1. Audit Reports
Chapter 3

2. Learning Objective 1
Describe the parts of the standard
unqualified audit report.

3. Parts of the Standard Unqualified Audit Report
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

4. Learning Objective 2
Specify the conditions required
to issue the standard unqualified
audit report.

5. Conditions for Standard Unqualified Audit Report
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.

6. Conditions for Standard Unqualified Audit Report
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.

7. Four Categories of Audit Reports
Standard unqualified
Unqualified with
explanatory paragraph
or modified wording
Qualified
Adverse or disclaimer

8. Learning Objective 3
Understand combined reporting
on financial statements and
internal control over financial
reporting under Section 404 of
the Sarbanes-Oxley Act.

9. 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.
PCAOB Auditing standard 2 requires
the audit of internal control to be integrated
with the audit of the financial statements.

10. Sarbanes-Oxley Act Combined 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

11. Learning Objective 4
Describe the five circumstances
when an unqualified report with
an explanatory paragraph or
modified wording is appropriate.

12. Unqualified Report with Explanatory Paragraph
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

13. Consistency Versus Comparability
Changes that affect consistency and require
an explanatory paragraph if they are material:
1. Changes in accounting principles
2. Changes in reporting entities
3. Corrections of errors involving principles

14. Consistency Versus Comparability
Changes that affect comparability but not
consistency:
1. Changes in an estimate
2. Error corrections not involving principles
3. Variations in format and presentation
of financial information
4. Changes because of substantially
different transactions or events

15. Consistency Versus Comparability
The Auditing Standards Board has issued
a proposal to the PCAOB to eliminate
the consistency explanatory paragraph.

16. Substantial Doubt About Going Concern
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 might
jeopardize the entity’s ability to operate

17. Auditor Agrees with a Departure from a Promulgated Principle
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.

18. Emphasis of a Matter 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.

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 5
Identify the types of audit reports
that can be issued when an
unqualified opinion is not justified.

21. Departures from an Unqualified Opinion
1. Scope limitation
2. GAAP departure
3. Auditor not independent

22. Qualified Opinion A qualified opinion report can result from
a limitation on the scope of the audit or
failure to follow generally accepted
accounting principles.

23. Adverse Opinion 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.

24. Disclaimer of Opinion It is issued when the auditor is unable
to be satisfied that the overall financial
statements are fairly presented.

25. Learning Objective 6
Explain how materiality affects
audit reporting decisions.

26. Materiality 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.

27. Levels of Materiality 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.

28. Relationship of Materiality to Type of Opinion
Level
Significance in Terms of
Reasonable Users’ Decisions
Type of
Opinion
Users’ decisions are unlikely
to be affected.
Immaterial
Unqualified
Users’ decisions are likely
to be affected.
Material
Qualified
Users’ decisions are likely
to be significantly affected.
Highly
material
Disclaimer
or adverse

29. Materiality Decisions
Failure to
follow GAAP
Audit report
Unqualified
Qualified
opinion only
Adverse

30. Materiality Decisions
Dollar amount compared with a base
Measurability
Nature of the item

31. Materiality Decisions
Scope
limitation
Audit report
Unqualified
Qualified scope
and opinion
Disclaimer

32. Learning Objective 7
Draft appropriately modified
audit reports under a variety
of 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 8
Determine the appropriate audit
report for a given audit situation.

35. Auditor’s Decision Process
Determine whether any condition exists
requiring a departure from a standard
unqualified 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
Immaterial
Material
Level of Materiality
Extremely
Unqualified
report
Qualified scope, additional
paragraph, and qualified
opinion (except for)
Disclaimer
of opinion

37. Statements Not Prepared in Accordance With GAAP
Level of Materiality
Immaterial
Material
Extremely
Material
Unqualified
report
Additional paragraph
and qualified opinion
(except for)
Adverse
opinion

38. The Auditor Is Not Independent
Level of Materiality
Immaterial
Material
Extremely
Material
Disclaimer of opinion
(regardless of materiality)

39. Number of Paragraphs in the Report
Standard unqualified
Unqualified with explanatory paragraph 4
Unqualified shared report with other auditors 3
Qualified – opinion only
Qualified – scope and opinion
Disclaimer – scope limitation
Adverse
Type of Report

40. Learning Objective 9
Discuss the impact of e-commerce
on audit reporting.

41. Impact of E-Commerce on Audit Reporting
Most public companies provide access to financial
information through their home Web page.
Auditors are not required to read information
contained in electronic sites.
Auditing standards note that electronic sites
are not considered “documents.”

42. End of Chapter 3