2Learning Objective 1 Describe the parts of the standard unqualified audit report.
3Parts of the Standard Unqualified Audit Report 1. Report title2. Audit report address3. Introductory paragraph4. Scope paragraph5. Opinion paragraph6. Name of CPA firm7. Audit report date
4Learning Objective 2 Specify the conditions required to issue the standard unqualifiedaudit report.
5Conditions for Standard Unqualified Audit Report 1. All financial statements are included.2. The three general standards have beenfollowed in all respects on the engagement.3. Sufficient evidence has been accumulatedto conclude that the three standards offield work have been met.
6Conditions for Standard Unqualified Audit Report 4. The financial statements are presented inaccordance with generally acceptedaccounting principles.5. There are no circumstances requiring theaddition of an explanatory paragraph ormodification of the wording of the report.
7Four Categories of Audit Reports 1. Standard unqualified2. Unqualified with explanatory paragraphor modified wording3. Qualified4. Adverse or disclaimer
8Learning Objective 3 Understand combined reporting on financial statements andinternal control over financialreporting under Section 404 ofthe Sarbanes-Oxley Act.
9Sarbanes-Oxley Act This Act requires the auditor of a public company to attest to management’sreport on the effectiveness of internalcontrol over financial reporting.PCAOB Auditing Standard 2 requiresthe audit of internal control to be integratedwith the audit of the financial statements.
10Sarbanes-Oxley Act Combined Report on Financial Statements and Internal Control Over Financial Reporting1. Introductory paragraph2. Scope paragraph3. Definition paragraph4. Inherent limitations paragraph5. Opinion paragraph
11Learning Objective 4 Describe the five circumstances when an unqualified report withan explanatory paragraph ormodified wording is appropriate.
12Unqualified Report with Explanatory Paragraph 1. Lack of consistent application of generallyaccepted accounting principles2. Substantial doubt about going concern3. Auditor agrees with a departure frompromulgated accounting principles4. Emphasis of a matter5. Reports involving other auditors
13Substantial Doubt About Going Concern 1. Significant recurring operating lossesor working capital deficiencies.2. Inability of the company to pay itsobligations as they come due.3. Loss of major customers, the occurrenceof uninsured catastrophes.4. Legal proceedings, legislation that mightjeopardize the entity’s ability to operate.
14Auditor Agrees with a Departure from a Promulgated Principle The auditor must be satisfied and must stateand explain, in a separate paragraph orparagraphs in the audit report, that adheringto the principle would have produced amisleading result in that situation.
15Emphasis of a Matter Under certain circumstances, the CPA may want to emphasize specific matters regardingthe financial statements, even though theCPA intends to express an unqualified opinion.
16Reports Involving Other Auditors 1. Make no reference in the audit report2. Make reference in the report(modified wording report)3. Qualify the opinion
17Learning Objective 5 Identify the types of audit reports that can be issued when anunqualified opinion is not justified.
18Departures from An Unqualified Opinion 1. Scope limitation2. GAAP departure3. Auditor not independent
19Qualified Opinion A qualified opinion report can result from a limitation on the scope of the audit orfailure to follow generally acceptedaccounting principles.
20Adverse Opinion It is used only when the auditor believes that the overall financial statements areso materially misstated or misleading thatthey do not present fairly the financialposition or results of operations and cashflows in conformity with GAAP.
21Disclaimer of Opinion It is issued when the auditor is unable to be satisfied that the overall financialstatements are fairly presented.
22Learning Objective 6 Explain how materiality affects audit reporting decisions.
23Materiality A misstatement in the financial statements can be considered material if knowledge ofthe misstatement would affect a decisionof a reasonable user of the statements.
24Levels of Materiality 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.
25Relationship of Materiality to Type of Opinion LevelSignificance in Terms ofReasonable Users’ DecisionsType ofOpinionImmaterialUsers’ decisions are unlikelyto be affected.UnqualifiedMaterialUsers’ decisions are likelyto be affected.QualifiedHighlymaterialUsers’ decisions are likelyto be significantly affected.Disclaimeror adverse
29Learning Objective 7 Draft appropriately modified audit reports under a varietyof circumstances.
30Discussion of Conditions Requiring Departure Auditor’s scope has been restrictedStatements are not in conformity with GAAPAuditor is not independent
31Learning Objective 8 Determine the appropriate audit report for a given audit situation.
32Auditor’s Decision Process Determine whether any condition existsrequiring a departure from a standardunqualified report.Decide the materiality for each conditionDecide the appropriate type of reportWrite the audit report
33More Than One Condition Requiring a Departure or Modification The auditor is not independent.There is a scope limitation.There is a substantial doubt aboutthe company’s ability to continueas a going concern.There is a deviation in the statements’preparation in accordance to GAAP.
34Number of Paragraphs in the Report Type of ReportStandard unqualifiedUnqualified with explanatory paragraph 4Unqualified shared report with other auditors 3Qualified – opinion onlyQualified – scope and opinionDisclaimer – scope limitationAdverse
35Learning Objective 9 Discuss the impact of e-commerce on audit reporting.
36Impact of E-Commerce on Audit Reporting Most public companies provide access to financialinformation through their home Web page.Under auditing standards, the auditor has noobligation to perform any procedures tocorroborate the other information.Auditing standards note that electronic sitesare not considered “documents.”