AUD: Audit Reports: Modified Opinions Due to Financial Statement Issues - Issuer

Summary

The script discusses the auditing process and reporting under GAAP, focusing on material issues leading to different audit opinions. It explains 'except for' or qualified opinions for material GAAP problems and 'adverse' opinions for very material issues. The script outlines the structure of audit reports, including opinion paragraphs, additional paragraphs detailing issues, and critical audit matters. It emphasizes the importance of professional judgment in deciding the impact of GAAP issues on audit opinions.

Takeaways

• ⚖️ GAAP problems lead to different audit opinions based on materiality: material issues result in 'except for' opinions, while very material issues lead to 'adverse opinions'.
• 📄 The 'except for' opinion, also known as a qualified opinion, is used when there's a GAAP issue that is material but not extremely so.
• 🔍 In a qualified opinion, the auditor still expresses that the financials are fairly presented except for the noted issue.
• 📝 The auditor must include an additional paragraph detailing the issue that led to the 'except for' qualification.
• 💡 The basis for an 'except for' opinion could also involve critical audit matters, depending on professional judgment.
• 🏢 The adverse opinion is used when a GAAP issue is very material, significantly affecting the financial statements' fairness.
• 🚫 In an adverse opinion, the auditor states that the financials do not present fairly in conformity with GAAP due to the discussed matters.
• 🔑 The opinion paragraph in both 'except for' and adverse opinions is modified to highlight the issue and its impact on the financial statements.
• 📊 The impact of the GAAP issue on the financials, such as changes in property, debt, and retained earnings, must be clearly stated.
• 📋 The standard audit report elements like RAP MEE (Risk Assessment, Performance, and Evaluation of Errors) are still included in the report despite the modified opinion.
• ✍️ Auditors must communicate critical audit matters separately, noting that these do not alter the overall opinion on the financials.

Q & A

What is a GAAP problem in the context of auditing?

A GAAP problem refers to an issue where the financial statements do not conform to Generally Accepted Accounting Principles in the United States. This can lead to different levels of audit opinions depending on the materiality of the issue.

What is the difference between a 'qualified opinion' and an 'adverse opinion' in auditing?

A 'qualified opinion', also known as an 'except for' opinion, is issued when there is a material GAAP problem. An 'adverse opinion' is issued when the GAAP issue is very material, indicating that the financial statements do not present fairly in conformity with GAAP.

How does a qualified opinion paragraph differ from a standard unmodified opinion paragraph?

In a qualified opinion paragraph, the phrase 'except for' is used to indicate that the financial statements are fairly presented except for the effects of the issue discussed in the additional paragraph detailing the GAAP problem.

What additional information is included in an audit report when a qualified or adverse opinion is issued?

When a qualified or adverse opinion is issued, the audit report includes an additional paragraph explaining the GAAP problem, its effects on the financial statements, and the basis for the auditor's opinion.

Why are critical audit matters mentioned in the audit report?

Critical audit matters are mentioned to highlight specific areas that were particularly challenging, subjective, or complex in the audit process, and that involved significant judgment by the auditors.

How does the PCAOB (Public Company Accounting Oversight Board) impact the audit report?

The PCAOB sets the standards that auditors must follow, which are reflected in the audit report's language regarding the planning and performance of the audit.

What is the significance of the phrase 'RAP MEE' in the context of the audit report?

The acronym 'RAP MEE' stands for 'Risk Assessment Procedures - Materiality - Evidence - Evaluation', which is a simplified way to remember the key components of the audit process as required by PCAOB standards.

What is the role of management in the context of an audit?

Management is responsible for the preparation and fair presentation of the financial statements in accordance with GAAP. Auditors express an opinion on these statements based on their audit.

How does the auditor address the issue of materiality in the audit report?

The auditor addresses materiality by discussing the impact of GAAP issues on the financial statements and determining whether the issues lead to a qualified or adverse opinion based on their materiality.

What is the purpose of including the tenure of the auditors in the audit report?

Including the tenure of the auditors provides transparency about the length of time the auditing firm has been associated with the company, which can be relevant for users of the financial statements.