AS 2810: A Framework for Evaluating Audit Results

Auditing Standard 2810 is a directive issued by the Public Company Accounting Oversight Board (PCAOB), a nonprofit corporation established by Congress to oversee public company audits. Titled “Evaluating Audit Results,” AS 2810 provides a framework for auditors finalizing their examination of a company’s financial statements. The standard governs the final judgment phase where an auditor synthesizes all gathered evidence. The purpose of AS 2810 is to ensure that before issuing an opinion, auditors have systematically evaluated their work to determine if they collected enough evidence to support their conclusions. This disciplined approach helps form a well-supported opinion on whether the financial statements are presented fairly and without material misstatements.

The Auditor’s Overall Evaluation Framework

The primary objective of AS 2810 is to guide an auditor in forming an appropriate basis for their opinion on a company’s financial statements. The framework established by the standard is a systematic approach to the final phase of the audit, ensuring a comprehensive review of all work performed and all evidence collected.

A key component of this framework is the overall review, which involves the auditor reading the financial statements and their accompanying disclosures. During this review, the auditor performs final analytical procedures, which are high-level comparisons of financial data to identify any unusual or unexpected trends or relationships not apparent during detailed testing. These procedures help the auditor evaluate the conclusions they formed about significant accounts and can highlight areas of potential risk, particularly those related to fraud, that may require further consideration. This evaluation framework requires the auditor to consider the collective results of all audit procedures, including the qualitative aspects of the company’s accounting practices.

Evaluating Accumulated Misstatements

A misstatement is a difference between what is reported in the financial statements and what is required by Generally Accepted Accounting Principles (GAAP), and can arise from either error or fraud. Throughout the audit, the auditor accumulates all identified misstatements other than those that are clearly trivial. The evaluation of these accumulated misstatements is a part of the final audit phase.

The auditor must assess the significance of any uncorrected misstatements, which are those that management has chosen not to fix. This assessment is performed for both individual misstatements and their combined effect, using materiality as the benchmark. Materiality is the threshold at which a misstatement could reasonably be expected to influence the economic decisions of someone relying on the financial statements.

The evaluation has both quantitative and qualitative considerations. A quantitative evaluation looks at the dollar amount of the misstatement in relation to key financial metrics, which the auditor establishes during the planning phase of the audit. The qualitative assessment requires professional judgment, where the auditor considers the nature and circumstances of the misstatement. A small misstatement might be considered significant if it helps the company meet analysts’ earnings expectations, avoids a loan default, or masks a change in a business trend.

A misstatement that involves fraud is always considered significant because it points to a potential breakdown in internal controls. If the auditor concludes that uncorrected misstatements are material, they must communicate these findings to the company’s management and its audit committee. If management refuses to make the necessary corrections, the auditor must consider the implications for their final audit report, which could lead to a modified opinion.

Assessing Financial Statement Presentation and Disclosure

An auditor’s responsibility extends beyond verifying the accuracy of the numbers in a company’s financial statements. Under AS 2810, the auditor must also conduct a thorough evaluation of how that financial information is presented and disclosed. This involves assessing whether the financial statements are presented fairly in conformity with the applicable financial reporting framework, such as GAAP in the United States.

The assessment covers several areas of presentation. The auditor must evaluate whether the company has selected and applied its accounting principles appropriately for its circumstances. They also examine the form, arrangement, and content of the financial statements themselves, including the classification of items on the balance sheet, income statement, and statement of cash flows.

A significant focus of this evaluation is on the disclosures provided in the notes to the financial statements. These notes contain supplemental information for understanding the company’s financial position and performance, and the auditor must assess whether these disclosures are adequate and clear.

A primary aspect of this assessment is the auditor’s responsibility to evaluate the potential for management bias in the financial statements. This involves looking for signs that management’s judgments and estimates may be skewed to achieve a desired outcome, such as using optimistic assumptions. The auditor must apply professional skepticism to identify and evaluate such potential biases to ensure they do not result in a material misstatement.

Concluding the Audit and Forming an Opinion

After completing the evaluations of misstatements and financial statement presentation, the auditor enters the final stage of the audit. The auditor must determine if the audit evidence obtained is sufficient and appropriate to support the opinion they will issue on the financial statements.

A procedure at this stage is the auditor’s final reassessment of fraud risks. Based on the totality of the audit results, the auditor reconsiders their initial assessment of the risk of material misstatement due to fraud.

This final review culminates in the formation of the audit opinion. If the auditor concludes that the financial statements are presented fairly, in all material respects, they will issue an unqualified opinion, which is often referred to as a “clean” opinion. Should the auditor find that there are uncorrected material misstatements or if they were unable to obtain sufficient appropriate evidence, a different type of opinion will be necessary. The type of opinion issued is a direct consequence of the evaluation process mandated by AS 2810 and includes the following:

• A qualified opinion is issued for a material but not pervasive issue.
• An adverse opinion is given when misstatements are so material and pervasive that the financial statements as a whole are not fairly presented.
• A disclaimer of opinion is issued when the auditor cannot obtain enough evidence to form an opinion.