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Unformatted text preview: atements were presented fairly and
in accordance with generally accepted accounting principles.
The auditor's report should be dated February 17, 2010, the date on which the
auditor concluded that he or she had sufficient appropriate evidence to support the auditor’s
3-6 An unqualified report may be issued under the following five circumstances:
1. All statements—balance sheet, income statement, statement of retained
earnings, and statement of cash flows—are included in the financial
2. The three general standards have been followed in all respects on the
3. Sufficient evidence has been accumulated and the auditor has conducted the
engagement in a manner that enables him or her to conclude that the three
standards of field work have been met.
9-30 4. The financial statements are presented in accordance with generally accepted
accounting principles. This also means that adequate disclosures have
been included in the footnotes and other parts of the financial statements.
5. There are no circumstances requiring the addition of an explanatory paragraph
or modification of the wording of the report. 9-31 3-7
The introductory, scope and opinion paragraphs are modified to include reference
to management’s report on internal control over financial reporting, and the scope of the
auditor’s work and opinion on internal control over financial reporting. The introductory
and opinion paragraphs also refer to the framework used to evaluate internal control. Two
additional paragraphs are added between the scope and opinion paragraphs that define
internal control and describe the inherent limitations of internal control.
When adherence to generally accepted accounting principles would result in
misleading financial statements there should be a complete explanation in a separate
paragraph. The separate paragraph should fully explain the departure and the reason why
generally accepted accounting principles would have resulted in misleading
statements. The opinion should be unqualified, but it should refer to the separate
paragraph during the portion of the opinion in which generally accepted accounting
principles are mentioned.
An unqualified report with an explanatory paragraph or modified wording is the
same as a standard unqualified report except that the auditor believes it is necessary to
provide additional information about the audit or the financial statements. For a
qualified report, either there is a scope limitation (condition 1) or a failure to follow
generally accepted accounting principles (condition 2). Under either condition, the
auditor concludes that the overall financial statements are fairly presented.
Two examples of an unqualified report with an explanatory paragraph or
modified wording are:
2. The entity changed from one generally accepted accounting principle to
another generally accepted accounting principle.
A shared report involving the use of other auditors. 3-10 When another CPA has performed part of the audit, the primary auditor issues one
of the following types of reports based on the circumstances.
1. 2. 3. No reference is made to the other auditor. This will occur if the other
auditor audited an immaterial portion of the statement, the other auditor
is known or closely supervised, or if the principal auditor has thoroughly
reviewed the other auditor's work.
Issue a shared opinion in which reference is made to the other auditor.
This type of report is issued when it is impractical to review the work of
the other auditor or when a portion of the financial statements audited
by the other CPA is material in relation to the total.
The report may be qualified if the principal auditor is not willing to
assume any responsibility for the work of the other auditor. A
disclaimer may be issued if the segment audited by the other CPA is
highly material. 9-32 3-11 Even though the prior year statements have been restated to enhance
comparability, a separate explanatory paragraph is required to explain the change in
generally accepted accounting principles in the first year in which the change took place.
3-12 Changes that affect the consistency of the financial statements may involve any
of the following:
a. Change in accounting principle
b. Change in reporting entity
c. Corrections of errors involving accounting principles.
An example of a change that affects consistency would be a change in the method
of computing depreciation from straight line to an accelerated method. A separate
explanatory paragraph is required if the amounts are material.
Comparability refers to items such as changes in estimates, presentation, and
events rather than changes in accounting principles. For example, a change in the
estimated life of a depreciable asset will affect the comparability of the statements. In that
case, no explanatory paragraph for lack of consistency is needed, but the information may
require disclosure in the statements.
3-13 The three conditions requiring a departure from an unqualified opinion are:
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- Fall '13