name?Cary, Loeb, & Co. The report should be dated as of the last day of field work, February 20.
18-9 Qualifying language is wording inserted in an auditors' report designed to lessen the auditors' responsibility for the presentation in the client's statements. The qualifying language uses the phrase "except for ..." to identify those elements of the statements for which the auditors do not accept responsibility for the fairness of presentation.
18-10 The statement is incorrect. While an explanatory paragraph will be added to the audit report for the departure from generally accepted accounting principles, the opinion will be either qualified or adverse.
18-11 If the client's failure to comply with generally accepted accounting principles is immaterial, the auditors may still issue an unqualified opinion. If the problem is material, they must qualify their report as to the accounting principles in question, using the "except for" qualifying language. If the problem is sufficiently material to overshadow the fairness of the financial statements ("very material"), the auditors must issue an adverse opinion.
18-12 A client can avoid an opinion qualified because of inadequate disclosure merely by making the appropriate disclosure in the financial statements.
18-13 Only an opinion qualified because of a scope limitation has qualifying language in both the scope and opinion paragraphs. When there is a material scope limitation, the audit does not conform, in all respects, to generally accepted auditing standards. Hence, the scope paragraph must be modified. Also, the auditors will not have gathered enough evidence to have an opinion on some element of the financial statements. Thus, the opinion paragraph also must be qualified.
18-14 Since the auditors have not been able to form an opinion on the financial statements taken as a whole, they must disclaim an opinion. However, they should set forth their reservations about the accounting treatment of the deferred income taxes in an explanatory paragraph to their disclaimer.
18-15 Adverse opinions do the client no good. Presumably, creditors and stockholders would not provide debt or equity capital and, if the client were under SEC jurisdiction, the SEC might launch an investigation of management for violations of the federal securities acts. Thus, the client usually will make whatever changes in the financial statements that the auditors require in order to avoid receiving an adverse opinion. In fact, in the few cases in which the client and its auditors cannot agree, the client would probably discharge the auditors instead of having them complete an audit that culminates in an adverse opinion.
18-16 When significant scope limitations are imposed by the client, the auditors generally should issue a disclaimer of opinion. As a disclaimer is of little value to the client, this potential strong action by the auditors serves as a deterrent to clients imposing scope limitations.
18-19 The reports containing audited financial statements filed by a company subject to the reporting requirements of the SEC may include:
Forms S-l through S-18. These are the "registration statements" for clients planning to issue securities to the public; they are accompanied by comparative audited financial statements.
Form 8-K. A report filed within 15 days of the occurrence of a specified significant event. If the event is a significant acquisition or disposal of assets, Form 8-K will be accompanied with pro forma financial information.
Form 10-K. This report is filed annually by publicly owned companies and includes audited financial statements and other detailed financial information.
18-20 (a) Generally, the independent auditors must issue a disclaimer of opinion when client imposed restrictions limit significantly the scope of the audit, because such restrictions lead to questions concerning whether the client is withholding important information.
Notes are an integral part of the financial statements. If there is contradiction or if the presentation is incomprehensible, this constitutes inadequate reporting and requires qualification of the audit report.
Because notes are prepared by management, the auditors cannot control their content. Other advisers, e.g., legal counsel, will influence the wording of notes. The auditors properly should recommend improvements in presentation, but they will make an opinion exception only if disclosure is inadequate or so unclear as to be misleading.
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(b) After discovering conditions and events that might indicate substantial doubt as to whether a firm can continue as a going concern, the auditors must obtain and evaluate management's plans for dealing with the conditions and events. After reviewing the feasibility of management's plans, if the auditors still believe that there is substantial doubt as to ability to continue as a going concern, they should determine that the matters are properly disclosed in the financial statements and also should modify the audit report to reflect that conclusion.
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The audit report is normally dated as of the last day of significant field work.
An example of how the opinion could have been worded had the the company left an audit trail...
We did not observe the taking of the physical inventory as of December 31, 19X0, since that date was prior to our appointment as auditors for the Company, and the Company's records do not permit adequate retroactive tests of those inventory quantities. Accordingly, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on the statements of income, retained earnings, and cash flows for the year ended December 31, 19X1.
In our opinion, based on our audit and the report of other auditors, the consolidated balance sheet as of December 31, 19X1 presents fairly, in all material respects, the financial position of AZNT as of December 31, 19X1, in conformity with generally accepted accounting principles.
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