The result of a financial audit is the audit report (auditor’s opinion) of the financial statements for the fiscal year. These reports have been issued at least since the 19th century in Britain. The objectives of the audit at that time were determined by the client and audit reports could be long or short, informative or vague. Table S-A.1 shows three examples of audit opinions before regulations. The opinion presented show no significant problems (called qualifications); therefore they are unqualified (also called clean) opinion. The 1902 audit report of U.S. Steel is particularly thorough about the procedures done to complete the audit.
After the McKesson & Robbins debacle, the AIA established the CAuP to establish audit standards, including the standard unqualified opinion, which was modified by Statement on Auditing Standards (SAS) No. 2 in 1974 and SAS No. 58 in 1988. SAS No. 2 was a “boiler plate” report with two paragraphs, (1) the scope of the audit and (2) the opinion. Little additional information was provided unless exceptions were noted (a qualified opinion—also an adverse opinion could be given or a disclaimer of opinion). Qualified opinions have been rare for companies traded on stock exchanges. Criticized because of the “expectation gap,” SAS 58 required a three-paragraph opinion which includes a more complete description of the audit process. The recommended reports are given in Table S-A.2.
The SOX created the PCAOB with the responsibility of overseeing the audits of public companies—those trading on U.S. stock exchanges. Included in the PCAOB’s audit standards were new rules on the auditor’s opinion. A separate required report on internal control associated with the internal control audit was initiated—also called the 401 audit because it was required by Section 401 of the SOX. Given all the fraud cases after Enron, the auditors made considerable effort to get the audit and audit reports right—at huge fees. Corporations, particularly the midsize and smaller companies complained about the cost. The thrust of the report was to highlight any material weaknesses and two of the 30 members of the Dow Jones Industrial Average reported internal control weaknesses, American Insurance Group (AIG) and General Electric (GE).
Table S-A.1 Audit reports before regulation
Examined.
(Imperial and Continental Gas Association, 1827)
We have examined the accounts and records of the Company for the fiscal year ending September 28, 1912, and thereby certify that the foregoing balance sheet is in accordance therewith, and is drawn up to exhibit the true condition of the Company’s affairs at that date.
(Swift & Company by Arthur Young)
We have examined the books of U.S. Steel and its Subsidiary Companies for the year ending December 31, 1902, and certify that the Balance Sheet at that date and the Relative Income Account are correctly prepared therefrom.
We have satisfied ourselves that during the year only actual additions and extensions have been charged to Property Account; that ample provision has been made for Depreciation and Extinguishment, and that the item of “Deferred Charges” represents expenditures reasonably and properly carried forward to operations of subsequent years.
We are satisfied that the valuations of the inventories of stocks on hand as certified by the responsible officials have been carefully and accurately made at approximate cost, also that the cost of materials and labor on contracts in progress has been carefully ascertained, and that the profit on these contracts is fair and reasonable.
Full provision has been made for bad and doubtful accounts receivable and for all ascertainable liabilities.
We have verified the cash and securities by actual inspection or by certificates from the Depositories and are of opinion that the Stocks and Bonds are fully worth the value at which they are stated in the Balance Sheet.
And we certify that in our opinion the Balance Sheet is properly drawn up so as to show the true financial position of the Corporation and its Subsidiary Companies, and that the Relative Income Account is a fair and correct statement of the net earnings for the fiscal year ending at that date
(U.S. Steel by Price Waterhouse)
Table S-A.3a presents the audit report and S-A.3b the report of internal control for Microsoft, fiscal year 2015. The financial audit report is a four-paragraph report; three are descriptive, while paragraph three gives the opinion—in this case a clean (or unqualified) opinion. The auditor was Big 4 firm Deloitte & Touche and the report was dated July 31, 2015, a mere 16 days after the end of the fiscal year. A date within 30 days of the end of the fiscal year (required by the SEC) suggests few if any audit-related problems. Microsoft’s internal control report is six paragraphs, giving details on audit procedures as well as a description of the importance of internal controls. The fifth paragraph gives the opinion, again a clean opinion—that internal controls were deemed effective.
Table S-A.2 Audit reports after regulation
Standard unqualified opinion under SAS No. 2, 1974
We have examined the balance of X Company as of December 31, 19XX, and the related statements of income retained earnings and changes in financial position for the year then ended. Our examination was made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstance. [Scope paragraph]
In our opinion, the financial statements referred to above present fairly the financial position of X Company as of December 31, 19XX, and the results of its operations and the changes in its financial position for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. [Opinion paragraph]
Standard unqualified opinion under SAS No. 58, 1988
We have audited the accompanying balance sheets of X Company as of December 31, 19X2 and 19X1, and the related statements of income, retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. 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 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 X Company as of December 31, 19X2 and 19X1, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
[Signature]
[Date]
Table S-A.3a Financial audit report under the PCAOB, Microsoft 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Microsoft Corporation
Redmond, Washington
We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the “Company”) as of June 30, 2015 and 2014, and the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for each of the three years in the period ended June 30, 2015. These financial statements are the responsibility of the Company’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 audit 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, such consolidated financial statements present fairly, in all material respects, the financial position of Microsoft Corporation and subsidiaries as of June 30, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2015, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 30, 2015, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 31, 2015, expressed an unqualified opinion on the Company’s internal control over financial reporting.
/S/DELOITTE & TOUCHE LLP
Seattle, Washington
July 31, 2015
Table S-A.3b Internal control report under the PCAOB, Microsoft 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Microsoft Corporation
Redmond, Washington
We have audited the internal control over financial reporting of Microsoft Corporation and subsidiaries (the “Company”) as of June 30, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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 Report of Management 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 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, 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.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended June 30, 2015, of the Company and our report dated July 31, 2015, expressed an unqualified opinion on those financial statements.
/S/DELOITTE & TOUCHE LLP
Seattle, Washington
July 31, 2015