©2008 prentice hall business publishing, auditing 12/e, arens/beasley/elder 3 - 1 audit reports...
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©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Auditing 12/e,Auditing 12/e, Arens/Beasley/Elder Arens/Beasley/Elder 3 - 1
Audit Reports
Chapter 3
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Learning Objective 1
Describe the parts of the standard
unqualified audit report.
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Parts of the StandardUnqualified Audit Report1. Report title
2. Audit report address
3. Introductory paragraph
4. Scope paragraph
5. Opinion paragraph
6. Name of CPA firm
7. Audit report date
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Learning Objective 2
Specify the conditions required
to issue the standard unqualified
audit report.
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Conditions for StandardUnqualified Audit Report
1. All financial statements are included.
2. The three general standards have beenfollowed in all respects on the engagement.
3. Sufficient evidence has been accumulatedto conclude that the three standards offield work have been met.
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Conditions for StandardUnqualified Audit Report
4. The financial statements are presented inaccordance with generally acceptedaccounting principles.
5. There are no circumstances requiring theaddition of an explanatory paragraph ormodification of the wording of the report.
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Four Categories of Audit Reports
1. Standard unqualified
3. Qualified
2. Unqualified with explanatory paragraphor modified wording
4. Adverse or disclaimer
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Learning Objective 3
Understand combined reporting
on financial statements and
internal control over financial
reporting under Section 404 of
the Sarbanes-Oxley Act.
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Sarbanes-Oxley Act
This Act requires the auditor of a publiccompany to attest to management’sreport on the effectiveness of internalcontrol over financial reporting.
PCAOB Auditing Standard 2 requiresthe audit of internal control to be integratedwith the audit of the financial statements.
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Sarbanes-Oxley Act
Combined 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
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Learning Objective 4
Describe the five circumstances
when an unqualified report with
an explanatory paragraph or
modified wording is appropriate.
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Unqualified Report with Explanatory Paragraph
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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Substantial Doubt AboutGoing Concern
1. Significant recurring operating lossesor working capital deficiencies.
2. Inability of the company to pay itsobligations as they come due.
3. Loss of major customers, the occurrenceof uninsured catastrophes.
4. Legal proceedings, legislation that mightjeopardize the entity’s ability to operate.
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Auditor Agrees with a Departurefrom a Promulgated Principle
The auditor must be satisfied and must stateand explain, in a separate paragraph orparagraphs in the audit report, that adheringto the principle would have produced amisleading result in that situation.
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Emphasis of a Matter
Under certain circumstances, the CPA maywant to emphasize specific matters regardingthe financial statements, even though theCPA intends to express an unqualified opinion.
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Reports Involving Other Auditors
1. Make no reference in the audit report
3. Qualify the opinion
2. Make reference in the report(modified wording report)
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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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Departures from AnUnqualified Opinion
1. Scope limitation
2. GAAP departure
3. Auditor not independent
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Qualified Opinion
A qualified opinion report can result froma limitation on the scope of the audit orfailure to follow generally acceptedaccounting principles.
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Adverse Opinion
It is used only when the auditor believesthat the overall financial statements areso materially misstated or misleading thatthey do not present fairly the financialposition or results of operations and cashflows in conformity with GAAP.
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Disclaimer of Opinion
It is issued when the auditor is unableto be satisfied that the overall financialstatements are fairly presented.
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Learning Objective 6
Explain how materiality affects
audit reporting decisions.
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Materiality
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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Levels of Materiality
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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Relationship of Materiality toType of Opinion
MaterialityLevel
Significance in Terms ofReasonable Users’ Decisions
Type ofOpinion
Users’ decisions are unlikelyto be affected.Immaterial Unqualified
Users’ decisions are likelyto be affected.Material Qualified
Users’ decisions are likelyto be significantly affected.
Highlymaterial
Disclaimeror adverse
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Materiality Decisions
Failure tofollow GAAP
Audit report
UnqualifiedQualified
opinion onlyAdverse
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Materiality Decisions
Dollar amount compared with a base
Measurability
Nature of the item
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Materiality Decisions
Scopelimitation
Audit report
UnqualifiedQualified scope
and opinionDisclaimer
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Learning Objective 7
Draft appropriately modified
audit reports under a variety
of circumstances.
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Discussion of ConditionsRequiring Departure
Auditor’s scope has been restricted
Statements are not in conformity with GAAP
Auditor is not independent
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Learning Objective 8
Determine the appropriate audit
report for a given audit situation.
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Auditor’s Decision Process
Determine whether any condition existsrequiring a departure from a standardunqualified report.
Decide the materiality for each condition
Decide the appropriate type of report
Write the audit report
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More Than One Condition Requiringa Departure or Modification
The auditor is not independent.
There is a scope limitation.
There is a substantial doubt aboutthe company’s ability to continueas a going concern.
There is a deviation in the statements’preparation in accordance to GAAP.
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Number of Paragraphsin the Report
Standard unqualified 3Unqualified with explanatory paragraph 4Unqualified shared report with other auditors 3Qualified – opinion only 4Qualified – scope and opinion 4Disclaimer – scope limitation 3Adverse 4
Type of Report
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Learning Objective 9
Discuss the impact of e-commerce
on audit reporting.
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Impact of E-Commerce onAudit Reporting
Under auditing standards, the auditor has noobligation to perform any procedures tocorroborate the other information.
Most public companies provide access to financialinformation through their home Web page.
Auditing standards note that electronic sitesare not considered “documents.”
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End of Chapter 3