Chapter20 - answer - CHAPTER 20 20-1. WRITING THE AUDIT...

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20-1. The purposes of the scope paragraph in the auditor’s report are to inform the financial statement users that the audit was conducted in accordance with generally accepted auditing standards, in general terms what those standards mean, and whether the audit provides a reasonable basis for an opinion. The information in the scope paragraph includes: 1. The auditor followed generally accepted auditing standards. 2. The audit is designed to obtain reasonable assurance about whether the statements are free of material misstatement. 3. Discussion of the audit evidence accumulated. 4. Statement that the auditor believes the evidence accumulated was appropriate for the circumstances to express the opinion presented. 20-2. The purpose of the opinion paragraph is to state the auditor’s conclusions based upon the results of the audit evidence. The most important information in the opinion paragraph includes: 1. The words “in our opinion” which indicate that the conclusions are based on professional judgment. 2. A restatement of the financial statements that have been examined and the dates thereof or a reference to the introductory paragraph. 3. A statement about whether the financial statements were presented fairly and in accordance with generally accepted accounting principles. 20-3. The common definition of materiality as it applies to accounting and, therefore, to audit reporting is: 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. Auditors must have knowledge of the likely uses of their client’s statements and the decisions that are being made. Materiality involves both quantitative and qualitative considerations. In assessing the quantitative importance of a misstatement, it is necessary to relate the peso amount of the CHAPTER 20 WRITING THE AUDIT REPORT
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20-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition error to the financial statements under examination. Qualitative considerations, on the other hand, relate to the causes of the misstatement. An error that may not be material quantitatively, may be material qualitatively. This may occur, for instance, when the misstatement is attributed to an irregularity or an illegal act by the client. 20-4. Materiality for lack of independence in audit reporting is easiest to define. If the auditor lacks independence as defined by the Code of Professional Ethics, it is always considered highly material and therefore a disclaimer of opinion is always necessary. For failure to follow GAAP, there are three levels of materiality: immaterial, material, and highly material. 20-5. The auditor’s opinion may be qualified by scope limitations caused by client restrictions or by limitations resulting from conditions beyond the client’s control. The former occurs when the client will not, for example, permit the auditor to
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Chapter20 - answer - CHAPTER 20 20-1. WRITING THE AUDIT...

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