Professional Documents
Culture Documents
Chapter 3
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Learning Objective 1
Describe the parts of the standard unqualified audit report.
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1. Report title
Auditing standards require the report to be titled & that The title include the word independent
3. Introductory paragraph
The first paragraph of the report does three things: A- makes a simple statement that a CPA has done an Audit B- it lists the financial statements that were audited C- it states that the financial statements are the responsibility of management & that auditors responsibility is to Express an opinion on the statements based on an audit
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4. Scope paragraph
-is a factual statement about what the auditor did in the audit
-it states that the audit id designed to provide reasonable assurance about whether the financial statements are free of material misstatement - IT discuss the audit evidence accumulated &states that the
auditor believe that the audit evidence accumulated was appropriate for the circumstances to express the opinion presented - it state that the auditor estimates the appropriateness of accounting principles , estimates ,financial statement presentation &disclosures
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5. Opinion paragraph -the final paragraph in the standard report states the auditors conclusion based on the results of the audit -the opinion paragraph is stated as an opinion rather than a as statement of absolute fact or guarantee -the opinion paragraph is directly related to first &fourth generally accepted repoting standards 6. Name of CPA firm the name identifies the CPA firm who performed the audit 7. Audit report date the appropriate date for audit report is the one in which the auditor has completed the most important procedures
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Learning Objective 2
Specify the conditions required to issue the standard unqualified audit report.
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4. The financial statements are presented in accordance with generally accepted accounting principles this also mean adequate disclosures have been included in footnotes of financial statements
5. There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report.
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Learning Objective 3
Understand reporting on financial statements and internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act.
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PCAOB Auditing Standard 5 requires the audit of internal control to be integrated with the audit of the financial statements. however the auditor may choose to issue
Combined Report on Financial Statements and Internal Control Over Financial Reporting 1. Introductory paragraph ,scope,opnion paragraphs are
modified to include reference to managements report on internal control over financial reporting 2- the introductory &opinion paragraphs also refer to the framework used to evaluate internal control 3- the report include a paragraph after the scope paragraph
defining the internal control 4- additional paragraph before opinion paragraph discuss the inherent limitations of internal control
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Sarbanes-Oxley Act
Separate Report on Financial Statements and Internal Control Over Financial Reporting
1. Introductory paragraph 2. Scope paragraph 3. Definition paragraph 4. Inherent limitations paragraph 5. Opinion paragraph 6. Cross Reference Paragraph
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Learning Objective 4
Describe the five circumstances when an unqualified report with an explanatory paragraph or modified wording is appropriate. unqualified report with an explanatory paragraph or modified wordings meet the
criteria of complete audit with satisfactory Results &financial statement are fairly presented but the auditor believe that it is important to provide additional information
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Unqualified Report with Explanatory Unqualified Report with Explanatory Paragraph Paragraph
The following are the most important causes of addition of explanatory paragraph or modification Of wording
1. Lack of consistent application of generally accepted accounting principles 2. Substantial doubt about going concern 3. Auditor agrees with a departure from promulgated accounting principles 4. Emphasis of a matter 5. Reports involving other auditors
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The auditor has a responsibility to evaluate whether the company is likely to continue as a going concern, SAS no 59 address this problem Existence of one or more of the following factors causes Uncertainty about the ability of the entity to continue as a going concern
. 1. Significant recurring operating losses or working capital deficiencies. 2. Inability of the company to pay its obligations as they come due. 3. Loss of major customers, the occurrence of uninsured catastroph 4. Legal proceedings, legislation that might jeopardize the entitys ability to operate
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Emphasis of a Matter
Under certain circumstances, the CPA may want to emphasize specific matters regarding the financial statements, even though the CPA intends to express an unqualified opinion.
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Learning Objective 5
Identify the types of audit reports that can be issued when an unqualified opinion is not justified.
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the conditions requiring a departure from an unqualified opinion 1. Scope limitation When the auditor has not accumulated sufficient evidence to conclude whether financial statements are stated in accordance with GAAP, a scope restriction exists. GAAP Departure The Financial Statements Have Not Been Prepared in Accordance with Generally Accepted Accounting Principles ( 3. Auditor not independent
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When any of the three conditions requiring a departure from an unqualified report exists and is material, a report other than an unqualified report must be issued. Three main types of audit reports are issued under these conditions:
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Qualified Opinion
Qualified report can result from a limitation on the scope of the audit or failure to follow generally accepted accounting principles. A qualified report can be used only when the auditor concludes that the overall financial statements are fairly stated. A disclaimer or an adverse report must be used if the auditor believes that the condition being reported on is highly material. Therefore, the qualified opinion is considered the least severe type of departure from an unqualified report
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Adverse Opinion
It is used only when the auditor believes that the overall financial statements are so materially misstated or misleading that they do not present fairly the financial position or results of operations
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Disclaimer of Opinion
It is issued when the auditor is unable to be satisfied that the overall financial statements are fairly presented.
The necessity for disclaiming an opinion may arise because of a severe limitation on the scope of the audit or a no independent relationship under the Code of Professional Conduct between the auditor and the client.
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Learning Objective 6
Explain how materiality affects audit reporting decisions.
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Materiality
A misstatement in the financial statements can be considered material if knowledge of the misstatement would affect a decision of a reasonable user of the statements.
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Levels of Materiality
Amounts are immaterial.
Amounts are material but do not overshadow the financial statements as a whole.
Amounts are so material or so pervasive that overall fairness of the statements is in question.
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Materiality Decisions
Failure to follow GAAP Audit report
Unqualified
Adverse
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Materiality Decisions
Dollar Amounts Compared with a Base The primary concern in measuring materiality when a client has failed to follow GAAP is usually the total dollar misstatement in the accounts involved, compared with some base
Measurability
The dollar amount of some misstatements cannot be accurately measured. in terms of dollar amounts. The materiality question the auditor must evaluate in such situations is the effect on statement users of the failure to make the disclosure. Nature of the Item The decision of a user may also be affected by the kind of misstatement in the Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley statement. 2010 3 - 32
Materiality Decisions
Scope limitation Audit report
Unqualified
Disclaimer
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Learning Objective 7
Draft appropriately modified audit reports under a variety of circumstances.
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Learning Objective 8
Determine the appropriate audit report for a given audit situation.
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If any conditions exist auditor must Decide the materialit of any Condition Decide the appropriate type of report Write the audit report
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Learning Objective 9
Understand proposed use of international accounting and auditing standards by U.S. companies
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End of Chapter 3
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