ACC 645 Module 9 Milestone Three Example

Reporting Decisions for the Fiscal 2025 Integrated Audit

[Student Name]

Southern New Hampshire University

ACC 645: Advanced Auditing

Milestone Three

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Reporting Decisions for the Fiscal 2025 Integrated Audit

Introduction

Fieldwork is nearly complete for the company's fiscal 2025 integrated audit. This milestone decides what the two opinions will say, one covering the statements and one covering the controls, under AS 3101 (Public Company Accounting Oversight Board, 2017), AS 3105 and AS 2201, and explains how different facts would have changed them.

The Financial Statement Opinion

The audit obtained sufficient appropriate evidence for all material accounts, including the Canadian component, whose auditor we supervised. Uncorrected misstatements total $1.4 million, below group materiality of $3.2 million and not material on qualitative grounds. The backdating case produced only a quarterly shift in revenue with no annual effect. The financial statements are presented fairly in accordance with GAAP, and the opinion will be unqualified. Because we supervised the Toronto firm rather than dividing responsibility, the report makes no reference to it.

Selecting Critical Audit Matters

AS 3101 sets three conditions for a CAM: the matter reached, or should have reached, the audit committee; it concerns a material account or disclosure; and auditing it called for unusually difficult, subjective or complex judgment. Five candidates were tested against all three.

Candidate matters

The backdating case was serious and occupied the committee, but auditing it did not require especially subjective judgment, because signature metadata and confirmations settled the facts. Burke et al. (2023) studied the first wave of CAMs in U.S. reports and what followed them, and their work reinforces that CAMs should be chosen by the definition rather than by which issues were most discussed.

Drafting the CAMs

Valuation of acquired customer relationships. As described in Note 3, the company acquired a Canadian payroll processor in June 2025 and recognized customer relationship intangible assets of $41 million. We identified this valuation as a critical audit matter because estimating the fair value required management to make significant assumptions about customer attrition rates and the discount rate, which involved a high degree of auditor judgment and the use of valuation specialists. Our procedures included testing controls over the valuation, comparing the attrition assumption with the acquired company's historical retention, evaluating the discount rate with our valuation specialists and testing the sensitivity of the fair value to reasonable changes in both assumptions.

Amortization period of capitalized contract costs. As described in Note 2, the company capitalizes sales commissions and amortizes them over an expected customer life of seven years; the balance was $58 million at December 31, 2025. We identified this as a critical audit matter because the customer life estimate involves significant judgment about future renewals. Our procedures included testing the historical renewal data used, comparing the estimate with customer cohort retention and evaluating whether recent changes in commission plans affected the estimate.

The Internal Control Report

Management excluded the Canadian business, acquired in June, from its 2025 assessment of internal control, as SEC staff guidance allows for an acquisition in its first year. We likewise excluded it, so the internal control report will include a paragraph stating that the acquired business, representing 9 percent of total assets and 6 percent of revenue, was excluded from management's assessment and from our audit of internal control. The significant deficiency in contract date review is not a material weakness, so the internal control opinion will be unqualified. The financial statement and internal control opinions may be combined in one report or issued separately with cross-references; we will issue a combined report.

How Different Facts Would Change the Reports

If the audit committee's investigation had not been complete by the report date and we could not determine whether other regions were affected, we would face a scope limitation. AS 3105 would require a qualified opinion if the possible effects were material but not pervasive, or a disclaimer if pervasive (Public Company Accounting Oversight Board, 2016). In practice, the company would delay its filing rather than accept either.

If the backdating had spanned eight quarters and materially misstated previously issued statements, the company would restate, our report would include an explanatory paragraph on the correction of the misstatement, and the internal control opinion would very likely be adverse, since a restatement to correct a material misstatement is a strong indicator of a material weakness.

Had cash and financing raised substantial doubt that the company could keep operating for a year, the report would carry a going concern paragraph even alongside an unqualified opinion. None of these facts is present.

Other Information in the Annual Report

AS 2710 requires the auditor to read the other information in the annual report, such as management's discussion and analysis, and consider whether it is materially inconsistent with the audited statements or contains a material misstatement of fact. This year that reading matters more than usual. The discussion of results will present bookings, the metric that the backdating inflated in the third quarter, and management plans to restate the third-quarter bookings figure in the annual report with an explanation. The team will compare the corrected figure with the investigation's findings and the contract data it tested, and will ask management to describe the correction plainly. If the discussion presented the original third-quarter figure without correction, the auditor would ask for a revision and, if refused, would consider the matter with the audit committee and legal counsel, since a report that sits beside a known misstatement of fact cannot simply be ignored.

Conclusion

The company will receive a combined report with unqualified opinions on its financial statements and internal control, two critical audit matters and a paragraph on the excluded acquisition. The audit committee will receive drafts of the CAMs two weeks before filing so that management can confirm the referenced notes contain the information the CAMs describe.

References

Burke, J. J., Hoitash, R., Hoitash, U., & Xiao, S. (2023). The disclosure and consequences of U.S. critical audit matters. The Accounting Review, 98(2), 59-95. https://doi.org/10.2308/TAR-2021-0013

Public Company Accounting Oversight Board. (2016). Departures from unqualified opinions and other reporting circumstances (AS 3105). Author.

Public Company Accounting Oversight Board. (2017). The auditor's report on an audit of financial statements when the auditor expresses an unqualified opinion (AS 3101). Author.