accounting mini assighment
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SecondChapter-2AUDITREPORTLEGALLIABILITY.pptxAUDIT REPORT
LEGAL LIABILITY
CHAPTER - 2
| Syllabus |
| Audit Report: Meaning, Audit Report Vs. Audit Certificate, Purpose or Objectives of Audit Report, Qualities of Audit Report, Types of Audit Report, Contents of Audit Report. Generally Accepted Auditing Standards: General Standards, Standards of Field Work, Reporting Standards, Legal liability. Legal Liability |
AUDIT REPORT
Report are essential to audit and assurance engagements because they communicate the auditor’s findings.
Audit Report provide assurance and rely on company’s financial statements
The auditor report is the final step in the entire audit process.
Audit report is common term is the expression of opinion by an independent third party (Auditor) as to compliance and fairness of a set of financial statements of a company.
Auditor's Report is the means by which the auditors formally communicate the scope and the results of their audit to the members of the company as well as to the readers of the financial statements on which they are reporting.
Format of the Audit Report?
- An Audit Report is a report describing the financial condition and internal accounting controls by an independent auditor. The report is consumed by the stakeholders of the organization like the board of directors, shareholders, investors to name a few. The auditor must be careful and unbiased while preparing the report. It is the responsibility of the Auditor to prepare this audit report in the standardized format every year after reviewing the financial statements of the organization.
- Investors tend to rely on the auditor’s report before investing in any company. The Audit Report provides a clear picture of the financial health of the company without having to analyze the reports on your own. The report gives a reliable summary of an organization’s financial health.
Audit REPORT VS. CERTIFICATE
An auditor's report is not a certificate of accuracy of accounts or financial statements. It would be necessary, therefore, to maintain a clear distinction between a report and a certificate. This difference can be placed in the following manner
1 - AR is an expression of opinion on the financial statements of a Company.
- AC is vouch safes the truth a the statement company.
2. - AR is based on an examination of relevant records. Audit is only a test, and not a guarantee.
- AC is a guarantee of absolute correctness and accuracy.
3 - AR It states that the Profit and Loss Account and the Balance Sheet represent a true and fair view of the state of affairs of the business.
- AC Signing of a wrong certificate implies corresponding liability.
- AR The auditors can not be held responsible for accuracy, because their report is simply an opinion on the working results of the company.
- Auditors are not required to certify the accounts.
Purpose or Objectives OF AUDIT REPORT
(1) Facts : Auditors spend anywhere from a few days to a few weeks conducting audits on financial information, depending on the size of the company. At the end of each audit, a report is prepared indicating the findings of the audit.
(2) Types: Two types of audit reports are used in the accounting profession: qualified and non-qualified. A qualified audit opinion indicates auditors found significant accounting errors; a non-qualified opinion means there were no issues, and all accounting standards were properly observed by the company.
(3) Features: Qualified audit opinions may contain disclaimers. A disclaimer of opinion is issued when the auditor is unable to form an opinion on a business's financial statements. Disclaimers may note a lack of auditor independence, a material scope limitation exists, or a significant uncertainty exists.
(4) Warning : Qualified audit opinions reflect negatively on the company, limiting opportunities for outside investment by individuals and banks. Failure to correct issues in the audit may cause the auditors to drop the company as a client.
(5) Expert Insight : The American Institute of Certified Public Accountants (AICPA) provides information for companies and auditors regarding the audit process and how Generally Accepted Accounting Principles (GAAP) should be applied in financial transactions.
An audit is an external review of a company's financial information. It provides external stakeholders with an objective opinion of the company's financial health, and how well the company follows standard accounting rules.
TYPES OF AUDIT REPORT:
There are four types of audit reports.
Unqualified Opinion : It is often called a Clean Opinion. The audit report that is issued when an auditor determines that each of the financial records provided by the business is free of any misrepresentations. In addition, an unqualified opinion indicates that the financial records have been maintained in accordance with the standards known as Generally Accepted Accounting Principles (GAAP). This is the best type of report a business can receive.
Qualified Opinion : Such kind of report issue by an auditor when a company’s financial records have not been maintained in accordance with GAAP but no misrepresentations are identified, an auditor will issue a qualified opinion. The writing of a qualified opinion is extremely similar to that of an unqualified opinion. A qualified opinion, however, will include an additional paragraph that highlights the reason why the audit report is not unqualified.
Adverse Opinion : The worst type of financial report that can be issued to a business is an adverse opinion. This indicates that the firm’s financial records do not conform to GAAP. In addition, the financial records provided by the business have been grossly misrepresented. Although this may occur by error, it is often an indication of fraud. When this type of report is issued, a company must correct its financial statement and have it re-audited, as investors, lenders and other requesting parties will generally not accept it.
Disclaimer of Opinion: On some occasions, an auditor is unable to complete an accurate audit report. This may occur for a variety of reasons, such as an absence of appropriate financial records. When this happens, the auditor issues a disclaimer of opinion, stating that an opinion of the firm’s financial status could not be determined.
The standard unqualified audit report is issued when
the following conditions have been met:
1. All statements - balance sheet, income statement, statement of
retained earnings, and statement of cash flows - are included in the
financial statements.
2. The three general standards have been followed in all respects on the
engagement. (General, FW, Reptg.)
Continued on next slide
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3. Sufficient evidence has been accumulated to conclude that the three
standards of field work have been met – “audit documentation”
4. The financial statements are presented in accordance with generally
accepted accounting principles.
5. There are no circumstances requiring the addition of an explanatory
paragraph or modification of the wording of the report.
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A good report from the auditors should normally have the following qualities:
Factual information
Effective presentation
Independent and unbiased approach
Honest identification of weaknesses in control
Positive outlook, balanced criticism and logical suggestions
Precise, brief and relevant
Qualities of AUDIT REPORT
Parts of the Standard Unqualified Audit Report
1. Report title
2. Audit report address
3. Introductory paragraph
4. Management’s Responsibility
5. Auditor’s Responsibility
6. Opinion Paragraph
7. Name and Address of CPA firm
8. Audit report date
Title should include the word independent (e.g., independent audit report)
Report is usually addressed to the company, its stockholders or board of directors.
The intro paragraph does 3 things:
1. States the CPA firm has done an audit
2. It lists the financial statements that were audited
3. It defines responsibilities between management and the auditor
The scope paragraph is a factual statement about what the auditor did in the audit and sets the expectation about reasonable assurance.
The opinion paragraph states the auditor’s conclusions.
The name identifies the CPA firm who performed the audit.
The report date indicates the last day audit procedures were performed in the field.
FIGURE 3-1 Standard Unqualified Report on
Comparative Statements
Independent auditor’s Report
To the Stockholders
General Ring corporation
We have audited the accompanying balance sheets of General Ring Corporation as of December 31, 1999 and 1998, and the related statements of income, retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the evidence supporting the amounts and disclosures in the financial statements. 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 financial position of General Ring Corporation as of December 31, 1999 and 1998 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
ANDERSON AND ZINDER, P.C., CPAs
March 5, 2000
Report Title
Audit Report
Address
Introductory
Paragraph
(factual Statement)
Scope Paragraph
(Factual Statement)
Opinion Paragraph
(Conclusions)
Name of CPA Firm)
Audit Report Date
(Date Audit Field
Work is completed)
ANDERSON and ZINDER, P.C.
Certified Public Accountants
Suite 100
Park Plazza East
Denver, Colorado 80110
303/359-0800
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CONTENTS OF AUDIT REPORT
1. Title: The title should mention – ‘Independent Auditor’s Report’.
2. Scope: The addressee should mention as to whom the report is being presented.
3. Introductory Paragraph:A statement that the financial statements described in the report have been audited.
4 Management’s responsibility for the financial statements: This section of audit reports format should mention the Management’s Responsibility to the integrity of the financial statements which gives an overview of the financial condition, cash flows of the Company and financial performance. The responsibility also includes the maintenance of accounting records to prevent frauds. It is their responsibility to formulate and execute necessary financial controls to ensure the accuracy of the financial records. It should mention that the financial statements are the responsibility of the organization’s management.
CONTENTS OF AUDIT REPORT
Auditors Responsibility: The Auditor responsibility is mentioned to depict an unbiased opinion on the financial statements and issue an audit report. The report is based upon Standards on Auditing. The Standards require that the auditor complies with ethical requirements. It is the auditor’s responsibility to plan and execute the audit to procure assurance regarding the financial statements.
Auditor’s Opinion : The most important content in an Audit Report is the Auditor’s Opinion. This mentions the impression derived after auditing the financial statements
Basis of Opinion: The basis on which the opinion has been achieved as reported. Facts of the basis should be mentioned.
Others Reporting Responsibilities.
Auditors Signature
Date of the Auditor’s Report
Sample of Audit Report:
Example Of An Unqualified Audit Report
MODEL AUDIT REPORT
Unqualified Opinion
(For an Organization)
Addressee10
Introductory Paragraph
We have audited the accompanying [indicate names of each financial statement] of the XYZ Company as of December 31, 20XX [indicate any other additional years necessary] for the year(s) then ended. These financial statements are the responsibility of [identify Borrower]. Our responsibility is to express an opinion on these financial statements based on our audit.
Scope Paragraph
We conducted our audit in accordance with International Standards on Auditing. 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 audit provides a reasonable basis for our opinion.
Opinion Paragraph
In our opinion, the financial statements give a true and fair view of the financial position of the XYZ Company as of December 31, 19XX, and of the results of its operations and its cash flows for the year then ended in accordance with [indicate International Accounting Standards or relevant national standards].
[Name and Address of Audit Firm]
[Date - Completion Date of Audit]
The auditor's report should be appropriately addressed as required by the circumstances of the engagement and local regulations..140 ANNEX XX
LEGAL LIABILITY
Understand the controversial environment in which CPAs practice.
Changed Legal Environment
Audit professionals have a responsibility under
common law to fulfill implied or expressed
contracts with clients.
They are liable to their clients for negligence
and/or breach of contract should they fail to
provide the services or not exercise due care
in their performance.
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CPA Liability
Common Law
Develops through case decisions
Generally arising due to
Breach of contract,
Negligence
Fraud
Statutory liability
Develops when governmental unit passes laws and regulations imposing liability on CPAs
Business Failure, Audit Failure, and Audit Risk
Business
Failure
Audit
Failure
Audit
Risk
Business Failure, Audit Failure, and Audit Risk
Business failure
It occurs when a business is unable to
repay its lenders or meet the
expectations of its investors because
of economic or business conditions.
Business Failure, Audit Failure, and Audit Risk
Audit failure
It occurs when the auditor issues an
Wrong audit opinion as the result
of an underlying failure to comply
with the requirements of generally
accepted auditing standards (GAAS).
Business Failure, Audit Failure, and Audit Risk
Audit risk
It represents the risk that the auditor will
conclude that the financial statements
are fairly stated and an unqualified
opinion can be issued when, in fact,
they are materially misstated.
Liability to Clients
The most common
source of lawsuits
against CPAs
is from clients.
Legal Terms Affecting CPAs’ Liability
Terms related to negligence and fraud
Ordinary
negligence
Gross
negligence
Constructive
fraud
Fraud
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Common Law
Breach of contract: Services not performed by auditors in manner described in contract
Tort liability: Obligation based on failure of auditors to exercise appropriate level of professional care
Ordinary negligence is when a party acts fails to exercise the degree of care that a reasonably prudent person would have used under similar circumstances.
Gross negligence lack of even slight care, indicative of a reckless disregard for one's professional responsibilities. An example: substantial failures on the part of an auditor to comply with GAAS.
Legal Terms Affecting CPAs’ Liability
Constructive fraud: does not involve a misrepresentation with intent to deceive (gross negligence)
Fraud:
Misrepresentation by a person of a material fact, known by that person to be untrue or made with reckless indifference as to whether the fact is true, with the intention of deceiving the other party and with the result that the other party is injured
Legal Liability Example
Understand the client’s business
Perform quality audits
Document the work properly
Obtain an engagement and a representation letter
Maintain confidential relations
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Why Has Auditor Liability Increased?
Highly-publicized failures (WorldCom, Enron)
Investor awareness of ability to recover monetary losses from auditors
Complex accounting standards
Joint and several liability
Mod C-28
