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Reports on audited financial statements and special reporting issues

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18-1 An auditor is associated with financial statements when he or she has consented to the use of his or her name in a document such as an annual report.
18-2 Accounting changes can be categorized into changes that affect consistency and those that do not affect consistency. If the change in accounting principle or in the method of its application has a material effect on the comparability and consistency of the financial statements and the auditor concurs with the change, the auditor should refer to the change in an explanatory paragraph. Accounting changes that affect comparability but do not affect consistency are normally disclosed in the footnotes to the financial statements but do not require recognition in the auditor's report.
18-3 An example of a client-imposed scope limitation is where a client requests that the auditor not confirm accounts receivable because of concerns about creating conflicts with customers over amounts owed. An example of a circumstances-imposed scope limitation is when the auditor is not engaged to conduct the audit until after year-end. Under such circumstances, the auditor may not be able to observe inventory.

Auditors should be particularly cautious when a client places a limit on the scope of the engagement because the client may be trying to prevent the auditor from discovering material misstatements. Auditing standards suggest that when restrictions imposed by the client significantly limit the scope of the engagement, the auditor should disclaim an opinion on the financial statements.

18-4 The concept of materiality plays a major role in the auditor's choice of audit reports. If the condition (e.g., scope limitation or not GAAP) that might lead to the departure is judged by the auditor to be immaterial, then a standard unqualified audit report can be issued. As the materiality of the condition increases, the auditor must judge the effect of the item on the overall financial statements. If the condition is material but the overall financial statements still present fairly, the auditor should issue a qualified opinion. If the effect of the condition is so significant that the overall financial statements are affected, the auditor should issue a disclaimer, an adverse opinion, or consider withdrawing from the engagement.

18-5 the auditor should issue an unqualified report on the 2002 financial statements and a qualified report on the 2003 financial statements because the current year is not in conformity with GAAP. The non-GAAP accounting for the lease transaction should be disclosed in the footnotes.
18-6 The auditor has no responsibility beyond the financial information contained in the report, and he or she has no obligation to perform any audit procedures to corroborate the other information. However, auditing standards (AU 550) requires that the auditor read the other information and consider whether such information is consistent with the information contained in the audited financial statements.
18-7 If the auditor determines that other information contained in audited financial statements is incorrect, the auditor should request that the client correct the other information. If the other information is not revised, the auditor should include an explanatory paragraph in the audit report, withhold the report, or withdraw from the engagement.
18-8 Examples of special reports include:

  • Financial statements prepared on a comprehensive basis of accounting other than GAAP.

  • Specified elements, accounts, or items of a financial statement.

  • Compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements.

  • Financial presentations to comply with contractual agreements or regulatory provisions.

  • Financial information presented in prescribed forms or schedules that require a prescribed form of auditor's report.

18-9 Four bases for OCBOA financial statements are:

  • Regulatory basis.

  • Tax basis.

  • Cash (or modified cash) basis.

  • A definite set of criteria having substantial support.

It is important that OCBOA financial statements be properly titled so that they are not confused with financial statements prepared on a GAAP basis.
18-10 When an auditor reports on an entity's compliance with certain contractual agreements or regulatory requirements related to audited financial statements (e.g., covenants on loan agreements), the auditor provides negative assurance as to compliance with the provisions of the loan agreement. Negative assurance consists of a statement that, as a result of specified procedures, nothing came to the auditor's attention that indicated that the provisions of the loan agreement were not complied with.

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