AUDIT REPORTS
Halvorson & Co., CPAs, was hired as the auditor for Machinetron, Inc., a company
that manufactured high-precision, computer-operated lathes. The owner, Al Trent, hired
Halvorson to conduct the upcoming audit and assist with an initial public offering
registration with the SEC.
Because Machinetron’s machines were large and complex, they were expensive.
Each sale was negotiated individually by Trent, and the sales often transpired over several
months. Improper recording of one or two machines could represent a material
misstatement of the financial statements.
The engagement partner in charge of the Machinetron audit was Bob Lehman, who
had significant experience auditing manufacturing companies. He recognized the risk for
improper recording of sales, and he insisted that his staff confirm all receivables at
yearend directly with customers. Lehman conducted his review of the Machinetron audit
files the same day that Trent wanted to file the company’s registration statement for the
initial public stock offering with the SEC. Lehman saw that a receivable for a major sale
at year-end was supported by a fax, rather than the usual written confirmation reply.
Apparently, relations with this customer were “touchy,” and Trent had discouraged the
audit staff from communicating with the customer.
At the end of the day, there was a meeting attended by Lehman, Trent, the
underwriter of the stock offering, and the company’s attorney. Lehman indicated that a
better form of confirmation would be required to support the receivable. After hearing
this, Trent blew his stack. Machinetron’s attorney offered to write a letter to Halvorson &
Co. stating that in his opinion, a fax had legal substance as a valid confirmation reply.
Lehman, feeling tremendous pressure, accepted this proposal and signed off on an
unmodified audit opinion.
Six months after the stock offering, Machinetron announced that its revenues for
the prior year were overstated as a result of improperly recorded sales, including the sale
supported by the fax confirmation. The subsequent SEC investigation uncovered that the
fax was returned to the audit firm by Trent, not the customer. Halvorson & Co. recalled
their audit report, but this was too late to prevent the harm done to investors. Halvorson
& Co. was forced to pay substantial damages, and Bob Lehman was forbidden to practice
before the SEC. He subsequently left public accounting.
Reports are essential to audit and assurance engagements because they
communicate the auditor’s findings. Users of financial statements rely on the auditor’s
report to provide assurance on the company’s financial statements. As the story at the
beginning of this chapter illustrates, the auditor will likely be held responsible if an
incorrect audit report is issued.
The audit report is the final step in the entire audit process. The reason for studying
it now is to permit reference to different audit reports as we study the accumulation of
audit evidence throughout this text. These evidence concepts are more meaningful after
you understand the form and content of the final product of the audit. We begin by
describing the content of the standard auditor’s report.
The AICPA Auditing Standard Board (ASB) sets standards for nonpublic entities, and
the PCAOB sets auditing standards for public companies. Because the PCAOB adopted
the existing AICPA standards as interim standards, auditing standards, including those
related to audit reporting, were similar for public companies and nonpublic entities.
However, as part of the AICPA Clarity Project, the ASB modified audit reporting for
nonpublic entities to be similar to reporting under international auditing standards. As a
result, the formats of audit reports for public and nonpublic entities currently differ,
although the overall substance of the content in the report is similar under both AICPA
and PCAOB auditing standards.
