Arens14e chapter 03 ppt.ppt

©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 11

Audit ReportsAudit Reports

Chapter 3Chapter 3


Learning Objective 1Learning Objective 1

Describe the parts of the standardDescribe the parts of the standard

unqualified audit report.unqualified audit report.


Parts of the StandardParts of the StandardUnqualified Audit ReportUnqualified 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


Parts of the StandardParts of the StandardUnqualified Audit ReportUnqualified Audit Report



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


Conditions for StandardConditions for StandardUnqualified Audit ReportUnqualified Audit Report

1. Includes all financial statements1. Includes all financial statements

3. Complies with the three standards of field Complies with the three standards of field workwork

2. Three general standards are met2. Three general standards are met


Conditions for StandardConditions for StandardUnqualified Audit ReportUnqualified Audit Report

4. Financial statements comply with GAAP4. Financial statements comply with GAAP

5. No circumstances require an explanatory 5. No circumstances require an explanatory paragraph or report modification paragraph or report modification


Four Categories of Audit Four Categories of Audit ReportsReports



Understand reporting on financial Understand reporting on financial statements and internal control over statements and internal control over financial reporting under Section 404 financial reporting under Section 404 of the Sarbanes-Oxley Act.of the Sarbanes-Oxley Act.


Reporting on Internal Reporting on Internal Control over Financial Control over Financial

ReportingReportingAuditors of public companies subject to Section 404 of the Sarbanes-Oxley Act mustreport 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.


Reporting on Internal Reporting on Internal Control over Financial Control over Financial

ReportingReportingSarbanes-

Oxley Sec.404

2010 Legislation

Permanent Exemption

ICFREffectiveness

AuditsAccelerated Filer

Non-accelerated Filer


Sarbanes-Oxley ActSarbanes-Oxley Act

Separate 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

6. Cross-Reference Paragraph


Separate Report on ICFRSeparate Report on ICFR



Describe the five circumstances when Describe the five circumstances when an unqualified report with an an unqualified report with an explanatory paragraph or modified explanatory paragraph or modified wording is appropriate.wording is appropriate.


Unqualified Report with Unqualified Report with Explanatory ParagraphExplanatory 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 matter5. Reports involving other auditors


Lack of Consistent Lack of Consistent Application of GAAPApplication 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


Substantial Doubt AboutSubstantial Doubt AboutGoing ConcernGoing Concern

Significant recurring operatinglosses orworking 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 entity’s ability to operate.


Auditor Agrees with a Auditor Agrees with a DepartureDeparture

from a Promulgated Principlefrom 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


Emphasis of a MatterEmphasis 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

Financial Statement

Comparability

Material Uncertainties

Related Party Transactions


Reports Involving Other Reports Involving Other AuditorsAuditors

1. Make no reference in the audit report

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

3. Qualify the opinion


Reports Involving Other Reports Involving Other AuditorsAuditors



Identify the types of audit reports that Identify the types of audit reports that can be issued when an unqualified can be issued when an unqualified opinion is not justified.opinion is not justified.


Departures from anDepartures from anUnqualified OpinionUnqualified Opinion

1. Scope limitation

2. GAAP departure

3. Auditor not independent


Qualified OpinionQualified Opinion

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


Qualified OpinionQualified Opinion


Adverse OpinionAdverse Opinion

Auditor believes the financial statements are not presented fairly in conformity with GAAP.


Adverse OpinionAdverse Opinion


Disclaimer of OpinionDisclaimer 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.


Disclaimer of OpinionDisclaimer of Opinion



Explain how materiality affects audit Explain how materiality affects audit reporting decisions.reporting decisions.


MaterialityMateriality

A misstatement in the financial statementscan be considered material if knowledge ofthe misstatement would affect a decisionof a reasonable user of the statements.


Levels of MaterialityLevels 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.


Materiality DecisionsMateriality Decisions

Failure tofollow GAAP

Audit report

UnqualifiedQualified

opinion onlyAdverse


Relationship of Materiality Relationship of Materiality toto

Type of OpinionType of OpinionMaterialityLevel

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



Dollar amount compared with a base

Measurability

Nature of the item



Scopelimitation

Audit report

UnqualifiedQualified scope

and opinionDisclaimer



Draft appropriately modified audit Draft appropriately modified audit reports under a variety of reports under a variety of circumstances.circumstances.


Discussion of ConditionsDiscussion of ConditionsRequiring DepartureRequiring Departure

Auditor’s scope has been restricted

Statements are not in conformity with GAAP

Auditor is not independent



Determine the appropriate audit report Determine the appropriate audit report for a given audit situation.for a given audit situation.


Auditor’s Decision ProcessAuditor’s Decision Process

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

Decide Materiality

Write Audit Report

Decide appropriate type of report


More Than One Condition More Than One Condition RequiringRequiring

a Departure or Modificationa 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.


Number of ParagraphsNumber of Paragraphsin the Reportin the Report

Type of Report



Understand proposed use of Understand proposed use of international accounting and auditing international accounting and auditing standards by U.S. companies.standards by U.S. companies.


Proposed Use of International Proposed Use of International Accounting and Auditing Accounting and Auditing

Standards by U.S. companiesStandards by U.S. companiesGlobalization of world’s 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?


End of Chapter 3End of Chapter 3

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