09.20.21 | Assurance Chat
There is a new auditor’s report coming for the 2021 engagements! Here are some highlights:
- The order of the paragraphs has been rearranged with the report leading with the Opinion.
Readers will now be able to see if the opinion is clean or has some modifications immediately, since the conclusion is right up front. The basis of opinion paragraph comes next, with other informational paragraphs (emphasis of a matter, key audit matters, and other matter) following, as necessary.
- All reports now include a Basis of Opinion paragraph.
Previous audit opinions only included a basis of opinion paragraph if the auditor had to modify its opinion. Now this paragraph will convey under which standards the audit was conducted, point to the expanded auditor’s responsibilities section, include declarations regarding auditor independence and ethical responsibilities, and state the auditor’s belief that it obtained sufficient audit evidence to support the opinion given.
- The Responsibilities of Management for the Financial Statements section needs to include an additional paragraph addressing the entities ability to continue as a going concern.
Aside from the new title, the paragraph outlining management’s responsibilities remained relatively the same no matter the financial reporting framework applied (US Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS), income tax basis, contractual basis, etc.). For financial statements reporting under GAAP or IFRS, there is now an added paragraph to state management’s existing requirement to assess whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern for one year after the financial statements are issued or available to be issued (this time frame could be different based on the accounting standards followed by the entity). Remember, the term going concern means that an entity is an ongoing, healthy, operational business who can meet its obligations. The management responsibility to evaluate the entity’s ability to continue functioning for one year after financial statement issuance or are available for issuance is nothing new.
- The Auditor’s Responsibilities for the Audit of the Financial Statements section provides an enhanced discussion of the auditor’s responsibilities.
There is a new title to the section outlining the auditor’s responsibilities, but that is not all. Readers will still find all of the responsibilities discussed in the old report, but now clarifications are included, such as:
- The auditor’s objective is to obtain reasonable assurance that the financial statements are not misstated. While reasonable assurance is a high level of assurance, it is NOT absolute.
- The risk of not detecting a material misstatement resulting from fraud is higher than not detecting one from an error.
- Misstatements are considered material if, individually or in the aggregate, they would influence the decision-making of a user of the financial statements.
- An auditor exercises professional judgement and skepticism throughout the audit.
- Procedures performed on a test basis by the auditor are designed to address the risks identified and assessed by the auditor.
- The auditor gains an understanding of the internal control environment in order to design appropriate procedures, but not express an opinion on the entity’s internal controls.
- The auditor evaluates the appropriateness of accounting policies and overall presentation of the financial statements and reasonableness of management estimates.
- The auditor concludes whether there are conditions or events that, individually or in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time, typically a year and a day from financial statement issuance or availability for issuance. This paragraph will appear in all opinions. If there is a going concern issue, a separate emphasis of a matter paragraph will be added after the basis of opinion paragraph as indicated above.
This new report gives readers greater insight into the audit! For a sample audit report on GAAP financial statements, click here. For a sample audit report on income tax basis financial statements click here.
Questions? I can be reached at 516.806.1193 | BMannFalk@berdonllp.com or reach out to your Berdon advisor.
Bonnie Mann Falk is a Partner in the Quality Control (QC) Department of Berdon LLP with nearly 30 years of experience in public accounting and expertise in a variety of areas including quality management, compliance, and risk management. As a QC Partner, Bonnie advises the Firm on policies and procedures to enhance quality, increase efficiency, and elevate communication.