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Copyright © 2014 Pearson Education
Chapter 3
Audit Reports
Chapter 3
Audit Reports
Copyright © 2014 Pearson Education3-2
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.
Copyright © 2014 Pearson Education3-3
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.
Copyright © 2014 Pearson Education3-4
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.
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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.
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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
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Copyright © 2014 Pearson Education
Specify the conditions required to issue the standard unqualified audit report.
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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
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Copyright © 2014 Pearson Education
Understand reporting on financial statements and internal control under PCAOB auditing
standards.
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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.
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Sarbanes-Oxley
Sec.404
2010 Legislation
Accelerated Filer
Non-accelerated Filer
ICFREffectiveness
Audits
Permanent Exemption
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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
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Copyright © 2014 Pearson Education
Describe the five circumstances when an unqualified report with an emphasis-of-
matter explanatory paragraph or modified wording is appropriate.
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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
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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
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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.
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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
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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
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1. Make no reference in the audit report
2. Make reference in the report(modified wording report)
3. Qualify the opinion
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Copyright © 2014 Pearson Education
Identify the types of audit reports that can be issued when an unqualified opinion is not
justified.
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1. Scope limitation
2. GAAP departure
3. Auditor not independent
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A qualified opinion report can result froma limitation on the scope of the audit orfailure to follow generally acceptedaccounting principles.
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Auditor believes the financial statements are not presented fairly in conformity with GAAP.
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Copyright © 2014 Pearson Education3-30
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.
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Copyright © 2014 Pearson Education
Explain how materiality affects audit reporting decisions.
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A misstatement in the financial statementscan be considered material if knowledge ofthe misstatement would affect a decisionof a reasonable user of the statements.
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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.
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Failure tofollow GAAP
Audit report
UnqualifiedQualified
opinion onlyAdverse
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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
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Dollar amount compared with a base
Measurability
Nature of the item
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Scopelimitation
Audit report
UnqualifiedQualified scope
and opinionDisclaimer
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Draft appropriately modified audit reports under a variety of circumstances.
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Auditor’s scope has been restricted
Statements are not in conformity with GAAP
Auditor is not independent
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Determine the appropriate audit report for a given audit situation.
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Determine whether any conditions existsrequiring a departure from a standardunqualified report.
Decide Materiality
Decide appropriate type of report
Write Audit Report
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The auditor is not independent.
There is a scope limitation.
Going concern uncertainty exists.
Statements are not prepared in accordance with GAAP.
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Understand proposed use of international accounting and auditing standards by U.S.
companies.
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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.
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Copyright © 2014 Pearson Education
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.
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