aud15 ppt 03 ge [compatibility mode]

Chapter 3

Copyright © 2014 Pearson Education

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

Copyright © 2014 Pearson Education3-2

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.

1


Describe the parts of the standardDescribe the parts of the standardunqualified audit report for nonunqualified audit report for non--public public

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

1. Report title2. Audit report address3. Introductory paragraph


4. Management’s Responsibility5. Auditor’s Responsibility6. Opinion Paragraph7. Name and Address of CPA firm8. Audit report date


2


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

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1. Includes all financial statements1. Includes all financial statements2. Sufficient appropriate evidence2. Sufficient appropriate evidence3. Financial statements present in accordance3. Financial statements present in accordance


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


3


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 internal

t l fi i l ti


control over financial reporting.

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

Sarbanes-Oxley

Sec 404Accelerated Filer

ICFREffectiveness

Audits


Sec.404

2010 Legislation

Non-accelerated Filer

Permanent Exemption

Separate Report on Financial Statements andInternal Control Over Financial Reporting

1. Introductory paragraph2. Scope paragraph


3. Definition paragraph4. Inherent limitations paragraph5. Opinion paragraph6. Cross-Reference Paragraph


4


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 matter5. 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 operatinglossesor working capital deficiencies.Inability of the company to pay its


Inability of the company to pay itsobligations 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

Th dit t t l l i i th


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

SubsequentEvents

Related Party Transactions

Material Uncertainties

1. Make no reference in the audit report

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

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(modified wording report)

3. Qualify the opinion


5


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


p

3. Auditor not independent

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

ti i i l


accounting 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.


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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 decision

f bl f th t t t


of a reasonable user of the statements.

Amounts are immaterial.

Amounts are material but do not overshadowth fi i l t t t h l


the financial statements as a whole.

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

Failure tofollow GAAP

A dit t


Audit report

Unqualified Qualifiedopinion only Adverse

MaterialityLevel

Immaterial

Significance in Terms ofReasonable Users’ Decisions

Users’ decisions are unlikelyt b ff t d

Type ofOpinion

Unqualified


Immaterial

Material

Highlymaterial

to be affected.

Users’ decisions are likelyto be affected.

Users’ decisions are likelyto be significantly affected.

Unqualified

Qualified

Disclaimeror adverse

Dollar amount compared with a base

Measurability


Nature of the item

Scopelimitation

A dit t


Audit report

Unqualified Qualified scopeand opinion Disclaimer

7


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


Statements are not in conformity with GAAP

Auditor is not independent

8


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

The auditor is not independent.

There is a scope limitation.


Going concern uncertainty exists.

Statements are not prepared in accordance with GAAP.

9


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


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 anymeans, electronic, mechanical, photocopying, recording, or otherwise,without the prior written permission of the publisher. Printed in theUnited States of America.

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aud15 ppt 03 ge [compatibility mode]

Documents

appropriate audit report

unqualified report

nonunqualified audit

audit report address3

report title2

report modification

financial reporting1

financial statements1