Chapter Chapter33 Audit AuditReports Reports Copyright © 2014 Pearson Education Describe the parts of the standard unqualified audit report for non-public entities under AICPA auditing standards. Specify the conditions required to issue the standard unqualified audit report. Understand reporting on financial statements and internal control under PCAOB auditing standards. 3-2 Copyright © 2014 Pearson Education Describe the five circumstances when an unqualified report with an emphasis-ofmatter 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 audit reporting decisions. 3-3 Copyright © 2014 Pearson Education Draft appropriately modified audit reports under a variety of circumstances. Determine the appropriate audit report for a given audit situation. Understand use of international accounting and auditing standards by U.S. companies. 3-4 Copyright © 2014 Pearson Education 1 Describe the parts of the standard unqualified audit report for non-public entities under AICPA auditing standards. 3-5 Copyright © 2014 Pearson Education 1. Report title 2. Audit report address 3. Introductory paragraph 4. Management’s Responsibility 5. Auditor’s Responsibility 6. Opinion Paragraph 7. Name and Address of CPA firm 8. Audit report date 3-6 Copyright © 2014 Pearson Education 3-7 Copyright © 2014 Pearson Education 2 Specify the conditions required to issue the standard unqualified audit report. 3-8 Copyright © 2014 Pearson Education 1. Includes all financial statements 2. Sufficient appropriate evidence 3. Financial statements present in accordance with U.S.GAAP 4. No circumstances require an explanatory paragraph or report modification 3-9 Copyright © 2014 Pearson Education 3-10 Copyright © 2014 Pearson Education 3 Understand reporting on financial statements and internal control under PCAOB auditing standards. 3-11 Copyright © 2014 Pearson Education 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 with the audit of the financial statements. 3-12 Copyright © 2014 Pearson Education SarbanesOxley Sec.404 2010 Legislation 3-13 Accelerated Filer Non-accelerated Filer ICFR Effectiveness Audits Permanent Exemption Copyright © 2014 Pearson Education Separate Report on Financial Statements and Internal Control Over Financial Reporting 1. Introductory paragraph 2. Scope paragraph 3. Definition paragraph 4. Inherent limitations paragraph 5. Opinion paragraph 6. Cross-Reference Paragraph 3-14 Copyright © 2014 Pearson Education 3-15 Copyright © 2014 Pearson Education 4 Describe the five circumstances when an unqualified report with an emphasis-ofmatter explanatory paragraph or modified wording is appropriate. 3-16 Copyright © 2014 Pearson Education 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 3-17 Copyright © 2014 Pearson Education 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 3-18 Copyright © 2014 Pearson Education 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 might jeopardize the entity’s ability to operate. 3-19 Copyright © 2014 Pearson Education Departure may not require a qualified or adverse opinion The auditor must separately explain in the audit report that adhering to the principle would have produced a misleading result. Circumstances are unusual 3-20 Copyright © 2014 Pearson Education 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 Financial Statement Comparability 3-21 Related Party Transactions Material Uncertainties Copyright © 2014 Pearson Education 1. Make no reference in the audit report 2. Make reference in the report (modified wording report) 3. Qualify the opinion 22 Copyright © 2014 Pearson Education 3-23 Copyright © 2014 Pearson Education 5 Identify the types of audit reports that can be issued when an unqualified opinion is not justified. 3-24 Copyright © 2014 Pearson Education 1. Scope limitation 2. GAAP departure 3. Auditor not independent 3-25 Copyright © 2014 Pearson Education A qualified opinion report can result from a limitation on the scope of the audit or failure to follow generally accepted accounting principles. 3-26 Copyright © 2014 Pearson Education 3-27 Copyright © 2014 Pearson Education Auditor believes the financial statements are not presented fairly in conformity with GAAP. 3-28 Copyright © 2014 Pearson Education 3-29 Copyright © 2014 Pearson Education Issued when the auditor is unable to be satisfied that the overall financial statements are fairly presented. Can arise only from a lack of knowledge by the auditor. 3-30 Copyright © 2014 Pearson Education 3-31 Copyright © 2014 Pearson Education 6 Explain how materiality affects audit reporting decisions. 3-32 Copyright © 2014 Pearson Education 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. 3-33 Copyright © 2014 Pearson Education 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. 3-34 Copyright © 2014 Pearson Education Failure to follow GAAP Audit report Unqualified 3-35 Qualified opinion only Adverse Copyright © 2014 Pearson Education 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 3-36 Copyright © 2014 Pearson Education Dollar amount compared with a base Measurability Nature of the item 3-37 Copyright © 2014 Pearson Education Scope limitation Audit report Unqualified 3-38 Qualified scope and opinion Disclaimer Copyright © 2014 Pearson Education 7 Draft appropriately modified audit reports under a variety of circumstances. 3-39 Copyright © 2014 Pearson Education Auditor’s scope has been restricted Statements are not in conformity with GAAP Auditor is not independent 3-40 Copyright © 2014 Pearson Education 8 Determine the appropriate audit report for a given audit situation. 3-41 Copyright © 2014 Pearson Education Determine whether any conditions exists requiring a departure from a standard unqualified report. Decide Materiality 3-42 Decide appropriate type of report Write Audit Report Copyright © 2014 Pearson Education The auditor is not independent. There is a scope limitation. Going concern uncertainty exists. Statements are not prepared in accordance with GAAP. 3-43 Copyright © 2014 Pearson Education 9 Understand proposed use of international accounting and auditing standards by U.S. companies. 3-44 Copyright © 2014 Pearson Education 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 Workplan 3-45 If plan is approved? 2015 Implementation of IFRS into U.S. Copyright © 2014 Pearson Education 3-46 Copyright © 2014 Pearson Education Copyright All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. 3-47 Copyright © 2014 Pearson Education
