2 Learning Objective 1Describe the parts of the standardunqualified audit report.
3 Parts 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
4 Learning Objective 2Specify the conditions requiredto issue the standard unqualifiedaudit report.
5 Conditions 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.
6 Conditions 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.
7 Four Categories of Audit Reports Standard unqualifiedUnqualified withexplanatory paragraphor modified wordingQualifiedAdverse or disclaimer
8 Learning Objective 3Understand combined reportingon financial statements andinternal control over financialreporting under Section 404 ofthe Sarbanes-Oxley Act.
9 Sarbanes-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.
10 Sarbanes-Oxley Act Combined Report on Financial Statements and Internal Control Over Financial Reporting1. Introductory paragraph2. Scope paragraph3. Definition paragraph4. Inherent limitations paragraph5. Opinion paragraph
11 Learning Objective 4Describe the five circumstanceswhen an unqualified report withan explanatory paragraph ormodified wording is appropriate.
12 Unqualified 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
13 Consistency Versus Comparability Changes that affect consistency and requirean explanatory paragraph if they are material:1. Changes in accounting principles2. Changes in reporting entities3. Corrections of errors involving principles
14 Consistency Versus Comparability Changes that affect comparability but notconsistency:1. Changes in an estimate2. Error corrections not involving principles3. Variations in format and presentationof financial information4. Changes because of substantiallydifferent transactions or events
15 Consistency Versus Comparability The Auditing Standards Board has issueda proposal to the PCAOB to eliminatethe consistency explanatory paragraph.
16 Substantial Doubt About Going Concern 1. Significant recurring operating lossesor working capital deficiencies2. Inability of the company to pay itsobligations as they come due3. Loss of major customers, the occurrenceof uninsured catastrophes4. Legal proceedings, legislation that mightjeopardize the entity’s ability to operate
17 Auditor 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.
18 Emphasis 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.
19 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.
20 Learning Objective 5Identify the types of audit reportsthat can be issued when anunqualified opinion is not justified.
21 Departures from an Unqualified Opinion 1. Scope limitation2. GAAP departure3. Auditor not independent
22 Qualified Opinion A qualified opinion report can result from a limitation on the scope of the audit orfailure to follow generally acceptedaccounting principles.
23 Adverse 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.
24 Disclaimer of Opinion It is issued when the auditor is unable to be satisfied that the overall financialstatements are fairly presented.
25 Learning Objective 6Explain how materiality affectsaudit reporting decisions.
26 Materiality A misstatement in the financial statements can be considered material if knowledge ofthe misstatement would affect a decisionof a reasonable user of the statements.
27 Levels 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.
28 Relationship of Materiality to Type of Opinion LevelSignificance in Terms ofReasonable Users’ DecisionsType ofOpinionUsers’ decisions are unlikelyto be affected.ImmaterialUnqualifiedUsers’ decisions are likelyto be affected.MaterialQualifiedUsers’ decisions are likelyto be significantly affected.HighlymaterialDisclaimeror adverse
32 Learning Objective 7Draft appropriately modifiedaudit reports under a varietyof circumstances.
33 Discussion of Conditions Requiring Departure Auditor’s scope has been restricted.Statements are not in conformity with GAAP.Auditor is not independent.
34 Learning Objective 8Determine the appropriate auditreport for a given audit situation.
35 Auditor’s Decision Process Determine whether any condition existsrequiring a departure from a standardunqualified report.Decide the materiality for each condition.Decide the appropriate type of report.Write the audit report.
36 Scope Restricted by Client or Other Conditions ImmaterialMaterialLevel of MaterialityExtremelyUnqualifiedreportQualified scope, additionalparagraph, and qualifiedopinion (except for)Disclaimerof opinion
37 Statements Not Prepared in Accordance With GAAP Level of MaterialityImmaterialMaterialExtremelyMaterialUnqualifiedreportAdditional paragraphand qualified opinion(except for)Adverseopinion
38 The Auditor Is Not Independent Level of MaterialityImmaterialMaterialExtremelyMaterialDisclaimer of opinion(regardless of materiality)
39 Number of Paragraphs in the Report Standard unqualifiedUnqualified with explanatory paragraph 4Unqualified shared report with other auditors 3Qualified – opinion onlyQualified – scope and opinionDisclaimer – scope limitationAdverseType of Report
40 Learning Objective 9Discuss the impact of e-commerceon audit reporting.
41 Impact of E-Commerce on Audit Reporting Most public companies provide access to financialinformation through their home Web page.Auditors are not required to read informationcontained in electronic sites.Auditing standards note that electronic sitesare not considered “documents.”