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Copyright 2014 Pearson Education

Chapter 3

Audit Reports

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Copyright 2014 Pearson Education3-2

Describe the parts of the standardunqualified audit report for non-publicentities under AICPA auditing standards.

Specify the conditions required to issue thestandard unqualified audit report.Understand reporting on financial

statements and internal control underPCAOB auditing standards.

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Describe the five circumstances when anunqualified report with an emphasis-of-matter explanatory paragraph or modified

wording is appropriate.Identify the types of audit reports that can

be issued when an unqualified opinion is

not justified.Explain how materiality affects auditreporting decisions.

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Draft appropriately modified audit reportsunder a variety of circumstances.Determine the appropriate audit report for

a given audit situation.Understand use of internationalaccounting and auditing standards by U.S.

companies.

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Describe the parts of the standardunqualified audit report for non-public

entities under AICPA auditing standards.

1

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1. Report title2. Audit report address

3. Introductory paragraph4. Managements Responsibility 5. Auditors Responsibility

6. Opinion Paragraph7. Name and Address of CPA firm8. Audit report date

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Specify the conditions required to issue thestandard unqualified audit report.

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2

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1. Includes all financial statements2. Sufficient appropriate evidence

3. Financial statements present in accordancewith U.S.GAAP

4. No circumstances require an explanatoryparagraph or report modification

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Understand reporting on financial statementsand internal control under PCAOB auditing

standards.

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3

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Auditors of public companies subject toSection 404 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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Sarbanes-Oxley

Sec.404

2010Legislation

Accelerated Filer

Non-acceleratedFiler

ICFREffectiveness

Audits

PermanentExemption

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Separate Repo rt o n Financ ial Statem ents an dInterna l Cont ro l Over F inancia l Repor t ing

1 . Introductory paragraph

2. Scope paragraph3. Definition paragraph4. Inherent limitations paragraph5. Opinion paragraph6. Cross-Reference Paragraph

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Describe the five circumstances when anunqualified report with an emphasis-of-

matter explanatory paragraph or modifiedwording is appropriate.

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4

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1. Lack of consistent application of generallyaccepted accounting principles

2. Substantial doubt about going concern3. Auditor agrees with a departure frompromulgated accounting principles

4. Emphasis of a matter5. Reports involving other auditors

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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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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 thatmight jeopardize the entitys ability to operate.

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Departure may not require a qualified oradverse opinion

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

Circumstances are unusual

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Under certain circumstances, the CPA maywant to emphasize specific matters regardingthe financial statements, even though theCPA intends to express an unqualified opinion.

FinancialStatement

Comparability

Subsequent

Events

Related Party

Transactions

MaterialUncertainties

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Copyright 2014 Pearson Education22

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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Identify the types of audit reports that can beissued when an unqualified opinion is not

justified.

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5

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1 . Scope limitation

2. GAAP departure

3 . Auditor not independent

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A qu al i f ied op in ion report can result froma limitation on the scope of the audit or

failure to follow generally acceptedaccounting principles.

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

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

Can arise only from a lack of

knowledge by the auditor.

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Explain how materiality affects audit reportingdecisions.

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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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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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Failure tofollow GAAP

Audit report

Unqualified Qualifiedopinion only

Adverse

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MaterialityLevel

Immaterial

Material

Highlymaterial

Significance in Terms ofReasonable Users Decisions

Users decisions are unlikely to be affected.

Users decisions are likely to be affected.

Users decisions are likely to be significantly affected.

Type ofOpinion

Unqualified

Qualified

Disclaimeror adverse

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Dollar amount compared with a base

Measurability

Nature of the item

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Scopelimitation

Audit report

Unqualified Qualified scopeand opinion

Disclaimer

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Draft appropriately modified audit reportsunder a variety of circumstances.

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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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8

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

DecideMaterialityDecide appropriatetype of report

Write AuditReport

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The auditor is not independent.

There is a scope limitation.

Going concern uncertainty exists.

Statements are not prepared inaccordance with GAAP.

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

companies.

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Globalization of worlds capital markets areleading to calls for a single set of accountingstandards to be used around the world.

SECDeveloping

Workplan

If plan is approved?

2015Implementation

of IFRSinto U.S.

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Copyright

All rights reserved. No part of this publication may be reproduced,stored in a retrieval system, or transmitted, in any form or by anymeans, electronic, mechanical, photocopying, recording, or otherwise,

without the prior written permission of the publisher. Printed in theUnited States of America.

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