Audit Report - LECT 5

8/7/2019 Audit Report - LECT 5

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AUDIT & ASSURANCE

Audit Report


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BM051-3.5-2-AAS Audit & Assurance Audit Report

LEARNING OUTCOMES

describe the parts of the standard

unqualified audit report

describe the conditions required to issue

the standard unqualified audit report.

Identify the types of audit reports that can

be issued when the unqualified opinion is

not justified

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Topic & Structure of the lesson

Types of audit report

Conditions for standard unqualified audit report

Unqualified report with explanation

Consistency versus comparability Substantial doubt about going concern

Emphasis on a matter

Departures from an unqualified opinion

Qualified opinion Adverse opinion

Disclaimer of opinion

Auditors decision process

Audit concept going concernSlide 3 of31


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Key Terms you must be able to use

Adverse opinion

Disclaimer opinion

M

aterial misstatement Qualified opinion

Unqualified opinion

Matter of attention

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INTRODUCTION

This chapter describe the auditors

standard unqualified audit report and the

four categories of audit reports The auditors decision process in choosing

the appropriate audit report to issue are

discussed

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FIVE CATEGORIES OF AUDIT

REPORT

Standard unqualified

Unqualified with explanatory paragraph or

modified wording Qualified (Except for)

Adverse

Disclaimer

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CONDITIONS FOR STANDARD

UNQUALIFIED AUDIT REPORT

All financial statements are included

The general standards have been followed

in all respects on the engagement Sufficient evidence has been accumulated

to conclude that the standards of field

work have been met.

The financial statements are presented in

accordance with generally accepted

accounting principles.Slide 7 of31


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UNQUALIFIED REPORT WITH

EXPLANATION

Lack of consistent application of generally

accepted accounting principles.

Substantial doubt about going concern Auditor agrees with a departure from

promulgated accounting principles

Emphasis of matter Reports involving other auditors

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CONSISTENCY VERSUS

COMPARABILITY

Changes that affect consistency and

require an explanatory paragraph if they

are material:Changes in accounting principles

Changes in reporting entities

Corrections of errors involving principles

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CONSISTENCY VERSUS

COMPARABILITY

Changes that effect comparability but not

consistency:

changes in an estimateerror corrections not involving principles

variation in format and presentations of

financial informationChanges because of substantial difference

in transaction or events

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SUBSTANTIAL DOUBT ABOUT

GOING CONCERN

Significant recurring operating losses or

working capital deficiencies

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 entitys ability to operate.

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AUDITOR AGREES WITH A

DEPARTURE FROM A

PROMULGATED PRINCIPLES The auditor must be satisfied and must

state and explain, in a separate paragraph

or paragraphs in the audit report, thatadhering to the principles would have

produced a misleading result in that

situation.

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EMPHASIS ON A MATTER

Under certain circumstances, the CPA

may want to emphasize specific matters

regarding the financial statements, eventhrough the CPA intends to express an

unqualified opinion.

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REPORTS INVOLVING

OTHERS AUDITORS

make no reference in the audit report

make reference in the report (modified

wording report) qualify the opinion

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DEPARTURES FROM AN

UNQUALIFIED OPINION

Scope limitation

GAAP departure

Auditor not independent

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QUALIFIED OPINION

A qualified opinion report can result from a

limitation on the scope of the audit or

failure to follow generally acceptedaccounting principles.

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ADVERSE OPINION

It is used only when the auditor believes

that the overall financial statements are so

materiality misstated or misleading thatthey do not present fairly the financial

position or results of operations and cash

flows in conforming with GAAP.

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DISCLAIMER OF OPINION

It is issued when the auditor is unable to

be satisfied that the overall financial

statements are fairly presented.

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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.

Levels of materiality

Amounts are immaterial

Amounts are material but to not overshadow the

financial statements as a whole.

Amounts are so material or so pervasive that

overall fairness of the statements is in question.

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RELATIONSHIP OF MATERIALITY

TO TYPE OF OPINION

Materiality Level Significance in terms of

reasonable users

decisions

Type of opinion

Immaterial Users decisions are

unlikely to be affected.

Unqualified

Material Users decisions are likely

to be affected

Qualified

Highly material Users decisions are likely

to be significantly affected.

Disclaimer or Adverse

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MATERIALITY DECISIONS

Scope limitation

Audit report

Unqualified Qualified scope Disclaimer

and opinion

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MATERIALITY DECISIONS

Failure to follow GAAP

Audit report

Unqualified Qualified opinion Adverse

only

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DISCUSSION OF CONDITIONS

REQUIRING DEPARTURE

Auditors scope has been restricted

Statements are not in conformity with

GAAP Auditors is not independent

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SCOPE RESTRICTED BY

CLIENT OR CONDITIONS

immaterial Material Extremely material

Unqualified report Qualified scope,

additional paragraph,

and qualified opinion

(except for)


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THE AUDITOR IS NOT

INDEPENDENT

immaterial Material Extremely material


(regardless of

materiality)


(regardless of

materiality)


(regardless of

materiality)

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GOING CONCERN

Fundamental assumption in the

preparation of financial statement

ISA 570 Going Concern Ability as a going concern for a reasonable

period of time 1 year

Going concern problem considerdisclosure in audit report

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FINANCIAL INDICATORS FOR

GOING CONCERN

Net liability or net current liability position

Fixed term borrowing approaching maturity

without realistic prospect of renewal

Negative operating cash flow

Adverse key ratio

Substantial operating losses

Inability to pay creditors on due dates

Change from credit to cash payment with

suppliersSlide 28 of31


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OPERATING AND OTHER INDICATORS

FOR GOING CONCERN

Loss of key management without

replacement

Loss of a major market, franchise, license

Shortage of raw material, obsolescene of

main products

Pending lawsuit

Changes in legislation affecting the entity

Non compliance with statutory requirement

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Question & Answer Session

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Next Session

THE END

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Audit Report - LECT 5

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