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Lecture Notes Ch. 3 (ACCT-422)

Lecture Notes Ch. 3 (ACCT-422) - Chapter 3 Audit Reports...

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Chapter 3: Audit Reports Chapter 3 covers the types of reports/opinions an auditor can render during the audit of a company’s financial statements. As discussed in Chapter 2, the requirement to render a report, and the general contents of the report, are set forth in the 4 standards of reporting under GAAS. When discussing the types of reports available to an auditor, it is appropriate to begin with the standard audit report, or the standard “unqualified” audit report, which is the most commonly issued report. An example of the standard unqualified audit report is shown in Fig. 3-1 on page 47. The report consists of 7 parts: 1. Report title a. The audit report must be titled and include the word “independent” (ie., “Independent Auditor’s Report”). 2. Audit report address a. The report should be addressed to the client company’s board of directors and/or stockholders to give the appearance of independence. 3. Introductory paragraph a. Identifies the type of service provided (“We have audited. . .”). b. Lists the financial statements that were audited (balance sheet, income statement, statement of cash flows) and the dates of financial statements. c. Identifies that the financial statements are the responsibility of management, and the auditor’s responsibility is to express an opinion on the statements. 4. Scope paragraph a. States that the audit was conducted in accordance with U.S. GAAS. b. Expresses that GAAS requires the auditor to plan and perform the audit to obtain “reasonable assurance” that the statements are free from “material” misstatement. An audit provides a high level of assurance (but not a guarantee) that the financial statements are free from material misstatements. c. States that an audit involves examining evidence on a “test basis”; indicating the use of sampling. d. States that the auditor evaluates the accounting principles used and the estimates made by management. 5. Opinion paragraph a. States the auditor’s conclusions about the audit in the form of an opinion (“In our opinion. . .”) b. States whether the financial statements “present fairly” in all “material” respects:
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1) the financial position of the company as of specific date(s) (“balance sheet”), and 2) the results of company’s operations (“income statement”) and cash flows (“statement of cash flows”) for specified period. c. States whether statements are presented in conformity with US GAAP. 6. Name of CPA firm a. Identifies CPA firm who performed audit. 7. Audit report date a. Report is generally dated as of last day of field work. As discussed on page 48, a standard unqualified audit report can only be issued when the following 5 conditions exist: 1. All financial statements are included (balance sheet, income statement, statement of cash flows).
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