Chapter 12

Auditors’ Reports

The very existence of the accounting profession depends on public confidence in the determination of certified public accountants to safeguard the public interest.

J.L Carey (Professional Ethics of Public Accounting)

Reports on Audited Financial Statements

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Enron Corp. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations, cash flows, and changes in shareholders’ equity for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.

The opinion paragraph from Arthur Andersen’s final audit of Enron Corp. (dated February 23, 2001)

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Audit Report

Providing an independent and expert opinion on the fairness of financial statements

When performing an audit, the auditors obtain reasonable assurance that the statements are in conformity with GAAP

Typical Coverage of Audit Reports

Financial Statements Balance Sheet Income Statement Statement of Cash Flows Statement of Retained Earnings (equity)

Financial Statement Disclosures The notes to the financial statements are

considered an integral part of the financial statements

Reports Accompanying Financial Statements

Report on financial statements and related disclosures (prepared by auditor) Are financial statements and disclosures according to GAAP?

Report on internal control over financial reporting (prepared by management) Has company maintained effective internal control over financial

reporting?

Report on internal control over financial reporting (prepared by auditor) Is management’s assessment of its internal control appropriate? Has company maintained effective internal control over financial

reporting?

Types of Auditors’ ReportsUnqualified Report

• Expresses an unqualified opinion

Unqualified Opinion with Modified Wording• F/S are in conformity with GAAP• Additional matters are disclosed in report

Qualified Opinion• “Except for” some matter, F/S are in conformity with

GAAP

Adverse Opinion• F/S are not in conformity with GAAP

Disclaimer of Opinion• No opinion is issued by auditors

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STANDARD (“CLEAN”) Audit ReportIntroductory Paragraph

F/S included and years examined Responsibility of auditor Management responsibility

Scope Paragraph Audit conducted in accordance with PCAOB standards Description of an audit --- specific references to “test basis,”

“materiality,” and “significant estimates” Audit provides reasonable basis for opinion

Opinion Paragraph – “fairly presented, in all material respects, in accordance with U.S. generally accepting accounting principles.”

Internal Control References examination, report, and opinion on internal

control

Conditions Required for Issuance of an Unqualified Report

Independence of Mental AttitudeEvidence Available, No Scope LimitationsFollowed GAAPConsistent Application of GAAPDisclosures are Adequate and CompleteExpression of OpinionNo Going Concern Problem

Independent Auditors’ Report (AS 5)

Report of Independent Registered Public Accounting Firm

To the Board of Directors and ShareholdersDUNDER-MIFFLIN, INC.

We have audited the accompanying balance sheets of DUNDER-MIFFLIN, INC. as of December 31, 2012 and 2011, and the related statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012. These financial statements are the responsibility of DUNDER-MIFFLIN, INC.'s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 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 DUNDER-MIFFLIN, INC. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), DUNDER-MIFFLIN, INC.’S internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 29, 2012 expressed an unqualified opinion thereon.

Michael Scarn, LLPScranton, PA

January 29, 2013

Report Title

Report Address

Introductory Paragraph

Scope Paragraph

Opinion Paragraph

Signature

Report Date

Internal Control Paragraph

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Reports on Internal Control

Options Separate reports on F/S and I/C,

with each reports referencing the other

Combined report on F/S and I/C

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Reports on Internal Control Over Financial Reporting

Identification of management's conclusion about effectiveness of company's internal control over financial reporting.

Responsibilities of auditor and management for internal control Definition of the scope of the engagement. Definition of internal control over financial reporting. Identification of inherent limitations of internal control Opinions on:

Whether management’s assessment is fairly stated. Whether company has maintained effective internal control over

financial reporting. Reference to auditor's report on financial statements, including

the type of opinion expressed.

Explanatory Language Added to the Standard Unqualified Financial

Statement Audit Report

Opinion based in part on the report of another

auditor.Going Concern.

Lack of Consistency. Emphasis of a Matter.

Agreement with a Departure from GAAP.

Other Issues Affecting the Auditor’s Report

Reference to Other Auditors

Circumstances Concerning Comparative Financial Statements Previous year audited by other auditors First year audit

Reporting on Other Information accompanying the financial statements

Division of Responsibility

Group Financial Statements: Financial statements comprised of more than one division/subsidiary/segment/component

Group Auditors: Conduct audit of material portion of the entity

Component Auditors: May be engaged by group auditors to audit divisions, subsidiaries, or components

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Division of Responsibility

Obtain permission and present component

auditors’ report

Standard Report (Unqualified

Opinion)YES

Indicate Division of Responsibility

in Unqualified Opinion

NO

NO

Take Responsibilit

y for Component

Auditors’ Work?

Refer to Component Auditors by

Name?

YES

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Effect on ReportGroup auditors should

Verify component auditors’ reputation and independence

Communicate and coordinate with component auditors

Options Take responsibility for work: Standard report Name component auditors

Present report of component auditors, only with their permission

Refer to component auditors Modify introductory, scope, and opinion paragraphs of

report Still express unqualified opinion, if appropriate

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Comparative F/SContinuing Auditors

Update opinion by considering if previously-issued opinions still appropriate

If previously-issued opinions not appropriate, revise opinion in current report

Predecessor Auditors With permission, auditors may present reissued report

from predecessor on prior-years’ F/S along with their report on current F/S

If predecessors’ report not presented, auditors’ report must reference predecessors’ report and opinion on prior-years’ F/S

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Report by a Predecessor Auditor

Before reissuing the report:predecessor auditor should:

1. Read the financial statements of the current period.

2. Compare the prior-period financial statements reported on with the current-year financial statements.

3. Obtain a letter of representation from the current-year or successor auditor.

Other Information Accompanying The Financial Statements

Provided by the Company --- Review, make sure that it is consistent with F/S

Supplemental information required by FASB/GASB Exception based (similar to consistency)

Information contained in an AUDITOR SUBMITTED document Typing or reproducing Financial Statements Presenting Financial Statements to third parties Attach report stating relationship with the submitted document

Emphasis of Matter Paragraph—Substantial Doubt as to Going Concern Status

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered negative cash flows from operations and has an accumulated deficient, conditions that raise substantial doubt about the Company's ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated fanatical statements n do not include any adjustments that might result from the outcome of this uncertainly. Our opinion is not modified with respect to this matter.

NOTE: Ordinarily an unmodified opinion with an emphasis of matter paragraph is issued. Alternatively, a disclaimer of opinion may be issued.

Lack of Consistency

Change in Accounting

Principle

Change in Accounting

Principle Change in Reporting

Entity

Change in Reporting

EntityCorrection of an Error in Principle

Correction of an Error in Principle

Changes Affecting Consistency

Change in Accounting

Estimate

Change in Accounting

Estimate

Correction of an error that does not involve an

accounting principle

Correction of an error that does not involve an

accounting principle

Changes Not Affecting Consistency

Change in Classification

and Reclassificatio

n

Change in Classification

and Reclassificatio

n

Change expected to

have a material future effect

Change expected to

have a material future effect

Consistency

Relates to: Change in accounting principles

Adjustments to correct misstatements in previously-issued F/S

Type of changes in accounting principles: Accounting principles (GAAP to GAAP)

Form of reporting entity

Accounting principles (non-GAAP to GAAP)

Accounting principle inseparable from changes in estimates

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Consistency: Effect on Report

Add explanatory paragraph following the opinion paragraph

May issue a qualified opinion (GAAP departure) if: Change is not justified Change is not accounted for in

conformity with GAAP

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Emphasis of Matter ParagraphLack of Consistency

A lack of consistent application of accounting principles results in an emphasis of matter paragraph, such as:

As discussed in Note 5 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards Update No. XXX (provide title) as of December 31, 20X8. Our opinion is not modified with respect to this matter.

Emphasis of a Matter

Explanatory paragraph after opinion paragraph discussing the matter (e.g., a subsequent event not affecting year-end F/S's)

Usually items that are difficult to disclose in the financial statements Non-Quantitative Matters Subsequent Events

Additional Emphasis of Matter Situations—Auditor Discretionary

A risk or uncertainty. Significant related party transactions

described in a note to the financial statements. The company is a component of a larger

business enterprise. Unusually important significant events. Accounting matters affecting comparability

(other than changes in accounting principles) of financial statements with those of the preceding year.

Rule 203 ReportAllows for non-GAAP solutions to fairly present the

company's financial situation.

Rule 203 of the AICPA Code of Professional Conduct ---

recognizes that adherence to certain accounting principles may create situations in which a company's financial condition may not be fairly presented.

Solution: Insert an additional middle paragraph (between scope and opinion paragraphs) stating the deviation from GAAP, but still issue an unqualified report.

Auditor Agrees with a Departure from Promulgated Accounting Principles

In unusual circumstances financial statements may be misleading if a promulgated accounting principle was

followed.

Rule 203 of the Code of Professional Conduct allows

the auditor, in such circumstances, to issue an

unqualified opinion.

An explanatory paragraph should describe the departure, the approximate effects of the

departure, if practicable, and the reasons that compliance with the

accounting principle results in misleading financial statements.

Modifications of the Auditors’ Report-- Unqualified Opinions

Type of Report

Sharedresponsibility

Going concernuncertainty

GAAP notconsistent

Emphasis ofmatter

Justified departurefrom officialGAAP

Introductory orScope ParagraphDescribe work ofother auditors

None

None

None

None

ExplanatoryParagraph

None

Describeuncertainty

Describe change inprinciple

Describe matter

Describe departure

OpinionParagraph

“...based on ouraudit and thereport of otherauditors...”

None

None

None

None

Departures from an Unqualified Financial Statement Audit Report

Qualified“except for”

Disclaimer

Adverse

Qualified Opinion

Issued when departure is material, yet not pervasive

Report Modifications: Introductory and scope paragraphs remain the same

Add paragraph preceding the opinion paragraph explaining departure and detailing $ amounts involved

Modify opinion paragraph (“In our opinion, except for

the matter discussed in the preceding paragraph,….”)

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Conditions for Departure

ScopeLimitation

Departurefrom GAAP

Lack of AuditorIndependence

Conditions Requiring Other Types of Financial Statement

Audit Reports

Scope Limitation

Not in Conformity with GAAP

Auditor Not Independent

Results from an inability to obtain sufficient competent evidence about some component of the

financial statements.

Results when financial statements are materially affected by an

unacceptable departure from GAAP.

Results when auditor is not independent.

Scope LimitationsStandard Report

(Unqualified Opinion)

Qualified Opinion

Disclaimer of Opinion

NO

YES

Alternative Procedures Available?

Is the LimitationPervasive?

Is the Limitation Material?

YES

NO

Standard Report (Unqualified

Opinion)

YES

NO

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Type of Scope LimitationsCircumstance-Imposed

Situation in which matters beyond auditors’ and client’s control limit procedures performed by auditor

Example: inability to observe year-end inventory because of late appointment

Client-Imposed Situation in which client specifically limits

auditors’ procedures Should be viewed as a significant restriction and

a disclaimer is ordinarily issued

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Scope Limitation: Qualified Opinion

Issued when scope limitations are material, but not pervasive

Report Modifications: Introductory paragraph remains the same Scope paragraph: “Except as discussed in the

following paragraph [the scope limitation], we conducted our audit…”

Add paragraph preceding the opinion paragraph describing the scope limitation

Modify opinion paragraph (“In our opinion, except for”)

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GAAP Departures

Qualified (“Except for ...”) Opinions

Scope limitations can cause disclaimers or qualified opinions depending upon severity and materiality. Key question: Is the scope limitation limited, or does it permeate

the financial statements? If alternative procedures are available, the auditor may still be able

to issue an unqualified opinion.

Report Modifications: Intro paragraph remain the same Scope paragraph: “Except for the problem noted, the audit was

conducted in accordance with auditing standards generally accepted in the United States”.

Add middle paragraph explaining problem Change opinion paragraph (“In our opinion, except for the matter

discussed in the preceding paragraph,….”)

GAAS Departures

Modifications of Auditors’ Report— Qualified Opinions

Type of Report Introductory or Scope Paragraph

Explanatory Paragraph

Opinion Paragraph

Qualified—GAAP Departure

None

Describe Departure and

Effects

“except for the effects of the departure the financial statements…”

Qualified—Scope Limitation

“Except as explained in the following paragraph…”

Describe Scope Limitation

“except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to…”

Adverse Opinion Issued when F/S do not present fairly according to

GAAP (i.e., a serious, pervasive departure from GAAP).

Report Modifications: Introductory and scope paragraphs remain the same Add paragraph preceding the opinion paragraph

explaining the departure and detailing $ amounts involved

Change opinion paragraph (“financial statements do not present fairly”)

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Disclaimer of Opinion

Issued when the auditor is unable to be satisfied Issued when the auditor is unable to be satisfied that the overall financial statements are fairly that the overall financial statements are fairly presented.presented.

Reasons for DisclaimerUncertainitiesScope LimitationGoing ConcernUnauditedReviewCompliationAgreed Upon Other ProceduresNot Independent

Scope Limitation: Disclaimer of Opinion

Pervasive scope limitation, usually client-imposed Significance of the limitation is such that auditors cannot gather

sufficient appropriate evidence to form an opinion

Report Modifications: Introductory paragraph: (“We were engaged to audit ….”; omit

auditors’ responsibility) Omit scope paragraph Add paragraph preceding the opinion paragraph describing the

scope limitation Modify opinion paragraph (“…we do not express an opinion….”)

May still issue opinion on internal control if no scope limitation on the examination of internal control

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Lack of IndependenceScenario: Auditors begin engagement but

independence subsequently compromised

Report Single paragraph Indicates auditors are not independent Does not indicate why independence lacking

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Reporting CPA is NOT Independent

Should state that CPA is not independent but need not state the reason why

I am (We are) not independent with respect to the XYZ Company and the accompanying balance sheet as of December 31, 20XX, and the related statements of income retained earnings, and cash flows for the year then ended were not audited by me (us) and, accordingly, I (we) do not express and opinion on them.

No heading on report Do not describe procedures performed

Must describe material departures from GAAP

Modifications of the Auditors’ Report-- Adverse & Disclaimer

Type of Report

Adverse

Disclaimer ofOpinion--ScopeLimitation

Introductory orScope

Paragraph

None

“We were engaged”

Omit “Ourresponsibility...”

Omit scopeparagraph

ExplanatoryParagraph

Describe reason foropinion

Describe scoperestriction and anyreservations

OpinionParagraph

“the financialstatements do notpresent fairly”

“we do not expressan opinion on thefinancial statements”

Summary of Appropriate Auditors’ Reports

Placement of Explanatory Paragraphs

Before Opinion Paragraph Qualified opinions Disclaimers Adverse opinions

Following Opinion Paragraph Consistency Substantial doubt about continued existence

Other types of paragraphs may precede or follow the opinion paragraph

Special ReportsFinancial Statements

prepared on a Comprehensive

Basis of Accounting other than GAAP

Specified Elements, Accounts, or Items

of Financial Statement

Compliance with Contractual

Agreements or Regulatory

Requirements

Financial StatementsPrepared on a Comprehensive Basis

of Accounting Other Than GAAP

Regulatory Basis

Tax Basis

Cash (or Modified Cash) Basis

A Definite Set of Criteria Having Substantial

Support

In some situations an auditor may be engaged to audit only part (or specified elements, accounts,

or items) of the financial statements.

Specific Elements, Accounts, or Items of a Financial Statement

GAAPGAAP

Other comprehensive

basis of accounting (OCBOA)

Other comprehensive

basis of accounting (OCBOA)

Basis of accounting

prescribed by a contract or agreement

Basis of accounting

prescribed by a contract or agreement

Basis of Accounting

Prospective Financial Statements

Forecasts and ProjectionsForecasts and Projections

Use of Prospective Financial StatementsUse of Prospective Financial Statements

Types of EngagementsTypes of Engagements

Examination of Prospective Financial StatementsExamination of Prospective Financial Statements

Audit is limited to certain specific audit Audit is limited to certain specific audit procedures.procedures.

Agreed-Upon Procedures Engagements

Referred to as procedures and findings Referred to as procedures and findings engagements.engagements.

The SASs deal with financial statement items, The SASs deal with financial statement items, whereas the SSAEs deal with nonfinancial whereas the SSAEs deal with nonfinancial statement subject matter.statement subject matter.

Standards for compilations and reviews Standards for compilations and reviews of financial statements are called...of financial statements are called...

Review and Compilation Services

Association with Unaudited F/S

Auditors permit use of name in communication including F/S

Issue disclaimer of opinion (one paragraph) Do not mention auditing procedures performed Must identify any known departures from GAAP in the

report Should cover all unaudited prior-years’ financial

statements

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Types of Engagements and Related Reports

ExaminationExamination

ReviewReview

Agreed-UponAgreed-Upon ProceduresProcedures

ExtensiveExtensive

SignificantSignificant

VaryingVarying

HighHigh

ModerateModerate

VaryingVarying

PositivePositive

NegativeNegative

FindingsFindings

GeneralGeneral

GeneralGeneral

LimitedLimited

Type ofType ofEngagementEngagement

Amount ofAmount ofEvidenceEvidence

Level ofLevel ofAssuranceAssurance

Form ofForm ofConclusionConclusion DistributionDistribution

Reporting SummaryOpinion Paragraphs modified/added

Material Pervasive Intro Scope Opinion Add’l

Departure from GAAP Qualified Adverse X X

Scope Limitation Qualified Disclaimer X X X

Other matters (Consistency, Going-concern, Rule 203, Emphasis of a matter)

Unqualified Unqualified X

Other matters (Division of responsibility when referencing work of component auditors)

Unqualified Unqualified X X X

May issue disclaimer if:•Lack of independence•Associated with financial statements•Material and pervasive going-concern uncertainty

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