Arens14e Ch03 Ppt Ge

7/14/2019 Arens14e Ch03 Ppt Ge

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2012 Pearson Education,Auditing 14/e,Arens/Elder/Beasley 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 Report

1. Report title

2. Audit report address

3. Introductory paragraph4. Scope paragraph

5. Opinion paragraph

6. Name of CPA firm7. Audit report date


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Parts of the StandardUnqualified Audit Report


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Specify the conditions required to issue thestandard unqualified audit report.


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Conditions for StandardUnqualified Audit Report

1. Includes all financial statements

3. Complies with the three standards of field work

2. Three general standards are met


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Conditions for StandardUnqualified Audit Report

4. Financial statements comply with GAAP

5. No circumstances require an explanatoryparagraph or report modification


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Four Categories of Audit Reports


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Understand reporting on financialstatements and internal control over

financial reporting under Section 404 ofthe Sarbanes-Oxley Act.


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Reporting on Internal Controlover Financial Reporting

Auditors of public companies subject to Section404 of the Sarbanes-Oxley Act must

report on the effectiveness of internalcontrol over financial reporting.

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


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Reporting on Internal Controlover Financial Reporting

Sarbanes-Oxley

Sec.404

2010Legislation

PermanentExemption

ICFREffectiveness

Audits

Accelerated Filer

Non-acceleratedFiler


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Sarbanes-Oxley Act

Separate Report on Financial Statements andInternal Control Over Financial Reporting

1. Introductory paragraph2. Scope paragraph

3. Definition paragraph

4. Inherent limitations paragraph

5. Opinion paragraph6. Cross-Reference Paragraph


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Separate Report on ICFR


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Describe the five circumstances when anunqualified report with an explanatory

paragraph or modified wording isappropriate.


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Unqualified Report withExplanatory Paragraph

1. Lack of consistent application of generallyaccepted accounting principles

2. Substantial doubt about going concern3. Auditor agrees with a departure from

promulgated accounting principles

4. Emphasis of a matter

5. Reports involving other auditors


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Lack of Consistent Application ofGAAP

Auditors must note circumstances in whichaccounting principles are not consistently

applied

Auditor should modify the report when amaterial change occurs by adding anexplanatory paragraph in the report


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Substantial Doubt AboutGoing Concern

Significant recurring operatinglosses or working capital deficiencies.

Inability of the company to pay itsobligations as they come due.

Loss of major customers, theoccurrence of uninsured catastrophes.

Legal proceedings, legislation that

might jeopardize the entitys ability to operate.


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Auditor Agrees with a Departurefrom a Promulgated Principle

The auditor must separately explain in theaudit report that adhering to the principlewould have produced a misleading result.

Departure may not require a qualified oradverse opinion

Circumstances are most unusual


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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.

Subsequent

Events

FinancialStatement

Comparability

MaterialUncertainties

Related Party

Transactions


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Reports Involving OtherAuditors

1. Make no reference in the audit report

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

3. Qualify the opinion


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Reports Involving OtherAuditors


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Identify the types of audit reports that canbe 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 opinionreport can result froma limitation on the scope of the audit or

failure to follow generally acceptedaccounting principles.


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Qualified Opinion


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Adverse Opinion

Auditor believes the financial statements arenot presented fairly in conformity with GAAP.


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Adverse Opinion


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Disclaimer of Opinion

It is issued when the auditor is unableto be satisfied that the overall financialstatements are fairly presented.

It can arise only from a lack of

knowledge by the auditor.


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Disclaimer of Opinion


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Explain how materiality affects auditreporting decisions.


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Materiality

A misstatement in the financial statementscan be considered material if knowledge of

the 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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Materiality Decisions

Failure tofollow GAAP

Audit report

UnqualifiedQualified

opinion onlyAdverse


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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 likely

to be affected.

Material Qualified

Users decisions are likelyto be significantly affected.

Highlymaterial

Disclaimeror adverse


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Dollar amount compared with a base

Measurability

Nature of the item


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Scopelimitation

Audit report

UnqualifiedQualified scope

and opinionDisclaimer


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Draft appropriately modified audit reportsunder a variety of circumstances.


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Discussion of ConditionsRequiring Departure

Auditors scope has been restricted

Statements are not in conformity with GAAP

Auditor is not independent


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Determine the appropriate audit report for agiven audit situation.


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Auditors Decision Process

Determine whether any condition existsrequiring a departure from a standardunqualified report.

DecideMateriality

Write

AuditReport

Decide appropriatetype of report


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More Than One Condition Requiringa Departure or Modification

The auditor is not independent.

There is a scope limitation.

Going concern uncertainty exists.

Statements are not prepared inaccordance with GAAP.

N b f P h


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Number of Paragraphsin the Report

Type of Report


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Understand proposed use of internationalaccounting and auditing standards by U.S.

companies.

P d U f I t ti l


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Proposed Use of InternationalAccounting and Auditing Standards

by U.S. companiesGlobalization of worlds capital markets areleading to calls for a single set of accounting

standards to be used around the world.

SECDevelopingWorkplan

2015Implementation

of IFRSinto U.S.

If plan is approved?


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End of Chapter 3

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