 Hello and welcome to the session in which we will discuss reporting with different opinions from year to year and with different auditors. What is the big idea? Well, here's the big idea. Let's assume we are looking at this audit report. This audit report is for the PCAOB, which is Foreign Assure, and we are auditing the balance sheet of X1 and X2, which is competitive balance sheet and the three year for the related statement of income changes of equity, cash flow, so on and so forth. Now notice we are presenting comparative financial statements and let's take a look at the opinion. In our opinion, the financial statement present fairly for Adam Company for the year X2 and X1 and the result of operation for the each of the three years ending period, December 31, X2. So far, so good. And notice the date. It's February 12, 2020 X3. Now what happens if we audited if we're auditing only year X2 and someone else audited X1 or notice here, both X1 and X2 got unqualified opinion. What if we had different opinion for year X2 or year X1? Obviously, the report would look different. Here we are assuming the following, the same auditor audited X1 and X2 and the opinion is the same, which is unqualified opinion for both years. But what happened if we have a different opinion from last audited period? What if another auditor audited the financial statement last year? We did not do it. What if we changed the opinion from the prior year? So the prior year was qualified. Now it's unqualified. What if last year was reviewed or compiled and not audited? What if last year was not even reviewed, compiled or audited? What do we have to do under those circumstances? So this is what we need to discuss in this session. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Myles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead. Start your free trial today. No obligation, no credit card required. So let's review real quick what we just did. So when comparative financial statements are presented, the auditor's report should refer to each statement presented and on which audit opinion is expressed. Because if you're looking at year two, what is your opinion of year two versus your opinion in year one? If they're both the same unqualified, it's easy. We saw the report. Why? Because the report date for the audit of the most recent financial statement is used, the auditor should update the audit report on the financial statement previously issued. If any, now when we say update should update, the update can mean reaffirm, basically no change, or it could mean a change of the original opinion as the result of the change in condition or information coming to the auditor's attention. So you could also change your opinion. If comparative financial information is presented, but not covered by the auditor's opinion, so we are showing the prior year, but we did not do the work, the auditor should indicate clearly in the audit report the character of the auditor's work, if any and the degree responsibilities of the auditor is taking. Simply put, if the auditor is engaged to express an opinion on all period presented, which is that's usually the case, the auditor should consider whether the information included in prior period contains sufficient detail to constitute fair presentation with the applicable reporting framework. So if you are reporting for year two and you did not do year one, you want to make sure year one's still good, we have sufficient appropriate evidence. Starting with different opinion within the same report, so we could have a different opinion within the same report, one opinion, a different opinion from year one to year two. The auditor's current year report will generally cover all financial statements for all year presented. So you're going to give your opinion for the current year, but you might have prior year data. For example, the auditor might express a qualified, adverse, disclaim or included emphasis of a matter or other matter paragraph or explanatory paragraph with respect to one or more financial statement for one or more period while expressing a different opinion on one or more financial statement of another period. Again, X1 and X2, we could have an opinion for X1 and a different opinion for X2, two different opinion. This could be qualified, this could be unqualified, this could be unqualified, this could be modified. Whatever, we could have two different opinion. That is what we're trying to say. Now the best way to illustrate this is to look at various samples about how we do this. For example, this is an AICPA report, which is for non-issuer private companies, independent auditors report on the audited financial statement. And here we have a qualified opinion for this period and unmodified the prior period. Notice two different opinions. So the current opinion is qualified. Notice we have a qualified opinion. Now we just, the standard verbiage at the beginning, we have audited December 31st, X1 and X0, except for the effect of the accompanying X1 financial statement. So there is a qualification here for not capitalizing certain lease obligation. Everything else from the prior year is good, but this year we have an exception. And this exception made the current year qualified, but the prior year is still, the prior year is unqualified. Then we have to explain our basis for the qualified opinion. And we explain basically, Adam company has executed from property and that in the accompanying X1 balance sheet, certain lease obligation, blah, blah, blah, they will explain the issue. The point here, we have two different opinion and you have to explain what happened. Let's take a look at this example. We have unmodified this period and disclaimer on the prior period. Unmodified means we are using the AICPA. We are dealing with the non-issuer or a private company. We have audited the financial statement of Adam company, which compromised the balance sheet X1 and X2 and the related financial statement. In our opinion, the balance sheet of Adam company for year X2 and year X1 and the statement of income changes in stockholders equity and cash flow for only X2 present fairly in all material respect. Notice we only for the other financial statement, we only have X2. So notice what we're doing is we cannot, we will not express an opinion on the result of operation, which is the income statement and cash flow for year X1. So we are modifying the opinion. Then we discuss the basis. Why did we modify the opinion? Notice two different opinion. One is unmodified, it's unmodified because it's for the current year, but the prior year was a disclaimer. We have a different opinion. If we are dealing with a publicly traded company or an issuer, which is a PCAOB, basically the same concept. Now we're going to have a qualified for the current year and unqualified for the prior year. We have audited the financial statement. Again, in our opinion, except for the effect on the X2 financial statement, not capitalizing certain leases. So we are qualifying. We are qualifying for X2. However, X1 is good. So also we have to look at the opinion on the financial statement. We have to kind of explain what is going on. Now, also we are dealing with a public public company. We have a clean opinion for the current year and disclaimer of the prior year. Basically the same concept. For the current year, we have a clean opinion. So for the current year, we have audited everything. The financial statement of the balance sheet, cash flow statements of operation. For the prior year, we disclaim. We don't discuss everything. We only cover the balance sheet for the prior year. So basically we disclaim. Why? Because we did not observe the taken of physical inventory for year X0, which was the prior year. Therefore, we disclaim on the prior year and we have qualified. So notice what we did, how we did the disclaimer. Now, what happened if we have a change of opinion from the prior year? So the prior year could be qualified. Now it's going to be unqualified. When would that happen? Well, the auditor might discover new evidence during the current audit that affect the accuracy of the previously issued financial statement and the opinion expressed. Then the auditor would revise their opinion in the current year's report. For instance, if the report was qualified for the financial statement due to a deviation from the financial reporting framework from gap and the prior year statements are now restated. The qualification would not be appropriate anymore. That's what we have to do. That's, that's, that's the idea. What we do is we add an emphasis of a matter. If it's a private, if it's for a non-assure, we add this information there, or we add this information in an explanatory paragraph. It's a public company. And we would say something like this. For example, we have to put the date of the report. And it did not present fairly last year. The reasons why, you know, carried property, planned and equipment at a price value that's not acceptable. And Adam company did not provide the deferred income taxes with respect to the differences between income and financial reporting. That's the reason it was qualified. Now, as described in note X, Adam company changed its method. Now, we have to clearly say that they changed their method. And the financial statements are restated. And as a result, we changed our opinion. So you have to show all of this, all of this. What happened if we have a predecessor auditor and we present the report? So we did not audit the prior year. The prior year was audited by some other company. And now we're auditing the current year. What do we have to do? Well, the first thing we have to do is figure out because we did not do the audit is the audit still valid? Is that opinion still valid? In other words, was there any changes to the current presentation of the prior period? Maybe or maybe a subsequent event happened that rendered the opinion and accurate? We don't know. So what do we have to do? We have to ask the predecessor auditor to do the following or they'll produce the predecessor auditor will have to do the following read the statement for the current period. So so the old auditor will have to read the statement for this period. And does it make sense to them? Why would it should make sense to them? Because they audited the prior period. Also compare the current period to the prior period. See if this makes sense. Basically, look at analytical procedures, get a letter of representation from the auditor, the base simply put the old auditor should ask the new auditor for a letter of representation, the one what asking them if they find any information that would make their opinion on valid. So basically, the old auditor is asking you, well, you did the audit this year. Do you think is there any information I need to be aware of where it's going to change my opinion from the opinion that I created last year that I issued last year. Also get the same letter from management. Ask in management. Is there any information that you provided to me last year that's no longer now valid, that I need to change my opinion simply put because you issued the opinion, you want to make sure management did not make any changes to the information they they presented to you last year. And also ask the current auditor. In your opinion, is there anything I should be aware of where I need to change my opinion? And how to date the report because now the report is different. If it's unrevised, you would you would use the original date. If it was revised, you would use a dual date. If the revise means the there's a new opinion or there's some changes in the report. What happened if the report was issued by the another auditor, but you are not issuing the report. So it was issued, but you're not showing a comparative. You're not showing the information from the prior year. When the successor auditor does not include the predecessor report, successor means the current predecessor means past the prior one. They should only express an opinion on the current financial statement. Your opinion is only on the current financial statement. Now you will add an emphasis of a matter if you're a private company or an explanatory paragraph if you're a public company, stating that another auditor without naming them, unless you merge with them, audited the financial statement. And you have to tell us in that emphasis of a matter or explanatory paragraph, depending what type of client you are dealing with, if it's a sure or non assure what type of opinion was given. If it's a modified opinion, state the reasons was there any emphasis of a matter or other matter or explanatory paragraph? If they had this, then you have to mention this in the report. So you're adding this information in an explanatory paragraph and an emphasis paragraph if they had any and date of the date of the predecessor's audit report. Now what happened if the prior financial statements were not audited? Well, if they were not audited simply put you mark them as unaudited. That's as simple as that. So everyone can see that the prior year that you are presenting were unaudited. What happened if the prior year statements were reviewed or compiled rather than audited, which is a lower level of assurance as far as review? When the current period financial statements are presented in comparative form with the prior period that were either reviewed or compiled. And the report on the prior period is not reissued. You're not reissuing the report. The auditor should include a disclosure and the other matter paragraph for non-issure or explanatory paragraph for issuer in the report. What should they say? Well, what they should they say in this explanatory paragraph or in the emphasis of a matter, depending what type of a company you are dealing with. Was it reviewed or compiled because reviewed is a limited assurance compiled, you're not providing any opinion. Basically, explain the scope of the services that reviewed is lower than an audit and compilation is lower than a reviewed. If there's any modification, describe the modification, also the date of the prior report. What happened if you, if the prior financial statements are not audited, reviewed or compiled? Well, if that's the case, if that's the case, the financial statements should be clearly marked as such the prior financial statement. Okay. And we would include a disclosure. What would that disclosure go? Either emphasis of a matter, if it's a private company or explanatory paragraph, if it's a publicly traded company. And you will state there that it, the auditor did not audit, review or compile the prior year financial statement. And the auditor takes no responsibility because you did not do any work. What should you do now? Well, go to farhand lectures and look at MCQs through false additional resources. That's going to help you in understanding these topics. This topic is testable on the CPA exam. Good luck, everyone. Study hard. And of course, stay safe.