A1: Reporting

Professional standards A1-M1

The Auditing Standards Board (ASB), a committee within the AICPA, issues Statements on Auditing Standards (SAS). SAS are the most authoritative guidance for the auditor of a nonissuer (a private company).

• The auditor is generally required to follow SAS guidance and must be able to justify any departure from it.
• The auditor should know the SASs well enough to identify the provisions relevant to an engagement.

Key terms

• Professional judgment: applying training, knowledge, and experience to make informed decisions about the specific circumstances of an audit.
• Presumptively mandatory requirement (signaled by the word "should"), must be followed whenever relevant, except in rare cases where departure is justified, alternative procedures are performed, and the reasoning is documented.
• FASB sets U.S. GAAP: the conventions, rules, and procedures defining accepted U.S. accounting practice. GAAP is the benchmark against which the auditor measures fair presentation.

The unmodified (unqualified) report A1-M4

An unmodified opinion states the financial statements are presented fairly, in all material respects, in accordance with U.S. GAAP. Under the current report format the sections appear in this order:

1. Title: clearly identifies it as the report of an independent auditor.
2. Addressee: as required by the engagement (e.g., shareholders, board).
3. Opinion: references the financial statements and that they conform to GAAP. This section comes first.
4. Basis for Opinion: states the audit followed GAAS (and PCAOB standards for issuers) and that the auditor is independent.
5. Going concern: if substantial doubt exists (when applicable).
6. Key Audit Matters: for nonissuers, only when engaged to report them (issuers report Critical Audit Matters).
7. Responsibilities of Management: preparing FS per GAAP and maintaining internal control.
8. Auditor's Responsibilities: obtaining reasonable assurance and following GAAS.
9. Other Information (when relevant) and any report on legal/regulatory requirements.
10. Signature, auditor's address, and date.

Modified opinions: financial-statement issues A1-M5

When the financial statements themselves are problematic (a GAAP departure), the auditor modifies the opinion based on materiality and pervasiveness:

For a nonissuer, a qualified or adverse opinion modifies both the Basis for Opinion section (explaining the matter) and the Opinion section.

Modified opinions: audit (scope) issues A1-M6

When the auditor cannot obtain sufficient appropriate evidence (a scope limitation), the issue is the audit, not the statements:

Disclaimer: what changes in the report

• Opinion section → retitled to say no opinion is expressed.
• Basis section → "Basis for Disclaimer of Opinion," explaining the scope limitation and why sufficient evidence could not be obtained.
• Auditor's Responsibilities → modified to reflect the disclaimer.

Disclaimer on unaudited financial statements

• The accountant must still read the statements for obvious errors.
• "Unaudited" should be marked clearly on each page.
• If the client refuses to correct an obvious GAAP departure, the accountant adds a separate paragraph describing its nature and effect; if the client then refuses the modified disclaimer, the accountant withdraws.
• When an accountant is associated with a public entity's statements but has not audited or reviewed them, the accountant may issue a report disclaiming any opinion.

Common triggers for a qualified opinion

• Scope limitation (not pervasive).
• Unjustified change in accounting principle.

Emphasis-of-matter, other-matter & explanatory paragraphs A1-M7

These paragraphs add communication without modifying the opinion.

Emphasis-of-matter (EOM): points within the financial statements

Used to draw attention to something already presented or disclosed. Common situations:

• Substantial doubt about going concern (mandatory when doubt remains; optional when the doubt has been alleviated).
• A material, justified change in accounting principle (e.g., change in depreciation method), i.e., a lack-of-consistency matter.
• Statements prepared on a special-purpose framework (e.g., cash basis).
• Unusually important subsequent events or significant uncertainties.
• A significant investment accounted for under the equity method; a change from equity to cost method, properly disclosed.

Other-matter paragraphs: points outside the financial statements

Used to communicate something relevant to users' understanding of the audit or report, including: restricting the report's use; prior-period statements audited by a predecessor whose report is not reissued/presented; current statements presented comparatively with prior-period statements that were reviewed, compiled, or not audited; reporting on compliance within the FS report; and special-purpose statements prepared on a contractual or regulatory basis.

Acceptability of a change in accounting principle: all four must be met

1. The new principle conforms to the applicable reporting framework.
2. The method of accounting for the change is acceptable.
3. Disclosures about the change are adequate.
4. Management has justified that the new principle is preferable.

Other consistency situations requiring an EOM paragraph: change in reporting entity; correction of an error in a prior-period principle; correction of a material misstatement in previously issued statements.

Reporting with different opinions; predecessor & component auditors A1-M8

Reissuing a predecessor's report

Before reissuing, the predecessor should: read the current-period statements; compare them with the prior statements audited; obtain a letter of representation from the successor auditor; and inquire of, and obtain representations from, management near the reissuance date. Dating:

• Unrevised report → use the original report date.
• Revised report → dual-date for the revision.

Predecessor's report NOT presented (comparative statements)

The successor's report states, in an other-matter paragraph: that a predecessor audited the prior period; the type of opinion and (if modified) the predecessor's reasons; the nature of any EOM/other-matter paragraph; and the date of the predecessor's report.

Evaluating a component auditor (group audits)

• Independence and ethical compliance of the component auditor.
• Professional competence of the component auditor.
• Extent of the group team's planned involvement in the component's work.
• Whether the group team can obtain information needed for consolidation.
• Whether the component auditor operates under active regulatory oversight.

Subsequent events A1-M9

Events occurring after the balance-sheet date that may require adjustment (conditions existing at year-end) or disclosure (conditions arising after year-end).

The dating timeline

1. Date of the financial statements: period-end (e.g., 12/31).
2. Date sufficient appropriate evidence is obtained.
3. Date of the auditor's report: the date sufficient appropriate evidence supporting the opinion was obtained. The auditor has no active responsibility to make continuing inquiries after this date.
4. Report release date: when the report is delivered to the client.

Dual dating: when a significant event occurs after the original report date but before issuance, the auditor uses two dates: the original report date for the audit generally, and a later date for the specific subsequent event (limiting responsibility for other events to the original date).

Other information & supplementary information A1-M10

If other information contains a material inconsistency or misstatement of fact

1. Discuss with management and request revision.
2. If management refuses, communicate with those charged with governance.
3. Further options: describe the inconsistency in the Other Information section, withhold use of the report, or withdraw (consulting legal counsel).

Special-purpose frameworks A1-M11

A special-purpose framework is a non-GAAP basis: cash, tax, regulatory, contractual, or other. An EOM paragraph referencing the note that describes the framework is generally required (the regulatory general-use case is the notable exception).