Proposed Statement on Auditing Standards (SAS) Forming an Opinion and Reporting on Financial Statements

Transcription

1 Proposed Statement on Auditing Standards (SAS) Forming an Opinion and Reporting on Financial Statements Matrix Comparison of ISA 700, (Revised and Redrafted) Forming an Opinion and Reporting on Financial Statements and ISA 710 Comparative Information, to proposed SAS Forming an Opinion and Reporting on Financial Statements and certain paragraphs in the following extant SASs: Extant AU section 508, Reports on Audited Financial Statements; paragraph.01 of AU section 530, Dating of the Independent Auditor s Report; and AU section 410, Adherence to GAAP. ISA 700 (Unless ) Introduction Introduction Scope of this ISA Scope of This Proposed Statement on this ISAAuditing Standards 1. This International Standard on Auditing (ISA) deals with the auditor s responsibility to form an opinion on the financial statements. It also deals with the form and content of the auditor s report issued as a result of an audit of financial statements. ISA This International Standard on Auditing (ISA) deals with the auditor s responsibilities relating to comparative information in an audit of financial statements. When the financial statements of the prior period have been audited by a predecessor auditor or were 1. This proposed Statement on Auditing Standards International Standard on Auditing (ISAS) addresses deals with the auditor s responsibility to form an opinion on the financial statements as a whole. It also addresses deals with the form and content of the auditor s report issued as a result of an audit of financial statements. Reference in this SAS to the financial statements as a whole.. applies not only to the financial statements of the current period but also to those of one or more prior periods that are presented on a comparative basis with those of the current period..01 This section applies to auditors' reports issued in connection with fn 1 audits of historical financial statements that are intended to present financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. It distinguishes the types of reports, describes the circumstances in which each is appropriate, and provides example reports. fn 1 An audit, for purposes of this section, is defined as an examination of historical financial statements performed in accordance with generally accepted auditing standards in effect at Page 1 of 105

2 ISA 700 (Unless ) not audited, the requirements and guidance in ISA regarding opening balances also apply. the time the audit is performed. Generally accepted auditing standards include the ten standards as well as the Statements on Auditing Standards that interpret those standards. In some cases, regulatory authorities may have additional requirements applicable to entities under their jurisdiction and auditors of such entities should consider those requirements..65 The fourth standard of reporting requires that an auditor's report contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. Reference in the fourth reporting standard to the financial statements taken as a whole applies not only to the financial statements of the current period but also to those of one or more prior periods that are presented on a comparative basis with those of the current period. Therefore, a continuing auditor fn 22 should update fn 23 the report on the individual financial statements of the one or more prior 1 ISA 510, Initial Audit Engagements Opening Balances. Page 2 of 105

3 ISA 700 (Unless ) periods presented on a comparative basis with those of the current period. fn 24 Ordinarily, the auditor's report on comparative financial statements should be dated as of the date of completion of fieldwork for the most recent audit. (See section 530, Dating of the Independent Auditor's Report, paragraph.01.) AU footnote 24: A continuing auditor need not report on the prior-period financial statements if only summarized comparative information of the prior period(s) is presented. For example, entities such as state and local governmental units frequently present total-all-funds information for the prior period(s) rather than information by individual funds because of space limitations or to avoid cumbersome or confusing formats. Also, not-for-profit organizations frequently present certain information for the prior period(s) in total rather than by net asset class. In some circumstances, the client may request the auditor to express an opinion on the prior period(s) as well as the current period. In those Page 3 of 105

4 ISA 700 (Unless ) 1.2. This proposed SAS is written in the context of a complete set of general purpose financial statements, prepared in accordance with a fair presentation framework. 2 AU Section 534, Reporting on Financial Statements Prepared for Use in Other Countries (AICPA. Professional Standards, vol. 1.), addresses circumstances in which an auditor practicing in the United States is engaged to report on the financial statements of a U.S. entity that have been prepared in conformity with the financial reporting framework adopted in another country. circumstances, the auditor should consider whether the information included for the prior period(s) contains sufficient detail to constitute a fair presentation in conformity with generally accepted accounting principles. In most cases, this will necessitate including additional columns or separate detail by fund or net asset class, or the auditor would need to modify his or her report. ISA 700 paragraph 3 first sentence moved here. 2. ISA and ISA deal with how the form and content of the auditor s Modifications to the Opinion in the Independent Auditor s Report and proposed SAS Emphasis of Matter Paragraphs And Other Matter See proposed Statement on Auditing Standards (SAS), Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards, for a definition of fair presentation framework. ISA 705, Modifications to the Opinion in the Independent Auditor s Report. ISA 706, Emphasis of Matter Paragraphs and Other Matter(s) Paragraphs in the Independent Auditor s Report. Page 4 of 105

5 ISA 700 (Unless ) report are affected when the auditor expresses a modified opinion or includes an Emphasis of Matter paragraph or an Other Matter(s) paragraph in the auditor s report. 3. This ISA is written in the context of a complete set of general purpose financial statements. ISA deals with special considerations when financial statements are prepared in accordance with a special purpose framework. ISA deals with special considerations relevant to an audit of a single financial statement or of a specific element, account or item of a financial statement. Paragraphs in the Independent Auditor s Report ISA and ISA deal with address how the form and content of the auditor s report are affected when the auditor expresses a modified opinion (a qualified opinion, an adverse opinion, or a disclaimer of opinion) or includes an Emphasis of Matter paragraph or an Other Matter(s) paragraph in the auditor s report This ISA is written in the context of a complete set of general purpose financial statements. ISA deals with Special Considerations Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks addresses special considerations when financial statements are prepared in accordance with a special purpose framework. 10 Special Considerations Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement ISA deals with addresses special considerations relevant to an audit of a single financial statement or of a specific element, account or item of a financial statement..02 This section does not apply to unaudited financial statements as described in section 504, Association With Financial Statements, nor does it apply to reports on incomplete financial information or other special presentations as described in section 623, Special Reports ISA 705, Modifications to the Opinion in the Independent Auditor s Report. ISA 706 (Revised and Redrafted), Emphasis of Matter Paragraphs and Other Matter(s) Paragraphs in the Independent Auditor s Report. ISA 800, Special Considerations Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks. ISA 805, Special Considerations Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement. ISA 800 (Revised and Redrafted), Special Considerations Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks. See proposed SAS Special Considerations Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks, for a definition of special purpose framework. ISA 805 (Revised and Redrafted), Special Considerations Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement. Page 5 of 105

6 ISA 700 (Unless ) 03 Justification for the expression of the auditor's opinion rests on the conformity of his or her audit with generally accepted auditing standards and on the findings. Generally accepted auditing standards include four standards of reporting. fn 2 This section is concerned primarily with the relationship of the fourth reporting standard to the language of the auditor's report. fn 2 This section revises the second standard of reporting as follows: The report shall identify those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period. Previously, the second standard required the auditor's report to state whether accounting principles had been consistently applied. As revised, the second standard requires the auditor to add an explanatory paragraph to his report only if accounting principles Page 6 of 105

7 ISA 700 (Unless ) have not been applied consistently. (See section 420, Consistency of Application of Generally Accepted Accounting Principles.) Paragraphs of this section provide reporting guidance under these circumstances. 4. This ISA promotes consistency in the auditor s report. Consistency in the auditor s report, when the audit has been conducted in accordance with ISAs, promotes credibility in the global marketplace by making more readily identifiable those audits that have been conducted in accordance with globally recognized standards. It also helps to promote the user s understanding and to identify unusual circumstances when they occur This proposed SAS ISA promotes consistency in the auditor s report. Consistency in the auditor s report, when the audit has been conducted in accordance with generally accepted auditing standards (GAAS)ISAs, promotes credibility in the global marketplace by making more readily identifiable those audits that have been conducted in accordance with globally recognized standards. ConsistencyIt also helps to promote the user s understanding and identification of to identify unusual circumstances when they occur. Effective Date Effective Date 5. This ISA is effective for audits of financial statements for periods beginning on or after December 15, This SAS ISA is effective for audits of financial statements for periods beginning on or after December 15, 2010 December 15, Objectives Objectives 6. The objectives of the auditor are: The objectives of the auditor are: 12 This date is provisional, but will not be earlier than December 15, Page 7 of 105

8 ISA 700 (Unless ) (a) To form an opinion on the financial statements based on an evaluation of the conclusions drawn from the audit evidence obtained; and a. (a) To form an opinion on the financial statements as a whole based on an evaluation of the conclusions drawn from the audit evidence obtained, including evidence obtained about whether comparative financial statements have been presented, in all material respects, in accordance with the requirements for comparative financial statements; and.04 The fourth standard of reporting is as follows: The report shall either contain an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. When an overall opinion cannot be expressed, the reasons therefore should be stated. In all cases where an auditor's name is associated with financial statements, the report should contain a clear-cut indication of the character of the auditor's work, if any, and the degree of responsibility the auditor is taking. Added as a whole to be consistent with the proposed SAS Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards and to include the concept of comparative financial information in the overall evaluation. Added comparative wording to be consistent with paragraph 7 of ISA 710 and because financial reporting frameworks in the United States do not contain requirements for comparative information. ISA 710 paragraph 5 (a) To obtain sufficient appropriate audit evidence about whether the comparative information included in the financial statements has been presented, in all material respects, in accordance with the requirements for comparative information in the applicable financial reporting framework; and (a) To obtain sufficient appropriate audit evidence about whether the comparative information included in the financial statements has been presented, in all material respects, in accordance with the requirements for comparative information in the applicable financial reporting framework; and Included in 7a. [(b) not included] Page 8 of 105

9 ISA 700 (Unless ) (b) To express clearly that opinion through a written report that also describes the basis for that opinion. b. To express clearly that opinion on the financial statements clearly through a written report that also describes the basis for that opinion. Definitions Definitions 7. For purposes of the ISAs, the following terms have the meanings attributed below: For purposes of generally accepted auditing standardsthe ISAs, the following terms have the meanings attributed below: (a) General purpose financial statements Financial statements prepared in accordance with a general purpose framework. General purpose financial statements Financial statements prepared in accordance with a general purpose framework. (Ref: Para A1) (b) General purpose framework A financial reporting framework designed to meet the common financial information needs of a wide range of users. The financial reporting framework may be a fair presentation framework or a compliance framework. General purpose framework A financial reporting framework designed to meet the common financial information needs of a wide range of users. The financial reporting framework may be a fair presentation framework or a compliance framework. AU The term "generally accepted accounting principles" as used in reporting standards is construed to include not only accounting principles and practices but also In the United States, only fair presentation frameworks are considered general purpose frameworks. Therefore, all requirements related to compliance frameworks have been deleted from the proposed SAS. At the October 2008 ASB meeting, the ASB discussed AU section 410, Adherence Page 9 of 105

10 ISA 700 (Unless ) the methods of applying them. The first reporting standard is construed not to require a statement of fact by the auditor but an opinion as to whether the financial statements are presented in conformity with such principles. fn 1 If limitations on the scope of the audit make it impossible for the auditor to form an opinion as to such conformity, appropriate qualification of his report is required. to GAAP (AICPA, Professional Standards, vol. 1), and determined the proposed SAS adequately covers this. The term fair presentation framework is used to refer to a financial reporting framework that requires compliance with the requirements of the framework and: The term fair presentation framework is used to refer to a financial reporting framework that requires compliance with the requirements of the framework and: This definition is not necessary in this SAS because fair presentation framework is defined in the Overall Objectives SAS and in the United States, we only have a general purpose, fair presentation framework. So, unlike the ISA, there is no need to reemphasize the differences between fair presentation framework and compliance framework. (i) Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be necessary for management to provide disclosures beyond those Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be necessary for management to provide disclosures beyond those specifically required by the framework; or Page 10 of 105

11 ISA 700 (Unless ) specifically required by the framework; or (ii) Acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial statements. Such departures are expected to be necessary only in extremely rare circumstances. Acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial statements. Such departures are expected to be necessary only in extremely rare circumstances. The term compliance framework is used to refer to a financial reporting framework that requires compliance with the requirements of the framework, but does not contain the acknowledgements in (i) or (ii) above. 13 The term compliance framework is used to refer to a financial reporting framework that requires compliance with the requirements of the framework, but does not contain the acknowledgements in (i) or (ii) above. 14 ISA 710 para. 6 (a) Comparative information The amounts and Separate definition not necessary in the United ISA 200, Overall Objectives of the Independent Auditor, and the Conduct of an Audit in Accordance with International Standards on Auditing, paragraph 13(a). ISA 200, Overall Objectives of the Independent Auditor, and the Conduct of an Audit in Accordance with International Standards on Auditing, paragraph 13(a). Page 11 of 105

12 ISA 700 (Unless ) (a) Comparative information The amounts and disclosures included in the financial statements in respect of one or more prior periods in accordance with the applicable financial reporting framework. disclosures included in the financial statements in respect of one or more prior periods in accordance with the applicable financial reporting framework. States. ISA 710 para. 6 (c) Comparative financial statements Comparative information where amounts and other disclosures for the prior period are included for comparison with the financial statements of the current period, but, if audited are referred to in the auditor s opinion. The level of information included in those comparative financial statements is comparable with that of the financial statements of the current period. Comparative financial statements A complete set of financial statements 15 for one or more prior periods Comparative information where amounts and other disclosures for the prior period are included for comparison with the financial statements of the current period and covered by, but, if audited are referred to in the auditor s opinion. The level of information included for the prior periods in theose comparative financial statements is comparable with that of the financial statements of the current period. Summarized financial information for prior periods presented for comparative purposes that is not in the form of a complete set of financial statements is not considered comparative financial statements and is not referred to in the auditor s opinion. Definition revised to clarify in the United States and to include summarized information. 15 See, Overall Objectives of the Independent Auditor, and the Conduct of an Audit in Accordance With International Standards on Auditing, for a definition of financial statements. Page 12 of 105

13 ISA 700 (Unless ) ISA 710 para. 6 (b) Corresponding figures Comparative information where amounts and other disclosures for the prior period are included as an integral part of the current period financial statements, and are intended to be read only in relation to the amounts and other disclosures relating to the current period (referred to as current period figures ). The level of detail presented in the corresponding amounts and disclosures is dictated primarily by its relevance to the current period figures. (b) Corresponding figures Comparative information where amounts and other disclosures for the prior period are included as an integral part of the current period financial statements, and are intended to be read only in relation to the amounts and other disclosures relating to the current period (referred to as current period figures ). The level of detail presented in the corresponding amounts and disclosures is dictated primarily by its relevance to the current period figures. Definition of corresponding figures not necessary in the United States because this is not a prevalent practice. See the application guidance in paragraphs A41-A42. (c) Unmodified opinion The opinion expressed by the auditor when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. 16 (c) Unmodified opinion The opinion expressed by the auditor when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework Reference to financial statements in this ISA means a complete set of general purpose financial statements, including the related notes. The related notes ordinarily 8. Reference to financial statements in this ISA means a complete set of general purpose financial statements, including the related notes. The related notes ordinarily comprise a summary of significant The guidance in this paragraph is already included in the Overall Objectives SAS and, Paragraphs deal with the phrases used to express this opinion in the case of a fair presentation framework and a compliance framework respectively. Paragraphs deal with the phrases used to express this opinion in the case of a fair presentation framework and a compliance framework respectively. Page 13 of 105

14 ISA 700 (Unless ) comprise a summary of significant accounting policies and other explanatory information. The requirements of the applicable financial reporting framework determine the form and content of the financial statements, and what constitutes a complete set of financial statements. 9. Reference to International Financial Reporting Standards in this ISA means the International Financial Reporting Standards issued by the International Accounting Standards Board, and reference to International Public Sector Accounting Standards means the International Public Sector Accounting Standards issued by the International Public Sector Accounting Standards Board. accounting policies and other explanatory information. The requirements of the applicable financial reporting framework determine the form and content of the financial statements, and what constitutes a complete set of financial statements Reference to generally accepted accounting principles in this SAS means the accounting principles generally accepted in the United States of America (GAAP). Reference to International Financial Reporting Standards in this SAS ISA means the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB)., and reference to International Public Sector Accounting Standards means the International Public Sector Accounting Standards issued by the International Public Sector Accounting Standards Board. therefore, it is not necessary to repeat it here. Requirements Requirements Forming an Opinion on the Financial Statements 10. The auditor shall form an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. Forming an Opinion on the Financial Statements The auditor should shall form an opinion on whether the financial statements as a whole are prepared, in all material respects, in accordance with the applicable financial reporting framework..07 The auditor's standard report states that the financial statements present fairly, in all material respects, an entity's financial position, results of operations, and cash flows in 18 ISA 200, paragraph 11. Page 14 of 105

15 ISA 700 (Unless ) conformity with generally accepted accounting principles. This conclusion may be expressed only when the auditor has formed such an opinion on the basis of an audit performed in accordance with generally accepted auditing standards.05 The objective of the fourth standard is to prevent misinterpretation of the degree of responsibility the auditor is assuming when his or her name is associated with financial statements. Reference in the fourth reporting standard to the financial statements "taken as a whole" applies equally to a complete set of financial statements and to an individual financial statement (for example, to a balance sheet) for one or more periods presented. (Paragraph.65 discusses the fourth standard of reporting as it applies to comparative financial Paragraphs deal with the phrases used to express this opinion in the case of a fair presentation framework and a compliance framework respectively. See proposed SAS, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards, for a definition of applicable financial reporting framework. ISA 200, paragraph 11. Paragraphs deal with the phrases used to express this opinion in the case of a fair presentation framework and a compliance framework respectively. Page 15 of 105

16 ISA 700 (Unless ) 11. In order to form that opinion, the auditor shall conclude as to whether the auditor has obtained reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. That conclusion shall take into account: In order to form that opinion, the auditor shouldshall conclude as to whether the auditor has obtained reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. That conclusion shouldshall take into account: (Ref: Para A2) statements.) The auditor may express an unqualified opinion on one of the financial statements and express a qualified or adverse opinion or disclaim an opinion on another if the circumstances warrant. (a) The auditor s conclusion, in accordance with ISA 330, whether sufficient appropriate audit evidence has been obtained; 23 a. The auditor s conclusion, in accordance with the proposed SAS ISA 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained, whether sufficient appropriate audit evidence has been obtained; 24 (b) The auditor s conclusion, in accordance with ISA 450, whether uncorrected misstatements are material, individually or in aggregate; 25 and b. The auditor s conclusion, in accordance with the proposed SAS, Evaluation of Misstatements Identified Dduring the Audit, ISA 450, whether uncorrected misstatements ISA 330 (Redrafted), The Auditor s Responses to Assessed Risks, paragraph 27. See proposed SAS Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained, paragraph 26ISA 330, The Auditor s Responses to Assessed Risks, paragraph 27. ISA 450, Evaluation of Misstatements Identified during the Audit, paragraph 11. Page 16 of 105

17 ISA 700 (Unless ) are material, individually or in aggregate; 26 and (c) The evaluations required by paragraphs c. The evaluations required by paragraphs The auditor shall evaluate whether the financial statements are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework. This evaluation shall include consideration of the qualitative aspects of the entity s accounting practices, including indicators of possible bias in management s judgments. (Ref: Para. A1-A3) 13. In particular, the auditor shall evaluate whether, in view of the requirements of the applicable financial reporting framework: The auditor should shall evaluate whether the financial statements are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework. This evaluation should shall include consideration of the qualitative aspects of the entity s accounting practices, including indicators of possible bias in management s judgments. (Ref: Para. A3- A5 A1-A3) In particular, the auditor shouldshall evaluate whether, in view of the requirements of the applicable financial reporting framework: (a) The financial statements adequately disclose the significant accounting policies selected and applied; a. The financial statements adequately disclose the significant accounting policies selected and applied; (b) The accounting policies selected and applied are consistent with the applicable financial reporting framework and are appropriate; b. The accounting policies selected and applied are consistent with the applicable financial reporting framework and are appropriate; 26 See Evaluation of Misstatements Identified During the Audit, paragraph 11ISA 450, Evaluation of Misstatements Identified during the Audit, paragraph 11. Page 17 of 105

18 ISA 700 (Unless ) (c) The accounting estimates made by management are reasonable; c. The accounting estimates made by management are reasonable; (d) The information presented in the financial statements is relevant, reliable, comparable and understandable; d. The information presented in the financial statements is relevant, reliable, comparable and understandable; (e) The financial statements provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the information conveyed in the financial statements; and (Ref: Para. A4) e. The financial statements provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the information conveyed in the financial statements; and (Ref: Para. A6A4) (f) The terminology used in the financial statements, including the title of each financial statement, is appropriate. f. The terminology used in the financial statements, including the title of each financial statement, is appropriate. 14. When the financial statements are prepared in accordance with a fair presentation framework, the evaluation required by paragraphs shall also include whether the financial statements achieve fair presentation. The auditor s evaluation as to whether the financial statements achieve fair presentation shall include consideration of: In addition to the evaluations required by paragraphs 12 and 13, When the financial statements are prepared in accordance with a fair presentation framework, tthe auditor s evaluation about whether the financial statements achieve fair presentation should include required by paragraphs shall also include whether the financial statements achieve fair presentation. The auditor s evaluation as to whether the financial statements achieve fair presentation shall include consideration of: AU 411 The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. AU The independent auditor's judgment concerning the "fairness" of the overall presentation of financial statements should be applied within the framework of generally accepted accounting principles. Without that framework, the auditor would have no Page 18 of 105

19 ISA 700 (Unless ) uniform standard for judging the presentation of financial position, results of operations, and cash flows in financial statements. AU The auditor's opinion that financial statements present fairly an entity's financial position, results of operations, and cash flows in conformity with generally accepted accounting principles should be based on his or her judgment as to whether (a) the accounting principles selected and applied have general acceptance; (b) the accounting principles are appropriate in the circumstances; (c) the financial statements, including the related notes, are informative of matters that may affect their use, understanding, and interpretation (see section 431); (d) the information presented in the financial statements is classified and summarized in a reasonable manner, that is, neither too detailed nor too condensed (see section 431); and (e) the financial statements reflect the underlying transactions and events in a manner that presents the financial position, results Page 19 of 105

20 ISA 700 (Unless ) of operations, and cash flows stated within a range of acceptable limits, that is, limits that are reasonable and practicable to attain in financial statements. fn 1 (a) The overall presentation, structure and content of the financial statements; and a. The overall presentation, structure and content of the financial statements; and (b) Whether the financial statements, including the related notes, represent the underlying transactions and events in a manner that achieves fair presentation. b. Whether the financial statements, including the related notes, represent the underlying transactions and events in a manner that achieves fair presentation. (Ref: Para. A7-A8) 15. The auditor shall evaluate whether the financial statements adequately refer to or describe the applicable financial reporting framework. (Ref: Para. A5-A10) The auditor shouldall evaluate whether the financial statements adequately refer to or describe the applicable financial reporting framework. (Ref: Para. A9-A12A5-A10) Form of Opinion Form of Opinion 16. The auditor shall express an unmodified opinion when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. 17. If the auditor: The auditor should shall express an unmodified opinion when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework The auditor should modify the opinion in the auditor s report in accordance with proposed SAS Modifications to the Opinion in the Independent Page 20 of 105

21 ISA 700 (Unless ) Auditor s Report, iif the auditor: (a) concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement; or a. concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement; or (b) is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement, b. is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement., the auditor shall modify the opinion in the auditor s report in accordance with ISA 705. the auditor shall modify the opinion in the auditor s report in accordance with ISA If financial statements prepared in accordance with the requirements of a fair presentation framework do not achieve fair presentation, the auditor shall discuss the matter with management and, depending on the requirements of the applicable financial reporting framework and how the matter is resolved, shall determine whether it is necessary to modify the opinion in the auditor s report in accordance with ISA 705. (Ref: Para. A11) If, in connection with the evaluation required by paragraph 14, the auditor concludes that additional disclosures may be necessary for the financial statements to prepared in accordance with the requirements of a fair presentation framework do not achieve fair presentation, the auditor should shall discuss the matter with management and, depending on the requirements of the applicable financial reporting framework and how the matter is resolved, should shall determine whether it is necessary to modify the opinion in the auditor s report in accordance with proposed SAS Modifications to the Opinion in the Independent Auditor s Report.ISA 705. (Ref: Para. A11) 19. Rule 203 of the Code of Professional Conduct of the AICPA (ET section ) requires compliance with accounting principles promulgated by the body Departure From a Promulgated Page 21 of 105

22 ISA 700 (Unless ) 19. When the financial statements are prepared in accordance with a compliance framework, the auditor is not required to evaluate whether the financial statements achieve fair presentation. However, if in extremely rare circumstances the auditor concludes that such financial statements are misleading, the auditor shall discuss the matter with management and, depending on how it is resolved, shall determine whether, designated by Council to establish such principles. This rule recognizes that upon occasion there may be unusual circumstances where the literal application of pronouncements on accounting principles would have the effect of rendering financial statements misleading. When the unusual circumstances contemplated by Rule 203, Accounting Principles, of the Code of Professional Conduct (AICPA, Professional Standards, vol. 2, ET sec. 203 par..01) are present, the auditor's report should include the information required by the rule in an emphasis of natter paragraph in accordance with proposed SAS Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor s Report. In such a case, the auditor should express an unmodified opinion with respect to whether the financial statements are in accordance with the applicable financial reporting framework unless there are other reasons, not associated with the departure from a promulgated principle, not to do so. (Ref: Para.A13-A14) 19. When the financial statements are prepared in accordance with a compliance framework, the auditor is not required to evaluate whether the financial statements achieve fair presentation. However, if in extremely rare circumstances the auditor concludes that such financial statements are misleading, the auditor shall discuss the matter with management and, depending on how it is resolved, shall determine whether, and how, to communicate it in the auditor s report. (Ref: Para. A12) Accounting Principle.15 When the circumstances contemplated by Rule 203 [ET section ] are present, the auditor's report should include, in a separate paragraph or paragraphs, the information required by the rule. In such a case, it is appropriate for the auditor to express an unqualified opinion with respect to the conformity of the financial statements with generally accepted accounting principles unless there are other reasons, not associated with the departure from a promulgated principle, not to do so. (See section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.) In the United States, only fair presentation frameworks are considered general purpose frameworks. Page 22 of 105

23 ISA 700 (Unless ) and how, to communicate it in the auditor s report. (Ref: Para. A12) Auditor s Report Auditor s Report 20. The auditor s report shall be in writing. (Ref: Para. A13-A14) Auditor s Report for Audits Conducted in Accordance with International Standards on Auditing The auditor s report should shall be in writing. (Ref: Para. A15-A16A13-A14) Auditor s Report for Audits Conducted in Accordance with Generally Accepted Auditing Standards International Standards on Auditing.08 The auditor's standard report identifies the financial statements audited in an opening (introductory) paragraph, describes the nature of an audit in a scope paragraph, and expresses the auditor's opinion in a separate opinion paragraph. The basic elements of the report are the following: Title Title 21. The auditor s report shall have a title that clearly indicates that it is the report of an independent auditor. (Ref: Para. A15) The auditor s report should shall have a title that includes the word independent to clearly indicates that it is the report of an independent auditor. (Ref: Para. A17 15).08a. A title that includes the word independent fn 3 Page 23 of 105

24 ISA 700 (Unless ) Addressee Addressee 22. The auditor s report shall be addressed as required by the circumstances of the engagement. (Ref: Para. A16) The auditor s report should shall be addressed as required by the circumstances of the engagement. (Ref: Para. A1816).09 The report may be addressed to the company whose financial statements are being audited or to its board of directors or stockholders. A report on the financial statements of an unincorporated entity should be addressed as circumstances dictate, for example, to the partners, to the general partner, or to the proprietor. Occasionally, an auditor is retained to audit the financial statements of a company that is not a client; in such a case, the report is customarily addressed to the client and not to the directors or stockholders of the company whose financial statements are being audited. Paragraph.09 of AU section 508, Reports on Audited Financial Statements (AICPA, Professional Standards, vol. 1), included as application material at A18. Introductory Paragraph Introductory Paragraph 23. The introductory paragraph in the auditor s report shall: (Ref: Para. A17-A19) The introductory paragraph in the auditor s report should shall: (Ref: Para. A19-A21A17-A19 (a) Identify the entity whose financial statements have been audited; (b) State that the financial statements have been audited; a. Identify the entity whose financial statements have been audited; b. State that the financial statements have been audited;.08b. A statement that the financial statements identified in the report were Page 24 of 105

25 ISA 700 (Unless ) (c) Identify the title of each statement that comprises the financial statements; c. Identify the title of each statement that comprises the financial statements; audited.06 The auditor's report is customarily issued in connection with an entity's basic financial statements balance sheet, statement of income, statement of retained earnings and statement of cash flows. Each financial statement audited should be specifically identified in the introductory paragraph of the auditor's report. If the basic financial statements include a separate statement of changes in stockholders' equity accounts, it should be identified in the introductory paragraph of the report but need not be reported on separately in the opinion paragraph since such changes are part of the presentation of financial position, results of operations, and cash flows. Second part of AU section 508 paragraph.06 included as application material. (d) Refer to the summary of significant accounting policies and other explanatory information; and (d) Refer to the summary of significant accounting policies and other explanatory information; and This is not currently required by extant AU section 508. Deleted from proposed SAS. (e) Specify the date or period covered by each financial statement comprising the financial statements. d. (e) Specify the date or period covered by each financial statement comprising the financial statements. Page 25 of 105

26 ISA 700 (Unless ) Management s Responsibility for the Financial Statements Management s Responsibility for the Financial Statements 24. This section of the auditor s report describes the responsibilities of those in the organization that are responsible for the preparation of the financial statements. The auditor s report need not refer specifically to management, but shall use the term that is appropriate in the context of the legal framework in the particular jurisdiction. In some jurisdictions, the appropriate reference may be to those charged with governance. 25. The auditor s report shall include a section with the heading Management s [or other appropriate term] Responsibility for the Financial Statements. 26. The auditor s report shall describe management s responsibility for the preparation of the financial statements. The description shall include an explanation that management is responsible for the preparation of the financial statements in accordance with the applicable financial reporting framework, and for such internal control as it determines is necessary to enable 24. This section of the auditor s report describes the responsibilities of those in the organization that are responsible for the preparation of the financial statements. The auditor s report need not refer specifically to management, but shall use the term that is appropriate in the context of the legal framework in the particular jurisdiction. In some jurisdictions, the appropriate reference may be to those charged with governance The auditor s report should shall include a section with the heading Management s [or other appropriate term] Responsibility for the Financial Statements The auditor s report shouldshall describe management s responsibility for the preparation and fair presentation of the financial statements. The description shouldshall include an explanation that management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework; this responsibility includes the design, implementation, and maintenance of, and for such internal control relevant to as it determines is necessary to enable the preparation and fair presentation of financial statements that are free from material misstatement,.08 c. A statement that the financial statements are the responsibility of the Company's management fn 4 and that the auditor's responsibility is to express an opinion on the financial statements based on his or her audit The task force believes that this paragraph is talking about jurisdictions, where the structure of boards and corporate law is different than in the United States and, therefore, it is sufficient to just discuss management s responsibilities for the preparation and presentation of the financial statements. Wording related to management s responsibility for internal control in the proposed SAS differs from the ISA because the proposed wording better conveys management s responsibilities. Footnote 4 to AU section Page 26 of 105

27 ISA 700 (Unless ) the preparation of financial statements that are free from material misstatement, whether due to fraud or error. (Ref: Para. A20- A23) 27. Where the financial statements are prepared in accordance with a fair presentation framework, the explanation of management s responsibility for the financial statements in the auditor s report shall refer to the preparation and fair presentation of these financial statements or the preparation of financial statements that give a whether due to fraud or error. (Ref: Para. A22A20- A23) The description about management s responsibility for the financial statements should not be further elaborated upon in the auditor s report or referenced to a separate statement by management about such responsibilities if one is included in a document containing the auditor s report. (Ref: Para. A23) 27. Where the financial statements are prepared in accordance with a fair presentation framework, the explanation of management s responsibility for the financial statements in the auditor s report shall refer to the preparation and fair presentation of these financial statements or the preparation of financial statements that give a true and fair view, as appropriate in the circumstances. AU Interpretation No. The statement about management's responsibilities for the financial statements required by section 508 Reports on Audited Financial Statements, should not be further elaborated upon in the auditor's standard report or referenced to management's report. Such modifications to the standard auditor's report may lead users to erroneously believe that the auditor is providing assurances about representations made by management about their responsibility for financial reporting, internal controls and other matters that might be discussed in the management report. 508 paragraph.08 included as application material. This is included in paragraph 25. Not necessary to include in a separate paragraph. Page 27 of 105

28 ISA 700 (Unless ) true and fair view, as appropriate in the circumstances. Auditor s Responsibility Auditor s Responsibility 28. The auditor s report shall include a section with the heading Auditor s Responsibility. 29. The auditor s report shall state that the responsibility of the auditor is to express an opinion on the financial statements based on the audit. (Ref: Para. A24) 30. The auditor s report shall state that the audit was conducted in accordance with International Standards on Auditing. The auditor s report shall also explain that those standards require that the auditor comply with ethical requirements and that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. (Ref: Para. A25-A26) The auditor s report should shall include a section with the heading Auditor s Responsibility The auditor s report should shall state that the responsibility of the auditor is to express an opinion on the financial statements based on the audit. (Ref: Para. A24A24) The auditor s report should shall state that the audit was conducted in accordance with generally accepted auditing standards and an identification of the United States of America as the country of origin of those standards (for example, auditing standards generally accepted in the United States of America or U.S. generally accepted auditing standards)international Standards on Auditing. The auditor s report should shall also explain that those standards require that the auditor comply with ethical requirements and that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. (Ref: Para. A25-A26A25-A26).08 c. and that the auditor's responsibility is to express an opinion on the financial statements based on his or her audit.08d. A statement that the audit was conducted in accordance with generally accepted auditing standards and an identification of the United States of America as the country of origin of those standards (for example, auditing standards generally accepted in the United States of America or U.S. generally accepted auditing standards).08e. A statement that those standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement The references to ethical requirements have been deleted so as not to create differences between issuers and nonissuers. Page 28 of 105