Copyright © 2014 Pearson Education Chapter 3 Audit Reports

Chapter 3

Audit Reports

Chapter 3

Audit Reports

Describe the parts of the standard unqualified audit report for non-public entities under AICPA auditing standards.

Specify the conditions required to issue the standard unqualified audit report.

Understand reporting on financial statements and internal control under PCAOB auditing standards.

Describe the five circumstances when an unqualified report with an emphasis-of-matter explanatory paragraph or modified wording is appropriate.

Identify the types of audit reports that can be issued when an unqualified opinion is not justified.

Explain how materiality affects audit reporting decisions.

Draft appropriately modified audit reports under a variety of circumstances.

Determine the appropriate audit report for a given audit situation.

Understand use of international accounting and auditing standards by U.S. companies.

Describe the parts of the standardDescribe the parts of the standard unqualified audit report for non-public unqualified audit report for non-public

entities under AICPA auditing standards.entities under AICPA auditing standards.

1. Report title

2. Audit report address

3. Introductory paragraph

4. Management’s Responsibility

5. Auditor’s Responsibility

6. Opinion Paragraph

7. Name and Address of CPA firm

8. Audit report date

Specify the conditions required to issue the standard unqualified audit report.

1. Includes all financial statements1. Includes all financial statements

2. Sufficient appropriate evidence2. Sufficient appropriate evidence

3. Financial statements present in accordance 3. Financial statements present in accordance with U.S.GAAP with U.S.GAAP

4. No circumstances require an explanatory 4. No circumstances require an explanatory paragraph or report modification paragraph or report modification

Understand reporting on financial statements and internal control under PCAOB auditing

standards.

Auditors of public companies subject to Section 404 of the Sarbanes-Oxley Act mustreport on the effectiveness of internalcontrol over financial reporting.

PCAOB Auditing Standard 5 requiresthe audit of internal control to be integratedwith the audit of the financial statements.

Sarbanes-Oxley

Sec.404

2010 Legislation

Accelerated Filer

Non-accelerated Filer

ICFREffectiveness

Audits

Permanent Exemption

Separate Report on Financial Statements andInternal Control Over Financial Reporting

1. Introductory paragraph

2. Scope paragraph

3. Definition paragraph

4. Inherent limitations paragraph

5. Opinion paragraph

6. Cross-Reference Paragraph

Describe the five circumstances when an unqualified report with an emphasis-of-

matter explanatory paragraph or modified wording is appropriate.

1. Lack of consistent application of generallyaccepted accounting principles

2. Substantial doubt about going concern

3. Auditor agrees with a departure frompromulgated accounting principles

4. Emphasis of a matter

5. Reports involving other auditors

Auditors must note circumstances in which accounting principles are not consistently applied

Auditor should modify the report when a material change occurs by adding an explanatory paragraph in the report

Significant recurring operatinglosses or working capital deficiencies.

Inability of the company to pay its obligations as they come due.

Loss of major customers, the occurrence of uninsured catastrophes.

Legal proceedings, legislation that

might jeopardize the entity’s ability to operate.

Departure may not require a qualified or adverse opinion

The auditor must separately explain in the audit report that adhering to the principle would have produced a misleading result.

Circumstances are unusual

Under certain circumstances, the CPA maywant to emphasize specific matters regardingthe financial statements, even though theCPA intends to express an unqualified opinion.

Financial Statement

Comparability

Subsequent Events

Related Party Transactions

Material Uncertainties

1. Make no reference in the audit report

2. Make reference in the report(modified wording report)

3. Qualify the opinion

Identify the types of audit reports that can be issued when an unqualified opinion is not

justified.

1. Scope limitation

2. GAAP departure

3. Auditor not independent

A qualified opinion report can result froma limitation on the scope of the audit orfailure to follow generally acceptedaccounting principles.

Auditor believes the financial statements are not presented fairly in conformity with GAAP.

Issued when the auditor is unableto be satisfied that the overall financialstatements are fairly presented.

Can arise only from a lack of knowledge by the auditor.

Explain how materiality affects audit reporting decisions.

A misstatement in the financial statementscan be considered material if knowledge ofthe misstatement would affect a decisionof a reasonable user of the statements.

Amounts are immaterial.

Amounts are material but do not overshadowthe financial statements as a whole.

Amounts are so material or so pervasive thatoverall fairness of the statements is in question.

Failure tofollow GAAP

Audit report

UnqualifiedQualified

opinion onlyAdverse

MaterialityLevel

Immaterial

Material

Highlymaterial

Significance in Terms ofReasonable Users’ Decisions

Users’ decisions are unlikelyto be affected.

Users’ decisions are likelyto be affected.

Users’ decisions are likelyto be significantly affected.

Type ofOpinion

Unqualified

Qualified

Disclaimeror adverse

Dollar amount compared with a base

Measurability

Nature of the item

Scopelimitation

Audit report

UnqualifiedQualified scope

and opinionDisclaimer

Draft appropriately modified audit reports under a variety of circumstances.

Auditor’s scope has been restricted

Statements are not in conformity with GAAP

Auditor is not independent

Determine the appropriate audit report for a given audit situation.

Determine whether any conditions existsrequiring a departure from a standardunqualified report.

Decide Materiality

Decide appropriate type of report

Write Audit Report

The auditor is not independent.

There is a scope limitation.

Going concern uncertainty exists.

Statements are not prepared in accordance with GAAP.

Understand proposed use of international accounting and auditing standards by U.S.

companies.

Globalization of world’s capital markets are leading to calls for a single set of accounting standards to be used around the world.

SEC Developing Workplan

If plan is approved?

2015 Implementation

of IFRS into U.S.

Copyright

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

Copyright © 2014 Pearson Education Chapter 3 Audit Reports

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