Addthis Arens Chapter03

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Audit Reports

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Learning Objective 1

Describe the parts of the standard

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Parts of the Standard

Unqualified Audit Report

1. Report title

2. Audit report address 3. Introductory paragraph 4. Scope paragraph

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Learning Objective 2

Specify the conditions required

to issue the standard unqualified

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Conditions for Standard

Unqualified Audit Report

1. All financial statements are included.

2. The three general standards have been

followed in all respects on the engagement.

3. Sufficient evidence has been accumulated to conclude that the three standards of

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Conditions for Standard

Unqualified Audit Report

4. The financial statements are presented in accordance with generally accepted

accounting principles.

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Four Categories of Audit

Reports

1. Standard unqualified

3. Qualified

2. Unqualified with explanatory paragraph or modified wording

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Learning Objective 3

Understand reporting

on financial statements and

internal control over financial

reporting under Section 404 of

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Reporting on Internal Control

over Financial Reporting

Auditors of public companies subject to Section 404 of the Sarbanes-Oxley Act must

report on the effectiveness of internal control over financial reporting.

PCAOB Auditing Standard 5 requires

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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

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Learning Objective 4

Describe the five circumstances

when an unqualified report with

an explanatory paragraph or

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Unqualified Report with

Explanatory Paragraph

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

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Substantial Doubt About

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 catastrophes.

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Auditor Agrees with a Departure

from a Promulgated Principle

The auditor must be satisfied and must state and explain, in a separate paragraph or

paragraphs in the audit report, that adhering to the principle would have produced a

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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

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Reports Involving Other

Auditors

1. Make no reference in the audit report

3. Qualify the opinion

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Learning Objective 5

Identify the types of audit reports

that can be issued when an

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Departures from An

Unqualified Opinion

1. Scope limitation

2. GAAP departure

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Qualified Opinion

A qualified opinion report can result from a limitation on the scope of the audit or

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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

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Disclaimer of Opinion

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Learning Objective 6

Explain how materiality affects

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Materiality

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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

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Relationship of Materiality to

Type of Opinion

Materiality Level

Significance in Terms of

Reasonable Users’ Decisions

Type of Opinion

Users’ decisions are unlikely to be affected.

Immaterial Unqualified

Users’ decisions are likely to be affected.

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Materiality Decisions

Failure to follow GAAP

Audit report

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Materiality Decisions

_{Dollar amount compared with a base}

_{Measurability}

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Materiality Decisions

Scope limitation

Audit report

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Learning Objective 7

Draft appropriately modified

audit reports under a variety

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Discussion of Conditions

Requiring Departure

_{Auditor’s scope has been restricted}

_{Statements are not in conformity with GAAP}

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Learning Objective 8

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Auditor’s Decision Process

Determine whether any condition exists requiring a departure from a standard unqualified report.

_{Decide the materiality for each condition}

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More Than One Condition Requiring

a Departure or Modification

The auditor is not independent.

There is a scope limitation.

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Number of Paragraphs

in the Report

Standard unqualified 3

Unqualified with explanatory paragraph 4

Unqualified shared report with other auditors 3

Qualified – opinion only 4

Qualified – scope and opinion 4

Disclaimer – scope limitation 3

Adverse 4

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Learning Objective 9

Understand proposed use of international

accounting and auditing standards by U.S.

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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.

The SEC has a proposed roadmap that could

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