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2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 1
Audit Reports
Chapter 3
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 2
Learning Objective 1
Describe the parts of the standard
unqualified audit report.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 3
Parts of the Standard Unqualified 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
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 4
Parts of the Standard Unqualified Audit Report
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 5
Learning Objective 2
Specify the conditions required to issue the standard unqualified audit report.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 6
Conditions for Standard Unqualified Audit Report
1. Includes all financial statements
3. Complies with the three standards of field work
2. Three general standards are met
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 7
Conditions for Standard Unqualified Audit Report
4. Financial statements comply with GAAP
5. No circumstances require an explanatory paragraph or report modification
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 8
Four Categories of Audit Reports
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 9
Learning Objective 3
Understand reporting on financial statements and internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 10
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 the audit of internal control to be integrated with the audit of the financial statements.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 11
Reporting on Internal Control over Financial Reporting
Sarbanes- Oxley
Sec.404
2010 Legislation
Permanent Exemption
ICFR Effectiveness
Audits
Accelerated Filer
Non-accelerated Filer
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 12
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
6. Cross-Reference Paragraph
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 13
Separate Report on ICFR
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 14
Learning Objective 4
Describe the five circumstances when an unqualified report with an explanatory paragraph or modified wording is appropriate.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 15
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
5. Reports involving other auditors
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 16
Lack of Consistent Application of GAAP
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
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 17
Substantial Doubt About Going Concern
Significant recurring operating losses 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 entitys ability to operate.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 18
Auditor Agrees with a Departure from a Promulgated Principle
The auditor must separately explain in the audit report that adhering to the principle would have produced a misleading result.
Departure may not require a qualified or adverse opinion
Circumstances are most unusual
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 19
Emphasis of a Matter
Under certain circumstances, the CPA may want to emphasize specific matters regarding the financial statements, even though the CPA intends to express an unqualified opinion.
Subsequent Events
Financial Statement
Comparability
Material Uncertainties
Related Party Transactions
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 20
Reports Involving Other Auditors
1. Make no reference in the audit report
2. Make reference in the report (modified wording report) 3. Qualify the opinion
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 21
Reports Involving Other Auditors
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 22
Learning Objective 5
Identify the types of audit reports that can be issued when an unqualified opinion is not justified.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 23
Departures from an Unqualified Opinion
1. Scope limitation
2. GAAP departure
3. Auditor not independent
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 24
Qualified Opinion
A qualified opinion report can result from a limitation on the scope of the audit or failure to follow generally accepted accounting principles.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 25
Qualified Opinion
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 26
Adverse Opinion
Auditor believes the financial statements are not presented fairly in conformity with GAAP.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 27
Adverse Opinion
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 28
Disclaimer of Opinion
It is issued when the auditor is unable to be satisfied that the overall financial statements are fairly presented.
It can arise only from a lack of knowledge by the auditor.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 29
Disclaimer of Opinion
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 30
Learning Objective 6
Explain how materiality affects audit reporting decisions.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 31
Materiality
A misstatement in the financial statements can be considered material if knowledge of the misstatement would affect a decision of a reasonable user of the statements.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 32
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 overall fairness of the statements is in question.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 33
Materiality Decisions
Failure to follow GAAP
Audit report
Unqualified Qualified
opinion only Adverse
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 34
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. Material Qualified
Users decisions are likely to be significantly affected.
Highly material
Disclaimer or adverse
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 35
Materiality Decisions
Dollar amount compared with a base Measurability
Nature of the item
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 36
Materiality Decisions
Scope limitation
Audit report
Unqualified Qualified scope
and opinion Disclaimer
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 37
Learning Objective 7
Draft appropriately modified audit reports under a variety of circumstances.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 38
Discussion of Conditions Requiring Departure
Auditors scope has been restricted Statements are not in conformity with GAAP
Auditor is not independent
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 39
Learning Objective 8
Determine the appropriate audit report for a given audit situation.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 40
Auditors Decision Process
Determine whether any condition exists requiring a departure from a standard unqualified report.
Decide Materiality
Write Audit Report
Decide appropriate type of report
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 41
More Than One Condition Requiring a Departure or Modification
The auditor is not independent.
There is a scope limitation.
Going concern uncertainty exists.
Statements are not prepared in accordance with GAAP.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 42
Number of Paragraphs in the Report
Type of Report
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 43
Learning Objective 9
Understand proposed use of international accounting and auditing standards by U.S. companies.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 44
Proposed Use of International Accounting and Auditing Standards
by U.S. companies
Globalization of worlds capital markets are leading to calls for a single set of accounting standards to be used around the world.
SEC Developing Workplan
2015 Implementation
of IFRS into U.S.
If plan is approved?
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 45
End of Chapter 3