audit reports chapter 3. 1. report title 2. audit report address 3. introductory paragraph 4....
TRANSCRIPT
Audit Reports
Chapter 3
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
What are the parts of the standardunqualified audit report ?
The report should be titled. Include the word independent. Examples : independent auditor’s report. What is the need for such title ?? to convey to users that the audit was unbiased.
1. Report title
The report is usually addressed to the
company, its stockholders or the board of directors.
It has become customary to address the report to the Board OF Directors.
2. Audit report address
The first paragraph does three things :1. Makes simple statement that the CPA firm has done
the Audit.2. Lists the financial statements that where audited.
(including balance sheet dates and accounting periods for income statement and cash flow statement).
3. States that the statements are the responsibility of management and Auditor’s responsibility is to express an opinion on the statements.
3. Introductory paragraph
What the auditor did in the audit. States the chosen criteria. Auditing standards used. States that the Audit is designed to obtain Reasonable
Assurance that the statements are free of material misstatements.
Test Basis.
4. Scope paragraph
Auditor’s conclusions based on the results of the Audit. Stated as an opinion rather than as a statement of
absolute fact or guarantee. Bases on professional judgment. Opinion on the financial statements taken as a whole.
5. Opinion paragraph
Identifies the CPA firm who performed the
Audit.
6. Name of CPA firm
The appropriate date is the one on which the
auditor completed the auditing procedures in the filed.
7. Audit report date
1. All financial statements are included.2.The three general standards have been followed in
all respects on the engagement.3. Sufficient evidence has been accumulated to
conclude that the three standards of field work have been met.
4. The financial statements are presented in accordance with generally accepted accounting principles.
5. There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report
Conditions requiredto issue the standard unqualifiedaudit report
1.Standard unqualified.2.Unqualified with explanatory paragraph or modified wording.3. Qualified4. Adverse or disclaimer
Four Categories of Audit Reports
• The financial statements are not fairly presented(adverse).
• The auditor is unable to form an opinion to whether the financial statements are fairly presented or not (Disclaimer)
• The financial statements are not fairly presented(adverse).
• The auditor is unable to form an opinion to whether the financial statements are fairly presented or not (Disclaimer)
Sarbanes-Oxley Act: This Act requires the auditor of a public company to
attest to management’s report on the effectiveness of internal control over financial reporting.
The Auditor may choose to issue :1. Separate reports. (separate report on internal
control over financial reporting ).2.Combined report on financial statements and
internal control over financial reporting.
Report on internal control over Financial reporting
Describe the five circumstances when an unqualified report with an explanatory paragraph or modified wording is appropriate.
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
Unqualified with Explanatory paragraph or Modified wording
The first four reports all require an explanatory
paragraph, following the opinion paragraph. Only reports involving other auditors use a
modified wording report. (this report contains three paragraphs and all three paragraphs are modified).
Accounting principles change is observed in the current period compared the previous period.
When a material change occurs the auditor modifies the report by adding explanatory paragraph.
The materiality of a change is evaluated based on the current year effect of the change.
Those changes could affect 1- Consistency 2- Comparability.
1. Lack of consistent application of generally accepted accounting principles
Changes that affect consistency and require an explanatory paragraph
Changes that affect consistency and require an disclosure in footnotes.
1. Significant recurring operating losses or working capital deficiencies.
2. Inability of the company to pay its obligations as they come due.
3. Loss of major customers, the occurrence of uninsured catastrophes.
4. Legal proceedings, legislation that mightjeopardize the entity’s ability to operate.
Substantial Doubt AboutGoing Concern
The auditor must be satisfied and must state
and explain, in a separate paragraph or paragraphs in the audit report, that adhering to the principle would have produced a misleading result in that situation.
Auditor Agrees with a Departurefrom a Promulgated Principle
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.
A. The existence of significant related party transactions.B. Important events occurring subsequent to the balance
sheet date.C. A description of accounting matters affecting the
comparability of the financial statements with those of previous years.
D. Material uncertainties disclosed in the footnotes.
Emphasis of a Matter
1. Make no reference in the audit reportA.The auditor audited an immaterial portion of the statements.B.The other auditor is well known or closely supervised by the principal auditor.C.The principal auditor has thoroughly reviewed the other auditor’s work.
Reports Involving Other Auditors
2. Make reference in the report(modified wording report).Also called shared opinion.A.When it is impractical to review the work of the other auditor.B.The portion of financial statements audited by the other CPA is material.Introductory paragraph discusses the shared responsibility. And the other auditor is referred to in the in the scope and opinion paragraphs.
Reports Involving Other Auditors
3. Qualify the opinionQualified or disclaimer (depending on materiality ) if the auditor is not willing to assume any responsibility for the work of the other auditor.
Reports Involving Other Auditors
Causes of Modified
Wording or Explanatory Paragraph
Example Type of
Report
ConsistencyException
Change from LIFOto FIFO inventory
Unqualified with explanatory paragraph
SubstantialDoubt AboutGoing Concern
Significant recurringlosses
Unqualified withexplanatoryparagraph
Auditor Agrees with a Departure from GAAP
Federal legislation requires the use of a new method of accounting for the automotive industry
Unqualified with explanatoryparagraph
Emphasis of a Matter
A merger with a large company occurred after the balance sheet date
Unqualified with explanatory paragraph
Reports Involving Other Auditors
A chartered accounting firm audited a sub sidiary operating in Canada
Unqualified with modified wording
1. Scope limitation: The auditor has not accumulated sufficient appropriate evidence.
Restrictions could be caused by the client or caused by circumstances.
2. GAAP departureUsing replacement cost for assets rather than historical cost.
3. Auditor is not independent
Departures from AnUnqualified Opinion
MaterialityLevel
(GAAP Departure)Auditor HasKnowledge
(Limitation ofScope)Auditor LacksKnowledge
Immaterial
Unqualified
Unqualified
Material
Qualified(opinion only)
Qualified(scope and opinion)
HighlyMaterial
Adverse
Disclaimer
A qualified opinion report can result from a limitation on the scope of the audit or failure to follow generally accepted accounting principles.
Can be used only when the auditor concludes that the overall financial statements are fairly stated.
The term “except for “ must be used in the opinion paragraph.
Types : Qualification of both the scope and opinion OR the
opinion alone.
Qualified Opinion
1.Qualification of both the scope and opinion: The auditor has been unable to accumulate all of the evidence required GAAS.Used when the scope has been restricted .
2. Qualification of the opinion alone.Financial statements are not stated in accordance with GAAP.
It is used only when the auditor believes that
the overall financial statements are so materially misstated or misleading that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP.
Rarely used .
Adverse Opinion
It is issued when the auditor is unable to be
satisfied that the overall financial statements are fairly presented.
Caused by : 1. severe limitations on the scope of the audit.2. Nonindependent relationship.
Disclaimer of Opinion
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.
Materiality
1-Amounts are immaterial.Is unlikely to affect the decision of a reasonable user.Unqualified.2-Amounts are material but do not overshadow the financial statements as a whole.The misstatement in the financial statement would affect users decision, BUT the overall statements are fairly stated.Qualified opinion ‘except for’.
3-Amounts are so material or so pervasive that overall fairness of the statements is in question.Users are likely to make incorrect decisions if they rely on the overall financial statements.Adverse or disclaimer.
MaterialityLevel
Significance in Terms ofReasonable Users’ Decisions
Type ofOpinion
Immaterial Users’ decisions are unlikelyto be affected.
Unqualified
Material Users’ decisions are likelyto be affected.
Qualified
Highlymaterial
Users’ decisions are likelyto be significantly affected.
Disclaimeror adverse
Materiality Decisions
Report type
1. Dollar amount compared with a base. Common bases : net income/total assets/ current
assets/working capital.2. Measurability. Acquisition of a new company
after balance sheet date.3.Nature of the item. Illegal or fraudulent
transactions.
Materiality Decisions
Report type
Conditions
Example
Types ofOpinions
ScopeRestricted:By Client - - - - - - - - - - - Scope Restricted:By Conditions
Client refusesto allow CPA to examineminutes- - - - - - - -Engagement begins after year-end
• Unqualified• Qualified (scope and opinion)•Disclaimer
Failure toFollow GAAP
Client uses replacement cost for inventory
•Unqualified•Qualified (opinion only)•Adverse
Auditor Lacks Independence
Ownership of stock in client by partner
•Disclaimer
The auditor may issue : Unqualified report,
Qualification of both scope and opinion or a disclaimer of opinion, depending on materiality.
If the auditor can be satisfied with alternative procedures that the information being verified is fairly stated, an unqualified report is appropriate.
If those procedures cannot be performed ??????
Auditor’s scope has Been Restricted
Qualified Scope and Opinion Due to Scope Restriction
Qualifying paragraph preceding the opinion to
describe the restriction.
Disclaimer of Opinion Due to Scope Restriction
“We were engaged” in the introductory
paragraph. Second paragraph added. Scope paragraph is deleted. The opinion paragraph is changed to
disclaimer .
The auditor knows that the statements may be
misleading because they were not prepared in conformity with GAAP.
The client is unable or unwilling to correct the misstatement.
Qualified or adverse opinion depending on materiality.
Statements Are Not in Conformity with GAAP
Qualified Due to Non-GAAP
Disclaimer
The client is unwilling to include the statement
of cash flow. A third paragraph stating the omission and an
“except for” opinion qualification.
Lack of statement of cash flow