Independent review of the financial statements of the firm
The auditor
- Responsible for seeing that the financial statements issued comply with generally accepted accounting principles.
- Examines the company's accounting and internal control systems, confirm assets and liabilities, and generally tries to be sure that there are no material errors in the financial statements.
- Supposed to be an independent certified public accountant
Audit report
· Also called the auditor's opinion
· Issued as part of a company's audited financial report
· Tell end users the following:
- Whether the financial statements are presented in accordance with generally accepted accounting principles.
- Identify those circumstances where the principles in the current period are not consistent with that in the preceding period.
- State in the report if any informative disclosures in the financial statements are not reasonably
Audit report is composed of:
- A cover letter, signed by the auditor, stating the opinion.
- The financial statements, including the balance sheet, income statement and statement of cash flows
- Notes to the financial statements
- The auditor often prepares a "management letter" or "management report" to the board of directors, citing areas in the organization's internal accounting control system that the auditor evaluates as weak.
Types of audit reports:
Unqualified opinion report: best type of report, clean opinion.
- The financial statements are free of material misstatements and are in accordance with GAAP. The company financial condition, position, and operations are fairly presented in the financial statements.
Qualified opinion report: very close to unqualified opinion but with a certain exception
- One or two situations of the financial statements do not comply with generally accepted accounting principles but the rest are fairly presented.
Adverse opinion: opposite of unqualified opinion
- The financial statements are materially misstated and generally do not comply with GAAP.
- Disclaimer of opinion
- The auditor could not form, and consequently refuses to present, an opinion on the financial statements due to various reasons.
Importance of effective internal controls
- Under US GAAP, auditor must state an opinion on the company’s internal controls
- Management is responsible for internal controls
- Under Sarbanes-Oxley Act, management required to provide a report including:
- A statement that the firm's management is responsible for implementing and maintaing the effectiveness of internal controls
- A description of how management evaluates the internal control system
- An assessment by management of the effectiveness over the most recent years of the firms's internal controls
- A statement that the firm's auditors have assecessed the management reports on internal controls
- A statement certifying the financial statements are presented fairly
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