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Auditor's Report
Introduction:

The Industrial Revolution in the United States was the catalyst to spark the need for an auditor’s report. As the revolution led to larger growing companies, there was a need for external managers, internal controls, and trustworthy reporting. In the early 1900s, the introduction of the first auditor’s report was formed. Although there was no formal structure or criteria, Price Waterhouse, now PWC, produced their own form of an auditor’s report[1] .As the shareholder’s found comfort in the ability to have an independent report, the Federal Reserve began creating a formal structure for the auditor’s report. In 1934, the AICPA issued the “Audits of Corporate Accounts”. The history of the auditor’s report began from the growing number of shareholders wanting an independent opinion on the companies they were investing in. The Securities Act of 1033 and Securities Exchange Act of 1934 are the two major pieces of legislation that requires all public company's financial statements to be audited to ensure an independent opinion[2]. Due to the stock market crash in 1929, the financial world needed to have trust and comfort in reporting for shareholders to continue to invest their money in companies, and this catalyzed the requirement of an auditor’s report. The auditor’s report has undergone many changes since its creation and there are even differences in report requirements for public companies versus private companies.

Topic 1:

The process of obtaining an auditor’s report begins with the auditor selection. This is different based on a public and private company due to the differing regulating bodies overseeing each. For a private company, the AICPA sets the standards, called Generally Accepted Auditing Standards (GAAS), but a SEC registrant public company follows the audit standards of the PCAOB. These two entities have different rules and requirements for how to hire an auditor. Although the AICPA does not have a formal requirement as to who hires the auditor directly in a private company, they discuss applicable characteristics and qualifications that the auditor should embody if selected.[3] Conversely, the PCAOB has specific requirements that an SEC registered company should follow when hiring an auditor. A subset of those charged with governance, the board of directors and top management, is referred to as the audit committee. This specific committee is a requirement in itself of PCAOB standards as well as they are given the responsibility to hire and determine commission for the auditor. [4]

Only a Certified Public Accountant (CPA) can perform an audit and is required to be independent of the entity for the entire period of the financial statements and during the audit period. If independence is impaired, the CPA will not be able to perform the audit. In addition to being required to be independent, a CPA must also obtain and provide reasonable assurance on whether the financial statements are free of material misstatements, obtain an understanding of the entity’s internal control, perform inquiry and analytical procedures, and perform substantive procedures.[5]

Although there are differences in responsibilities for a private and public company, the process of completing an audit report is the same. The auditor begins with accepting the engagement, they can do this with, or without, prior knowledge of the company and/or industry. Once the auditor has a meeting with the predecessor auditor to advise with the engagement as well as obtain an understanding of the company and/or industry, they begin to set materiality levels. The materiality within an audit is important as it sets the threshold for an amount that could be considered a misstatement to the financial statements. Once the initial planning is done of setting materiality, performing initial procedures, and gaining an understanding, the auditor begins to substantively test dollar amounts and perform tests of relevant internal controls. There are specific qualifications an auditor will determine if they want to test controls of a company. Regardless, the auditor will perform substantive tests as they directly indicate a misstated dollar amount. Once the audit evidence is obtained, the auditor will begin to perform analytical procedures on the evidence to see for any missed misstatements or issues. To finalize, the auditor uses the audit documentation as the main source of evidence for the auditor’s report and will complete this. It is typical for a private company for the auditor to not test controls, but typically this is the only difference between the two companies in an audit. [6]

When determining who can perform an audit, it is crucial to determine independence and competence. An audit is an attestation engagement as it provides a reasonable assurance that the financial statements are free from material misstatement. This includes a report and an opinion, so the auditor must be a registered CPA. If the audit is for a public company, the CPA must be registered with the PCAOB. For a private company audit, the auditor must be a CPA. This qualification is important as it allows the auditor to perform its responsibilities properly. As well as meeting the qualification of a certification, the auditor must be independent. For an auditor to meet this requirement, they must meet the criteria that allows them to not have any relationship financially, personally, or professionally with the client prior to the audit. The AICPA Code of Professional Conduct describes the exact requirements and rules that make a CPA independent. These should be followed when accepting an attestation engagement, including an audit. [7]

Topic 2:

Under the AICPA (American Institute of Certified Public Accountants) guidelines, the most commonly used auditor’s report is a standard unmodified opinion. This is when the financial statements are fairly stated in all material respects. If the financial statements are not fairly stated, there are three modifications of the standard unmodified opinions that can be issued. Modifications are used when there is a departure from GAAP (Generally Accepted Accounting Principles) or a scope limitation. A departure from GAAP is when the auditor obtains sufficient audit evidence and determines that the financial statements are materially misstated. A scope limitation occurs when the auditor is unable to obtain sufficient appropriate audit evidence to conclude if the financial statements are free of material misstatements.[8]  If these situations arise, an auditor would then decide on the specific opinion necessary to modify the standard report. A qualified opinion would be used if there is a material departure from GAAP, but is not pervasive to the financial statements or if there is a material scope limitation, but is not pervasive. [9]An adverse opinion should be expressed if there is a departure from GAAP that is material and pervasive. On the other hand, a disclaimer of opinion would be issued if there is a scope limitation that is material and pervasive. For both an adverse opinion and disclaimer of opinion, “an auditor’s report should not include an unmodified opinion with respect to the same financial reporting framework on a single financial statement or one or more specific elements, accounts, or items of a financial statement” because it would contradict the modification opinions. [10]

In addition to the three modifications above, there are also situations in which explanatory language is added to the auditor’s standard report. For example, if an audit involves another auditor and the auditor decides to make reference to the other auditor, there is substantial doubt of the entity continuing as a going concern, there is a material change in accounting principles, material misstatements have been corrected from previous financial statements, etc.[11]

Topic 3:

For a company to be public, it must be traded on a stock exchange. A private company transitions into a public one when it has an IPO, initial public offering of its stock. Public and private companies have different reporting requirements. Private companies are not required to have an audit, but they may do so for other reasons such as obtaining a lower interest rate from the bank. The Sarbanes-Oxley Act of 2002 requires public companies that are filers with the SEC have an annual integrated audit. In addition to a financial audit, an integrated audit includes management assessing the company's internal controls and an independent auditor giving an opinion on the assessment of internal controls. This integrated audit allows investors to place more reliance on the company's financials. [12] The audit reports for public and private companies are very similar but have a few distinctions. Firstly, an unmodified opinion for a private company is called a standard unmodified opinion while for a public company it is called a standard unqualified opinion. Also, public companies must include CAMs which stand for critical audit matters. These inform the user of the audited financial statements which areas of the audit were tricky and how the auditor dealt with them. This is important for subjective, complex accounting matters.[13] Lastly, the CPA firm’s signature on the bottom of the audit report for a public company must include how long they have been consecutively serving as that company's auditor. [14] An example of the auditor’s report format for a publicly traded company is shown below.

Conclusion: Due to the introduction of the auditor’s report, many instances of fraud and error have been uncovered that may not have been located if it was not for the formal structure and process of the auditor’s report. The ability to have this report is able to allow shareholders, potential investors, and the public to trust the companies. With the numerous changes, the auditor’s report has become a standard practice for public and private companies.

History of Auditor's Report
The Industrial Revolution in the United States was the catalyst to spark the need for an auditor’s report. As the revolution led to larger growing companies, there was a need for external managers, internal controls, and trustworthy reporting. In the early 1900s, the introduction of the first auditor’s report was formed. Although there was no formal structure or criteria, Price Waterhouse, now PWC, produced their own form of an auditor’s report. As the shareholder’s found comfort in the ability to have an independent report, the Federal Reserve began creating a formal structure for the auditor’s report. In 1934, the AICPA issued the “Audits of Corporate Accounts”. The history of the auditor’s report began from the growing number of shareholders wanting an independent opinion on the companies they were investing in. The Securities Act of 1033 and Securities Exchange Act of 1934 are the two major pieces of legislation that requires all public company's financial statements to be audited to ensure an independent opinion. Due to the stock market crash in 1929, the financial world needed to have trust and comfort in reporting for shareholders to continue to invest their money in companies, and this catalyzed the requirement of an auditor’s report. The auditor’s report has undergone many changes since it's creation and there are even differences in report requirements for public companies versus private companies.

Selection of an Auditor
The process of obtaining an auditor’s report begins with the auditor selection. This is different based on a public and private company due to the differing regulating bodies overseeing each. For a private company, the AICPA sets the standards, called Generally Accepted Auditing Standards (GAAS), but a SEC registrant public company follows the audit standards of the PCAOB. These two entities have different rules and requirements for how to hire an auditor. Although the AICPA does not have a formal requirement as to who hires the auditor directly in a private company, they discuss applicable characteristics and qualifications that the auditor should embody if selected. Conversely, the PCAOB has specific requirements that an SEC registered company should follow when hiring an auditor. A subset of those charged with governance, the board of directors and top management, is referred to as the audit committee. This specific committee is a requirement in itself of PCAOB standards as well as they are given the responsibility to hire and determine commission for the auditor.

Only a Certified Public Accountant (CPA) can perform an audit and is required to be independent of the entity for the entire period of the financial statements and during the audit period. If independence is impaired, the CPA will not be able to perform the audit. In addition to being required to be independent, a CPA must also obtain and provide reasonable assurance on whether the financial statements are free of material misstatements, obtain an understanding of the entity’s internal control, perform inquiry and analytical procedures, and perform substantive procedures.

Auditor's Beginning Steps
Although there are differences in responsibilities for a private and public company, the process of completing an audit report is the same. The auditor begins with accepting the engagement, they can do this with, or without, prior knowledge of the company and/or industry. Once the auditor has a meeting with the predecessor auditor to advise with the engagement as well as obtain an understanding of the company and/or industry, they begin to set materiality levels. The materiality within an audit is important as it sets the threshold for an amount that could be considered a misstatement to the financial statements. Once the initial planning is done of setting materiality, performing initial procedures, and gaining an understanding, the auditor begins to substantively test dollar amounts and perform tests of relevant internal controls. There are specific qualifications an auditor will determine if they want to test controls of a company. Regardless, the auditor will perform substantive tests as they directly indicate a misstated dollar amount. Once the audit evidence is obtained, the auditor will begin to perform analytical procedures on the evidence to see for any missed misstatements or issues. To finalize, the auditor uses the audit documentation as the main source of evidence for the auditor’s report and will complete this. It is typical for a private company for the auditor to not test controls, but typically this is the only difference between the two companies in an audit.

Additional Difference Between AICPA and PCAOB Audit Reports
For a company to be public, it must be traded on a stock exchange. A private company transitions into a public one when it has an IPO, initial public offering of its stock. Public and private companies have different reporting requirements. Private companies are not required to have an audit, but they may do so for other reasons such as obtaining a lower interest rate from the bank. The Sarbanes-Oxley Act of 2002 requires public companies that are filers with the SEC have an annual integrated audit. In addition to a financial audit, an integrated audit includes management assessing the company's internal controls and an independent auditor giving an opinion on the assessment of internal controls. This integrated audit allows investors to place more reliance on the company's financials.The audit reports for public and private companies are very similar but have a few distinctions. Firstly, an unmodified opinion for a private company is called a standard unmodified opinion while for a public company it is called a standard unqualified opinion. Also, public companies must include CAMs which stand for critical audit matters. These inform the user of the audited financial statements which areas of the audit were tricky and how the auditor dealt with them. This is important for subjective, complex accounting matters. Lastly, the CPA firm’s signature on the bottom of the audit report for a public company must include how long they have been consecutively serving as that company's auditor.

Conclusion
With the help of an auditor’s report many instances of fraud and error have been uncovered that may not have been located if it was not for the formal structure and process of the auditor’s report. The ability to have this report is able to allow shareholders, potential investors, and the public to trust the companies. With the numerous changes, the auditor’s report has become a standard practice for public and private companies.