Audit Chapter 3 Terms and Notes: Audit Reports

What is THE MOST significant difference between the two reports (AICPA and PCAOB)?

The most significant difference in the reports is that the PCAOB now requires a discussion of critical audit matters. While the AICPA report allows a discussion of key audit matters, the discussion of critical audit matters, if any, is required by the PCAOB. One additional difference is that the PCAOB now requires the disclosure of the tenure of the auditor-client relationship.

Describe the information included in the opinion and basis for opinion sections in a separate audit report on the effectiveness of internal control over financial reporting.

The opinion and basis for opinion sections 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 basis for opinion paragraphs also refer to the framework used to evaluate internal control.

A careful reading of an unmodified opinion audit report indicates several important phrases. Explain why each of the following phrases or clauses is used rather than the alternative provided: "The accompanying financial statements present fairly, in all material respects, the financial position" rather than "The financial statements mentioned above are correctly stated."

"Correctly stated" implies absolute accuracy, whereas the alternativereport states that no material misstatements exist.

1. The report is usually addressed to the company,its stockholders, or the board of directors.

Audit Report Address

The appropriate date for the report is the one on which the auditor completed the auditing procedures needed to obtain sufficient appropriateevidence to support the opinion.

Audit Report Date

Those matters during the audit of a public company that involved difficult, subjective, or complex auditor judgments or that posed difficulty to the auditor in obtaining sufficient appropriate evidence or in forming the opinion on the financial statements.

Critical Audit Matters (CAMs)

What is this an example of? - Material physical inventories not observed and the inventory cannot be verified through other procedures. - Lack of independence by the auditor.

Disclaimer

states that the auditor has been unable to satisfy himself or herself as to whether or not the overall financial statements are fairly presented because of a significant limitation of the scope of the audit, or a non-independent relationship under the AICPA Code of Professional Conductbetween the auditor and the client.

Disclaimer of Opinion

is issued when the auditor has been unable to satisfy himself or herselfthat the overall financial statements are fairly presented.

Disclaimer of opinion

What are the benefits of having standard wording?

Having standard wording improves communications for thebenefit of users of the auditor's report. When there are departures from thestandard wording, users are more likely to recognize and consider situationsrequiring a modification or qualification to the auditor's report or opinion.

Under which of these two will the auditor be most likely to issue a disclaimer of opinion? Explain.

If the scope limitation is caused by the client's restriction, the auditor should be aware that the reason for the restriction might be to deceive theauditor. For this reason, a disclaimer is more likely for client restrictions than for conditions beyond anyone's control.

Those matters that, in the auditor's professional judgement, were of most significance in the audit of the financial statements of the current period of a nonpublic entity, and they are selected from matters communicated with those charged with governance. - used by AICPA

Key Audit Matters (KAMs)

A misstatement in the financial statements, knowledge of which would affect a decision of a reasonable user of the statements

Material Misstatement

Explain how materiality differs for failure to follow GAAP and for lack of independence.

Materiality for lack of independence in audit reporting is easiest to define. If the auditor lacks independence as defined by the AICPA Code of Professional Conduct, it is always considered highly material and therefore a disclaimer of opinion is always necessary. That is, either the CPA is independent or notindependent. For failure to follow GAAP, there are three levels of materiality: immaterial, material, and highly material.

A careful reading of an unmodified opinion audit report indicates several important phrases. Explain why each of the following phrases or clauses is used rather than the alternative provided: "In accordance with accounting principles generally accepted in the United States of America" rather than "are properly stated to represent the true economic conditions."

The reference to generally accepted accounting principles specifiesrules that were followed in accounting for the transactions to date, whereas "the true economic conditions" does not identify thespecific accounting procedures applied.

One example is when the client will not permit the auditor to confirm material receivables. Another example is when the engagement is not agreed upon until after the client's year-end when it may be impossible to physically observe inventories.

The scope of the audit has been restricted.

The name identifies the CPA firm or practitioner who performed the audit, and the city and statewhere the auditor is located.

Signature and Address of CPA Firm

refers to the uniform wording typically used in audit reports

Standard

the report a CPA issues when all auditing conditions have been met, no significant misstatements have been discovered and left uncorrected, and it is the auditor's opinion that the financial statements are fairly stated in accordance with the applicable financial reporting framework.

Standard Unmodified Opinion Audit Report

What is included in the first paragraph of the Auditor's Responsibility section?

The first paragraph indicates thatthe auditor's objectives are to obtain reasonable assurance about whether the financial statements are free of material misstatement whether due to error or fraud, and to issue an opinion. This paragraph defines reasonable assurance, and highlights that the risk of failing to detect a material misstatement due to fraud is greater than the risk due to an error.

How does the auditor's opinion differ between scope limitations caused by client restrictions and limitations resulting from conditions beyond the client's control?

The former occurs when the client will not, for example, permit theauditor to confirm material receivables or physically observe inventories. The latter may occur when the engagement is not agreed upon until after the client's year-end when it may not be possible to physically observe inventories orconfirm receivables.

A careful reading of an unmodified opinion audit report indicates several important phrases. Explain why each of the following phrases or clauses is used rather than the alternative provided: "Brown & Phillips, CPAs (firm name)," rather than "James E. Brown, CPA (individual partner's name)."

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.

Which of the following is not a required element of a standard unmodified opinion audit report issued in accordance with AICPA auditing standards?

The name of the engagement partner

A careful reading of an unmodified opinion audit report indicates several important phrases. Explain why each of the following phrases or clauses is used rather than the alternative provided: "In our opinion, the financial statements present fairly" rather than "The financial statements present fairly."

The opinion paragraph is not intended to be a certification or aguarantee of the accuracy and correctness of the financial statements,but rather it is intended to be an expression of professional judgmentbased upon a reasonable audit of the statements and underlyingrecords.

What are the purposes of the opinion section in the auditor's report?

The opinion section appears first in the report due to its importance. The purpose of the opinion section is to state the auditor's conclusions based upon the results of the audit evidence.

What is this an example of? A highly material departure from GAAP.

Adverse

___________ section of thereport includes three paragraphs and must include the heading "Auditor's Responsibilities for the Audit of the Financial Statements".

Auditor's responsibility

What is the most significant change to the auditor reporting standard for public companies is the requirement to disclose _________________.

Critical Audit Matters (CAMS)

The client changed from FIFO to LIFO inventory valuation in the current year and reflected this change in their financial statements. How should this be reflected in the auditor's report?

Even though this change has been reflected in the financial statements, a separate explanatory paragraph is required to explain the change in generally accepted accounting principles in the first year in which the changetook place.

A misstatement that affect multiple elements of the financial statements, or an account that is a significant portion of the financial statements, or a disclosure that is fundamental to understanding the financial statements.

Pervasive misstatement

How do the eight parts of a standard unmodified opinion audit report for nonpublic companies differ from those found in a qualified opinion report? 7.) Signature and Address of CPA firm

Same as standard unmodified opinion report.

An example is when the auditorowns stock in the client's business.

The auditor is not independent.

How do the eight parts of a standard unmodified opinion audit report for nonpublic companies differ from those found in a qualified opinion report? 3.) Opinion Section

The introductory paragraph in the opinion section is the same as in the standard unmodified opinion report. The second paragraph containing the opinion is modified to include the term except for in the opinion paragraph.

What is included in the third paragraph of the Auditor's Responsibility section?

The third paragraph indicates that the auditor is required to communicate certain matters to those charged with governance, such as the planned scope and timing of the audit, significant findings, and internal control matters.

What is the nature of the additional paragraphs in the audit report?

Two additional paragraphs are added below the basis for opinion paragraphs that define internal control and describe the inherent limitations of internal control. There is also a cross reference paragraph between the opinion and the basis for opinion paragraphs that references the report on the audit of the financial statements.

refers to the fact that the auditor's opinion about the financial statements contains no material exceptions or qualifications

Unmodified Opinion

What's the difference between a disclaimer of opinion and an adverse opinion?

a disclaimer can arise only from a lack of knowledge by the auditor, whereas to express an adverse opinion, the auditor must have knowledge that the financial statements are not fairly stated.

Separate Report on Internal Control Over Financial Reporting

audit report on the effectiveness of internal control over financial reporting required for larger public companies under Section 404 of the Sarbanes - Oxley Act that cross-references the separate audit report on the financial statements.

Reports are essential to audit and assurance engagements because they communicate the ___________.

auditor's findings.

As compared to an unmodified opinion, an opinion qualified due to a material departure from generally accepted accounting principles would

indicate that, except for the problem noted, the financial statements are presented fairly

When is a qualified opinion appropriate?

is appropriate when the deviation from GAAP is material but not highly material; the adverse opinion is appropriate when the deviation ishighly material.

If a principal auditor decides to refer in his or her report to the audit of another auditor, he or she is required to disclose the

portion of the financial statements audited by the other auditor.

Auditors' reports are important to users of financial statements because:

they inform users of the auditor's opinion as to whether or not the financialstatements are fairly stated or whether no conclusion can be made with regard to the fairness of their presentation. Users especially look for any deviation from the wording of the standard unmodified report and the reasons and implications of such deviations.

When the financial statements are fairly stated but the auditor concludes there is substantial doubt whether the client can continue in existence, the auditor should issue a(n)

unmodified opinion with explanatory paragraph.

When should an auditor include an explanatory paragraph in an unmodified opinion audit report?

when the audit is completed with satisfactory results and the financial statements are fairly presented, but the auditor believes it is important to draw the reader's attention to certain matters or the auditor is required to provide additional information.

The following are the most important causes of the addition of an emphasis of matter explanatory paragraph or a modification in the wording of the standard unmodified opinion audit report:

· Lack of consistent application of generally accepted accounting principles · Substantial doubt about going concern · Auditor agrees with a departure from promulgated accounting principles · Emphasis of other matters · Reports involving other auditors

Distinguish between an unmodified opinion audit report that contains an emphasis-of-matter explanatory paragraph and a qualified report.

An unmodified opinion audit report with an explanatory paragraph or modified wording is the same as a standard unmodified opinion report exceptthat the auditor believes it is necessary to provide additional information about the audit or the financialstatements. 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.

What is the final step in the entire audit process?

Audit report

This section indicates that the financial statements are the responsibility of management, including selecting appropriate accounting principles and maintaining internalcontrol over financial reporting. This section also acknowledges management's responsibility to assess whether there is substantial doubt about the entity's ability to continue as a going concern.

Management's responsibility

What is this an example of? Inability to confirm the existence of an asset which is material but not extremely material in value.

Qualified

How do the eight parts of a standard unmodified opinion audit report for nonpublic companies differ from those found in a qualified opinion report? 5.) Management's Responsibility

Same as standard unmodified opinion report.

What are the purposes of the auditor's responsibilities section in the auditor's report?

The purposes of the auditor's responsibility section of the report are to inform the financial statement users of the objective of the audit and the nature of the audit proceduresperformed.

When an auditor discovers more than one condition that requires departure from or modification of the standard unmodified opinion audit report, what should the auditor's report include?

When the auditor discovers more than one condition that requires adeparture from or a modification of a standard opinion audit report, the reportshould be modified for each condition. An exception is when one conditionneutralizes 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 ofindependence overshadows the scope limitation. Accordingly, the scope limitationshould not be mentioned.

When is an unmodified opinion appropriate?

if the GAAP departure is immaterial (standard unmodified) or if the auditor agreeswith the client's departure from GAAP (unmodified with explanatory paragraph).

The auditor's report contains the following: "We did not audit the financial statements of EZ, Inc., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 27 percent and 29 percent, respectively, of the consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ, Inc., is based solely on the report of the other auditors." These sentences

indicate a division of responsibility.

When is a Disclaimer of Opinion issued?

is issued if the scope limitation is so material that the auditor cannot determine if the overall financial statements are fairlypresented. If the scope limitation is caused by the client's restriction, the auditor should be aware that the reason for the restriction might be to deceive theauditor. For this reason, a disclaimer is more likely for client restrictions than for conditions beyond anyone's control.

How do the eight parts of a standard unmodified opinion audit report for nonpublic companies differ from those found in a qualified opinion report? 2.) Audit Report Address

Same as standard unmodified opinion report.

An adverse opinion and a disclaimer of opinion

both require modification of the opinion section.

Two examples of an unmodified opinion audit report with an explanatory paragraph or modified wording are:

1.) The entity changed from one generally accepted accounting principle to another generally accepted accounting principle. 2.) A shared report involving the use of other auditors.

The three conditions requiring a departure from an unmodified opinion are:

1.) The scope of the audit has been restricted. 2.) The financial statements have not been prepared in accordancewith generally accepted accounting principles. 3.) The auditor is not independent.

An example is when the client insists upon using replacement costs for fixed assets.

The financial statements have not been prepared in accordance with generally accepted accounting principles.

A careful reading of an unmodified opinion audit report indicates several important phrases. Explain why each of the following phrases or clauses is used rather than the alternative provided: "We conducted our audit in accordance with auditing standards generally accepted in the United States of America" rather than "Our audit was performed to detect material misstatements in the financial statements."

"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 torecognize the audit standards followed by the auditor. "We conducted our audit in accordance with auditingstandards generally accepted in the United States of America"identifies the auditor's responsibilities for the conduct of the audit, accumulation of evidence, and reporting requirements. It is amuch broader statement than the alternative clause. It also implies that if the auditor has conducted the audit in accordance withgenerally accepted auditing standards but does not uncovercertain material errors or fraud, the auditor is unlikely to haveresponsibility for failing to do so.

An auditor who qualified an opinion because of an insufficiency of audit evidence should refer to the scope limitation in the:

- Auditor's Responsibility Section: No - Opinion Section: Yes - Note to the Financial Statements: No

Conditions that affect the auditor's determination of materiality include:

- Potential users of the financial statements - Dollar amounts of the following items: net income before taxes, total assets, current assets, current liabilities, and owners' equity - Nature of the potential misstatements—certain misstatements, such as fraud, are likely to be more important to users of the financial statements than other misstatements.

The standard unmodified opinion audit report for a nonpublic entity contains the following eight parts:

- Report Title - Audit Report Address - Opinion Section - Basis for Opinion - Management's responsibility - Auditor's Responsibility - Signature and Address of CPA firm - Audit report date

Compare the wording in the standard unmodified opinion audit report for a nonpublic entity under AICPA auditing standards in Figure 3-1 with the wording for a public company audit under PCAOB auditing standards in Figure 3-3. How are the reports similar? How are they different?

- The standard unmodified opinion audit report for a nonpublic entity under AICPA auditing standards and the standard unqualified report for a public company under PCAOB auditing standards are very similar in substance. Both reports begin with the opinion paragraphs. The PCAOB report also references the opinion on the audit of internal control over financial reporting. The PCAOB report includes theresponsibilities of management and the auditor within the basis for opinion section, while the report for the nonpublic entity in Figure 3-1 has separate sections for management's and the auditor'sresponsibility. These paragraphs provide additional information on the nature ofthese responsibilities, including the responsibility of management and the auditor to evaluate whether there are conditions that raise substantial doubt about the entity's ability to continue as a going concern. - Finally, The PCAOB report contains a section for critical audit matters, whereas a discussion of key audit matters is only included in the report for nonpublic entities if the terms of the audit engagement require such disclosure.

What four circumstances are required for a standard unmodified opinion audit report to be issued?

1. ) All statements—balance sheet, income statement, statement of retained earnings, and statement of cash flows—are included in the financial statements. 2.) Sufficient appropriate evidence has been accumulated and the auditor has conducted the engagement in a manner that enables him or her to conclude that the audit was performed in accordance with auditing standards. 3.) The financial statements are presented in accordance with appropriate accounting standards such as U.S. generally accepted accounting principles or IFRS. This also means that adequatedisclosures have been included in the footnotes and other parts of the financial statements. 4.) There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report.

What are the three options available to the primary auditor responsible for the opinion, and when should each be used?

1.) No reference is made to the other auditor. This will occur if the other auditor audited an immaterial portion of the financial statements, the other auditor is known or closely supervised, or if the principalauditor has thoroughly reviewed the other auditor's work. 2.) 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 financialstatements audited by the other CPA is material in relation to the total. 3.) The report may be qualified if the principal auditor is not willing to assume any responsibility for the work of the other auditor. Adisclaimer may be issued if the segment audited by the other CPA is highly material.

Identify the most important information included in the auditor's responsibilities section.

1.) Stating that the objective of the audit is to obtain evidence about whether the financial statements are free of material misstatements whether due to error or fraud, and to issue an audit opinion. 2.) Define reasonable assurance as a high level of assurance, but not absolute assurance. 3.) An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. 4.) The audit procedures selected depend on the auditor's judgment, and consider the auditor's assessment of the risks of material misstatement, whether due to fraud or error. 5.) As part of this risk assessment, the auditor considers internal control over financial reporting in the design of the audit procedures.The assessment is not for the purpose of expressing an opinion on internal control over financial reporting, and the auditor does not express such an opinion. 6.) An audit includes evaluating the appropriateness of the accounting policies used, the reasonableness of significant estimates, the overall presentation of the financial statements, and the entity's ability to continue as a going concern.

Identify the most important information included in the opinion section.

1.) The words "in our opinion," which indicate that the conclusions are based on professional judgment. 2.) A statement about whether the financial statements were presented fairly and in accordance with generally accepted accounting principles along with indication of the fiscal year(s) associated with those statements.

Define materiality as it is used in audit reporting.

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.

How do the eight parts of a standard unmodified opinion audit report for nonpublic companies differ from those found in a qualified opinion report? 4.) Basis for Opinion Section

A new paragraph is added that describes the basis for the qualified opinion. The standard paragraph is modified to state that the audit evidence obtained provides a sufficient and appropriate basis for the qualified audit opinion.

is used only when the auditor believes that the overall financial statements are so materially misstated or misleading that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP.

Adverse Opinion

states that the auditor believes the overall financial statements are so materially misstated or misleading that they do not present fairly in accordance with GAAP the financial position, results of operations, orcash flows.

Adverse Opinion

indicates that the auditor conducted the audit in accordance with the relevant auditing standards. This paragraph must also include an affirmative statement that the auditor is independent and has followed the relevant ethical standards. Finally, this paragraph includes a statement that the auditor believes the audit evidence obtained is sufficient and appropriate and provides a basis for the opinion.

Basis for Opinion

Distinguish between changes that affect consistency and those that may affect comparability but not consistency. Give an example of each.

Changes that affect the consistency of the financial statements mayinvolve 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 isneeded because the same method of depreciation is used in both years, but the information may require disclosure in the statements.

On February 17, 2019, a CPA completed all the evidence gathering procedures on the audit of the financial statements for the Buckheizer Technology Corporation for the year ended December 31, 2019. The audit is satisfactory in all respects except for the existence of a change in accounting principles from FIFO to LIFO inventory valuation, which results in an explanatory paragraph on consistency. On February 26, the auditor completed the tax return and the draft of the audit report. The final audit report was completed, attached to the financial statements, and delivered to the client on March 7. What is the appropriate date on the auditor's report?

Note that this review problem should have indicated that the auditor completed all of the evidence gathering procedures on February 17, 2020 for the audit of the financial statements for the fiscal year ended December 31, 2019. Under that scenario, the auditor's report should be dated February 17, 2020, the date on which the auditor concluded that he or she had sufficient appropriate evidence to supportthe auditor's opinion.

The first section in the standard report, which must include the title "Opinion", states the auditor's conclusions based on the results of the audit. The first paragraph of the report makes the simple statement that the CPA firm has done an audit. Second, it lists the financial statements that were audited, including the balance sheet, income statement, statement of cash flows, and footnotes. The second paragraph contains the auditor's opinion as to whether the financial statements present fairly in all material respects the financial position and results of operations in accordance with the relevant accounting standards (e.g., U.S. GAAP).

Opinion Section

Distinguish between a qualified opinion, an adverse opinion, and a disclaimer of opinion, and explain the circumstances under which each is appropriate. states that there has been either a limitation on the scope of the audit of material accounts, transactions, or disclosures or a material departure from GAAP in the financial statements, but that the auditor believes that the overall financial statements are fairly presented. This type of opinion may not be used if the auditor believes the exceptions being reported upon are extremely material, in which case a disclaimer or adverse opinion would be used.

Qualified Opinion

report can result from a limitation on the scope of the audit or failure to follow generally accepted accounting principles. - can be used only when the auditor concludes that the overall financial statements are fairly stated.

Qualified Opinion

Distinguish between a report qualified due to a GAAP departure and one qualified due to a scope limitation. is issued when the auditor can neither perform procedures that he or she considers necessary nor satisfyhimself or herself by using alternative procedures, usually due to the existence of conditions beyond the client's or the auditor's control, but the amountinvolved in the financial statements is not highly material. An important part ofa qualified opinion due to a scope limitation is that it results from not accumulatingsufficient appropriate audit evidence, either because of the client's request or because of circumstances beyond anyone's control. When the opinion is qualified due to a scope limitation, the auditor modifies both the basis for opinion and the opinion sections of the report. The basis for opinion section is modified to indicate that the auditor's scope has been restricted and the opinion paragraph is modified to include the qualified opinion.

Qualified Report due to a Scope

results when the auditor has accumulated sufficient appropriate evidence but has concluded that the financial statements are not correctly stated. The only circumstance in which an qualified opinion for a GAAP departure is appropriate is for material, but not highly material, departuresfrom GAAP. When the opinion is qualified due to a GAAP departure, the opinion paragraph is modified to include the qualified opinion (including the "except for" wording). The basis for opinion section is modified by adding a new paragraph that describes the GAAP departure, and modifying the basis for opinion paragraph to state that the audit evidence obtained provides a sufficient and appropriate basis for the qualified audit opinion

Qualified due to a GAAP departure

Auditing standards require that the report be titled and that the title includes the word independent.

Report title

What is the rationale for the PCAOB's requirement to include a discussion of critical audit matters in the audit report?

Revisions to the PCAOB audit report, including the requirement to include a discussion of critical audit matters, are intended to provide more information to users of financial statements. In particular, the disclosure of critical audit matters provides information to users about areas considered high risk by the auditor, and areas requiring significant auditor judgment. This makes a financial statement user aware that not all account balances or related disclosures may have the same level of assurance. For each critical audit matter (CAM) communicated in the audit report, the auditor must identify the CAM, describe the considerations that led the auditor to identify the area as a CAM, describe how the matter was addressed in the audit, and refer a reader to the relevant accounts or related disclosures in the financial statements.

How do the eight parts of a standard unmodified opinion audit report for nonpublic companies differ from those found in a qualified opinion report? 1.) Report Title

Same as standard unmodified opinion report.

How do the eight parts of a standard unmodified opinion audit report for nonpublic companies differ from those found in a qualified opinion report? 8.) Audit Report Date

Same as standard unmodified opinion report.

How do the eight parts of a standard unmodified opinion audit report for nonpublic companies differ from those found in a qualified opinion report? 6.) Auditor's Responsibility

Same as the standard unmodified opinion report.

What is included in the second paragraph of the Auditor's Responsibility section?

The second paragraph briefly describes important aspects of an audit, including that theprocedures depend on the auditor's professional judgment and assessment ofthe risks of material misstatement. This paragraph alsoindicates that the auditor considers the entity's internal control, but not for the purposes of expressing an opinion on the effectiveness of internal control over financial reporting. The last two bullet points of the paragraph indicate that the audit includes evaluating the appropriateness of accounting policies selected, the reasonableness of accounting estimates, and the overall financial statement presentation, as well as evaluating the entity's ability to continue as a going concern.

Provide two examples of areas that might be considered critical audit matters in the audit of a public company in the hotel and lodging industry.

Two examples of areas that might be considered critical audit matters in the audit of a public company in the hotel and lodging industry include revenue and leased property. Revenue in the lodging industry is highly material, depends on occupancy rates, and room rates that vary based on the location of the property, the day of the week, time of year, and the source of the booking. For all of these reasons, revenue requires extensive testing and auditor judgment. In the lodging industry, properties can either be owned or leased, and many hotel companies have various arrangements depending on the type of lodging (e.g., hotels, timeshare properties, etc.). Hotels may have an incentive to report property as being owned or leased under certain categories, and thus this area requires extensive testing by the auditor.

An entity changed from the straight-line method to the declining-balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements but is reasonably certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n)

Unmodified Opinion

An unmodified opinion audit report in which the financial statements are fairly presented, but the auditor believes it is important, or is required, to provide additional information or the wording of other paragraphs of the report require revision.

Unmodified Opinion Audit Report with emphasis-of-matter paragraph or nonstandard report wording

Describe what is meant by reports involving the use of other auditors.

When another CPA has performed part of the audit, the primary auditor issues one of the following types of reports based on the circumstances.

What are the most significant differences between a standard unmodified opinion under AICPA and PCAOB auditing standards (referred to as an unqualified opinion)

are the inclusion or exclusion of certain sections of the report, such as a discussion of critical audit matters in a PCAOB report, and a reference to a report on the audit of internal controls in a PCAOB report for large public companies. The Basis for Opinion section of the PCAOB report references the PCAOB auditing standards, and indicates the financial statements are the responsibility of management, whereas the auditor's responsibility is to express an opinion on the financial statements. This is in contrast to the separate and more detailed AICPA audit report sections on management's responsibility and the auditor's responsibilities.

addresses both the financial statements and management's report on internal control over financial reporting.

combined report on financial statements and internal control over financial reporting

The date of the CPA's opinion on the financial statements of the client should be the date of the

completion of all important audit procedures.

Determining which is of the three alternative opinion is appropriate depends entirely upon _______________.

materiality

Why would a disclaimer of opinion be necessary?

may arise because of a severe limitation on the scope of the audit or a nonindependent relationshipunder the AICPA Code of Professional Conduct between the auditor and the client

When there is a __________ that results in the failure to verify material, but not pervasive accounts, a qualified opinion may be issued. This is more likely when the scope limitation is for conditions beyond the client'scontrol than for restrictions by the client.

scope restriction

The three alternative opinions that may be appropriate when the client's financial statements are not in accordance with GAAP are an:

unmodified opinion,qualified opinion, and adverse opinion.