Title: Audit Reports and Communication Principles of Auditing: An Introduction to International Standards o
1Audit Reports and Communication Principles of
Auditing An Introduction to International
Standards on Auditing - - Ch. 12
- Rick Stephan Hayes,
- Roger Dassen, Arnold Schilder,
- Philip Wallage
2Management Responsibility for Audit Report - SOx
- Sox Requires that the principal executive officer
or officers and the principal financial officer
or officers, certify in each report filed with
the SEC the following - the signing officer has reviewed the report
- the report does not contain any untrue statement
of a material fact or omit to state a material
fact - the financial statements, and other financial
information, fairly present in all material
respects the financial condition of the company - the signing officers
- are responsible for establishing and maintaining
internal controls - have evaluated the effectiveness of the companys
internal controls and - have presented in the report their conclusions
about the effectiveness of their internal
controls based on their evaluation
3Corporate Responsibility for Audit Report under
SOx (cont.)
- Requires that the principal executive officer or
officers and the principal financial officer or
officers, certify in each report filed with the
SEC the following - the signing officers have disclosed to the
companys auditors and the audit committee of the
board of directors - all significant deficiencies in the design or
operation of internal controls which could
adversely affect the companys ability to record,
process, summarize, and report financial data and
have identified for the companys auditors any
material weaknesses in internal controls and - any fraud, whether or not material, that involves
management or other employees who have a
significant role in the companys internal
controls
4ISA 700 Elements of Auditors Report Not in Text
- (a) Title
- (b) Addressee
- (c) Introductory paragraph
- (d) Managements responsibility for the financial
statements - (e) Auditors responsibility
5ISA 700 Elements of Auditors Report (cont.)
- (f) Auditors opinion
- (g) Other reporting responsibilities
- (h) Auditors signature
- (i) Date of the auditors report and
- (j) Auditors address.
6Contents of the Auditor's Report
- title,
- addressee,
- opening or introductory paragraph
- scope paragraph (describing the nature of an
audit) - opinion paragraph containing an expression of
opinion on the financial statements, - the date of the report
- the auditor's address, and
- auditors signature
7Example PCAOB Amgem Saple audit report from Audit
Standard No. 4 NEXT SLIDE
8- Report of Independent Registered Public
Accounting Firm on the Financial Statements -
- The Board of Directors and Stockholders of Amgen
Inc. - We have audited the accompanying
Consolidated Balance Sheets of Amgen Inc. (the
Company) as of December 31, 2005 and 2004, and
the related Consolidated Statements of
Operations, Stockholders Equity, and Cash Flows
for each of the three years in the period ended
December 31, 2005. Our audits also included the
financial statement schedule listed in the Index
at Item 15(a)2. These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an
opinion on these financial statements and
schedule based on our audits. - We conducted our audits in
accordance with the standards of the Public
Company Accounting Oversight Board (United
States). Those standards require that we plan and
perform the audit to obtain reasonable assurance
about whether the financial statements are free
of material misstatement. An audit includes
examining, on a test basis, evidence supporting
the amounts and disclosures in the financial
statements. An audit also includes assessing the
accounting principles used and significant
estimates made by management, as well as
evaluating the overall financial statement
presentation. We believe that our audits provide
a reasonable basis for our opinion. - In our opinion, the financial
statements referred to above present fairly, in
all material respects, the consolidated financial
position of Amgen Inc. at December 31, 2005 and
2004, and the consolidated results of its
operations and its cash flows for each of the
three years in the period ended December 31,
2005, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the
related financial statement schedule, when
considered in relation to the basic financial
statements taken as a whole, presents fairly in
all material respects the information set forth
therein. - We also have audited, in
accordance with the standards of the Public
Company Accounting Oversight Board (United
States), the effectiveness of Amgen Inc.s
internal control over financial reporting as of
December 31, 2005, based on criteria established
in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated
March 2, 2006 expressed an unqualified opinion
thereon. - Ernst Young LLP
- Los Angeles, California
- March 2, 2006
9Example PCAOB sample audit report from Audit
Standard No. 5 NEXT SLIDES
10Report of Independent Registered Public
Accounting Firm Introductory paragraph We have
audited the accompanying balance sheets of W
Company as of December 31, 20X8 and 20X7, and the
related statements of income, stockholders'
equity and comprehensive income, and cash flows
for each of the years in the three-year period
ended December 31, 20X8. We also have
audited management's assessment, included in the
accompanying title of management's report, that
W Company maintained effective internal control
over financial reporting as of December 31, 20X8,
based on Identify control criteria, for example,
"criteria established in Internal
ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the
Treadway Commission (COSO)." . W Company's
management is responsible for these
financial statements, for maintaining effective
internal control over financial reporting, and
for its assessment of the effectiveness of
internal control over financial reporting. Our
responsibility is to express an opinion on these
financial statements and an opinion on the
company's internal control over financial
reporting based on our audits.
11Scope paragraph We conducted our audits in
accordance with the standards of the Public
Company Accounting Oversight Board (United
States). Those standards require that we plan and
perform the audits to obtain reasonable assurance
about whether the financial statements are free
of material misstatement and whether effective
internal control over financial reporting was
maintained in all material respects. Our audits
of the financial statements included examining,
on a test basis, evidence supporting the amounts
and disclosures in the financial statements,
assessing the accounting principles used and
significant estimates made by management, and
evaluating the overall financial statement
presentation. Our audit of internal control over
financial reporting included obtaining an
understanding of internal control over financial
reporting, assessing the risk that a material
weakness exists, testing and evaluating the
design and operating effectiveness of internal
control based on the assessed risk, and
performing such other procedures as we considered
necessary in the circumstances. We believe that
our audits provide a reasonable basis for our
opinions.
12Definition paragraph A company's internal
control over financial reporting is a process
designed to provide reasonable assurance
regarding the reliability of financial reporting
and the preparation of financial statements for
external purposes in accordance with generally
accepted accounting principles. A company's
internal control over financial reporting
includes those policies and procedures that (1)
pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets
of the company (2) provide reasonable assurance
that transactions are recorded as necessary to
permit preparation of financial statements in
accordance with generally accepted accounting
principles, and that receipts and expenditures of
the company are being made only in accordance
with authorizations of management and directors
of the company and (3) provide reasonable
assurance regarding prevention or timely
detection of unauthorized acquisition, use, or
disposition of the company's assets that could
have a material effect on the financial
statements.
13Inherent limitations paragraph Because of its
inherent limitations, internal control over
financial reporting may not prevent or detect
misstatements. Also, projections of any
evaluation of effectiveness to future periods are
subject to the risk that controls may become
inadequate because of changes in conditions, or
that the degree of compliance with the policies
or procedures may deteriorate. Opinion
paragraph In our opinion, the financial
statements referred to above present fairly, in
all material respects, the financial position of
W Company as of December 31, 20X8 and 20X7, and
the results of its operations and its cash flows
for each of the years in the three-year period
ended December 31, 20X8 in conformity with
accounting principles generally accepted in the
United States of America. Also in our opinion, W
Company maintained, in all material respects,
effective internal control over financial
reporting as of December 31, 20X8, based on
Identify control criteria, for example,
"criteria established in Internal
ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the
Treadway Commission (COSO)." . Signature City
and State or Country Date
14The opinion expressed in the auditor's report may
be one of four types
- unqualified,
- qualified,
- adverse, or
- disclaimer of opinion
Q
U
A
D
15Unqualified Audit Opinion
- Most common type of audit report
- Called clean opinion
- Used for more than 90 per cent of all audit
reports - Other audit reports are referred to as 'other
than unqualified reports (adverse opinion,
disclaimer of opinion, and qualified opinion).
16An Unqualified Opinion should be expressed
when the auditor concludes that the
financial statements give a true and fair
view or are presented fairly,
in all material respects, in accordance
with the applicable financial reporting
framework.
17Modifications To The Opinion ISA 705 (not in
text)
- ISA 705 uses the term modifications to the
opinion to describe qualified opinions (except
for opinions), adverse opinions, and disclaimers
of opinion. - ISA 705 establishes standards and provides
guidance on (a) circumstances that may result in
a modification to the opinion in the auditors
report, (b) the type of opinion appropriate in
the circumstances, and (c) the form and content
of the auditors report when the auditors
opinion is modified.
18The auditor should modify the opinion in the
auditors report when (not in text)
- (a) The auditor concludes that, based on the
audit evidence obtained, the financial statements
are not free from material misstatement and
accordingly are not prepared, in all material
respects, in accordance with an applicable
financial reporting framework or - (b) The auditor is unable to obtain sufficient
appropriate audit evidence to conclude that the
financial statements are free from material
misstatement.
19Auditors Report Containing a Qualified Opinion
- An auditors report containing a qualified
opinion is issued when the auditor concludes that
an unqualified opinion cannot be expressed but
that the effect of any disagreement with
management, or limitation on scope is not so
material as to require an adverse opinion or a
disclaimer of opinion.
20Auditors Report Containing an Adverse Opinion
- An adverse opinion is issued when the effect
of a disagreement is so material and pervasive to
the financial statements that the auditor
concludes that a qualification of her report is
not adequate to disclose the misleading or
incomplete nature of the financial statements.
21Auditors Report Containing a Disclaimer of
Opinion
- An auditors report containing a disclaimer of
opinion should be expressed when the possible
effect of a limitation on scope is so material
and pervasive that the auditor has not been
able to obtain sufficient appropriate audit
evidence and therefore is
unable to express
an opinion on the
financial statements.
22In addition to the, specific elements discussed,
whenever the auditor expresses a modified opinion
on the financial statements, the auditor should
include a paragraph that provides
- (a) A clear description of all the substantive
reasons for the modification - (b) In the event of a disagreement with
management about disclosures, a description of
the omitted disclosures, unless impracticable or
prohibited by law or regulation. - (c) In the event of a disagreement with
management, a description and quantification of
the principal effects on the financial statements
of the matter giving rise to the modification - (d) In the event of an inability to obtain
sufficient appropriate audit evidence, a
description of the reason for the inability.
23An Emphasis of a Matter Paragraph with an
Unqualified Opinion
- An auditors unqualified report is sometimes
expanded upon to explain matters that do
not affect the auditors opinion, but should be
emphasized to the financial statement user. - In certain circumstances an auditors report may
be modified by adding a fourth paragraph to
highlight a material going concern problem or
when there is significant uncertainties in the
future which may affect the financial statements.
24ISA 706, Emphasis of Matter Paragraphs and Other
Matters Paragraphs in the Independent Auditors
Report (Not in text)
- The auditors report should emphasize a matter
presented or disclosed in the financial
statements or the notes when - (a) the matter is both unusual and
- (b) of fundamental importance to the users
understanding of the financial statements.
25An auditor might write an Emphasis of a Matter
paragraph
- If there is a significant uncertainty which may
affect the financial statements, the resolution
of which is dependent upon future events - Examples of uncertainties that might be
emphasized include - the existence of related party transactions,
- important accounting matters occurring subsequent
to the balance sheet date - matters affecting the comparability of financial
statements with those of previous years (e.g.
change in accounting methods) - Litigation, long-term contracts, recoverability
of asset values, losses on discontinued
operations - To highlight a material matter regarding a going
concern problem.
26Going Concern
- The going concern assumption is that the
enterprise is normally viewed as a going concern,
that is, as continuing in operation for the
foreseeable future. - When a question arises regarding the
appropriateness of the going concern assumption,
the auditor should gather sufficient appropriate
audit evidence to attempt to determine the
entity's ability to continue in operation for the
foreseeable future.
27Going Concern Disclosure
- If the going concern questions are not resolved,
the auditor must adequately disclose in her
report the principal conditions that raise doubt
about the entity's ability to continue in
operation in the foreseeable future. - The disclosure should
- describe the principal conditions that raise
doubt - state that there are doubts about going concern,
therefore the entity may be unable to realize its
assets and discharge its liabilities in the
normal course of business - state that the financial statements do not
include any adjustments relating to the
recoverability and classification of recorded
asset amounts or to amounts and classification of
libilities.
28Circumstances That May Result in Modifications to
the Audit Report
- According to ISA 705. there are at least two
circumstances where the auditor may not be able
to express an unqualified opinion - a limitation in scope and
- a disagreement with management
-
29 Limitation on Scope
- Scope limitations arise when the auditors are
unable for any reason to obtain sufficient
appropriate audit evidence to conclude that the
financial statements are free from material
misstatement
30 Disagreement with Management
- The auditor may disagree with management as to
- a) The acceptability of the accounting policies
selected - b) The method of policy application, including
the adequacy of valuations and disclosures
in the financial statements or - c) The compliance of the
financial statements with relevant
regulations and
statutory requirements. - If any of these disagreements are material, but
not - pervasive, the auditor should express a qualified
opinion. - If the effect of the disagreement is so material
and pervasive to the financial statements that a
qualification would not be adequate , an adverse
opinion should be expressed.
31- In determining the pervasiveness of the effect of
a disagreement with management or the inability
to obtain sufficient appropriate audit evidence,
the auditor considers - (a) The extent to which the disagreement with
management or inability to obtain sufficient
appropriate audit evidence can be (i) related to
specific items in the financial statements and
(ii) quantified. - (b) Whether the effect of the disagreement with
management on the financial statements can be
clearly described in the auditors report so that
the modification can address the incomplete or
misleading nature of the financial statements.
32Uncertainties Leading to Qualification of Opinions
- Although ISAs specify qualification of opinions
based on either limitation of scope or
disagreement with management, certain
uncertainties such as material uncertainties,
lack of consistency of application of accounting
principles, independence of auditor, reports in
reference to experts or fraud may lead to an
auditors report containing a qualification of
opinion in many countries.
33Accounting Principles Not Consistently Applied
- Lack of consistency in the application of
accounting principles in the current period in
relation to the preceding period may require a
modification to an unqualified opinion in many
countries based on local standards.
34Auditor is Not Independent
- IFAC's Guideline on Ethics for Professional
Accountants stresses the great importance to
auditing of independence both in fact and
appearance. However, the ISA Auditing standards
do not require a qualified opinion or a
disclaimer of opinion if the auditor is not
independent, although this is the case in most
countries.
35Reports involving other auditors and experts
- ISA 620 suggests that when expressing an
unqualified opinion the auditor should not refer
to the work of an expert in her report as such a
reference might be misunderstood to be a
qualification of the auditor's opinion or a
division of responsibility. If the auditor as a
result of the other auditor's or expert's work
issues an auditors report containing other than
an unqualified opinion, she may in some
circumstances describe the work of the expert.
36Communications With Those Charged With Governance
- ISA 260 states The auditor should communicate
audit matters of governance interest arising from
the audit of financial statements with those
charged with governance of an entity. - Governance is the term used to describe the
role of persons entrusted with the supervision,
control and direction of an entity, usually the
board of directors or supervisory board or the
audit committee.
37Governance Structures
- The structures of governance vary from country to
country reflecting cultural and legal
backgrounds. - In some countries, the supervision function, and
the management function are legally separated
into different bodies, such as a supervisory
(wholly or mainly non-executive) board and a
management (executive) board. - In other countries, like the U.S., both functions
are the legal responsibility of a single, unitary
board.
38Auditor Communications to Governance Entity
- Audit matters of governance interest to be
communicated by the auditor to the board or audit
committee ordinarily include - Material weaknesses in internal control
- Non-compliance with laws and regulations.
- Fraud involving management
- Questions regarding management integrity
- The general approach and overall scope of the
audit - The selection of, or changes in, significant
accounting policies and practices that have a
material effect on the financial statements
39Auditor Communications to Governance Entity (cont)
- Audit matters of governance interest to be
communicated by the auditor to the board or audit
committee ordinarily include - The potential effect on the financial statements
of any significant risks and exposures, such as
pending litigation, that requires disclosure in
the financial statements - Significant audit adjustments to the accounting
records - Material uncertainties related to the entitys
ability to continue as a going concern - Disagreements with management about matters that
could be significant to the entitys financial
statement. - Expected modifications to the auditors report
40Fraud and Error
- ISA 240 says the auditor should communicate to
management any material weaknesses in internal
control related to the prevention or detection of
fraud and error, which have come to the auditors
attention. - If the auditor concludes that it is not possible
to continue performing the audit as a result of a
misstatement resulting from fraud or suspected
fraud, withdrawal from the engagement must then
be seriously considered.
41Reporting of Non-compliance with Laws
- If the auditor concludes that the noncompliance
has a material effect on the financial
statements, and has not been properly reflected
in the financial statements, the auditor should
express a qualified or an adverse opinion. - The auditors duty of confidentiality would
ordinarily preclude reporting noncompliance to a
third party. However, in certain circumstances,
that duty of confidentiality is overridden by
statute, law or by courts of law (for example, in
some countries the auditor is required to report
noncompliance by financial institutions to the
supervisory authorities).
42Long-Form Audit Report
- In many countries it is customary for the auditor
to prepare a long-form report to the Audit
Committee of an entitys board of directors in
addition to the publicly published short-form
report discussed in this chapter. - A long- form report ordinarily includes
- Overview of the Audit Engagement
- Analysis of Financial Statements
- Risk Management and Internal Control
- Optional Topics
- Auditor independence and quality control
- Fees
43- XBRL is a freely licensed, open technology
standard that makes it possible to store and/or
transfer data along with the complex hierarchies,
data-processing rules and descriptions. - Permits the automatic exchange and reliable
extraction of financial information across all
software formats and technologies, including the
Internet - Reduces the need to enter financial information
more than one time, reducing the risk of data
entry error and eliminating the need to manually
key information for various formats
44Continuous Reporting and Auditing
- Continuous reporting is the real-time disclosure
of transaction data. - Embedded audit modules (EAM) are database
software routines that are placed at
predetermined points to gather information about
transactions or events within the system that
auditors deem to be material. EAMs allow
auditors to proactively monitor auditable
conditions.
45Thank You for Your Attention