The auditor's report
1. Introduction
Important innovations have come to alter the concept, scope and application of the audit operations of a modern company. Such changes have produced a critical management tool whose purpose is to control and analyze the important functions of your firm. This instrument is the Audit.
The purpose of this Module is to make known in summary form the function and interpretation of Standards that must be complied with in order to communicate to the administration and stakeholders the results of a work carried out for decision-making at any given time.
2. Role of the auditor's report
Auditor's role
Management begins by deciding that the company is in immediate need of an audit function. Then, it establishes the organizational framework within the company and also within the audit function itself.
The primary ingredient to the success of the audit function is the degree of support from management. In order to ensure its effectiveness, the administration must give its full support.
The obligations and responsibilities of the audit function consist of the analysis of each operating department and the subsequent report to the administration on the results of its verifications. The audit function is responsible for formulating objective recommendations to correct the reported situations.
The opinion of an auditor regarding the financial statements of a client is expressed in what is usually called «Opinion» (1).
Rules Relating to Information and Opinion
First Standard Relating to the Report.
The opinion must indicate whether the financial statements are presented in accordance with generally accepted accounting principles.
The term (2) "generally accepted accounting principles"
As used in reporting standards, it should be interpreted to include not only accounting principles and practices, but also methods of applying them. The first standard on the report requires the auditor, not a statement of fact but an opinion as to whether the financial statements are presented in accordance with such principles. If limitations on the scope of the auditor's review preclude you from forming an opinion regarding such compliance, the appropriate qualification is required in your opinion.
Determining whether the financial statements are presented in accordance with generally accepted accounting principles requires using criteria to define whether the principles used in the statements have been generally accepted.
Generally accepted accounting principles evolve and change. Statements published by the empowered bodies of the American Institute of Accountants acknowledge those changes. The first standard related to the report and opinion, assumes that the independent auditor will be aware of these statements.
Second Standard on Uniformity.
The opinion must indicate whether these principles have been applied consistently with the previous period.
The objective of the uniformity standard:
to). ensures that the comparability of the financial statements between different periods has not been significantly affected by changes in accounting principles, which include not only the principles and practices but also the methods of their application, b). if comparability has been materially affected by such changes, require the independent auditor the appropriate way to report such changes. It is implicit in this objective that such principles have been uniformly observed within each period.
The proper application of the uniformity standard by the independent auditor requires an understanding of the relationship between uniformity and comparability. Although non-uniformity can cause non-comparability, other non-uniform factors also cause non-comparability.
The comparison of an entity's financial statements between different years may be affected by:
a) accounting changes
b) an error in previously issued financial statements,
c) changes in classifications and, d) Events or transactions substantially different from those included in the financial statements previously issued.
A change in principle results from the adoption of a generally accepted accounting principle different from another that was previously used for reporting purposes. The term accounting principles includes not only accounting principles and practices but also methods for their application. A change in accounting principle includes, for example, a change in the straight-line depreciation method to that of decreasing balances for all assets of a certain type or for all new acquisitions of a certain type of asset, and a change in considering expenses as research and development costs and amortize those costs during the estimated benefit period. The uniformity standard is applicable to this type of change and requires recognition of the change in the auditor's opinion regarding uniformity.
Third Standard Adequate Disclosure Disclosures.
Unless stated otherwise in the report, the explanatory notes to the financial statements will be deemed adequate.
The reasonableness of the presentation of the financial statements in accordance with generally accepted accounting principles includes appropriate disclosures regarding important issues. These questions refer to the form, disposition and content of the financial statements with their attached notes; the terminology used; the amount of details supplied; the classification of the items in the states; the basis of the amounts presented, for example with respect to assets such as inventories and industrial plants; liens on assets; overdue dividends; restrictions on the payment of dividends; contingent liabilities; and the existence of interests of subsidiaries and affiliates and the nature and volume of transactions with such interests.This list is not intended to be limiting but merely illustrative of the nature and type of disclosures necessary for the financial statements to be sufficiently informative.
Excessive words should not be confused with adequate disclosure. The independent auditor should use his judgment in light of the circumstances and facts of which he becomes aware on that occasion to decide what constitutes a matter that requires disclosure. The fact that subsequent events may give greater importance to questions that once seemed to have no significance, does not in itself invalidate the soundness of his judgment. It cannot be accepted that the anticipation of a fact and the subsequent perception of it have the same weight in the process of reaching conclusions at the beginning. Late perception should be removed from the factors by which the soundness of the above conclusions is judged.
If issues that the independent auditor believes require disclosure are omitted from the financial statements, these issues should be included in his report, and the auditor should express the appropriate exception in his opinion.
The disclosure should not be deemed to require the publication of certain types of information that may be detrimental to the company or its shareholders. For example, the threat of legal action for the violation of a patent tub could induce scrupulous management to create a wide reserve for a possible loss, even if they have decided to vigorously fight that game. But the publicity given to such a reservation could result in harm to the company or its shareholders, because the courts have held that a reservation created in connection with a patent infringement constitutes a disputed distribution of profits, however, the refusal of the company or its management to admit that such reserve could be an equitable proportion of the disputed profits.
The issue of disclosures to be made in the financial statements is somewhat related to information that the auditor receives on confidential basis that is similar in quality to privileged communications. Without this basis of confidentiality, the auditor may sometimes have difficulty obtaining the information necessary to formulate their opinion. If the information received, in your opinion, does not need to be disclosed so that the financial statements do not lead to erroneous conclusions, this standard does not require that such information be disclosed.
Fourth Standard The Expression of Opinion.
The purpose of the fourth standard on information and opinion is to avoid a misinterpretation of the degree of responsibility that the independent auditor is assuming whenever his name is related to financial statements. In thinking about the degree of responsibility that he is assuming, the auditor should not forget that the justification for expressing his opinion, either with or without qualification, is based on the degree to which the scope of his examination has been adjusted to the standards of generally accepted audit.
An auditor may issue a Report: without qualifications, with qualifications, denial of opinion or adverse.
Unqualified opinion. If, as a result of its examination, an auditor has no opposition regarding the content and presentation of financial statements, regarding the application of accounting principles, regarding the consistency in the application of said principles in relation to the previous year, he shall render a (favorable) opinion without qualifications.
Generally, the short form of the auditor's report is used in relation to the basic financial statements. The usual short form of opinion consists of a presentation of the work performed, expressed in an initial paragraph or in scope, and in a presentation of the conclusions of the independent auditor, in a final paragraph to the opinion.
Because of the importance of the independent auditor's opinion to the investing and crediting public, and the responsibility it assumes in expressing it, reasonable uniformity in the way of expressing their opinion is important, both for the auditor and for those who trust their conclusions.
The following model of the independent auditor's short opinion is recommended:
We have examined the balance sheet of company X as of December 31, 19.., and the statements of results of operations and accumulated earnings and changes in the financial situation that are relative to it for the year that ended on that date. Our examination was conducted in accordance with generally accepted auditing standards and consequently included testing of accounting records and other auditing procedures that we deem necessary in the circumstances.
In our opinion, the aforementioned financial statements reasonably present the financial position of company x as of December 31, 19.. and the result of its operations and changes in its financial situation for the year that ended on that date, in accordance with Generally accepted accounting principles that were applied uniformly in relation to the previous year.
The opinion must be addressed to the client, or to the Board of Directors or to the client's shareholders, if they are the ones who made the contract or if it is preferred to assign it to them. When the appointment of the auditor is made by the directors and is approved by the shareholders, the opinion may be addressed to both.
Qualified Opinion. If a client has not applied accounting principles correctly, or if an auditor cannot adhere to recognized auditing standards due to being restricted in the application of recognized auditing procedures in the course of this, or if the auditor has uncertainty regarding a specific situation, the audit report will contain a qualified opinion. This opinion is subject to caveats as there is an issue pending resolution. (Look at annex 1)
Opinion in the sense of not being able to render an opinion. If an auditor is severely restricted by management to carry out their investigative work, or if the exceptions to the practices followed by the client are of such magnitude, or if the scope or procedure paragraph contains so many caveats that it would cause If a negative opinion is rendered, the auditor must indicate that he is not qualified to render an opinion, stating the reasons for it. (see annex # 2)
Negative (or Adverse) Opinion. A negative (or adverse) opinion should be externalized when an auditor is in complete disagreement with a client and cannot convince the auditor to change the procedure (or procedures), or when the client violates the recognition of the application of recognized accounting principles and refuses to change your criteria. (see annex # 3)
Partial Opinions with Certain Items of the Financial Statements. In a partial opinion, an auditor will either refrain from rendering an opinion or may file an adverse opinion with respect to the financial statements taken as a whole; however, he believes that he can give a good opinion regarding certain items in the financial statements. A partial opinion must be drafted in such a way that it does not contradict the abstention of opinion or an adverse opinion and must be presented after the abstention of opinion or adverse opinion of the financial statements taken as a whole.
The opinion must contain the opinion of the Auditor regarding the financial statements, taken as a whole, or it must indicate that it abstains from rendering an opinion about them. When a general opinion about them cannot be rendered, the reasons should be indicated. In all cases where the name of an auditor appears in relation to financial statements, the report must contain a clarification of the nature of the auditor's examination, and the degree of responsibility it is assuming.
3. Definition of reasonably presented
Meaning of "Present Reasonably" in accordance with GAAP, in the opinion of the independent auditor.
The clean opinion of an independent auditor is normally worded as follows:
In our opinion, the aforementioned financial statements reasonably present the financial situation of Company X as of December 31, 19xx, and the result of its operations and changes in its financial situation for the year that ended on that date, in accordance with principles generally accepted accounting standards that were applied uniformly in relation to the previous year.
The purpose of this statement is to explain the meaning of the phrase "present reasonably in accordance with generally accepted accounting principles" in the independent auditor's opinion. (3)
The first reporting standard requires an auditor who has examined financial statements in accordance with generally accepted auditing standards to express in his or her opinion whether the financial statements are presented in accordance with generally accepted accounting principles. The phrase Generally Accepted Accounting Principles is a technical accounting term that includes the conventions, rules and procedures necessary to define the accepted accounting practice at a particular date. Includes not only generally applicable guidelines, but also detailed practices and procedures, these conventions, rules and procedures provide a basis for measuring financial presentation.
The independent auditor's judgment regarding the reasonableness of the presentation of the financial statements taken together should be applied within the framework of generally accepted accounting principles. Without that framework, the auditor would not have a uniform basis for judging the presentation of the financial position, the results of the operation and changes in the financial situation in the financial statements.
The auditor's opinion that the financial statements reasonably present an entity's financial position and the result of its operations and changes in its financial position in accordance with generally accepted accounting principles should be based on its judgment regarding whether.
to). Selected and applied accounting principles are generally accepted.
b). Accounting principles are appropriate in the circumstances.
c). The financial statements, including their relative notes, provide information on aspects that could affect their use, understanding and interpretation.
d). The information presented in the financial statements is classified and reasonably summarized, this is neither too detailed nor too condensed.
and). The financial statements reflect the fundamental events and transactions in such a way that they present the financial situation within a range of limits that are reasonable and practical to achieve in the financial statements.
Generally accepted accounting principles are relatively objective; that is, they are sufficiently established to the point that independent auditors usually agree that they exist. However, identifying an accounting principle as generally accepted in particular circumstances requires judgment. There is no single source of reference for all established accounting principles.
Generally accepted accounting principles recognize the importance of recording transactions according to their nature. (4)
The auditor should consider whether the nature of the transactions differs materially from its form. The auditor should become familiar with alternative accounting principles that may be applied to transactions or facts to be considered and realize that an accounting principle may have only one use. limited but which nevertheless has general acceptance.
The auditor should recognize, however, that there may be unusual circumstances in which the selection and application of specific accounting principles, rather than alternative principles, could cause the financial statements taken as a whole to be misleading.
4. Adequate interpretation in the financial statements
Adequate disclosure in the financial statements.
SAS No.32 defines that what is practicable means that: the information can be reasonably obtained from the accounts and records of management and that providing the information in its opinion does not require the auditor to assume the role of the person preparing the information. financial.
In carrying out an audit and in preparing the financial statements, the concepts of sufficient disclosure, consistency, materiality and conservatism should constantly be kept in mind.
Enough Disclosure
Adequate disclosure is the basis for adequate financial information. Adequate disclosure implies that all data and all relevant information should be presented in the financial statements and in the explanatory notes and relationships accompanying those financial statements.
Characteristic of a revelation:
All samples must be adequate, representative and must reflect stability.
A suitable sample is one that contains a sufficient number of headings to lead to the same results that would be obtained if another sample or samples of the same size were selected from the same universe.
A representative sample has characteristics similar to those possessed by the rest of the elements of the universe. In accordance with probability theory, a randomly selected sample is supposed to be representative enough of the universe.
A sample will reveal stability when the results of its stage have to be the same even when the sample size is increased.
The disclosure would be incorrect, for example, if long-term investments were classified as current assets in order to present a better financial situation in the short term; it would also be incorrect if the fixed assets were presented at a value other than their acquisition cost, without giving any explanation in this regard; or that executive salaries be combined with other office salaries or in the event that primary earnings per common share were not separated from fully diluted earnings per common share. There are many other examples where there would be no proper disclosure.
Consistency
Consistency in preparing the financial statements means that the accounting principles have been applied in the same way in the current period in relation to the previous one. For example, there would be no consistency if inventories were valued at cost in one year and valued on another basis the following year. Consistency does not prohibit a change in the application of an accounting principle, but it does require that when there is a change in the application of a principle it is disclosed, either in the financial statements or in the accompanying explanatory notes, indicating the monetary effect of such a change. If consistency does not exist for two consecutive years, that fact should be mentioned in the audit report,together with the indication if the change or changes in the application of the principles involved is approved or not.
Relative importance.
Relative importance is said to exist when the balance of an item constitutes a high percentage of the total for the group of items to which it belongs. Relative importance is also a practical concept involved in many problems that require proper disclosure.
Even when an item of expenses or income is considered non-recurring and it is of relative importance, it must be presented in the Income Statement, since the reality is that said item occurred in that year and therefore must be disclosed as such. Another point that is a matter of discussion is the one that refers to what should be considered as an important or not important item regarding its amount. This is subject to opinion; however, a game will be important if, according to the criteria of the reader of the financial statement, it is considered so. Thus, so far the accounting profession cannot establish something specific to "relative importance".
Conservatism.
Conservatism means moderation or adherence to correct principles. By conservatism, it should not be implied that there is an under-estimate as previously believed, for example, by rapidly depreciating fixed assets for the sole purpose of presenting lower profits or by following the policy of accounting for losses since they were known, before performed, but recording the gains until they are realized and for no reason at an earlier date; in other cases, conservatism was applied, charging expenses to certain items that had to be capitalized through increases in assets. Conservatism does imply that assets and income are not underestimated at a value less than the net realizable value and that liabilities and expenses should not be overestimated. The doctrine of conservatism refers to the following:When there are two or more reasonable conclusions, the choice of the one that produces the least favorable immediate results is due to the application of the principle or doctrine of conservatism. Conservatism only differs in a favorable outcome because underestimation in one period leads to overestimation in a subsequent period.
Identification of Reports
The opinion consists of two paragraphs: the procedure paragraph and the opinion paragraph; in the first, the scope of the audit is indicated and in the second, the auditor's opinion regarding the correct presentation of the financial statements appears.
Audit reports are classified into two classes:
1. Short report called opinion, 2. Long report.
The short reports or opinions are extended in favor of the shareholders, who do not manage the company and also in favor of the creditors. Long audit reports are extended in favor of management and may or may not be directed to shareholders, creditors, credit or investment analysts and other interested persons.
In many companies, it is likely that their own accounting staff will be able to prepare adequate financial statements, comparisons, analyzes, present statistical information, calculate ratios, and make comments that may be necessary for management and control purposes. Therefore, in such cases the audit report will be short, together with appropriate notes to the financial statements. In several large companies, representatives of the auditing firms are found daily in these companies. In other companies, the accounting department staff may not be highly trained; In these cases, management will depend on its auditor not only to render its opinion regarding the reasonableness of the presentation of the financial statements.You will also be asked to submit analyzes, reasons, comparisons, etc. In such cases, a long audit report will be prepared.
It has been pointed out that the extensive audit report is of greater value than the opinion, because said Long report is more useful for negotiating credit and raising capital and also because the opinion does not detail the scope of the review for some important items of the financial statements. Currently the Securities and Exchange Commission is insisting on better financial reports, demanding that there be better disclosure; the reader should be aware of these developments and their effect on audit reports, both those that are published and those that are not published.
In recent years, the use of a modified audit opinion has increased. This modified opinion normally contains all the elements of a normal opinion, only it presents the opinion section first.
All audit reports must contain (1) date, (2) addressed to the client and (3) signed by the auditor. All audit reports must comply with the Information Auditing Standards.
Identify Changes to the Independent Auditor's Opinion
Reports on Audited Financial Statements
The Auditor's Standard Report
The auditor's standard report states that the financial statements reasonably present, in all aspects, the financial situation of the entity, the results of operations, cash flows in accordance with generally accepted accounting principles. This conclusion can be expressed only when the auditor has formed an opinion, stating that the financial statements present reasonably, on the basis of an audit conducted in accordance with generally accepted auditing standards.
The auditor's standard report identifies the audited financial statements in an introductory paragraph (introduction) describing the nature of the audit in a paragraph with this intention and expresses the auditor's opinion in a separate opinion paragraph. The basic elements of the report are as follows.
to. A title that includes the word independent.
b. The statement that the financial statements identified in the report were audited.
c. The statement that the financial statements are the responsibility of the company's management and that the auditor's responsibility is to express an opinion on the financial statements based on their audit.
d. The statement that the audit was conducted in accordance with generally accepted auditing standards.
and. The statement that generally accepted auditing standards require the auditor to plan and execute the audit to obtain reasonable assurance that the financial statements are free from material errors.
F. Points included in the audit
g. A statement that the auditor believes that his audit provides a reasonable basis for his opinion.
h. An opinion on whether the financial statements reasonably present, in all material respects, the company's financial position, as of the balance sheet date and results of operations, cash flows for the period ended therein, in accordance with Generally accepted accounting principles.
i. The manual or printed signature of the auditor.
j. The date of the audit report. (5)
Responsibility towards users of the report
The public using financial information is oblivious to the contractual relationship between the client and the Auditor. This third party uses the information produced by the client and audited, depending on the opinion that the latter has issued, will make decisions of an economic nature that may affect its assets, positively or negatively.
The user trusts the information provided with public faith, must presume it as reasonably correct, therefore it becomes the taxable person.
The opinion expressed by the auditor in attention to the financial statements, gives these absolute credibility, since they have public faith. Therefore, the user public can trust its veracity and reasonableness. Likewise, it may assume that the information is suitable to serve as a basic instrument of analysis within the economic decision-making process.
If this opinion is wrong or false, in whole or in part, the possibility will arise that the user public will make wrong decisions, with the consequent economic damage that it may cause.
As an element of the Extra-contractual Civil Liability of the Certified Public Accountants, the fact is therefore satisfied with the issuance of the opinion, false or wrong, by the CPA on the client's financial statements.
Elements of Professional Civil Responsibility
Unlawfulness.
It consists in acting contrary to law, in conduct that contravenes duties imposed by the legal system, considering it in its entirety. Likewise, it may consist in the infringement of contractual obligations, which constitutes for the contracting parties a rule to which they must submit as to the law itself.
Causal relationship.
The existence of a causal link between the professional's conduct and the damage suffered. This topic is of vital importance in cases of advice from the professional of economic sciences, since they are mere advice that may or may not be followed by the client, it is essential to prove that the non-achievement of the objectives pursued and their Harmful derivations, was due really and exclusively to what was advised and not to the inefficient or faulty execution of the client.
Hurt.
The professional responsibility of the CPA, in particular, is a responsibility of its own or personal fact; reason why the attributive factor must be, in principle, subjective, that is, the imputability due to fault or fraud of the agent of the damage.
In the case of professionals, guilt appears as inexperience or ignorance of the rules and methods of the profession; Since everyone who exercises a profession must possess the technical and practical knowledge of the same, and act with foresight and diligence.
For the public user of financial information, who holds the normal or disqualified opinion of a CPA, the damage is conformed to the moment they suffer a disorder, impairment or injury to their economic assets.
In all cases, the damage must be economically quantifiable. In the case of financial information, endowed with public faith, the basis on which the user public makes economic decisions, it is natural that the damages caused are of an economic nature.
The auditor is responsible for his own negligence, such as the failure to exercise professional care in performing his duties. Being the subject of lawsuits for making incorrect assertions, or for errors or omissions or for any illegal act committed by this.
Additionally, in some countries the auditor is held liable if he does not detect fraud or illegal act, even if the client has deliberately provided the auditor with incorrect information or has not acted appropriately in relation to his observations. Consequently, as those responsible for such losses are sued directly and in a subsidiary way, the auditors may be sued for not having detected or disclosed such losses, a situation that is considered reckless, since the causal link between the fact and the result. (6)
5. Conclusions
The Auditor's opinion consists of the expression of a technical judgment, issued with reasoning based on the conclusions of a task carried out according to pre-established basic guidelines, which are the generally accepted accounting and auditing principles, in which normally opinion is given on whether or not what is stated or reported in financial statements, accounting, inventories, among others, from a previous period or period, with respect to a specific situation or the result of management, constitutes a reasonable statement of what happened, whether it agrees or not with the truth of what happened.
The issuance of an opinion constitutes an obligation of means, since it deals with the determination of the veracity and technical precision, of it or the documents on which it must be ruled; taking into account that the veracity of the facts is not susceptible of being established with all precision in accounting matters, although the professional can appreciate if they have been presented reasonably, based on accounting principles generally accepted and applied uniformly.
recommendations
As representatives of the profession we must educate both the public and the media about the financial preparation process and the auditor's responsibilities. Misunderstandings about the nature, purpose and limitations of financial statements can cause false expectations on the part of the public regarding auditors and the work carried out by them.
A list of accounting disclosures is recommended as a means of documenting reasoning regarding significant disclosures in the financial statements.
6. Consulted Bibliography
HOLMES, Arthur W., Basic Principles of Auditing, Mexico City, 1976, pp. 11-39, 512.
Instituto Mexicano de Contadores Publico, AC, SAS No.1, SAS No.5, SAS No. 32, SAS No.39, SAS No.58, Declarations on Auditing Standards, Volume 1, Sections 410.01 ª 410.04, 420.01 ª 420.21, 430.01 ª 430.06, 510-1 ª 542-06, Tomo 4, México DF, Pág.
Alexander Hamilton Institute, Internal Audit: Key to Financial and Operational Improvement, 1984, USA, pp. 117-128
Lic. Nergio Prieto Urdaneta, Inter-American Regional Seminar on Accounting and Auditing, from May 15 to 17, 1997.
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