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Chapter3: The Balance Sheet and Financial Disclosures

Auditor's Report

Auditors examine financial statements and the internal control procedures designed to support the content of those statements. Their role is to attest to the fairness of the financial statements based on that examination. The auditors' attest function results in an opinion stated in the auditors' reportreport issued by CPAs who audit the financial statements that informs users of the audit findings. .

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   One step in financial analysis should be an examination of the auditors' report, which is issued by the CPAs who audit the financial statements and inform users of the audit findings. Every audit report of a public company looks similar to the one prepared by Deloitte & Touche LLP for the financial statements of Microsoft Corporation, as shown in Graphic 3-14 (on the next page).

   The reason for the similarities is that auditors' reports of public companies must be in compliance with the specifications of the PCAOB.12 In most cases, including the report for Microsoft, the auditors will be satisfied that the financial statements “present fairly” the financial position, results of operations, and cash flows and are “in conformity with accounting principles generally accepted in the United States of America.” These situations prompt an unqualified opinion. Notice that the last paragraph in Microsoft's report references the auditors' separate report on the effectiveness of the company's internal control over financial reporting.

The auditors' report provides the analyst with an independent and professional opinion about the fairness of the representations in the financial statements and about the effectiveness of internal controls.

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Auditors' Report—Microsoft Corporation

Real World Financials


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Microsoft Corporation:

   We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the “Company”) as of June 30, 2009 and 2008, and the related consolidated statements of income, cash flows, and stockholders' equity for each of the three years in the period ended June 30, 2009. 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, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2009, in conformity with accounting principles generally accepted in the United States of America.

   As discussed in Note 18 to the financial statements, on July 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, and Emerging Issues Task Force Issue No. 06-2, Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43.

   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, 2009, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 29, 2009, expressed an unqualified opinion on the Company's internal control over financial reporting.

Deloitte & Touche LLP
Seattle, Washington
July 29, 2009

   Sometimes, as with the Microsoft report, circumstances cause the auditors' report to include an explanatory paragraph in addition to the standard wording, even though the report is unqualified. Most notably, these include:


Lack of consistency due to a change in accounting principle such that comparability is affected even though the auditor concurs with the desirability of the change.


Uncertainty as to the ultimate resolution of a contingency for which a loss is material in amount but not necessarily probable or probable but not estimable.


Emphasis of a matter concerning the financial statements that does not affect the existence of an unqualified opinion but relates to a significant event such as a related-party transaction.

   Some audits result in the need to issue other than an unqualified opinion due to exceptions such as (a) nonconformity with generally accepted accounting principles, (b) inadequate disclosures, and (c) a limitation or restriction of the scope of the examination. In these situations the auditor will issue a (an):


Qualified opinion This contains an exception to the standard unqualified opinion but not of sufficient seriousness to invalidate the financial statements as a whole.


Adverse opinion This is necessary when the exceptions (a) and (b) above are so serious that a qualified opinion is not justified. Adverse opinions are rare because auditors usually are able to persuade management to rectify problems to avoid this undesirable report.


Disclaimer An auditor will disclaim an opinion for item (c) above such that insufficient information has been gathered to express an opinion.

The auditors’ report calls attention to problems that might exist in the financial statements.

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   During the course of each audit, the auditor is required to evaluate the company's ability to continue for a reasonable time as a going concern. If the auditor determines there is significant doubt, an explanation of the potential problem must be included in the auditors' report.13

   Obviously, the auditors' report is most informative when any of these deviations from the standard unqualified opinion are present. These departures from the norm should raise a red flag to a financial analyst and prompt additional search for information.

   The auditors' report of General Motors Corporation exhibited in Graphic 3-15, included a fourth paragraph after the standard first three paragraphs.

The auditor should assess the firm’s ability to continue as a going concern.


Going Concern Paragraph—General Motors Corporation

Real World Financials


The accompanying consolidated financial statements for the year ended December 31, 2008, have been prepared assuming that the Corporation will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Corporation's recurring losses from operations, stockholders' deficit, and inability to generate sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also discussed in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

12 “An Audit of Internal Control over Financial Reporting That Is Integrated with An Audit of Financial Statements,” Auditing Standard No. 5 (Washington, D.C., PCAOB, 2007).

13 “The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern,” Statement on Auditing Standards No. 59 (New York: AICPA, 1988).

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