Module 9 Acc 372 (UPDATE AFTER CLASS)

IN AUDIT REPORT:

Opinion whether F/S are presented fairly, in all material respects, i/c/w GAAP.

What is the Value of the Audit Report to F/S User?

Increases credibility of fs, investors confidence, and fs user confidence

What is Economic Value to the Company Issuing the F/S?

lowers cost of capital

What is the Source of the Value of audit report?

independence of the auditor in mind and appearance

Audit report contains

Title, Addressee & Opinion on F/S Paragraph

Addressee — Nonissuer

Depends on Engagement

Addressee — Issuer

Shareholders & Board of Directors

PARAGRAPHS — nonissuer

GAAS from AICPA

PARAGRAPHS — issuer

PCAOB auditing standards

Both paragraphs

basis for opinion section, auditor and managements responsibility, describes an audit

closing — nonissuer

Signature, Address & Report Date

closing — issuer

Signature, Address, Report Date & LENGTH OF SERVICE

Unique reporting consideration: Communicated to Audit Committee of Board of Directors

Material F/S accounts/disclosures that require challenging, complex, subjective auditor judgment. (management judgment and uncertainty)

Unique reporting consideration: in audit report

1. Identify issue (WHAT?)

2. Considerations to determine a CAM (WHY?)

3. Describe how addressed in the audit (HOW?)

4. Reference F/S accounts & disclosures affected (WHERE?)

UNIQUE REPORTING CONSIDERATION: no effect on auditors opinion

we are just drawing fs users attention. doesnt mean something was wrong, just unusual and difficult

UNIQUE REPORTING CONSIDERATION examples

litigation liabilities and disclosures
restructuring reserves (estimates)
goodwill and impairment

Unique reporting issue two options:

share responsibility or accept full responsibility

Types of audit opinions

unmodified
modified: qualified, adverse, disclaimer

unmodified opinion audit report

in our opinion, the fs present fairly in all material respects icw gaap

unmodified opinion audit report: special cases absent other considerations, opinion is unchanged

~ Reasonable, Justified Change in GAAP (Material)

~Substantial Doubt re: Ability to Continue as a Going Concern

(add emphasis of matter paragraph)

If special cases for unmodified opinion occur, does that mean fs are MM?

no

Potential Going Concern Modification to Audit Report

Auditor evaluates whether substantial doubt exists about entity’s ability to continue as a going concern (1 year)

How does auditor’s substantial doubt arise?

consecutive losses, difficulty repaying debt, negative cash flows from operations

What must auditors do to address substantial doubt?

evaluate the viability of managements plans to address going concern

What is reported by auditors & in management’s F/S, under what circumstances, and where?

Auditors:

-if substantial doubt is alleviated, no mention to audit report
-if substantial doubt is not alleviated, do include in audit report and going concern paragraph

Management:
-must disclose going concern issue and their plans in fs + footnotes

Pervasive influence on F/S

those in auditor’s professional judgment that are not limited to specific elements, represent substantial proportion of F/S (if limited), & disclosures fundamental to understanding F/S)

QUALIFIED OPINION paragraph

fs icw gaap except for …

QUALIFIED OPINION: issued for material but not pervasive

Departure from GAAP (enough evidence)

Scope Limitation (not enough evidence

QUALIFIED OPINION DEPARTURE FROM GAAP MATERIAL, BUT NOT PERVASIVE

The Company has STATED INVENTORIES AT COST in the accompanying balance sheets. GAAP requires INVENTORIES TO BE STATED AT THE LOWER OF COST OR MARKET.

adverse opinion paragraph

fs NOT icw gaap

adverse opinion issued for

material and pervaside: departure from gaap

disclaimer of opinion paragraph

do not express an opinion

disclaimer of opinion issued for

material and pervasive: scope limitation (unable to obtain evidence to provide a basis for an opinion)

If f/s are MM and not pervasive

Qualified opinion

if scope limitation and not pervasive

qualified opinion

if fs are MM and pervasive

Adverse

if scope limitation and pervasive

Disclaimer of opinion

common law

Case law developed over time
“legal precedent”

common law is typically used with which parties?

3rd parties and clients

statutory law

 Laws enacted by federal & state governments

Which acts go with statutory law?

-Securities Act of 1933

-Securities Exchange Act of 1934

Auditors’ Potential Liability under common law only

Breach of contract
Negligence
Fraud

breach of contract

violates contract terms

ordinary negligence

Lack of reasonable care (Violate Auditing Standards)

Gross Negligence

Lack of even minimum care (Recklessly violate Auditing Standards)

FRAUD

Intentional misrepresentation (omission) of material fact

What document is the contract between auditor and client?

engagement letter

Plaintiff’s burden of proof: Common law

1. Auditor had a DUTY to exercise due professional care.
2. Auditor BREACHED DUTY and failed to meet professional standards (NEGLIGENCE).
3. The plaintiff suffered LOSSES or damage.
4. The auditor’s negligence CAUSED the loss or damage.

Auditor’s Main Defense: Common law

-Auditor demonstrated due diligence (Followed the Auditing Standards)

comparative negligence

Client bears some responsibility for loss
Can reduce liability if can demonstrate this

Which third party user can sue auditor in all states?

PRIMARY BENEFICIARY

Which third party user can sue auditor in some states?

FORESEEN USER

Which third party user can sue auditor in few states?

FORESEEABLE USER

Which third party user can sue auditor in most states?

KNOWN USER

Statutory law: SECURITIES ACT OF 1933

Basis for liability: Untrue statements or omissions of material facts in registration statements
Plaintiff: initial purchasers of stock (ipo’s)

which form is for 1933?

S-1