23Reporting Considerations – Audit and Accounting Guide Depository and Lending Institutions, 2nd Edition

Chapter 23
Reporting Considerations

Introduction

23.01 This chapter applies the reporting guidance found in AU-C sections 700, Forming an Opinion and Reporting on Financial Statements; 705, Modifications to the Opinion in the Independent Auditor’s Report; and 706, Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor’s Report (AICPA, Professional Standards), to audit reports on the financial statements of depository and lending institutions. Such reports may contain an unmodified opinion, an unmodified opinion with emphasis-of-matter (EOM) or other-matter paragraphs, a qualified opinion, an adverse opinion, or a disclaimer of opinion. This chapter contains a brief discussion of each of those reports, with an emphasis on illustrating issues that an auditor may encounter in the industry. The reports are illustrative; the facts and circumstances of each particular audit will govern the appropriate form of report. Paragraphs 23.22–.24 and 23.28–.34 apply only to credit unions.

Forming an Opinion on the Financial Statements

23.02 Paragraphs .13–.18 of AU-C section 700 address the auditor’s responsibility to form an opinion on the financial statements. The auditor should form an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. In order to form that opinion, the auditor should conclude whether the auditor has obtained reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. That conclusion should take into account the following:

  1. a. The auditor’s conclusion, in accordance with AU-C section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained (AICPA, Professional Standards), about whether sufficient appropriate audit evidence has been obtained
  2. b. The auditor’s conclusion, in accordance with AU-C section 450, Evaluation of Misstatements Identified During the Audit (AICPA, Professional Standards), about whether uncorrected misstatements are material, individually or in aggregate
  3. c. The evaluations required by paragraphs .15–.18 of AU-C section 700 (as discussed in paragraphs 23.03–.04)

23.03 The auditor should evaluate whether the financial statements are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework. This evaluation should include consideration of the qualitative aspects of the entity’s accounting practices, including indicators of possible bias in management’s judgments. In particular, the auditor should evaluate whether, in view of the requirements of the applicable financial reporting framework

  1. a. the financial statements adequately disclose the significant accounting policies selected and applied;
  2. b. the accounting policies selected and applied are consistent with the applicable financial reporting framework and are appropriate;
  3. c. the accounting estimates made by management are reasonable;
  4. d. the information presented in the financial statements is relevant, reliable, comparable, and understandable;
  5. e. the financial statements provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the information conveyed in the financial statements; and
  6. f. the terminology used in the financial statements, including the title of each financial statement, is appropriate.

23.04 The auditor’s evaluation about whether the financial statements achieve fair presentation should also include consideration of the overall presentation, structure, and content of the financial statements and whether the financial statements, including the related notes, represent the underlying transactions and events in a manner that achieves fair presentation. Finally, the auditor should evaluate whether the financial statements adequately refer to or describe the applicable financial reporting framework.

Reports

Unmodified Opinion

23.05 The auditor should express an unmodified opinion when the auditor concludes that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. The following is an illustration of an auditor's report (unmodified opinion) on the comparative financial statements of a bank or savings institution prepared in accordance with U.S. generally accepted accounting principles (GAAP).

Independent Auditor's Report

To the [Institution, Board of Directors, or Stockholders]:

Report on the Financial Statements2

We have audited the accompanying financial statements of ABC Institution, which comprise the balance sheets as of December 31, 20X1 and 20X0, and the related statements of income and comprehensive income, changes in stockholders' equity, and cash flows for the years then ended, and the related notes to the financial statements.3

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.4 Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Institution as of December 31, 20X1 and 20X0, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Report on Other Legal and Regulatory Requirements

[Form and content of this section of the auditor’s report will vary depending on the nature of the auditor’s other reporting responsibilities.]

[Auditor’s signature]
[Auditor’s city and state]
[Date of the auditor’s report]

23.06 In accordance with paragraphs .37–.38 of AU-C section 700, if the auditor addresses other reporting responsibilities in the auditor’s report on the financial statements that are in addition to the auditor’s responsibility under GAAS to report on the financial statements, these other reporting responsibilities should be addressed in a separate section in the auditor’s report that follows the section titled "Report on the Financial Statements" and that should be subtitled "Report on Other Legal and Regulatory Requirements" or otherwise, as appropriate to the content of the section. Paragraphs .A32–.A34 of AU-C section 700 indicate that, for example, for audits conducted under Government Auditing Standards, the auditor may be required to report on internal control over financial reporting and compliance with laws, regulations, and provisions of contracts or grant agreements. However, reporting requirements in AU-C section 935, Compliance Audits (AICPA, Professional Standards), apply when the auditor is engaged or required by law or regulation to perform a compliance audit in accordance with GAAS, Government Auditing Standards, and a governmental audit requirement. In some cases, the relevant law or regulation may require or permit the auditor to report on these other responsibilities within the auditor’s report on the financial statements. In other cases, the auditor may be required or permitted to report on them in a separate report. As previously discussed in paragraph 4.37 of this guide, financial institutions may participate in the U.S. Department of Housing and Urban Development (HUD) programs and must comply with the requirements of the Consolidated Audit Guide for Audits of HUD Programs (HUD Audit Guide), which includes reporting on internal control over financial reporting and compliance with laws, regulations, and provisions of contracts or grant agreements. Chapter 2 of the HUD Audit Guide provides illustrative reporting examples for audits conducted under Government Auditing Standards for HUD programs.

EOM and Other-Matter Paragraphs Added to the Independent Auditor's Report

EOM Paragraphs

23.07 If the auditor considers it necessary to draw users’ attention to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s professional judgment, is of such importance that it is fundamental to users’ understanding of the financial statements, paragraphs .06–.07 of AU-C section 706 state that the auditor should include an EOM paragraph in the auditor’s report, provided that the auditor has obtained sufficient appropriate audit evidence that the matter is not materially misstated in the financial statements. Such a paragraph should refer only to information presented or disclosed in the financial statements. When the auditor includes an EOM paragraph in the auditor’s report, the auditor should

  1. a. include it immediately after the opinion paragraph in the auditor’s report,
  2. b. use the heading "Emphasis of Matter" or other appropriate heading,
  3. c. include in the paragraph a clear reference to the matter being emphasized and to where relevant disclosures that fully describe the matter can be found in the financial statements, and
  4. d. indicate that the auditor’s opinion is not modified with respect to the matter emphasized.

23.08 Exhibit B, "List of AU-C Sections Containing Requirements for Emphasis-of-Matter Paragraphs," of AU-C section 706 identifies other AU-C sections that require the auditor to include an EOM paragraph in the auditor’s report in certain circumstances. One such circumstance is when the auditor concludes that there is substantial doubt about an institution's ability to continue as a going concern for a reasonable period of time.5 AU-C section 570A, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern (AICPA, Professional Standards), addresses the auditor's responsibilities in an audit of financial statements with respect to evaluating whether there is substantial doubt about the ability of the entity to continue as a going concern for a reasonable period of time, which is defined as a period of time not to exceed one year beyond the date of the financial statements being audited.6 Chapter 17, "Equity and Disclosures Regarding Capital Matters," of this guide describes going-concern considerations as they relate to banks and savings institutions and discusses how an institution's regulatory capital position should be considered in the auditor's assessment of whether there is substantial doubt about the institution's ability to continue as a going concern. If, after considering management’s plans that are intended to mitigate the adverse effects of conditions or events that indicate substantial doubt could exist, the auditor concludes that substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time remains, paragraph .15 of AU-C section 570A states that the auditor should include an EOM paragraph in the auditor’s report to reflect that conclusion. Paragraph .16 of AU-C section 570A further states that the auditor's conclusion about the entity's ability to continue as a going concern should be expressed through the use of the phrase "substantial doubt about its (the entity’s) ability to continue as a going concern" or similar wording that includes the terms substantial doubt and going concern. In a going concern EOM paragraph, the auditor should not use conditional language in expressing a conclusion concerning the existence of substantial doubt about the entity’s ability to continue as a going concern. If the auditor concludes that the entity's disclosures with respect to the entity's ability to continue as a going concern for a reasonable period of time are inadequate, paragraph .17 of AU-C section 570A states that the auditor should modify the opinion in accordance with AU-C section 705. The following is an illustration of an auditor’s report on the financial statements of a bank or savings institution that includes an EOM paragraph because of the existence of substantial doubt about the institution's ability to continue as a going concern for a reasonable period of time.

Independent Auditor's Report

To the [Institution, Board of Directors, or Stockholders]:

Report on the Financial Statements7

[Same first, second, third, fourth, fifth, and sixth paragraphs as the unmodified report. See illustrative example at paragraph 23.05.]

Emphasis of Matter Going Concern

The accompanying financial statements have been prepared assuming that ABC Institution will continue as a going concern. As discussed in Note XX to the financial statements, at December 31, 20X1, the Institution did not meet its minimum capital requirements established by the Office of the Comptroller of the Currency (OCC). The Institution also has suffered recurring losses from operations. The Institution has filed a capital restoration plan with the OCC outlining its plans for attaining the required levels of regulatory capital by December 31, 20X2. To date, the Institution has not received notification from the OCC regarding acceptance or rejection of its capital restoration plan. Failure to meet the capital requirements and interim capital targets included in the capital restoration plan would expose the Institution to regulatory sanctions that may include restrictions on operations and growth, mandatory asset dispositions, and seizure. These matters raise substantial doubt about the ability of the Institution to continue as a going concern. The ability of the Institution to continue as a going concern is dependent on many factors, one of which is regulatory action, including ultimate acceptance of its capital restoration plan. Management's plans in regard to these matters are described in Note XX. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

Report on Other Legal and Regulatory Requirements

[Form and content of this section of the auditor’s report will vary depending on the nature of the auditor’s other reporting responsibilities.]

[Auditor’s signature]
[Auditor’s city and state]
[Date of the auditor’s report]

Other-Matter Paragraphs

23.14 If the auditor considers it necessary to communicate a matter other than those that are presented or disclosed in the financial statements that, in the auditor’s professional judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report, paragraph .08 of AU-C section 706 states that the auditor should do so in a paragraph in the auditor’s report with the heading "Other Matter" or other appropriate heading. The auditor should include this paragraph immediately after the opinion paragraph and any EOM paragraph or elsewhere in the auditor’s report if the content of the other-matter paragraph is relevant to the "Other Reporting Responsibilities" section. Exhibit C, "Lists of AU-C Sections Containing Requirements for Other-Matter Paragraphs," of AU-C section 706 identifies other AU-C sections that require the auditor to include an other-matter paragraph in the auditor’s report in certain circumstances. The following is an illustration of an unmodified opinion that contains an other-matter paragraph to draw user attention to an updated auditor’s report on the financial statements of a prior period that contains an opinion different from the opinion previously expressed.

Independent Auditor's Report

To the [Institution, Board of Directors, or Stockholders]:

Report on the Financial Statements19

[Same first, second, third, fourth, fifth, and sixth paragraphs as the unmodified report. See illustrative example at paragraph 23.05.]

Other Matter

In our report dated March 1, 20X1, we expressed an opinion that the 20X0 financial statements did not fairly present the financial position, results of operations, and cash flows of ABC Institution in accordance with accounting principles generally accepted in the United States of America because of two departures from such principles: (1) ABC Institution carried its property, plant, and equipment at appraisal values, and provided for depreciation on the basis of such values, and (2) ABC Institution did not provide for deferred income taxes with respect to differences between income for financial reporting purposes and taxable income. As described in Note X, the Company has changed its method of accounting for these items and restated its 20X0 financial statements to conform with accounting principles generally accepted in the United States of America. Accordingly, our present opinion on the restated 20X0 financial statements, as presented herein, is different from that expressed in our previous report.

Report on Other Legal and Regulatory Requirements

[Form and content of this section of the auditor’s report will vary depending on the nature of the auditor’s other reporting responsibilities.]

[Auditor’s signature]

[Auditor’s city and state]

[Date of the auditor’s report]

Modified Opinions

23.15 AU-C section 705 addresses the auditor’s responsibility to issue an appropriate report in circumstances when, in forming an opinion in accordance with AU-C section 700, the auditor concludes that a modification to the auditor’s opinion on the financial statements is necessary. Paragraph .07 of AU-C section 705 states that the auditor should modify the opinion in the auditor’s report when

  1. a. the auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are materially misstated or
  2. b. the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.

23.16 AU-C section 705 establishes three types of modified opinions: a qualified opinion, an adverse opinion, and a disclaimer of opinion. The decision regarding which type of modified opinion is appropriate depends upon the following:

  1. a. The nature of the matter giving rise to the modification (that is, whether the financial statements are materially misstated or, in the case of an inability to obtain sufficient appropriate audit evidence, may be materially misstated)
  2. b. The auditor’s professional judgment about the pervasiveness of the effects or possible effects of the matter on the financial statements

AU-C section 705 also provides guidance on the circumstances when a modification to the auditor’s opinion is required as well as guidance on determining the type of modification to the auditor’s opinion (for example, guidance illustrating how the auditor’s professional judgment about the nature of the matter giving rise to the modification and the pervasiveness of its effects or possible effects on the financial statement opinion).

23.17 When the auditor modifies the opinion on the financial statements, paragraph .17 of AU-C section 705 states that the auditor should, in addition to the specific elements required by AU-C section 700, include a paragraph in the auditor’s report that provides a description of the matter giving rise to the modification. The auditor should place this paragraph immediately before the opinion paragraph in the auditor’s report and use a heading that includes "Basis for Qualified Opinion," "Basis for Adverse Opinion," or "Basis for Disclaimer of Opinion," as appropriate. Paragraphs .18–.22 of AU-C section 705 provide further discussion on information that should be included within the basis for modification paragraph. In addition, paragraph .23 of AU-C section 705 states that the auditor should use a heading that includes "Qualified Opinion," "Adverse Opinion," or "Disclaimer of Opinion," as appropriate, for the opinion paragraph.

Qualified Opinion

23.18 In accordance with paragraph .08 of AU-C section 705, the auditor should express a qualified opinion when

  1. a. the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material but not pervasive to the financial statements, or
  2. b. the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.

23.19 For purposes of GAAS, AU-C section 705 defines pervasive as a term used in the context of misstatements to describe the effects on the financial statements of misstatements or the possible effects on the financial statements of misstatements, if any, that are undetected due to an inability to obtain sufficient appropriate audit evidence. Pervasive effects on the financial statements are those that, in the auditor’s professional judgment

  • are not confined to specific elements, accounts, or items of the financial statements;
  • if so confined, represent or could represent a substantial proportion of the financial statements; or
  • with regard to disclosures, are fundamental to users’ understanding of the financial statements.

Paragraph 23.24 describes a circumstance in which a qualified opinion is appropriate and provides an illustrative qualified opinion.

Adverse Opinion

23.20 In accordance with paragraph .09 of AU-C section 705, the auditor should express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements. When the auditor expresses an adverse opinion, paragraph .25 of AU-C section 705 states that the auditor should state in the opinion paragraph that, in the auditor’s opinion, because of the significance of the matter(s) described in the basis for adverse opinion paragraph, the financial statements are not presented fairly in accordance with the applicable financial reporting framework. In accordance with paragraph .27 of AU-C section 705, the auditor should also amend the description of the auditor’s responsibility to state that the auditor believes that the audit evidence the auditor has obtained is sufficient and appropriate to provide a basis for the auditor’s modified audit opinion.

Disclaimer of Opinion

23.21 In accordance with paragraph .10 of AU-C section 705, the auditor should disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive. When the auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit evidence (also referred to as a limitation on the scope of the audit), paragraph .26 of AU-C section 705 states that the auditor should state in the opinion paragraph that

  1. a. because of the significance of the matter(s) described in the basis for disclaimer of opinion paragraph, the auditor has not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion and
  2. b. accordingly, the auditor does not express an opinion on the financial statements.

When the auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit evidence, paragraph .28 of AU-C section 705 states that the auditor should amend the introductory paragraph of the auditor’s report to state that the auditor was engaged to audit the financial statements. The auditor should also amend the description of the auditor’s responsibility and the description of the scope of the audit to state only the following:

Our responsibility is to express an opinion on the financial statements based on conducting the audit in accordance with auditing standards generally accepted in the United States of America. Because of the matter(s) described in the Basis for Disclaimer of Opinion paragraph, however, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.

Financial Statements Prepared in Accordance With a Special Purpose Framework

23.22 Title II of the Credit Union Membership Access Act of 1998, requires all federally insured credit unions with assets of $10 million or more to follow GAAP. Credit unions with assets under $10 million may use a basis of accounting other than GAAP; the National Credit Union Administration (NCUA) provides the Accounting Manual for Federal Credit Unions as a guide in accounting for financial transactions and reporting in accordance with the regulatory-basis of accounting described therein that may be adopted by federally insured, state-chartered credit unions with under $10 million in assets. AU-C section 800, Special Considerations—Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks (AICPA, Professional Standards), addresses special considerations in an audit of financial statements prepared in accordance with a special purpose framework, which includes a regulatory basis of accounting. For purposes of GAAS, a regulatory basis is defined in AU-C section 800 as a basis of accounting that the entity uses to comply with the requirements or financial reporting provisions of a regulatory agency to whose jurisdiction the entity is subject. The objective of the auditor, when applying GAAS in an audit of financial statements prepared in accordance with a special purpose framework, is to address appropriately the special considerations that are relevant to (a) the acceptance of the engagement, (b) the planning and performance of that engagement, and (c) forming an opinion and reporting on the financial statements. The illustration included in paragraph 23.23 specifically focuses on reporting considerations in an audit of financial statements prepared in accordance with a special purpose framework.

23.23 The following is an illustration of an auditor's report on financial statements prepared in accordance with the financial reporting provisions prescribed by the NCUA (a special purpose framework). In this illustration, the financial statements together with the auditor’s report are not intended for general use.

Independent Auditor's Report

To the [Institution, Board of Directors, or Stockholders]:

Report on the Financial Statements20

We have audited the accompanying financial statements of XYZ Credit Union, which comprise the statements of financial condition—regulatory basis as of December 31, 20X1 and 20X0, and the related statements of income and comprehensive income—regulatory basis, members' equity—regulatory basis, and cash flows—regulatory basis for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with the financial reporting provisions prescribed or permitted by the National Credit Union Administration (NCUA) as more fully described in Note X; this includes determining that the regulatory basis of accounting described in Note X is an acceptable basis for the preparation of the financial statements in the circumstances.21 Management is also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.22 Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Credit Union as of December 31, 20X1 and 20X0, and the results of its operations and its cash flows for the years then ended in accordance with the financial reporting provisions prescribed or permitted by the NCUA as described in Note X.

Basis of Accounting

We draw attention to Note X to the financial statements, which describes the basis of accounting. As described in Note X to the financial statements, the financial statements are prepared by XYZ Credit Union on the basis of the financial reporting provisions prescribed or permitted by the NCUA, which is a basis of accounting other than accounting principles generally accepted in the United States of America, to meet the requirements of the NCUA. Our opinion is not modified with respect to this matter.

Restriction on Use

Our report is intended solely for the information and use of the board of directors and management of XYZ Credit Union and the NCUA, and is not intended to be and should not be used by anyone other than these specified parties.

Report on Other Legal and Regulatory Requirements

[Form and content of this section of the auditor’s report will vary depending on the nature of the auditor’s other reporting responsibilities.]

[Auditor’s signature]

[Auditor’s city and state]

[Date of the auditor’s report]

Members' Shares Reported as Equity

23.24 As discussed in paragraph 13.43 of this guide, GAAP require that members' shares of a credit union be reported as liabilities in the statement of financial condition. If members' shares are not reported as such, or in any other manner in which it is not unequivocal that members' shares are liabilities, and the shares are material to the financial statements, the auditor should express a qualified opinion or, in certain cases, an adverse opinion on the financial statements unless the financial statements are prepared using a special purpose framework (see paragraphs 23.22–.23). An illustration of a report modified for a qualified opinion in those circumstances follows.

Independent Auditor’s Report

To the [Institution, Board of Directors, or Stockholders]:

Report on the Financial Statements23

[Same first and second paragraphs as the standard report]

Auditor’s Responsibility

[Same third and fourth paragraphs as the standard report]

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.

Basis for Qualified Opinion

XYZ Credit Union has reported members' shares as equity in the accompanying balance sheets. Accounting principles generally accepted in the United States of America require members’ shares to be reported as liabilities in the balance sheet. If the Credit Union had properly reported these shares as liabilities, liabilities would increase and equity would decrease by $_______ and $_______ as of December 31, 20X1 and 20X0, respectively.

Qualified Opinion

In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Credit Union as of December 31, 20X1 and 20X0, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Report on Other Legal and Regulatory Requirements

[Form and content of this section of the auditor’s report will vary depending on the nature of the auditor’s other reporting responsibilities.]

[Auditor’s signature]

[Auditor’s city and state]

[Date of the auditor’s report]

Communication of Internal Control Related Matters

23.25 AU-C section 265, Communicating Internal Control Related Matters Identified in an Audit (AICPA, Professional Standards), addresses the auditor’s responsibility to appropriately communicate to those charged with governance and management deficiencies in internal control that the auditor has identified in an audit of financial statements. Paragraphs .11–.12 of AU-C section 265 state that the auditor should communicate, in writing to those charged with governance, on a timely basis, significant deficiencies and material weaknesses identified during the audit, including those that were remediated during the audit. The auditor also should communicate to management at an appropriate level of responsibility, on a timely basis

  1. a. in writing, significant deficiencies and material weaknesses that the auditor has communicated or intends to communicate to those charged with governance, unless it would be inappropriate to communicate directly to management in the circumstances.
  2. b. in writing or orally, other deficiencies in internal control identified during the audit that have not been communicated to management by other parties and that, in the auditor’s professional judgment, are of sufficient importance to merit management’s attention. If other deficiencies in internal control are communicated orally, the auditor should document the communication.

These communications, as stated in paragraph .13 of AU-C section 265, should be made no later than 60 days following the report release date. However, as further explained in paragraph .A16 of AU-C section 265, the communication is best made by the report release date because receipt of such communication may be an important factor in enabling those charged with governance to discharge their oversight responsibilities. Nothing in AU-C section 265 precludes the auditor from communicating to those charged with governance or management other internal control matters that the auditor has identified during the audit. Paragraph .16 of AU-C section 265 states that the auditor should not issue a written communication stating that no significant deficiencies were identified during the audit.

23.26 AU-C section 265 is not applicable if the auditor is engaged to perform an audit of internal control over financial reporting that is integrated with an audit of financial statements. In such circumstances, AU-C section 940, An Audit of Internal Control Over Financial Reporting That Is Integrated With an Audit of Financial Statements (AICPA, Professional Standards), applies. AU-C section 940 establishes requirements and provides guidance that applies only when an auditor is engaged to perform an audit of internal control over financial reporting that is integrated with an audit of financial statements. Among other reporting considerations, because the auditor issues a report that expresses an opinion on the effectiveness of the entity’s internal control over financial reporting, paragraph .65 of AU-C section 940 states that the auditor should not issue a report indicating that no material weaknesses were identified during the integrated audit.

23.27 Part 363 of the FDIC’s Rules and Regulations requires the independent public accountant’s report on internal control over financial reporting to include a statement that the evaluation included controls over the preparation of regulatory financial statements in accordance with regulatory reporting instructions including identification of the regulatory reporting instructions. Exhibit D, "Reporting Under Section 112 of the Federal Deposit Insurance Corporation Improvement Act," of AU-C section 940 provides guidance and an illustrative definition paragraph to assist auditors in complying with the Federal Deposit Insurance Corporation Improvement Act and Part 363.

Reports on Supervisory Committee Audits

23.28 Part 715 of the NCUA’s regulations requires a credit union’s Supervisory Committee to obtain an annual audit of the credit union according to its charter type and asset size. Any federally insured credit union can meet this requirement by obtaining an independent audit of its financial statements performed in accordance with GAAS. Depending on the credit union’s charter type and asset size, this requirement may also be met through other audit options, one of which may be an audit conducted in accordance with the procedures prescribed in NCUA’s Supervisory Committee Guide for Federal Credit Unions.24 The form and content of reports that are currently prepared by independent auditors in connection with supervisory committee audits reflect a diversity of practice. As a result, supervisory committee members may not understand the fundamental differences between an engagement for the application of agreed-upon procedures to specified elements, accounts, or items of a financial statement in connection with a supervisory committee audit and an audit of a credit union's financial statements in accordance with GAAS. This is of particular concern when the limitations of the supervisory committee audit relate to areas of higher risk in the credit union industry. Further, supervisory committee members may incorrectly assume that the application of agreed-upon procedures included obtaining an understanding of the credit union's internal control similar to that obtained in an audit of the credit union's financial statements in accordance with GAAS.

23.29 Independent auditors' reports on audits of financial statements should comply with the reporting provisions contained in applicable AICPA professional standards. AU-C sections 700, 705, 706, and 805, Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement (AICPA, Professional Standards), provide guidance on reports on audited financial statements.

23.30 Independent accountants’ reports on the performance of agreed-upon procedures in connection with a supervisory committee audit should be prepared in accordance with Statements on Standards for Attestation Engagements. Paragraph .35 of AT-C section 215, Agreed-Upon Procedures Engagements (AICPA, Professional Standards), states that the practitioner’s agreed-upon procedures report should include the following:

  • A title that includes the word independent.
  • An appropriate addressee as required by the circumstances of the engagement.
  • An identification of the subject matter or assertion and the nature of an agreed-upon procedures engagement.
  • An identification of the specified parties.
  • A statement that the procedures performed were those agreed to by the specified parties identified in the report.
  • A statement that identifies the responsible party and its responsibility for the subject matter or its assertion.
  • A statement that

—  the sufficiency of the procedures is solely the responsibility of the parties specified in the report.

—  the practitioner makes no representation regarding the sufficiency of the procedures either for the purpose for which the report has been requested or for any other purpose.

  • A list of the procedures performed (or reference thereto) and related findings. (The practitioner should not provide a conclusion. See paragraph .25 of AT-C section 215).
  • When applicable, a description of any agreed-upon materiality limits.
  • A statement that

—  the agreed-upon procedures engagement was conducted in accordance with attestation standards established by the AICPA.

—  the practitioner was not engaged to and did not conduct an examination or review, the objective of which would be the expression of an opinion or conclusion, respectively, on the subject matter.

—  the practitioner does not express such an opinion or conclusion.

—  had the practitioner performed additional procedures, other matters might have come to the practitioner’s attention that would have been reported.

  • When applicable, a description of the nature of the assistance provided by a practitioner’s external specialist, as discussed in paragraphs .21–.22 of AT-C section 215.
  • When applicable, reservations or restrictions concerning procedures or findings.
  • An alert, in a separate paragraph, that restricts the use of the report. The alert should

—  state that the practitioner’s report is intended solely for the information and use of the specified parties,

—  identify the specified parties for whom use is intended, and

—  state that the report is not intended to be, and should not be, used by anyone other than the specified parties.

  • When the engagements is also performed in accordance with Government Auditing Standards, the alert that restricts the use of the report should include the following information, rather than the information required by the previous bullet:

—  A description of the purpose of the report.

—  A statement that the report is not suitable for any other purpose.

  • The manual or printed signature of the practitioner's firm.
  • The city and state where the practitioner practices.
  • The date of the report. (The report should be dated no earlier than the date on which the practitioner completed the procedures and determined the findings, including that

—  the attestation documention has been reviewed,

—  if applicable, the written presentation of the subject matter has been prepared, and

—  the responsible party has provided a written assertion, unless the responsible party refuses to provide an assertion.)

23.31 As mentioned previously, some regulatory agencies require that supervisory committee audit reports include financial statements or other data. In such instances, the supervisory committee usually includes the auditor's report on the application of agreed-upon procedures and the unaudited financial statements or data in its report to the regulatory agency.

23.32 An auditor may be requested to perform specific procedures in conjunction with a compilation or review of financial statements. The procedures employed in compilation and review engagements, and reports thereon, should comply with, among other professional standards, the provisions of AR-C section 60, General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services; AR-C section 80, Compilation Engagements; and AR-C section 90, Review of Financial Statements (AICPA, Professional Standards). Any procedures that the accountant might have performed before or during the review engagement, including those performed in connection with a compilation of the financial statements, should not be described in his or her report. However, this would not preclude the auditor from issuing a separate, special-purpose report on the nature and extent of procedures performed.

23.33 Q&A section 9150.34, "Modifications to the Accountant’s Compilation or Review Report When a Client Adopts a Private Company Council Accounting Alternative That Results in a Changes to a Previously Issued Report" (AICPA, Technical Questions and Answers), addresses the need to include an explanatory paragraph in the auditor’s report when an entity adopts a PCC alternative that results in a change to a previously issued report, specifically if the prior year report included a departure from GAAP and now that the PCC alternative had been adopted, the prior year no longer contains the departure from GAAP. Paragraph .49 of AR-C section 90, states that when the accountant’s report on the financial statements of the prior period contains a changed reference to a departure from the applicable financial reporting framework, the accountant’s review report should include an other-matter paragraph indicating

  1. a. the date of the accountant’s previous review report.
  2. b. the circumstances or events that caused the reference to be changed.
  3. c. when applicable, that the financial statements of the prior period have been changed.

According to paragraph .86 of AR-C section 90, a changed reference to a departure from the applicable financial reporting framework includes the removal of a prior reference or the inclusion of a new reference.

Example Report on the Application of Agreed-Upon Procedures Performed in Connection With a Supervisory Committee Audit

23.34 The following is an example of a report on the application of agreed-upon procedures performed in connection with a supervisory committee audit.

Independent Accountant’s Report on Applying Agreed-Upon Procedures

To the Supervisory Committee XYZ Credit Union

We have performed the procedures enumerated in the attached supplement, which were agreed to by [list specified parties,25 ordinarily the Supervisory Committee of XYZ Credit Union], on XYZ Credit Union’s financial statements or specified elements, accounts, or items thereof for the period ended June 30, 20X0 to assist you with your supervisory audit of XYZ Credit Union conducted pursuant to section 715 of the National Credit Union Administration regulations. XYZ Credit Union’s management is responsible for the selected accounting records and transactions of XYZ Credit Union for the period ended June 30, 20X0. The procedures performed by us and enumerated in the attached supplement are in accordance with the minimum procedures described in appendix A of the National Credit Union Administration’s Supervisory Committee Guide for Federal Credit Unions. Because the committee is responsible to ensure that a complete set of procedures is performed and because appendix A procedures are designed for smaller, less complex credit unions, we performed supplemental procedures at the committee’s request. The sufficiency of the procedures is solely the responsibility of the parties specified in this report. Consequently, we make no representation regarding the sufficiency of the procedures enumerated in the supplement either for the purpose for which this report has been requested or for any other purpose.

This agreed-upon procedures engagement was conducted in accordance with the attestation standards established by the American Institute of Certified Public Accountants. We were not engaged to and did not conduct an examination or review, the objective of which would be the expression of an opinion or conclusion, respectively, on XYZ Credit Union’s financial statements or specified elements, accounts, or items thereof for the period ended June 30, 20X0. Accordingly, we do not express such an opinion or conclusion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you.

[Additional paragraph(s) may be added to describe other matters]

This report is intended solely for the information and use of [identify the specified parties] and is not intended to be, and should not be, used by anyone other than the specified parties.

[Practitioner’s signature]
[Practitioner’s city and state]
[Date of practitioner’s report]

Supplement to Illustrative Report26

Loans

We obtained trial balances or subsidiary ledgers of the notes or both from the service center and reconciled the totals to the general ledger in the following amounts:

Account Amount Outstanding at June 30, 20X0
Business loans $
Consumer loans
Real estate loans
Participations purchased
$       

Certain [specify number] loans, including lines of credit that had not been fully funded, were selected for confirmation directly with borrowers. The results of our confirmation procedures are summarized in schedule A. Borrowers with lines of credit of $_______ or more as of June 30, 20X0, who did not respond to confirmation requests by July 31, 20X0, are listed in schedule B.

We obtained and read selected [specify number] loan agreements on hand and inspected readily marketable securities and other collateral recorded as held in respect of certain selected secured loans.

We obtained the Credit Union's listing of business loans, real estate loans, and participations purchased five days or more past due as of June 30, 20X0, and compared it with a similar listing as of July 31, 20X0. The following loans were listed in both reports:

Name Due Date Amount Outstanding at June 30, 20X0 Amount Outstanding at July 31, 20X0

Similarly, we obtained the Credit Union's listing of consumer loans ten days or more past due as of June 30, 20X0, and compared it to a like listing as of July 31, 20X0. The following loans were listed in both reports:

Name Due Date Amount at June 30, 20X0 Amount at July 31, 20X0

Loan participations [Specify "all" or number] "sold" and serviced by the credit union were confirmed with the purchasers, without exception.

We obtained the Credit Union's listing of overdrafts as of June 30, 20X0, and compared it to a similar listing as of July 31, 20X0. The following overdrafts were listed in both reports:

Name Date of Overdraft Amount at June 30, 20X0 Amount at July 31, 20X0

The interest rates and repayment terms of five judgmentally selected loans granted to directors, officers, and other related parties during May 20X0 were compared to the interest rate and repayment terms of similar loans granted to outsiders during the same month. We found no instances where favorable interest rates or repayment terms were granted to directors, officers, and other related parties.

The maturity date and amount of loan commitments in excess of $50,000 were confirmed as of May 20X0 by the customers for whose benefit they were issued, without exception. We judgmentally selected five loan commitments and tested the computation of deferred fee income. [Specify results of computations.]

Requests for confirmation of loan balances could not be mailed to the following borrowers due to lack of sufficient addresses:

Name Account Number Balance as of June 30, 20X0

Lack of Evaluation of Collectibility and Adequacy of Collateral

As noted in our engagement letter and report, we did not evaluate the collectibility of loans or the adequacy of collateral thereon.

Lack of Evaluation of the Allowance for Loan Losses

As noted in our engagement letter and report, we did not evaluate the reasonableness of the allowance for loan losses determined by management.

Confirmation Statistics

[Confirmation Date]

Loans Share Draft Accounts Savings Accounts Certificates of Deposit
Dollar amounts
Total
     Circularized
Percent circularized to total
Replies received to total circularized
     Selected but not circularized
     Not delivered by post office
Number of accounts
Total
Circularized
Percent circularized to total
Replies received
Percent replies received to total circularized
     circularized
Selected but not circularized
Not delivered by post office

          Confirmation Requests Not Mailed

Name and Address Reason for Not Mailing Balance as of June 30, 20X0
Loans
Share draft accounts
Savings accounts
Certificates of deposit

Note: An indication of how the samples were selected (that is, on a random, statistical, or judgmental basis), as well as an indication of the type of confirmation (that is, positive or negative requests), should be included. If the loans are categorized by type in the report, similar categories would normally be used in this schedule.

Example Reports on the FDIC Loss Sharing Purchase and Assumption Transactions

23.35 The FDIC’s Resolutions Handbook (handbook) states that a loss sharing transaction is a purchase and assumption (P&A) transaction that the FDIC commonly uses as a resolution tool for handling failed institutions with more than $500 million in assets. A P&A is a resolution transaction in which a healthy institution purchases some or all of the assets of a failed bank or thrift and assumes some or all of the liabilities, including all insured deposits. The handbook also states that a loss sharing P&A uses the basic P&A structure, except for the provision regarding transferred assets. Instead of selling some or all of the assets to the acquirer at a discounted price, the FDIC agrees to share in future losses experienced by the acquirer on a fixed pool of assets. The handbook for P&A agreements requires that within 90 days after each calendar year end, the acquiring bank must furnish the FDIC a report signed by its independent public accountants containing specified statements27 relative to the accuracy of any computations made regarding shared loss assets. It must also perform a semi-annual internal audit of the shared loss compliance and provide the FDIC with copies of the internal audit reports and access to the internal audit work papers.

23.36 Q&A section 9110.16, "Example Reports on Federal Deposit Insurance Corporation Loss Sharing Purchase and Assumption Transactions" (AICPA, Technical Questions and Answers), provides examples of how the auditor might respond to FDIC reporting requirements for an engagement covering an FDIC loss sharing P&A transaction. Q&A section 9110.16 suggests that the auditor may respond by issuing a report in accordance with the requirements of AU-C section 806, Reporting on Compliance With Aspects of Contractual Agreements or Regulatory Requirements in Connection With Audited Financial Statements (AICPA, Professional Standards), and also provides illustrative auditor reports for three possible outcomes for which the independent auditor might report.

Small Business Lending Fund Auditor Certification Guidance

23.37 Under the terms of the Small Business Lending Fund (SBLF), a community bank is required to calculate and report to the Treasury Department the amount of its qualified small business lending in a supplemental report. The bank’s management is required to certify that the information provided in the report is accurate and also to submit a certification from its external auditors that the processes and controls used to generate the supplemental reports are satisfactory. Q&A section 9110.18, "Small Business Lending Fund Auditor Certification Guidance" (AICPA, Technical Questions and Answers), indicates that an independent auditor may satisfy this requirement by issuing a report in accordance with the requirements of AU-C section 806 and provides an illustration of a report that an auditor may use when, as a result of the auditor’s audit procedures, nothing has come to the auditor’s attention to indicate that the bank failed to comply with the terms of the SBLF.

23.38

Appendix A — Illustrative Unqualified PCAOB Reports

This appendix is nonauthoritative and is included for informational purposes only.

Introduction

This appendix provides illustrative unqualified reports applying the requirements of the PCAOB.1 The reports are illustrative; the facts and circumstances of each particular audit will govern the appropriate form of report. A discussion of the types of modifications of the reports that may be appropriate (for example, adverse opinion, disclaimer of opinion, and explanatory paragraphs) is not presented herein.

Reports

General Form of Unqualified Opinion on Financial Statements

The following is an illustration of an auditor's report (unqualified opinion) on the financial statements of a bank or savings institution when a report on internal controls over financial reporting is not being issued.

Report of Independent Registered Public Accounting Firm

To the [Institution, Board of Directors, or Stockholders]:

We have audited the accompanying balance sheets of ABC Institution as of December 31, 20X1 and 20X0, and the related statements of income and comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 20X1.2 These financial statements are the responsibility of ABC Institution's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Institution as of December 31, 20X1 and 20X0, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 20X1 in conformity with U.S. generally accepted accounting principles.

[Signature]
[City and State or Country]
[Date]

General Form of Unqualified Opinion on the Effectiveness of Internal Control over Financial Reporting

When performing an integrated audit of financial statements and internal control over financial reporting in accordance with PCAOB standards, the auditor may choose to issue a combined report or separate reports on the company’s financial statements and on internal control over financial reporting. Refer to paragraphs .85–.98 of AS 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements (AICPA, PCAOB Standards and Related Rules), for direction on reporting on internal control over financial reporting.

The following is an illustration of an auditor's combined report expressing unqualified opinions on each of the financial statements and the effectiveness of internal control over financial reporting of a bank or savings institution.

Report of Independent Registered Public Accounting Firm

To the [Institution, Board of Directors, or Stockholders]:

We have audited the accompanying balance sheets of ABC Institution as of December 31, 20X1 and 20X0, and the related statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 20X1.3 We also have audited ABC Institution’s internal control over financial reporting as of December 31, 20X1, based on [identify criteria].4 ABC Institution’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying [title of management’s report]. Our responsibility is to express an opinion on these financial statements and an opinion on ABC Institution’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Institution as of December 31, 20X1 and 20X0, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 20X1, in conformity with U.S. generally accepted accounting principles. Also in our opinion, ABC Institution maintained, in all material respects, effective internal control over financial reporting as of December 31, 20X1, based on [identify criteria].5

[Signature]
[City and State or Country]
[Date]

The following is an illustration of an auditor’s report expressing an unqualified opinion on the effectiveness of internal control over financial reporting of a bank or savings institution when a separate report expressing an unqualified opinion on the financial statements is issued.

Report of Independent Registered Public Accounting Firm

To the [Institution, Board of Directors, or Stockholders]:

We have audited ABC Institution’s internal control over financial reporting as of December 31, 20X1, based on [identify criteria].6 ABC Institution’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying [title of management’s report]. Our responsibility is to express an opinion on ABC Institution’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, ABC Institution maintained, in all material respects, effective internal control over financial reporting as of December 31, 20X1, based on [identify criteria].7

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of ABC Institution as of December 31, 20X1 and 20X0, and the related statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 20X1, and our report dated [date of report, which should be the same as the date of the report on the effectiveness of internal control over financial reporting] expressed [include nature of opinion].8

If the auditor issues separate reports on the company’s financial statements and on the effectiveness of internal control over financial reporting, the following paragraph, as presented in paragraph 88 of AS 2201, should be added to the auditor’s report on the company’s financial statements:

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), ABC Institution’s internal control over financial reporting as of December 31, 20X1, based on [identify control criteria]9 and our report dated [date of report, which should be the same as the date of the report on the financial statements] expressed [include nature of opinion].

When performing an integrated audit of financial statements and internal control over financial reporting in accordance with PCAOB standards, the auditor’s report on the company’s financial statements and on internal control over financial reporting should be dated the same date. Refer to paragraph 89 of AS 2201.

Notes

Appendix A Notes

__________________________