Question

Write a 1,050- to 1,400-word paper on the following: Management's Report on Internal Control Over Financial Reporting The Independent Registered Public Accounting Firm's Report on Internal Control Over Financial Reporting The Independent Registered Public Accounting Firm's Report on the Financial Statements Explain the purpose and content of each of these reports. Assuming the report you review is an Unqualified Opinion, express your thoughts on other types of financial statement reports such as Qualified Opinions, Adverse Opinions, and Disclaimer of Opinions. Company is PepsiCo

Answer 1

Answer:

Managements report on Internal control over financial reporting:

The purpose of this report is to make the management responsible for the effectiveness of internal controls over financial reporting. By insisting for this report by management would result in frequent monitoring of the internal controls by the management and continuous improvements to any loopholes identified during the process. Management is responsible for maintaining effective internal controls over financial reporting within the organisation. The report would typically contain the following details:

• a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting for the company,
• management's assessment of the effectiveness of the company's internal control over financial reporting as of the end of the company's most recent fiscal year,
• a statement identifying the framework used by management to evaluate the effectiveness of the company's internal control over financial reporting.
• a statement that the registered public accounting firm that audited the company's financial statements included in the annual report has issued an attestation report on management's assessment of the company's internal control over financial reporting.
• Limitations in internal controls and the possibility of overriding those controls.

The independent Registered Public Accounting Firm’s report on Internal control over financial reporting:

The independent Public Accounting firm must express an opinion on the Company’s internal control over financial reporting based on their audit. The purpose of this report is to assess the managements report on internal control as well as independent assessment of internal controls by the auditor.

The report would contain the responsibilities of the auditor and the assurances they need to get with respect to internal controls over financial reporting like

• obtaining reasonable assurance about internal control effectiveness.
• obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
• Perform such other procedures as they considered necessary in the circumstances.

The report also contains the details of policies and procedures of internal controls and state that there are certain limitations in the internal controls because of which misstatements may not be prevented or detected.

The auditor finally expresses his opinion whether the internal controls are effective or not based on the criteria established in Internal-Control -Integrated framework.

The independent Registered Public Accounting Firm’s Report on the Financial statements:

The purpose of this report is to understand whether the financial statements present a true and fair position of the company affairs. The auditor's report contains either an expression of opinion on the financial statements, taken as a whole, or an assertion that an opinion cannot be expressed.

The unqualified report typically would contain the following matters:

• Management and Auditors responsibility(Auditor need to express an unbiased opinion on the financial statements)
• Auditors opinion and basis of his opinion
  • Should mention the overall opinion and facts of his basis
  • Statement that financial statements are the responsibility of the management
  • Statement that audit was conducted in accordance with PCAOB
  • Statement that audit included performing procedures to assess the risk of misstatements of financial statements, evaluating accounting principles and estimated used by the management and test basis examination regarding the disclosures
  • Statement that auditor believes that the audit provides reasonable basis for the auditors opinion
• Any other reporting responsibility
• Other parameters like auditors signature, date etc
• Critical audit matters

Other opinions:

Whenever auditor gives a report, he expresses his opinion on the financial statements. The auditor could express unqualified, qualified, adverse or even disclaimer of opinion.

When the auditor expresses unqualified opinion in both internal control and financial statement report it implies that effective internal controls over financial reporting are being maintained by the management and financial statements are presumed to be free from any sort of misstatements. The auditor feels that all the standards are complied with while preparation of financial statements. Similarly in case of internal controls, they are maintained effectively and if any limitations are there they are addressed by the management.

The auditor is said to have given a qualified opinion in case he mentions that except for few areas/reasons if feels that rest of the information provided in the financial statements or internal controls are fairly presented and maintained. In this case he cannot express a clean report as there are some discrepancies. Qualified opinion is similar to an unqualified opinion except for few reasons. One reason could be some of GAAP were not followed while preparation of financial statements.

Auditor can also express adverse opinion when he feels that financial statements are grossly misstated and none of the information presented are true and accurate. It indicates that financial statements are not prepared in accordance with GAAP. He can also express adverse opinion in his internal control report when he feels that the internal controls do not exists, or even if they exist, they are not effective at all. Adverse opinions indicate very poor presentation of the financial statements. They are even rejected by the financial institutions and bankers. Adverse opinion typically contain the reasons why the auditor is issuing adverse opinion. It will contain the details where the financial statements are gross misstated.

Another opinion which the auditor could express is disclaimer of opinion. He would resort to this opinion if he could not come to any conclusion about the effectiveness of internal controls or true and fair view of financial statements due to lack of adequate support from the management or lack of proper data. He could not observe the complete procedures for determining the objectives of his audit. For performing the audit, the auditor requires ample amount of information and access to various database and process of the organisation. At times the auditor is not given access to the information or process which would make him to give a disclaimer of opinion. The financial records may not have been maintained properly or trailing data may not be available. Because of this the auditor would not completed the crucial tasks which he is supposed to do for expressing his opinion. In disclaimer of opinion report, auditor would mention that areas where could not check and reason for this sort of opinion.