jzanzig_Auditing Ch 3 Lecture

jzanzig_Auditing Ch 3 Lecture - Chapter 3 Audit Reports...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 3 Audit Reports Presentation Outline I. The Standard Audit Report II. Section 404 of the Sarbanes-Oxley Act III. Conditions Requiring an Explanatory Conditions Paragraph or Modified Report Wording Paragraph IV. Other Opinion Possibilities V. Scope Limitation Scope VI. GAAP Departure VII. Lack of Independence VIII. Other Information Other I. The Standard Audit Report A. The Seven Parts of the Auditor’s Standard The Report Report B. Five Conditions for the Standard Report A. The Seven Parts of the Auditor’s Standard Report Report title – Must include the word independent. Audit report address – Customary to address to board of directors and stockholders to demonstrate independence. Introductory paragraph – States that an audit has been performed; identifies the financial statements and appropriate dates; states that the financial statements are the responsibility of the entity’s management. Scope paragraph – States that auditor followed GAAS or PCAOB standards and indicates that the audit only provides reasonable assurance. Opinion paragraph – Communicates the results of the audit. Name of CPA firm or practitioner. Audit report date showing last day of field work. Auditor is held accountable only through this date B. Five Conditions for the Standard Report All 4 of the basic financial statements All are included. are Three General Standards have been Three followed. followed. Sufficient evidence has been Sufficient accumulated and three Field Work Standards have been followed. Standards Financial Statements are in accordance Financial with U.S. GAAP. with No circumstances require an No explanatory paragraph or modified wording of the report. wording II. Section 404 of the SarbanesOxley Act A. PCAOB Auditing Standard 2 B. The Time Period Covered C. The Audit Report A. PCAOB Auditing Standard 2 Section 404 requires the auditor of a public Section company to attest to management’s report on the effectiveness of internal control over financial reporting. financial PCOAB Auditing Standard 2 requires the PCOAB audit of internal control to be integrated with the audit of the financial statements. with B. The Time Period Covered Although the audit Although opinion on the financial statements addresses multiple reporting periods, management’s assertion about the effectiveness of internal control is as of the end of the most recent fiscal year. recent C. The Audit Report The auditor may choose to The issue separate reports or a combined report, such as the one shown in Figure 3-3 on page 50. 3-3 The combined report on The financial statements and internal control over financial reporting addresses both the financial statements and management’s report on internal control over financial reporting. financial III. Conditions Requiring an Explanatory Paragraph or Modified Report Wording A. Lack of Consistency B. Going Concern Problem C. Auditor Agrees with a Departure from Auditor GAAP GAAP D. Emphasis of a Matter E. Reports Involving Other Auditors Note: The first four reports above require an explanatory paragraph following the opinion paragraph. There is no change in the wording of the three standard paragraphs. For reports involving other auditors, the three standard report paragraphs are modified but there is not a separate explanatory paragraph. A. Lack of Consistency The following affect consistency and require an explanatory paragraph when material (See Fig. 3-4 on page 51): Change in accounting principles (i.e., FIFO to LIFO) Change in reporting entities (i.e., change is companies in combined financial statements) Corrections of changing from unacceptable to acceptable accounting principles. The following affect comparability but not consistency. If material these items may require disclosure, but not a explanatory paragraph: Change in accounting estimate (i.e., asset’s depreciable life) Error correction not involving accounting (i.e., math error) Variations in format and presentation. Changes due to substantially different events such as the sale of a subsidiary. B. Going Concern Problem SAS No. 59 requires auditor to evaluate going concern for a reasonable time (not over one year from date of financial statements). statements). Include an explanatory Include paragraph that includes the phrases “substantial doubt” and “going concern.” See Figure 3-5 on page 53. Figure Note: SAS No. 59 permits but does not require a disclaimer of opinion when there is substantial doubt about ability to continue as a going concern. C. Auditor Agrees with a Departure from GAAP An auditor may issue an An unqualified opinion when a departure from GAAP is necessary to prevent financials from being misleading. being Modify report wording Modify by adding an explanatory paragraph. explanatory D. Emphasis of A Matter The auditor may add an The explanatory paragraph to emphasize items such as: emphasize Significant related party Significant transactions transactions Important subsequent Important events events Factors affecting Factors comparability of financial statements. statements. Material uncertainties Material disclosed in the notes to the financial statements. the E. Reports Involving Other Auditors Assume Responsibility If you accept responsibility for the other auditor’s work (and it If is unqualified) the standard report may be issued without modification. modification. If the other auditors report is qualified and the qualification is If material to the financial statements taken as a whole, you must qualify your report. qualify Shared Responsibility The opinion is unaffected (i.e. can be unqualified). Modify all three paragraphs of the standard report (See Figure Modify 3-6 on page 54). 3-6 Assume No Responsibility A qualified opinion or disclaimer, depending on materiality, is qualified required. required. IV. Other Opinion Possibilities A. Qualified Opinion B. Adverse Opinion C. Disclaimer of Opinion A. Qualified Opinion Use the term “except for” in Use the opinion paragraph to exclude a specific item from the auditor’s opinion. the Qualified opinion is Qualified appropriate when there is a: appropriate Material scope limitation Material (qualified scope, additional paragraph, and qualified opinion) opinion) Material departure from Material GAAP (additional paragraph, qualified opinion) opinion) Note: Materiality is defined in Table 3-1 on page 57. An auditor may have to play the bad guy to protect the public B. Adverse Opinion Financials as a whole Financials are not fairly presented. Used when auditor Used feels that financial statements contain contain a highly material departure from GAAP. from Note: Materiality is defined in Table 3-1 on page 57. C. Disclaimer of Opinion Auditor can not Auditor express an opinion. express Disclaimer of opinion Disclaimer is appropriate when: is There is a highly There material scope limitation. limitation. There is a lack of There independence independence Note: Auditor has option to issue a disclaimer of opinion for a going concern problem. Note: Materiality is defined in Table 3-1 on page 57. V. Scope Limitation A. Scope Limitation Defined B. Effect of Scope Limitation on Audit Effect Report – Qualified Opinion Report C. Effect of Scope Limitation on Audit Effect Report – Disclaimer of Opinion Report A. Scope Limitation Defined An unqualified opinion can only be An issued for an immaterial scope limitation. limitation. If the scope is restricted by the If client, the auditor will usually disclaim an opinion. disclaim If scope is restricted by other If conditions: conditions: Qualified opinion if statements Qualified “as a whole” are not affected. “as Disclaimer if scope limitation Disclaimer affects numerous financial statement items. statement Note: Materiality is defined in Table 3-1 on page 57. B. Effect of Scope Limitation on Audit Report – Qualified Opinion Introductory paragraph is same as in standard Introductory report. report. Scope paragraph identifies limitation by adding Scope “except as discussed in the following paragraph.” “except A separate explanatory paragraph is added to the separate report to describe the scope limitation. Opinion paragraph wording is changed to express Opinion an “except for” qualified opinion. an Note: See Figure 3-7 on page 59. C. Effect of Scope Limitation on Audit Report – Disclaimer of Opinion Introductory paragraph modified to say “We were Introductory engaged to audit…” rather than “We have audited …”. …”. Scope paragraph is omitted. A separate explanatory paragraph is added to the separate report to describe the scope limitation. Opinion paragraph wording is changed to disclaim Opinion an opinion. an Note: See Figure 3-8 on page 60. VI. GAAP Departure A. GAAP Departure Defined B. Effect of GAAP Departure on Audit Effect Report – Qualified Opinion Report C. Effect of Scope Limitation on Audit Effect Report – Adverse Opinion Report A. GAAP Departure Defined An unqualified opinion can An only be issued if GAAP departure is immaterial. departure If financial statements “taken If as a whole” are not misleading, then a qualified opinion can be issued. Required for omission of statement of cash flows (SAS 58). 58). If financial statements “taken If as a whole” are misleading, then an adverse opinion must be issued. See Nature of Item on page 58. on How misleading are the financial statements? Note: Materiality is defined in Table 3-1 on page 57. B. Effect of GAAP Departure on Audit Report – Qualified Opinion Introductory paragraph is same as in standard Introductory report. report. Scope paragraph is the same as the standard Scope report. report. A separate explanatory paragraph is added to the separate report to describe the GAAP departure and its effect on the financial statements. Opinion paragraph wording is changed to express Opinion an “except for” qualified opinion. an Note: See Figures 3-9 and 3-11 on pages 60-61. C. Effect of GAAP Departure on Audit Report – Adverse Opinion Introductory paragraph is same as in standard Introductory report. report. Scope paragraph is the same as the standard Scope report. report. Separate explanatory paragraphs are added to the Separate report to describe the GAAP departures and their effects on the financial statements. Opinion paragraph wording is changed to express Opinion an adverse opinion . an Note: See Figure 3-10 on page 61. VII. Lack of Independence An accountant who is An not independent is required to issue a special disclaimer of opinion. opinion. One paragraph report One with no title (See Figure 3-12 on page 61). 61). No opinion is No expressed. expressed. VIII. Other Information In regard to other information In included with the audited financial statements in the annual report, the auditor is required to read the information to ensure that it is not materially inconsistent with the audited financial statement. statement. Auditors are not currently Auditors responsible for information on a company’s web site, even if it includes audited financial statements. statements. Summary Type of Report Condition Limit on audit Limit scope scope Departure Departure from GAAP from Lack of Lack Independence Independence Unqualified Immaterial Immaterial Qualified Disclaimer Material Adverse Highly Highly Material Material Highly Highly Material Material Material Only Only report report ...
View Full Document

Ask a homework question - tutors are online