Which is responsible for expressing an opinion on the financial statements?
Auditors may include an emphasis of matter paragraph to draw attention to something so the reader can better understand the financial statements. Examples of when an emphasis of matter may be included is when there is:
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Adopting Release: PCAOB Release No. 2017-001 Effective Date of Standard: For audits of fiscal years ending on or after Dec. 15, 2017, except for the requirements related to critical audit matters. The requirements related to critical audit matters in paragraphs .11–.17 will be effective for audits of fiscal years ending on or after June 30, 2019, for large accelerated filers; and for fiscal years ending on or after Dec. 15, 2020, for all other companies to which the requirements apply, as described in paragraph .05. Amendments: Amending releases and related SEC approval orders Guidance on AS 3101:
Introduction.01 The auditor's report contains either an expression of opinion on the financial statements,1 taken as a whole,2 or an assertion that an opinion cannot be expressed. This standard establishes requirements regarding the content of the auditor's written report when the auditor expresses an unqualified opinion on the financial statements (the "auditor's unqualified report").3 .02 The auditor is in a position to express an unqualified opinion on the financial statements when the auditor conducted an audit in accordance with the standards of the Public Company Accounting Oversight Board ("PCAOB") and concludes that the financial statements, taken as a whole, are presented fairly, in all material respects,4 in conformity with the applicable financial reporting framework. 5 .03 When the auditor conducts an audit of financial statements in accordance with the standards of the PCAOB, some circumstances require that the auditor express a qualified opinion, adverse opinion, or disclaimer of opinion on the financial statements and state the reasons for the departure from the unqualified opinion. AS 3105, Departures from Unqualified Opinions and Other Reporting Circumstances, describes reporting requirements related to departures from unqualified opinions and other reporting circumstances. Objectives.04 The objectives of the auditor when the auditor concludes that an unqualified opinion is appropriate are to:
The Auditor's Unqualified Report.05 The auditor's unqualified report includes:7
Basic ElementsTitle .06 The auditor's report must include the title, "Report of Independent Registered Public Accounting Firm." Addressee .07 The auditor's report must be addressed to the shareholders and the board of directors, or equivalents for companies not organized as corporations. The auditor's report may include additional addressees. Opinion on the Financial Statements .08 The first section of the auditor's report must include the section title "Opinion on the Financial Statements" and the following elements:
Basis for Opinion .09 The second section of the auditor's report must include the section title "Basis for Opinion" and the following elements:
Signature, Tenure, Location, and Date .10 The auditor's report must include the following elements:
Critical Audit MattersDetermination of Critical Audit Matters .11 The auditor must determine whether there are any critical audit matters in the audit of the current period's financial statements. A critical audit matter is any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex auditor judgment. Critical audit matters are not a substitute for the auditor's departure from an unqualified opinion (i.e., a qualified opinion, adverse opinion, or disclaimer of opinion on the financial statements as described in AS 3105). .12 In determining whether a matter involved especially challenging, subjective, or complex auditor judgment, the auditor should take into account, alone or in combination, the following factors, as well as other factors specific to the audit:
Note: It is expected that, in most audits, the auditor would determine that at least one matter involved especially challenging, subjective, or complex auditor judgment. Communication of Critical Audit Matters .13 The auditor must communicate in the auditor's report critical audit matters21 relating to the audit of the current period's financial statements or state that the auditor determined that there are no critical audit matters. Note: When the current period's financial statements are presented on a comparative basis with those of one or more prior periods, the auditor may communicate critical audit matters relating to a prior period. This may be appropriate, for example, when (1) the prior period's financial statements are made public for the first time, such as in an initial public offering, or (2) issuing an auditor's report on the prior period's financial statements because the previously issued auditor's report could no longer be relied upon. .14 For each critical audit matter communicated in the auditor's report the auditor must:
Note 1: Language that could be viewed as disclaiming, qualifying, restricting, or minimizing the auditor's responsibility for the critical audit matters or the auditor's opinion on the financial statements is not appropriate and may not be used. The language used to communicate a critical audit matter should not imply that the auditor is providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate. Note 2: When describing critical audit matters in the auditor's report, the auditor is not expected to provide information about the company that has not been made publicly available by the company unless such information is necessary to describe the principal considerations that led the auditor to determine that a matter is a critical audit matter or how the matter was addressed in the audit. Language Preceding Critical Audit Matters in the Auditor's Report .15 The following language, including the section title "Critical Audit Matters," should precede critical audit matters communicated in the auditor's report: Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Note: If the auditor communicates critical audit matters for prior periods, the language preceding the critical audit matters should be modified to indicate the periods to which the critical audit matters relate. .16 In situations in which the auditor determines that there are no critical audit matters, the auditor should include the following language, including the section title "Critical Audit Matters," in the auditor's report: Critical Audit Matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. Documentation of Critical Audit Matters .17 For each matter arising from the audit of the financial statements that:
the auditor must document whether or not the matter was determined to be a critical audit matter (i.e., involved especially challenging, subjective, or complex auditor judgment) and the basis for such determination.22 Explanatory Language Added to the Auditor's Report.18 Other standards of the PCAOB require that, in certain circumstances, the auditor include explanatory language (or an explanatory paragraph) in the auditor's report, while not affecting the auditor's opinion on the financial statements. These circumstances include when:
Emphasis of a Matter.19 The auditor may emphasize a matter regarding the financial statements in the auditor's report ("emphasis paragraph").36 The following are examples of matters, among others, that might be emphasized in the auditor's report:37
If the auditor adds an emphasis paragraph in the auditor's report, the auditor should use an appropriate section title. Information about Certain Audit Participants.20 The auditor may include in the auditor's report information regarding the engagement partner and/or other accounting firms participating in the audit that is required to be reported on PCAOB Form AP, Auditor Reporting of Certain Audit Participants. 38 If the auditor decides to provide information about the engagement partner, other accounting firms participating in the audit, or both, the auditor must disclose the following:
APPENDIX A – DefinitionA1. For purposes of this standard, the term listed below is defined as follows: A2. Critical audit matter – Any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex auditor judgment. Note: Required audit committee communications are set forth in PCAOB standards, including AS 1301, Communications with Audit Committees, and Appendix B of that standard which refers to other PCAOB rules and standards. APPENDIX B – An Illustrative Auditor's Unqualified Report Including Critical Audit MattersReport of Independent Registered Public Accounting Firm To the shareholders and the board of directors of X Company Opinion on the Financial Statements We have audited the accompanying balance sheets of X Company (the "Company") as of December 31, 20X2 and 20X1, the related statements of [titles of the financial statements, e.g., income, comprehensive income, stockholders' equity, and cash flows], for each of the three years in the period ended December 31, 20X2, and the related notes [and schedules] (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of [at] December 31, 20X2 and 20X1, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20X2, in conformity with [the applicable financial reporting framework]. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters [if applicable] The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. [Include critical audit matters] [Signature] We have served as the Company's auditor since [year]. [City and State or Country] [Date] Footnotes (AS 3101 - The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion):1This standard uses the term "financial statements" as used by the U.S. Securities and Exchange Commission ("SEC") to include all notes to the statements and all related schedules. See Regulation S-X Rule 1-01(b), 17 CFR 210.1-01(b). This and other PCAOB standards often refer to the notes as disclosures; see, e.g., AS 2110, Identifying and Assessing Risks of Material Misstatement. 2 "Taken as a whole" applies equally to a complete set of financial statements and to an individual financial statement with appropriate disclosures. 3Paragraphs .85–.98 and Appendix C, Special Reporting Situations, of AS 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements, address the form and content of the auditor's report when the auditor performs an audit of internal control over financial reporting. 4 AS 2815, The Meaning of "Present Fairly in Conformity with Generally Accepted Accounting Principles," describes the basis for an auditor's responsibility for forming an opinion on whether the company's financial statements are presented fairly in conformity with the applicable financial reporting framework. 5 The auditor should look to the requirements of the SEC for the company under audit with respect to the accounting principles applicable to that company. 6 This term is defined in Appendix A, Definitions, and is set in boldface type the first time it appears. 7Appendix B provides an illustrative auditor's unqualified report. 8Laws, rules, and forms may contain requirements for auditor's reports of different types of companies. See, e.g., Sections 30(g) and 32(a)(4) of the Investment Company Act; Regulation S-X Rule 2-02, 17 CFR 210.2-02; and Securities Exchange Act of 1934 ("Exchange Act") Rule 17a-5, 17 CFR 240.17a-5. Auditor's reports on financial statements filed with the SEC are subject to all such applicable requirements. 9 See PCAOB Rule 1001(b)(iii). 10See PCAOB Rule 1001(d)(iii). 11See Section 8 of the Investment Company Act. 12See Section 54 of the Investment Company Act. 13See Exchange Act Rule 15d-21, 17 CFR 240.15d-21. 14See Section 3(a)(80) of the Exchange Act. 15Various SEC rules and forms require that companies file schedules of information and that those schedules be audited if the company's financial statements are audited. See, e.g., Regulation S-X Rules 5-04, 6-10, 6A-05, and 7-05, 17 CFR 210.5-04, 210.6-10, 210.6A-05, 210.7-05. See generally, Regulation S-X Rule 12-01, 17 CFR 210.12-01, et seq., which address the form and content of certain SEC-required schedules. 16 The terms used in the Opinion on the Financial Statements section, such as financial position, results of operations and cash flows, should be modified, as appropriate, depending on the type of company and financial statements being audited. 17See Regulation S-X Rule 2-02(a), 17 CFR 210.2-02(a). 18For an investment company that is part of a group of investment companies, the statement contains the year the auditor began serving consecutively as the auditor of any investment company in the group of investment companies. See Section 12(d)(1)(G)(ii) of the Investment Company Act. 19See Regulation S-X Rule 2-02(a). 20See AS 3110, Dating of the Independent Auditor's Report. 21Critical audit matters are not a substitute for required explanatory language (paragraphs) described in paragraph .18. If a matter that meets the definition of a critical audit matter also requires an explanatory paragraph, such as a matter related to going concern, the auditor may include the information required under paragraph .14 in the explanatory paragraph with a cross-reference in the critical audit matters section of the auditor's report to the explanatory paragraph. Alternatively, the auditor may include the explanatory paragraph and critical audit matter communication separately in the auditor's report and add a cross-reference between the two sections. 22Consistent with the requirements of AS 1215, Audit Documentation, the audit documentation should be in sufficient detail to enable an experienced auditor, having no previous connection with the engagement, to understand the determinations made to comply with the provisions of this standard. 23See AS 2415, Consideration of an Entity's Ability to Continue as a Going Concern. 24See paragraphs .06–.09 of AS 1205, Part of the Audit Performed by Other Independent Auditors. 25See paragraphs .08 and .12–.15 of AS 2820, Evaluating Consistency of Financial Statements. 26See AS 2820.06. 27See AS 2820.09 and .16–.17. 28See AS 2201.88. AS 2201 provides additional circumstances in which the auditor includes an explanatory paragraph. If the combined report is issued, AS 2201 notes that the auditor should consider those circumstances as well. 29See Item 308 of Regulation S-K. 30See AS 3105.59–.60. 31See AS 3105.52–.53 and .56–.58. 32See paragraph .50 of AS 4105, Reviews of Interim Financial Information. 33See paragraphs .03 and .08 of AS 2705, Required Supplementary Information. 34See paragraph .B5 of Appendix B, Audit Evidence Regarding Valuation of Investments Based on Investee Financial Results, of AS 1105, Audit Evidence. 35See paragraph .04 of AS 2710, Other Information in Documents Containing Audited Financial Statements. 36Emphasis paragraphs are never required and are not a substitute for required critical audit matters described in paragraphs .11–.17. 37It is not appropriate for the auditor to use phrases such as "with the foregoing [following] explanation" in the opinion paragraph when an emphasis paragraph is included in the auditor's report. 38If the auditor decides to include information regarding certain audit participants in the auditor's report, the auditor should use an appropriate section title. Who is responsible for forming and expressing an opinion on financial statements?03. The financial statements are management's responsibility. The auditor's responsibility is to express an opinion on the financial statements.
Who is responsible for the financial statements provided by the company?The preparation and presentation of a company's financial statements are the responsibility of the management of the company. Published financial statements may be audited by an independent certified public accountant. In the case of publicly traded firms, an audit is required by law.
When the auditors express an opinion on financial statements?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.
Who gives an opinion regarding the truth and fairness of financial statement?An auditor conducts the audit with a view to express a true and fair view of financial statements of an entity. He expresses an audit opinion on the financial statements of an entity on the basis of the audit evidence that he obtains.
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