When presenting financial statements, it’s crucial to clearly distinguish between audited and unaudited information, especially when showing comparative figures. This article explores the requirements and best practices for handling unaudited figures in comparative financial statements.
Marking Unaudited Figures: Essential for Transparency
Financial statements must be clearly marked as “unaudited” when an independent auditor hasn’t performed a full audit. This applies to individual statements and comparative figures presented alongside audited data. This clear labeling is paramount for transparency and ensures users understand the level of assurance provided for the information. Omitting this clear distinction can mislead users about the reliability of the data.
Reporting Requirements for Comparative Financial Statements
Different reporting scenarios exist for comparative financial statements containing both audited and unaudited information:
SEC Filings
For documents filed with the Securities and Exchange Commission (SEC), unaudited comparative figures should be conspicuously marked as “unaudited.” However, the auditor’s report itself shouldn’t specifically reference these unaudited statements. The clear marking on the statements themselves suffices.
Other Documents
For comparative financial statements in documents other than SEC filings, more explicit handling is required. The unaudited statements must be clearly marked, and one of the following two options must be chosen:
1. Reissuance of Prior Period Report:
The auditor’s report on the prior period (which is now presented comparatively) should be reissued. This ensures the report reflects the current understanding of the prior period’s financial statements.
2. Separate Paragraph in Current Report:
The auditor’s report on the current period should include a separate paragraph describing the responsibility assumed for the prior period’s financial statements. This paragraph details:
- Whether the prior period statements were audited or not.
- The date of the prior period report.
- The type of opinion issued previously (e.g., unqualified, qualified).
- If the opinion was other than unqualified, the reasons for the modification.
- Confirmation that no auditing procedures were performed after the date of the prior period report.
Example of Separate Paragraph for Previously Audited Statements:
The financial statements for the year ended December 31, 20X1, were audited by us (other accountants) and we (they) expressed an unqualified opinion on them in our (their) report dated March 1, 20X2, but we (they) have not performed any auditing procedures since that date.
Example of Separate Paragraph for Previously Unaudited Statements:
The 20X1 financial statements were reviewed by us (other accountants) and our (their) report thereon, dated March 1, 20X2, stated we (they) were not aware of any material modifications that should be made to those statements for them to be in conformity with generally accepted accounting principles. However, a review is substantially less in scope than an audit and does not provide a basis for the expression of an opinion on the financial statements taken as a whole.
Addressing Departures from Generally Accepted Accounting Principles (GAAP)
If unaudited financial statements deviate from GAAP, including inadequate disclosures, the accountant should recommend revisions. If the client doesn’t comply, the accountant should describe the departure in their disclaimer of opinion, specifying the nature and, if possible, the impact on the financial statements. If the impact is indeterminable, the disclaimer should state this. If the client refuses these measures, the accountant should disassociate from the statements and potentially withdraw from the engagement.
Conclusion
Including unaudited figures in comparative financial statements demands meticulous attention to clarity and disclosure. Proper labeling, reporting modifications, and addressing GAAP departures are essential for ensuring users understand the limitations of unaudited information and can make informed decisions. Failing to adhere to these requirements can have serious consequences, potentially misleading stakeholders and damaging the credibility of the financial reporting process.
