Sunday 16 June 2013

Independent Auditors' Report.

Under this, we are going to place our emphasis on the auditor's report. A qualified auditor's report says that the financial statements are presented fairly. But before the auditor can draft his report, he has to undergo through the following steps:


  1. The auditor has to be engaged to perform the audit.
  2. The auditor must follow GAAS.
  3. The auditor must gather sufficient appropriate auditors' evidence.
  4. The auditor must evaluate the fairness of presentation relevant to GAAP.
  5. The auditor must have no reservations.

Let us take a look at the sections of a standard auditor's report:


  1. It must include a title such as "Independent Auditor's Report." This emphasizes the independence of the auditor.
  2. Management's responsibility. This shows that management is responsible for the preparation and fair presentation of the financial statements.
  3. The auditor's  responsibility. This shows that the auditor is responsible for the expression of his opinions based on the audit carried out.
  4. Opinion. This section shows that the financial statements are presented fairly, "in all material respects" in accordance with GAAP
  5. The firm's name. This includes the name of the firm that the auditor works for.
  6. Date. The report is dated "as at" the date the statements are approved at by management.
A sample of an independent auditor's report is given below:



INDEPENDENT AUDITOR'S REPORT
Board of Directors, Stockholders, Owners, and/or Management of
ABC Company, Inc.
123 Main St.
Anytown, Any Country

We have audited the accompanying financial statements of ABC Company, Inc. (a California corporation), which comprise the balance sheet as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year then ended, and the related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company, Inc. as of December 31, 20XX, and the results of its operations and its cash flows for the year then ended in accordance with U.S. generally accepted accounting principles.

AUDITOR'S SIGNATURE
Auditor's name and address

Date = Last day of any significant field work
This date should not be dated earlier than when the auditor has sufficient audit evidence to support the opinion.




Modified audit opinions:

When the financial statements “give a true and fair view” and the organization under audit has gone in accordance with all requirements, the auditor will issue an unmodified audit opinion. A modified audit opinion is issued in all other circumstances such as  when the auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are materially misstated or the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement and must be identified as such.


Types

There are three types of modified audit opinions. The first is an opinion in which the auditor states that there is a possibility of a misstatement in the client’s financial records that is “material but not pervasive.” In this case, the auditor states that everything in the audit is fairly presented with the exception of a specific item, and why that item is an exception. The second type of modified audit opinion comes with a disclaimer or opinion, which is used when the misstatement in the financial record is due to a scope limitation and is both material and pervasive. The third modified audit opinion is adverse; in this case, the misstatement is both material and pervasive, and must originate from a departure from applicable financial reporting framework.

Disclaimers

At the end of an audit, Generally Accepted Auditing Standards mandate that auditors must either express an opinion of the financial records in question, or must issue a disclaimer of opinion. An auditor may decide to issue a disclaimer of opinion if one of four circumstances are applicable: a lack of independence, scope limitations, substantial doubt about the organization’s ability to survive or matters involving uncertainties.
Auditor's report reservation:

Reservation of opinion include:



  1. Qualified Opinion - forms a positive opinion on the financial statements as a whole, but qualifies that opinion with respect to a departure from generally accepted accounting principles or a limitation in the scope of the audit.
  2.  Adverse Opinion - forms an opinion that the financial statements are not presented fairly in accordance with generally accepted accounting principles.
  3. Denial of Opinion - is unable to form an opinion on the financial statements as a whole because of a limitation in the scope of the audit.

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