Lelievre, Clara C.

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eGrove (Univ. of Mississippi)

Woman C.P.A. Volume 37 Issue 1 Article 5 1-1975 Financial Statements: Auditor’s Opinion Reports Clara C. Lelievre Follow this and additional works at: https://egrove.olemiss.edu/wcpa  Part of the Accounting Commons, and the Women's Studies Commons Recommended Citation Lelievre, Clara C. (1975) "Financial Statements: Auditor’s Opinion Reports," Woman C.P.A.: Vol. 37 : Iss. 1 , Article 5. Available at: https://egrove.olemiss.edu/wcpa/vol37/iss1/5 This Article is brought to you for free and open access by the Archival Digital Accounting Collection at eGrove. It has been accepted for inclusion in Woman C.P.A. by an authorized editor of eGrove. For more information, please contact egrove@olemiss.edu. FinancialStatementsAuditor’s Opinion ReportsDr. Clara C. Lelievre, CPA University of Cincinnati Cincinnati, OhioIntroductionThe auditor's responsibilities for the con­tents of financial statements are undergo­ing substantial change: current respon­sibilities exceed those undreamed of two decades ago. The small and medium­sized accounting firms face the greatest practice adjustments as a result of new legal and professional interpretations. Small and medium-sized businesses have to bear increased accounting and auditing fees and accountants must educate their clients as to why financial statements may be marked unaudited, have a qualified opinion, or have a disclaimer opinion.Prior to SAP #38 few statements carried anything other than an unqualified opin­ion. Professional developments, one of the most obvious being increasing legal involvements, have made the auditor wary of expressing an opinion on state­ments where any uncertainties exist. APB Opinion #29 on interim financial state­ments may cause the auditors additional grief through a further expansion of their responsibilities. Items previously re­served for the management letter are find­ing their way into footnotes and opin­ions. Auditors are more aware of their responsibilities than at any other time in the history of the profession.Audited Financial StatementsTypes of opinionsFinancial statements prepared by au­ditors may be accompanied by the follow­ing types of opinions: unqualified, qual­ified, adverse, or a disclaimer of opinion.The unqualified opinion is the most prevalent in published financial state­ments, but their numbers are declining. Among 600 companies (see Table 1) over 549 reported an unqualified opinion in 1965, 485 in 1970, and 507 in 1972. The increase in qualified opinions may reflect the concern over the increase in litigation against accounting firms during the last eight years. SAS #1, paragraph 511.01, states that:an unqualified opinion may be ex­pressed only when the independent auditor has formed the opinion on the basis of an examination made in ac­cordance with generally accepted au­diting standards (GAAS), that the pre­sentation conforms with generally ac­cepted accounting principles (GAAP) applied on a consistent basis and in­cludes all informative disclosures necessary to make the statements not misleading.The size of the company, amount of assets, of amount of profit or loss, has no effect on the auditor's ability to render an opinion. The criteria are, (1) whether the state­ments were prepared in accordance with GAAP and on a basis consistent with the prior year, (2) whether the auditor has followed GAAS, (3) whether, in the opin­ion of the auditor, the statements fairly present the condition of the company, and (4) whether the results of operations are presented fairly. If the auditor has found nothing to negate any of these, the statements may be accompanied by an unqualified opinion.A qualified opinion must be rendered if the auditor has discovered sufficient "unusual uncertainties" or if the state­ments do not conform with GAAP. These opinions generally contain a "subject to" clause. Occasionally, a qualified opinion will be given due to a limit on the scope of the audit. Table 1 shows that the most prevalent reason for qualification used to be the inconsistent application of GAAP. In recent years the principal reason for qualification has become fair presentation due to uncertainties. The uncertainties concerning litigation have become the leading reasons for qualification.Since Accounting Trends and Techniques for 1973 is not yet available, Accounting Practices 1974 published by Haskins and Sells was examined for trends in changes of reasons for qualifications. Accounting Practices 1974 does not tabulate numbers of items but lists illustrative items of cur­rent interest from published annual re­ports. In addition to the reasons pre­sented in Table 1, fair presentation of de­ferred costs, subsidiary operations, and negotiations with governmental agencies appear with increasing frequency. A good example of a qualified opinion ap­peared in the 1973 auditor's report for Mattel, Inc. (the conglomerate that began as a toy manufacturer). The opinion was qualified subject to the realization of de­ferred costs related to the development of Circus World, a discontinued operation. The opinion referred to Note 2(b) which read:The investment in Circus World con­sisted of costs incurred by Ringling Bros. in connection with the construc­tion of a family entertainment park lo­cated near Orlando, Florida. These 14 / The Woman CPAcosts include approximately $7,300,000 for land, $6,200,000 for construction, $1,500,000 for memorabilia, $2,500,000 for administration, salaries, consult­ing fees and interest, and $1,500,000 for other costs. These costs are being deferred by Ringling Bros. and will be amortized against future revenues, if any. The ultimate realization of the in­vestment in Circus World is depen­dent upon obtaining financing to complete the project (currently esti­mated to approximate $66,000,000) and the success of the project after comple­tion, or the sale of Ringling Bros. for not less than its net book value.An adverse opinion is an opinion that the financial statements do not fairly pre­sent the financial position, results of op­erations, or changes in financial position in conformity with GAAP. An adverse opinion is required when the exceptions are so material that in the auditor's judg­ment the statement lacks creditability. In such cases a disclaimer opinion is not ap­propriate since the auditor has sufficient information to form an opinion that the statements are not fairly presented. The issuance of an adverse opinion rarely oc­curs. As a practical matter the auditor would probably be dismissed before such an adverse report was issued. Neither Ac­counting Trends and Techniques nor Ac­counting Practices 1974 presents any in­stances of adverse opinions being ren­dered.If a case should arise where a disagree­ment occurs between a company and its auditor that results in the dismissal of the auditor the SEC must be notified. New rules are being proposed that will tighten the ruling related to a change in the au­ditor. The old rules were so loosely writ­ten that companies have not been provid­ing the disclosure anticipated by the SEC. It was intended that companies not only file with the agency a report on a change of auditors but also that letters from the dismissed auditors be attached explain­ing the disagreement.Many companies thought that the new rule applied only when new auditors were hired, thus reports of disagreements were not reported. Business Week in its Oct. 19, 1974, issue states that the en­forcement of this rule would have dis­closed to the stockholders of Mattel and Cerro the developing disputes between management and the accountants. For­merly this information was only required on the 10-K form and not reported to the stockholders.A disclaimer of opinion is necessary when the examination has not producedTable 1Auditors' Opinion QualifiedREASON FOR QUALIFICATIONFair Presentation:Litigation ........................................Valuation or realization of assets . Uncertainties concerning discon­tinued operations .......................Tax or renegotiation liability .... Claims in connection with sales contracts ......................................Availability of adequate financing Other................................................SubtotalChange in Application of Accounting Principles ..Total ReasonsNUMBER OF COMPANIES Opinion not qualified as to presentation or consistency Opinion qualified as to pre­sentation or consistency .. Disclaimer of opinion ......Total companies Source: AICPA, Accounting Trends and Techniques, 1973 & 1968.sufficient evidential matter to form an opinion on the financial statements. Table 1 indicates that disclaimers are sel­dom used. When a disclaimer is used the auditor must give all substantive reasons for doing so. In most instances the client would prefer a disclaimer to an adverse opinion.Revised reports and/or opinions may be necessary. The necessity for these became evident with the Yale Express Case. In June, 1974, Peat, Marwick & Mitchell (PM&M), the auditors of the Yale Express Company, discovered that the statements for December 31, 1973, were incorrect. PM&M had audited these statements and issued a non-qualified opinion. Yale was advised by PM&M to withdraw the statements but refused. PM&M did noth­ing to inform the public. No reporting standards existing at that time were vio­lated. SAS #1 changed the reporting standards by requiring that, if newly discovered information would have af­fected the auditors' opinion had they1972 1971 1970 1969 196532 20 16 16 5. 18 23 20 16 —14 7 6 — —8 15 14 9 62 6 2 4 —2 2 5 1 —4 2 5 10 2 — — ———80 75 68 55 13. 36 43 35 59 43116 118 103 114 56.. 507 510 515 510 549.. 93 88 83 90 50_ 2 2 _ 1.......... . - --  — —600 600 600 600 600known it at the time of the issuance of the report and if they believe people are still relying on the report, then they must take action to prevent further reliance. Au­ditors should advise the client to make such disclosure and should satisfy them­selves that the client has made such dis­closure. If the client refuses to do so, then the auditors must do so themselves by, among other things, notifying members of the board of directors of the client, the SEC, and the stock exchanges. When the auditors are aware of the recipients of the prior report, such as banks, creditors, etc., then they should notify these receiv­ers. An auditor serving a small business is usually aware of such distribution.RecommendationsAll persons preparing reports are urged to familiarize themselves with SAS #1 (which combines all SAP's) and APB #28. A future column will cover unaudited fi­nancial statements.January 1975 / 15

Financial Statements: Auditor’s Opinion Reports

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Financial Statements: Auditor’s Opinion Reports

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