An important part of a scope and opinion

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Unformatted text preview: erial, but not highly material, departures from GAAP. 3-19 The three alternative opinions that may be appropriate when the client's financial statements are not in accordance with GAAP are an unqualified opinion, qualified as to opinion only and adverse opinion. Determining which is appropriate depends entirely upon materiality. An unqualified opinion is appropriate if the GAAP departure is immaterial (standard unqualified) or if the auditor agrees with the client's departure from GAAP (unqualified with explanatory paragraph). A qualified opinion is appropriate when the deviation from GAAP is material but not highly material; the adverse opinion is appropriate when the deviation is highly material. 3-20 The AICPA has such strict requirements on audit opinions when the auditor is not independent because it is important that stockholders and other third parties be absolutely assured that the auditor is unbiased throughout the entire engagement. If users develop the attitude that auditors are not independent of management, the value of the audit function will be greatly reduced, if not eliminated. 9-35 3-21 When the auditor discovers more than one condition that requires a departure from or a modification of a standard unqualified report, the report should be modified for each condition. An exception is when one condition neutralizes the other condition. An example would be when the auditor is not independent and there is also a scope limitation. In this situation the lack of independence overshadows the scope limitation. Accordingly, the scope limitation should not be mentioned. 3-22 Given the global nature of the financial markets, investors, both in the U.S. and abroad, are frequently making investments in companies that are located all over the world. While many companies located outside the U. S. already prepare financial statements in accordance with International Financial Reporting Standards (IFRS), financial statements of U.S.-based entities are based on U.S. generally accepted accounting principles, Differences in the basis of presentation makes the analysis of U.S. and non-U.S.-based company financial statements difficult. Similarly, differences exist in auditing standards issued across the globe, so the adoption of International Statements on Auditing (ISAs) would mean auditors from around the globe are conducting their audits using the same set of standards. The embrace of IFRS and ISAs will help investors in their analysis of audited financial statements prepared across the globe. Multiple Choice Questions From CPA Examinations 3-23 a. (2) b. (3) c. (3) 3-24 a. (3) b. (4) c. (1) 3-25 a. (2) b. (3) c. (3) Discussion Questions and Problems 3-26 a. b. c. d. "Correctly stated" implies absolute accuracy, whereas the alternative report states that no material misstatements exist. The reference to generally accepted accounting principles specifies rules that were followed in accounting for the transactions to date; whereas "the true economic conditions" does not identify the specific accounting procedures applied. The opinion paragraph is not intended to be a certification or a guarantee of the accuracy and correctness of the financial statements, but rather is intended to be an expression of professional judgment based upon a reasonable audit of the statements and underlying records. The name of the CPA firm rather than that of the individual practitioner should appear on the accountant's report because it is the entire firm that accepts responsibility for the report issued. 9-36 3-26 (continued) e. 7 a. "Our audit was performed to detect material misstatements in the financial statements" is flawed because the purpose of the audit is to determine whether financial statements are fairly stated, not to specifically search for material errors and fraud. It also fails to recognize the audit standards followed by the auditor. "We conducted our audit in accordance with auditing standards generally accepted in the United States of America" identifies the auditor's responsibilities for conduct of the audit, accumulation of evidence and reporting requirements. It is a much broader statement than the alternative clause. It also implies that if the auditor has conducted the audit in accordance with generally accepted auditing standards but does not uncover certain material errors or fraud, the auditor is unlikely to have responsibility for failing to do so. Items that need not be included in the auditor's report are: 1. 2. 3. 4. b. That Optima is presenting comparative financial statements. (Both years' statements will be referred to in the audit report.) Specific description of the change in method of accounting for long-term construction contracts need not be included in the report since it is discussed in the footnotes. But, the auditor's report must state that there is a change in accounting principles and refer to the footnote. The fact that normal receivable confirmation procedures were not...
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This note was uploaded on 02/04/2014 for the course ACCOUNTING 211 taught by Professor Alikapur during the Fall '13 term at American University of Sharjah.

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