Presentation on theme: "MODERN AUDITING 7th Edition"— Presentation transcript:
1 MODERN AUDITING 7th Edition William C. BoyntonCalifornia Polytechnic State University at San Luis ObispoRaymond N. JohnsonPortland State UniversityWalter G. KellUniversity of MichiganDeveloped by:Dr. Raymond N. Johnson, CPAGregory K. Lowry, MBA, CPAJohn Wiley & Sons, Inc.
2 CHAPTER 2 FINANCIAL STATEMENT AUDITS AND AUDITORS’ RESPONSIBILITIES Fundamentals Underlying Financial Statement AuditsIndependent Auditor RelationshipsAuditing StandardsAssurance Provided by an AuditThe Auditor’s ReportTrends Affecting Auditor Responsibilities
3 Relationship Between Accounting and Auditing Figure 2-1
4 Need for Financial Statement Audits Conflict of InterestManagement and Board of DirectorsShareholders and Creditors2. Consequence3. Complexity4. Remoteness
5 Economic Benefits of an Audit 1. Access to Capital Markets2. Lower Cost of Capital3. Deterrent to Inefficiency and Fraud4. Control and Operational Improvements
6 Limitations of a Financial Statement Audit Following are 2 important economic limits:1. Reasonable Cost2. Reasonable Length of Time
7 Limitations of a Financial Statement Audit Following are 2 important limitations associated with the established accounting framework:1. Alternative Accounting Principles2. Accounting Estimates
8 Independent Auditor Relationships ManagementAssumption of management honestyNeed for professional skepticism2. Board of Directors and Audit Committee3. Internal AuditorsNot a substitute for independent auditor’s work4. Stockholders (and other users)
9 Generally Accepted Auditing Standards Figure 2-2 General Standards1. The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor.2. In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors.3. Due professional care is to be exercised in the performance of the audit and the preparation of the report.
10 Generally Accepted Auditing Standards Figure 2-2 Standards of Field Work1. The work is to be adequately planned, and assistants, if any, are to be properly supervised.2. A sufficient understanding of the internal control structure is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed.3. Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.
11 Generally Accepted Auditing Standards Figure 2-2 Standards of Reporting1. The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles.2. The report shall identify those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.3. Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report.
12 Generally Accepted Auditing Standards Figure 2-2 Standards of Reporting4. The report shall either contain an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. When an overall opinion cannot be expressed, the reasons therefore should be stated. In all cases where an auditor’s name is associated with financial statements, the report should contain a clear-cut indication of the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking.
13 Assurance Provided by an Audit 1. Auditor Independence2. Reasonable Assurance3. Definition of FraudFraudulent financial reportingMisappropriation of assets4. Responsibility to Detect FraudAssess risk of fraudDesign plan to provide reasonable assurance that fraud does not exist that is material to the financial statements based on risk assessment.Use due professional care in implementing audit plan
14 Assurance Provided by an Audit 5. Responsibility to Report FraudEmployee fraudManagement fraudConfidential client information6. Illegal Client ActsDirect and materialIndirect7. Assurance About a Going Concern
15 Auditor’s Standard Report Basic Elements of Auditor’s Standard ReportTitle AddresseeIntroductory ParagraphScope ParagraphOpinion ParagraphFirm’s SignatureDate
16 Introductory Paragraph We have audited the accompanying consolidated balance sheets of Intel Corporation as of December 25, 1999 and December 26, 1998, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended December 25, These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits.
17 Scope ParagraphWe conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosure in the financial statements. An audit also includes assessing the accounting principles used and significant accounting estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
18 Opinion ParagraphIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Intel Corporation at December 25, 1999 and December 26, 1998, and the consolidated results of operations and its cash flows for each of the three years in the period ended December 25, 1999, in conformity with accounting principles generally accepted in the United States.
19 Types of Auditors’ Reports and Circumstances Figure 2-4
20 Types of Auditors’ Reports and Circumstances Figure 2-4
21 Standard Report with Explanatory Language Reason for OpinionThe financial statements present fairly in all material respectsUsed withChanges in accounting principlesMaterial uncertaintiesGoing concern mattersEmphasis of a matterForm of Opinion4th paragraph to explain issue and refer to note in the financial statements
22 Qualified Opinion Reason for Opinion Form of Opinion Material departure from GAAPMaterial scope limitationExcept for the qualification, the financial statements present fairly.Form of Opinion3rd paragraph before the opinion to explain the exception its impact on the financial statements4th paragraph is opinion paragraph. “In our opinion, except for ….
23 Adverse Opinion Reason for Opinion Form of Opinion Departures from GAAP are so material and so pervasive to the financial statement that the auditor concludes that the financial statement do not present fairly …Form of Opinion3rd paragraph before the opinion to explain the exception its impact on the financial statements4th paragraph is opinion paragraph. “In our opinion,… the financial statements referred to above do not present fairly….
24 Disclaimer of Opinion Reason for Opinion Form of Opinion The auditor is unable to obtain sufficient evidence to form an opinion on the financial statementsCommon with client imposed scope restrictionsForm of OpinionOmit 2nd scope paragraph3rd paragraph before the opinion to explain the reason for the disclaimer of opinion4th paragraph is opinion paragraph. “… the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on the financial statements.
26 Trends Affecting Auditor Responsibilities 1. Information Technologies2. Assurance Services
27 CHAPTER 2 FINANCIAL STATEMENT AUDITS AND AUDITORS’ RESPONSIBILITIES
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