AP1.9. (LO 2, 4, 6, 7, 8) Limitations of an audit You are an intern at a Big 4 accounting firm and have just finished your internship training. You feel a little overwhelmed with all of the information from the training session, and you are wondering if you are qualified to perform work that is of high-enough quality to meet the firm's and the profession's standards. What if you miss something or forget to do something? What if it takes you too long to complete your tasks? What if you spend time on something that is trivial and miss something that is important? You decide to review your notes from the training session and from your undergraduate audit course.

Required

1. Discuss the limitations of an audit.
2. Refer to the audit reports in Illustrations 1.6, 1.7, and 1.9. What are some key terms and phrases included in the reports that address these limitations?

[1] INDEPENDENT AUDITOR'S REPORT

[2] To the owners of McLellan's Shoes:

[3] Report on the Financial Statements

We have audited the accompanying financial statements of McLellan's Shoes, which comprise the balance sheets as of December 31, 2022 and 2021, and the related statements of income, changes in equity, and cash flows for the years then ended, and the related notes to the financial statements.

[4] 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.

[5] 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 from 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. 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.

[6] Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of McLellan's Shoes as of December 31, 2022 and 2021, 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.

[7] Bell & Bowerman, LLP

Seattle, Washington

[8] February 15, 2023

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[1] REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

[2] To the shareholders and the Board of Directors of The Boeing Company

Opinion on the Financial Statements

[3] We have audited the accompanying consolidated statements of financial position of The Boeing Company and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

[4] We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 12, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

[5] These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

[6] We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

[7] /s/ Deloitte & Touche LLP

Chicago, Illinois

[8] February 12, 2018

[9] We have served as the Company's auditor since at least 1934; however, an earlier year cannot be reliably determined.

ILLUSTRATION 1.7 Example of an unqualified audit report on the financial statements of The Boeing Company, a public company

Take a moment to look over the report in Illustration 1.7 and note some of the similarities and differences with the private company audit report. Again, you will see some of the key concepts discussed in this chapter. Sections of the report are numbered so we can further explain each component. Explanations of each numbered component follow Illustration 1.7.

1. TitleThe term independent is also in the title of this report to emphasize the auditors are external to the company, unbiased, and therefore can provide an objective opinion. In addition, the term registered is included to emphasize the firm is registered with the PCAOB.
2. AddressThe report is addressed to the shareholders and board of directors of the company.
3. Opinion paragraphThe first sentence explains that an audit was conducted and identifies the financial statements and the dates of the financial statements. The second sentence states the auditor's opinion. Note the opinion sentence is virtually identical to the opinion paragraph for the private company audit report.
4. Paragraph referencing the audit of internal controlThis paragraph is unique to the public company audit report. Public companies are required to have an audit of ICFR and auditors issue a separate opinion for that audit, which is discussed in the next section.
5. Basis for opinion paragraphThis paragraph states the differing responsibilities of management and auditors. It is similar to the responsibility paragraphs of the report for private company audits, but the private company report goes into more detail regarding the responsibilities of management and auditors. One key difference is that this paragraph references registration with the PCAOB and independence requirements of the SEC and other federal securities laws.
6. Scope paragraphThis paragraph explains, in brief terms, the process of conducting an audit. It mentions the concept of reasonable assurance about whether the financial statements are free of material misstatement. It includes an explicit statement that PCAOB auditing standards were followed since it is a public company. The scope paragraph also includes a brief discussion of the professional judgments made during the audit. Finally, it concludes with a statement that the audit firm believes that its audit provides a reasonable basis for its opinion.
7. SignatureThe firm name and location is used as the signature.
8. DateThe date represents the end of fieldwork, which is the conclusion of gathering and evaluating evidence, and drawing all conclusions for the audit.
9. Auditor tenureThe final component of the report is a sentence that states the year in which the firm began serving consecutively as the company's auditor.

After reviewing the standard audit reports, you may be wondering what happens if auditors conclude the financial statements are not presented fairly in accordance with the applicable financial reporting framework? Or what happens if auditors cannot gather enough evidence to form an opinion? When situations such as these occur, auditors may have to modify their opinion. Auditing standards have established three types of modified audit opinions: a qualified opinion, an adverse opinion, and a disclaimer of opinion. Illustration 1.8 provides a brief summary of situations that could cause auditors to issue a modified opinion. It is important to note that only material situations would cause auditors to modify the opinion. The discovery of immaterial errors would not prevent the issuance of an unmodified/unqualified opinion. The different types of modified reports will be covered in depth in Chapter 15, so consider Illustration 1.8 a basic introduction to the modified reports.

__________________________________________________________________________________________________________

[1] REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

[2] To the Shareholders and Board of Directors of The Boeing Company

[3] Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of The Boeing Company and subsidiaries (the "Company") as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

[4] We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017, of the Company and our report dated February 12, 2018, expressed an unqualified opinion on those financial statements.

[5] Basis for Opinion

The Company'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 Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

[6] We conducted our audit in accordance with the standards of the PCAOB. 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, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

[7] Definition and Limitations of Internal Control over Financial Reporting

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.

[8] /s/Deloitte & Touche LLP

Chicago, Illinois

[9] February 12, 2018