Auditing and assurance services 14e by arens chapter 03

Learning Objective 1Describe the parts of the standard unqualified audit report... Learning Objective 2Specify the conditions required to issue the standard unqualified audit report...

Audit Reports

Chapter 3 http://www.authorstream.com/shengv

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Learning Objective 1

Describe the parts of the standard

unqualified audit report.

Parts of the Standard Unqualified Audit Report

6 Name of CPA firm

7 Audit report date

Parts of the Standard Unqualified Audit Report

Learning Objective 2

Specify the conditions required to issue the

standard unqualified audit report.

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

Conditions for Standard Unqualified Audit Report

4 Financial statements comply with GAAP

5 No circumstances require an explanatory

paragraph or report modification

Four Categories of Audit

Reports

Learning Objective 3

Understand reporting on financial

statements and internal control over

financial reporting under Section 404 of

the Sarbanes-Oxley Act.

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

Reporting on Internal Control

over Financial Reporting

ICFR Effectiveness

Audits

Accelerated Filer

Non-accelerated

Filer

Separate Report on ICFR

Learning Objective 4

Describe the five circumstances when an

unqualified report with an explanatory

paragraph or modified wording is

appropriate.

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

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

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

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

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 Related Party Transactions

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

Reports Involving Other

Auditors

Learning Objective 5

Identify the types of audit reports that can

be issued when an unqualified opinion is

not justified.

Departures from an Unqualified Opinion

1 Scope limitation

2 GAAP departure

3 Auditor not independent

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.

Qualified Opinion

Adverse Opinion

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

Adverse Opinion

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.

Disclaimer of Opinion

Learning Objective 6

Explain how materiality affects audit

reporting decisions.

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 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.

Materiality Decisions

Failure to follow GAAP Audit report

Unqualified opinion only Qualified Adverse

Relationship of Materiality to

Type of Opinion

Materiality

Level Significance in Terms of Reasonable Users’ Decisions Type of Opinion

Users’ decisions are unlikely

Materiality Decisions

Scope limitation Audit report

Unqualified Qualified scope Disclaimer

Learning Objective 7

Draft appropriately modified audit reports

under a variety of circumstances.

Discussion of Conditions

Requiring Departure

 Auditor’s scope has been restricted

 Statements are not in conformity with GAAP

 Auditor is not independent

Learning Objective 8

Determine the appropriate audit report for a given audit situation.

Auditor’s 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

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.

Number of Paragraphs

in the Report

Type of Report

Learning Objective 9

Understand proposed use of international

accounting and auditing standards by U.S companies.

Proposed Use of International Accounting and Auditing Standards

by U.S companies

Globalization of world’s capital markets are leading

to calls for a single set of accounting standards to be used around the world.

SEC Developing

2015 Implementation

of IFRS

If plan is approved?

End of Chapter 3