ACC 403 Chapter 3: Audit Reports
Lack of Consistent application of GAAP
¬ Changes affecting consistency require explanatory paragraph: Change in accounting principle (LIFO to FIFO; Operating vs. Capital lease); Change in reporting entity (Consolidation vs equity method); Correction of errors (change from non-GAAP to GAAP accounting principle) ¬ Changes affecting comparability ned not be included in the audit report: Change in estimate (change in useful life affecting depreciation); Corrections of errors not involving principles, variations in presentation; Changes caused by different transactions or events
The appropriate report to issue?
Depends on whether the situation involves a GAAP departure or a scope limitation, as well as the level of materiality/
What type of opinion is usually given when in the Highly Material Level?
Disclaimer or Adverse
Auditor agrees with GAAP departure
Highly unusual
Reports involving other auditors
Make No reference; Make Reference; Qualify Opinion
Highly Material
Most or all users' decisions based on the financial statements are like to be significantly affected
Report on Internal Control Over Financial Reporting (ICFR) for Public Companies under PCAOB Auditing Standards
Paragraphs: Introductory; Scope; Definition; Inherent Limitations; Opinion; Cross-reference to FS audit
Unqualified Audit Report and Report for Public Companies under PCAOB Auditing Standards
Paragraphs: Scope; Basis of Presentation; Responsibility; Opinion
What type of opinion is usually granted when in the Material Level?
Qualified
Standard Unqualified Audit Report for Non-public entities (AICPA)
Report Titiel Addressee paragraphs: Introductory; Management's Responsibility; Auditor's responsibility; Scope; Auditor's Opinion Name and address of CPA firm Audit Report Date (Date Audit Fieldwork is completed)
What are the different types of Audit Reports?
Standard Unqualified, Unqualified Audit report with an explanatory, Emphasis-of-matter or a Modified wording paragraph, qualified, and Adverse or Disclaimed
Unqualified Audit Report with Emphasis-Of-Matter Explanatory Paragraph or Modified Wording. Covers such matters as:
Substantial doubt about going concern Lack of consistent application of GAAP Auditor agrees with GAAP departure Emphasis of other matters Reports involving other auditors
Substantial doubt about Going Concern
(poor operating results; inability to meet future debt obligations; significant contingencies or legal proceedings; loss of major customer)
Emphasis of other matters
(related party transactions; subsequent events; matters affecting comparability; material uncertainties)
Material Misstatement
A misstatement in the financial statements, knowledge of which would affect a decision of a reasonable user of the statements
Adverse Opinon
A report issued when the auditor believes the financial statements are so materially misstated or misleading as a whole that they do not present fairly the entity's financial position or the results of its operations and cash flows in conformity with GAAP
Disclaimer of Opinion
A report issued when the auditor is not able to become satisfied that the overall financial statements are fairly presented or the auditor is not independent
Qualified Opinion
A report issued when the auditors believes that the overall financial statements are fairly stated but that either the scope of the audit was limited or the financial data indicated a failure to follow GAAP
Unqualified audit report with explanatory paragraph or modified wording
An unqualified report in which the financial statements are fairly presents, but the auditor believes it is important, or is required, to provide additional information
Spare 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
Combined report on financial statements and internal control over financial reporting
Audit report on the financial statements and the effectiveness of internal control over financial reporting required for larger public companies under Section 404 of the Sarbanes-Oxley Act
Standard Unqualified Audit Report
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
What type of opinion is usually an immaterial?
Unqualified
Immaterial
Users' decision are unlikely to be affected
Material
Users' decisions are likely to be affected only if the information in question is important to the specific decisions being made. The overall financial statements are presented fairly
Materiality
♣ A misstatement in the financial statements can be considered material if the knowledge of the misstatement will affect the decision of a reasonable user of the financial statements. ♣ Immaterial ♣ Material, but do not overshadow the FS taken as whole ♣ Material, but are so pervasive that the FS are not fairly presented. ♣ Materiality Decision- Non-GAAP condition. Consider: Dollar amount; Measurability and Nature. ♣ Materiality Decision- Scope Limitation condition. Consider: Dollar amount; Measurability and Nature. ♣ Based upon Net Income Before Taxes ¬ Immaterial <2% ¬ Material 9-10% ¬ Significantly Material Over 10%
Departures from an Unqualified Audit Report
♣ Scope has been restricted ♣ Financial statements are not IAW GAAP ♣ Auditor is NOT independent ♣ Qualified Opinion. Occurs when something is not in order but not considered to be material, however, the overall financial are fairly stated. Use of the terminology, "except for", to identify the matter. ♣ Adverse opinion. Occurs when an item or items is/are material misstated or misleading that the FS are NOT fairly stated. Rarely used. ♣ Disclaimer Opinion. Occurs when an auditor is unable to satisfy himself that the overall FS are fairly stated.
