Page 68 - Encyclopedia of Business and Finance

eobf_A 7/5/06 2:54 PM Page 45

Authority

for publicly traded company audits and specifies the ion that the financial statements taken as a whole do not
intention of the PCAOB to consider changes to GAAS on present fairly the financial position, results of operations,
a go-forward basis. The second standard specifies the and cash flows of the company in accordance with GAAP.
audit requirements for the internal control audits com- Adverse opinions are rarely, if ever seen in practice.
pleted by external auditors, and the third standard speci-
A disclaimer of opinion, which means that the audi-
fies documentation requirements related to the evidential
tor provides no opinion, is issued when the scope limita-
matter gathered on an audit of publicly traded companies.
tion (typically lack of evidence regarding financial
statement assertions) is so pervasive or highly material that
TYPES OF AUDITORS’ REPORTS the auditor cannot conclude as to the fairness of the finan-
The auditor can issue five types of reports on financial cial statements, taken as a whole. A disclaimer is also
statements: unqualified opinion, unqualified opinion issued when the auditor lacks independence from the
with modified wording, qualified opinion, adverse opin- company being audited. Disclaiming an opinion is also
ion, or disclaimer of opinion. Importantly, SOX has permitted, but not required, in conditions of major uncer-
brought about dramatic changes to the audit process fol- tainty about the company’s ability to continue as a going
lowed by auditors at publicly traded companies. As a concern for a year following the date of the financial state-
result, the auditors’ reports for publicly traded and pri- ments.
vately held companies are different. For privately held For publicly traded companies that report to the
companies, if the financial statements present fairly, in all SEC, the guidelines issued by the PCAOB must be fol-
material respects, an entity’s financial position (i.e., the lowed by auditors. Under Section 404 of the law, the audit
balance sheet), results of operations (the income state- firms are required to audit both the internal control sys-
ment), and cash flows (the statement of cash flows) in tem and the financial statements on an annual basis. As a
conformity with GAAP, and if the audit is performed in result, the auditor report for publicly traded companies
accordance with GAAS, then a standard unqualified
report can be issued. has changed.
The auditor would issue an unqualified report with SEE ALSO Accounting; Audit Committees; Government
modified wording in situations such as a change in Auditing Standards; Performance Audits
accounting principle made by the client, when more than
one auditor participated in the audit, where there is a BIBLIOGRAPHY
question about the client continuing as a going concern American Institute of Certified Public Accountants Web site:
for a year from the date of the balance sheet, or when the http://www.aicpa.org retrieved February 2, 2006.
auditor wishes to highlight a specific matter. The modifi- Internal Revenue Service Web Site: http://www.irs.gov retrieved
cation does not affect the opinion. February 2, 2006.
Auditors would issue a qualified opinion in situations Messier, William F., Jr., Glover, Steven M., and Prawitt, Douglas
where they view a departure from GAAP as being material, F. (2006). Auditing & Assurance Services (4th ed.). Boston:
but not pervasive or highly material relative to the entire McGraw-Hill/Irwin.
set of financial statements; or when the auditors have not
been able to obtain sufficient competent evidence pertain-
Mohammad J. Abdolmohammadi
ing to a material, but not pervasive or highly material, part
Jay C. Thibodeau
of the financial statements. The auditors must add an
explanatory paragraph before the opinion paragraph
describing the reason for the qualification and then qualify
the opinion paragraph. In the case of inadequate evidence, AUDITOR REPORTS
which is referred to as a scope limitation, the second para-
graph of the report would also be modified. SEE Auditing
If in the auditor’s judgment, pervasive or highly
material deviation(s) from GAAP exist and the auditee
fails to adjust the financial statements to the satisfaction of
the auditor, then the auditor must express an adverse AUTHORITY
opinion. In this condition, the auditor expresses an opin- SEE Management: Authority and Responsibility

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 45