EOM Paragraphs

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

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:

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.

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.

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.

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

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

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:

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:

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:

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:

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:

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]

          Confirmation Requests Not Mailed

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.

Introduction

Reports