.21 Interpretation—When other relevant evidential matter exists, the auditor should consider it before reaching a conclusion about the appropriateness of management’s accounting for a transfer. fn 14 However, since the isolation aspect of surrender of control is assessed primarily from a legal perspective, the auditor usually will not be able to obtain persuasive evidence in a form other than a legal opinion. In the absence of persuasive evidence that a transfer has met the isolation criterion, derecognition of the transferred assets is not in conformity with generally accepted accounting principles and the auditor should consider the need to express a qualified or adverse opinion in accordance with section 508, Reports on Audited Financial Statements [new proposed title] Departures from Unqualified Opinions and Other Reporting Circumstances, paragraphs .35 through .60. However, if permission for the auditor to use a legal opinion that he or she deems otherwise adequate is not granted, this would be a scope limitation and the auditor should consider the need to express a qualified opinion or to disclaim an opinion in accordance with section 508.22–.26 and 508.61–.63.
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AU sec. 341, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern
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.03 The auditor should evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time in the following manner:
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c. After the auditor has evaluated management's plans, he concludes whether he has substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time. If the auditor concludes there is substantial doubt, he should (1) consider the adequacy of disclosure about the entity's possible inability to continue as a going concern for a reasonable period of time, and (2) include an explanatory paragraph (following the opinion paragraph Opinion on the Financial Statements section) in his audit report to reflect his conclusion. If the auditor concludes that substantial doubt does not exist, he should consider the need for disclosure.
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.12 If, after considering identified conditions and events and management's plans, the auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the audit report should include an explanatory paragraph (following the opinion paragraph Opinion on the Financial Statements section) to reflect that conclusion. fn 4 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] as illustrated in paragraph .13. [As amended, effective for reports issued after December 31, 1990, by Statement on Auditing Standards No. 64.]
fn 4 The inclusion of an explanatory paragraph (following the opinion paragraph Opinion on the Financial Statements section) in the auditor's report contemplated by this section should serve adequately to inform the users of the financial statements. Nothing in this section, however, is intended to preclude an auditor from declining to express an opinion in cases involving uncertainties. If he disclaims an opinion, the uncertainties and their possible effects on the financial statements should be disclosed in an appropriate manner (see paragraph .10), and the auditor's report should give all the substantive reasons for his disclaimer of opinion (see section 508, Reports on Audited Financial Statements [new proposed title] Departures from Unqualified Opinions and Other Reporting Circumstances, paragraphs .61-.63).
.13 An example follows of an explanatory paragraph (following the opinion paragraph Opinion on the Financial Statements section) in the auditor's report describing an uncertainty about the entity's ability to continue as a going concern for a reasonable period of time. fn 5
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note X to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going
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concern. Management's plans in regard to these matters are also described in Note X.
The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
[As amended, effective for reports issued after December 31, 1990, by Statement on Auditing Standards No. 64.]
.14 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, a departure from generally accepted accounting principles exists. This may result in either a qualified (except for) or an adverse opinion. Reporting guidance for such situations is provided in section 508, Reports on Audited Financial Statements [new proposed title]
Departures from Unqualified Opinions and Other Reporting Circumstances.
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.16 If substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time existed at the date of prior period financial statements that are presented on a comparative basis, and that doubt has been removed in the current period, the explanatory paragraph included in the auditor's report (following the opinion paragraph Opinion on the Financial Statements section) on the financial statements of the prior period should not be repeated.
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AU sec. 9342, Auditing Accounting Estimates: Auditing Interpretations of Section 342
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.03 Required Information Presented—When an entity discloses in its basic financial statements only information required by FASB Statement No. 107, the auditor may issue an standard unqualified opinion (assuming no other report modifications are necessary). The auditor may add an emphasis-of-matter explanatory paragraph describing the nature and possible range of such fair value information especially when management's best estimate of value is used in the absence of quoted market values (FASB Statement No. 107, paragraph 11 [AC section F25.115D]) and the range of possible values is significant (see paragraph 16 of Proposed Auditing Standard, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion). If the entity has not disclosed required fair value information, the auditor should evaluate whether the financial statements are materially affected by the departure from generally accepted accounting principles.
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AU sec. 9410, Adherence to Generally Accepted Accounting Principles: Auditing Interpretations of Section 410
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.15 Section 508, Reports on Audited Financial Statements [new proposed title]
Departures from Unqualified Opinions and Other Reporting Circumstances, paragraph .41 states: "Information essential for a fair presentation in conformity with generally accepted accounting principles should be set forth in the financial statements (which include related notes)." For financial statements that are prepared on the basis of accounting principles that are acceptable at the financial-statement date but that will not be acceptable in the future, the auditor should consider whether disclosure of the impending change in principle and the resulting restatement are essential data. If he decides that the matter should be disclosed and it is not, the auditor should express a qualified or adverse opinion as to conformity with GAAP, as required by section 508.41.
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.18 Even if the auditor decides that the disclosure of the forthcoming change and its effects are adequate and, consequently, decides not to qualify his opinion, he nevertheless may decide to include an explanatory paragraph in his report if the effects of the change are expected to be unusually material. The explanatory paragraph should not be construed as a qualification of the auditor's opinion; it is intended to highlight circumstances of particular importance and to aid in interpreting the financial statements (see section 508.19paragraph 16 of Proposed Auditing Standard, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion).
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