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©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 1
Audit Reports
Chapter 3
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 2
Learning Objective 1
Describe the parts of
the standard unqualified
audit report.
Describe the parts of
the standard unqualified
audit report.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 3
Parts of the StandardUnqualified Audit Report
1. Report title
2. Audit report address
3. Introductory paragraph
4. Scope paragraph
5. Opinion paragraph
6. Name of CPA firm
7. Audit report date
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 4
Learning Objective 2
Specify the conditions
required to issue the
standard unqualified
audit report.
Specify the conditions
required to issue the
standard unqualified
audit report.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 5
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.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 6
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.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 7
Four Categoriesof Audit Reports
Standard unqualified
Unqualified withexplanatory paragraphor modified wording
Qualified
Adverse or disclaimer
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 8
Learning Objective 3
Describe the five circumstances
when an unqualified report with
an explanatory paragraph
or modified wording is
appropriate.
Describe the five circumstances
when an unqualified report with
an explanatory paragraph
or modified wording is
appropriate.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 9
Unqualified Reportwith Explanation
1. Lack of consistent application of generallyaccepted 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.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 10
Consistency versusComparability
Changes that affect consistency and requirean explanatory paragraph if they are material:
1. Changes in accounting principles
2. Changes in reporting entities
3. Corrections of errors involving principles
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 11
Consistency versusComparability
Changes that affect comparabilitybut not consistency:
1. Changes in an estimate
2. Error corrections not involving principles
3. Variations in format and presentation of financial information
4. Changes because of substantially different transactions or events
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 12
Substantial Doubtabout 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
4. Legal proceedings, legislation, that might jeopardize the entity’s ability to operate
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 13
Auditor Agrees with a Departure
from a Promulgated Principle
The auditor must be satisfied and must stateand explain, in a separate paragraph or
paragraphs in the audit report, that adheringto the principle would have produced a
misleading result in that situation.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 14
Emphasis on a Matter
Under certain circumstances, the CPA maywant to emphasize specific matters regarding
the financial statements, even though theCPA intends to express an unqualified opinion.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 15
Reports InvolvingOther Auditors
1. Make no reference in the audit report.
3. Qualify the opinion.
2. Make reference in the report(modified wording report).
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 16
Learning Objective 4
Identify the types of audit
reports that can be issued
when an unqualified
opinion is not justified.
Identify the types of audit
reports that can be issued
when an unqualified
opinion is not justified.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 17
Departures from anUnqualified Opinion
1. Scope limitation
2. GAAP departure
3. Auditor not independent
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 18
Qualified Opinion
A qualified opinion report canresult from a limitation on thescope of the audit or failure to
follow generally acceptedaccounting principles.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 19
Adverse Opinion
It is used only when the auditor believesthat the overall financial statements are
so materially misstated or misleading thatthey do not present fairly the financial
position or results of operations and cashflows in conformity with GAAP..
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 20
Disclaimer of Opinion
It is issued when the auditor is unableto be satisfied that the overall financial
statements are fairly presented.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 21
Learning Objective 5
Explain how materiality affects
audit reporting decisions.
Explain how materiality affects
audit reporting decisions.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 22
Materiality
A misstatement in the financial statementscan be considered material if knowledge ofthe misstatement would affect a decision
of a reasonable user of the statements.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 23
Levels of Materiality
Amounts are immaterial.
Amounts are material but donot overshadow the financial
statements as a whole.
Amounts are so material or sopervasive that overall fairness
of the statements is in question.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 24
Relationship of Materialityto Type of Opinion
MaterialityLevel
Significance in Terms ofReasonable Users’ Decisions
Type ofOpinion
Users’ decisions are unlikelyto be affected.
Users’ decisions are likelyto be affected.
Users’ decisions are likelyto be significantly affected.
Immaterial
Material
HighlyMaterial
Unqualified
Qualified
Disclaimeror Adverse
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 25
Materiality Decisions
Failure tofollow GAAP
Audit report
UnqualifiedQualified
opinion onlyAdverse
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 26
Materiality Decisions
Scopelimitation
Audit report
UnqualifiedQualified scope
and opinionDisclaimer
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 27
Materiality Decisions
Dollar amount compared with a base
Measurability
Nature of the item
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 28
Learning Objective 6
Draft appropriately modified
audit reports under a variety
of circumstances.
Draft appropriately modified
audit reports under a variety
of circumstances.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 29
Discussion of ConditionsRequiring Departure
Auditor’s scope has been restricted.
Statements are not in conformity with GAAP.
Auditor is not independent.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 30
Scope Restricted byClient or Conditions
Immaterial Material
Level of Materiality
ExtremelyMaterial
Unqualifiedreport
Qualified scope, additionalparagraph, and qualified
opinion (except for)
Disclaimerof opinion
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 31
Statements Not Prepared inAccordance With GAAP
Immaterial Material
Level of Materiality
ExtremelyMaterial
Unqualifiedreport
Additional paragraphand qualified opinion
(except for)
Adverseopinion
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 32
The Auditor Is NotIndependent
Immaterial Material
Level of Materiality
ExtremelyMaterial
Disclaimer of opinion(regardless of materiality)
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 33
Learning Objective 7
Determine the appropriate
audit report for a given
audit situation.
Determine the appropriate
audit report for a given
audit situation.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 34
Auditor’s Decision Process
Determine whether any condition existsrequiring a departure from a standard
unqualified report.
Decide the materiality for each condition.
Decide the appropriate type of report.
Write the audit report.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 35
Number of Paragraphsin the Report
Standard 3Unqualified with explanatory paragraph 4Unqualified shared report with other auditors 3Qualified – opinion only 4Qualified – scope and opinion 4Disclaimer – scope limitation 3Adverse 4
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 36
Learning Objective 8
Discuss the impact
of e-commerce on
audit reporting.
Discuss the impact
of e-commerce on
audit reporting.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 3 - 37
Impact of E-Commerceon Audit Reporting
Auditors are not required to read informationcontained in electronic sites.
Most companies provide access to financialinformation through their home Web page.
Auditing standards note that electronic sitesare not considered “documents.”
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