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Similar to Audit Reports Arens11e_ab.az.Chapter03.ppt (20)
Audit Reports Arens11e_ab.az.Chapter03.ppt
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Audit Reports
Chapter 3
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Learning Objective 1
Describe the parts of the standard
unqualified audit report.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Learning Objective 2
Specify the conditions required
to issue the standard unqualified
audit report.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Four Categories of Audit Reports
Standard unqualified
Qualified
Unqualified with
explanatory paragraph
or modified wording
Adverse or disclaimer
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Learning Objective 3
Understand combined reporting
on financial statements and
internal control over financial
reporting under Section 404 of
the Sarbanes-Oxley Act.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Learning Objective 4
Describe the five circumstances
when an unqualified report with
an explanatory paragraph or
modified wording is appropriate.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Consistency Versus
Comparability
The Auditing Standards Board has issued
a proposal to the PCAOB to eliminate
the consistency explanatory paragraph.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Reports Involving Other Auditors
1. Make no reference in the audit report.
3. Qualify the opinion.
2. Make reference in the report
(modified wording report).
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Learning Objective 5
Identify the types of audit reports
that can be issued when an
unqualified opinion is not justified.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Departures from an
Unqualified Opinion
1. Scope limitation
2. GAAP departure
3. Auditor not independent
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Disclaimer of Opinion
It is issued when the auditor is unable
to be satisfied that the overall financial
statements are fairly presented.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Learning Objective 6
Explain how materiality affects
audit reporting decisions.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Relationship of Materiality to
Type of Opinion
Materiality
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
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Materiality Decisions
Failure to
follow GAAP
Audit report
Unqualified
Qualified
opinion only
Adverse
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Materiality Decisions
Dollar amount compared with a base
Measurability
Nature of the item
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Materiality Decisions
Scope
limitation
Audit report
Unqualified
Qualified scope
and opinion
Disclaimer
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Learning Objective 7
Draft appropriately modified
audit reports under a variety
of circumstances.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Discussion of Conditions
Requiring Departure
Auditor’s scope has been restricted.
Statements are not in conformity with GAAP.
Auditor is not independent.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Learning Objective 8
Determine the appropriate audit
report for a given audit situation.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Scope Restricted by Client
or Other Conditions
Immaterial Material
Level of Materiality
Extremely
Material
Unqualified
report
Qualified scope, additional
paragraph, and qualified
opinion (except for)
Disclaimer
of opinion
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Statements Not Prepared in
Accordance With GAAP
Immaterial Material
Level of Materiality
Extremely
Material
Unqualified
report
Additional paragraph
and qualified opinion
(except for)
Adverse
opinion
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
The Auditor Is Not Independent
Immaterial Material
Level of Materiality
Extremely
Material
Disclaimer of opinion
(regardless of materiality)
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Number of Paragraphs
in the Report
Standard unqualified 3
Unqualified with explanatory paragraph 4
Unqualified shared report with other auditors 3
Qualified – opinion only 4
Qualified – scope and opinion 4
Disclaimer – scope limitation 3
Adverse 4
Type of Report
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Learning Objective 9
Discuss the impact of e-commerce
on audit reporting.
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Impact of E-Commerce on
Audit Reporting
Auditors are not required to read information
contained in electronic sites.
Most public companies provide access to financial
information through their home Web page.
Auditing standards note that electronic sites
are not considered “documents.”
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©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
End of Chapter 3