figure 2-2 explanatory paragraph

explanatory paragraph because of substantial doubt about going concern

Independent auditor’s report

Same introductory, scope, and opinion paragraphs as the standard report

The accompanying financial statements have been prepared assuming that fairfax company will continue as a going concern. As discussed in note11 to the financial statements, fairfax company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about the company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in note11. the financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Substantial doubt about going concern. The criteria for issuing a disclaimer of opinion instead of adding an explanatory paragraph are not stated in the standards, and this type of opinion is rarely issued in practice. An example for which a disclaimer might be issued is when a regulatory agency, such as the environmental protection agency, is considering a severe sanction against a company and, if the proceedings result in an unfavorable outcome, the company will be forced to liquidate.

Reports involving other auditors

When the CPA relies on a different CPA firm to perform part of the audit, which is common when the client has several widespread branches or subdivisions, the principal CPA firm has three alternatives. Only the second is an unqualified report with modified wording.

1.Making no reference in the audit report 

When no reference is made to the other auditor, a standard unqualified opinion is given unless other circumstances require a departure. This approach is typically followed when the other auditor audited an immaterial portion of the statements, the other auditor is well known or closely supervised by the principal auditor, or the principal auditor has thoroughly reviewed the other auditor’s work. The other auditor is still responsible for his or her own report and work in the event of a lawsuit or SEC action.

2.make reference in the report

This type of report is called a shared opinion or report. A shared unqualified report is appropriate when it is impractical to review the work of the other auditor or when the portion of the financial statements audited by the  other CPA  is material in relation to the whole. An example of an unqualified shared report is shown in behind figure. Notice that the report does not include a separate paragraph that discusses the shared responsibility,but does so in the introductory paragraph and refers to the other auditor inn the scope and opinion paragraphs. The portions of the financial statements audited by the other auditor can be stated as percentages or absolute amounts.

3. qualify the opinion. A qualified opinion or disclaimer, depending on materiality, is required if the principal auditor is not willing to assume any responsibility for the work of the other auditor. The principal auditor may also decide that a qualification is required in the overall report if the other auditor qualified his or her portion of the audit. Qualified opinions and disclaimers are discussed in a later section.