10 Questions
What does the standard auditor's opinion contain?
Three parts stating that the financial statements are prepared by management, auditing standards were followed, and the statements were prepared in accordance with applicable accounting principles.
What type of opinion will an auditor issue if a firm has made exceptions to the accounting principles?
Qualified opinion
What will an auditor do if a material loss is probable but the amount cannot be reasonably estimated?
Include an explanatory paragraph in the auditor's report
What is the purpose of the auditor's report?
To provide reasonable assurance that the financial statements contain no material errors
What is the role of the auditor in financial statement preparation?
The auditor reviews the financial statements prepared by management
What does an unqualified or clean opinion indicate?
The auditor believes the statements are free from material omissions and errors
In the United States, what must an auditor express an opinion on?
A company's internal controls
What is the purpose of internal controls?
To present financial statements accurately
What type of opinion will an auditor issue if the statements are not presented fairly?
Adverse opinion
What is the purpose of the explanatory paragraph in the auditor's report?
To explain uncertainties such as the going concern assumption, valuation or realization of assets, or litigation
Study Notes
Financial Statement Analysis
- Financial statements help investors and creditors evaluate firms by providing a snapshot of assets, liabilities, and equity (balance sheet), operating performance (income statement), cash flows (statement of cash flows), and ownership changes (statement of owners' equity).
- Financial reporting is done in periods of time, typically annually, but also quarterly on an interim basis.
Financial Reporting Periods
- Companies choose a 12-month reporting period (fiscal year), which may not coincide with the calendar year ending December 31.
International Financial Reporting Standards (IFRS)
- IFRS are accounting standards created by the International Accounting Standards Board (IASB), widely accepted in most major economies, including the European Union.
- In the United States, the Financial Accounting Standards Board (FASB) issues Generally Accepted Accounting Principles (U.S. GAAP), which has some differences with IFRS.
Financial Statement Analysis
- Allows users to assess the amount, timing, and uncertainty of estimates reported in financial statements.
- Footnotes provide additional information on accounting methods, assumptions, and estimates used by management.
Management's Commentary (MD&A)
- Discusses the nature, past performance, and future outlook of the company, including results from operations, capital resources, liquidity, and discontinued operations.
Auditing
- An independent review of an entity's financial statements to provide an opinion on fairness and reliability.
- The auditor examines accounting and internal control systems, confirms assets and liabilities, and checks for material errors.
Auditor's Report
- Contains three parts: management's responsibility, independent review, and adherence to accounting principles and reasonable estimates.
- The auditor's report may include an explanatory paragraph for exceptions to accounting principles or uncertainties.
Types of Auditor's Opinions
- Unqualified (clean) opinion: no material omissions or errors.
- Qualified opinion: exceptions to accounting principles.
- Adverse opinion: statements not presented fairly.
- Disclaimer of opinion: unable to express an opinion.
Internal Controls
- Processes a company uses to present financial statements accurately.
- In the United States, auditors must express an opinion on a company's internal controls.
Financial statements are useful in evaluating firms, providing snapshots of assets, liabilities, and equity, as well as summaries of operating performance and cash flows.
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