Audit Ch 3

Disclaimer of Opinion

A ________ is issued when the auditor has been unable to satisfy himself or herself that the overall financial statements are fairly presented. The necessity for disclaiming an opinion may arise because of a severe limitation on the scope of the audit or a nonindependent relationship under the Code of Professional Conduct between the auditor and the client.

a) true

A qualified opinion report can be used only when the auditor concludes that the overall financial statements are fairly stated. a) true b) false

a) true

An adverse 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. a) true b) false

Title of Report Audit Report Address Introductory Paragraph Responsibilities of Management Responsibilities of Auditor (3 paragraphs) -audit conducted in accordance to auditing standards and includes reasonable assurance statements are free of material misstatements - scope of audit and accumulated evidence - sufficient appropriate evidence gathered for opinion Opinion Paragraph -based on professional judgement (hence opinion and not absolute fact or guarantee) Name and address of CPA firm Date of Audit Report - last day of field work

Elements of the standard unqualified report for non public entities

1. Changes in an estimate, such as a decrease in the life of an asset for depreciation purposes 2. Error corrections not involving principles, such as a previous year's mathe- matical error 3. Variations in format and presentation of financial information 4. Changes because of substantially different transactions or events, such as new endeavors in research and development or the sale of a subsidiary

Examples of comparability issues which does not require explanatory paragraph

1. Changes in accounting principles, such as a change from FIFO to LIFO inven- tory valuation 2. Changes in reporting entities, such as the inclusion of an additional company in combined financial statements 3. Corrections of errors involving principles, by changing from an accounting principle that is not generally acceptable to one that is generally acceptable, including correction of the resulting error

Examples of consistency issues in the application of GAAP which results in an explanatory paragraph

1. Significant recurring operating losses or working capital deficiencies 2. Inability of the company to pay its obligations as they come due 3. Loss of major customers, the occurrence of uninsured catastrophes such as an earthquake or flood, or unusual labor difficulties 4. Legal proceedings, legislation, or similar matters that have occurred that might jeopardize the entity's ability to operate

Going concern examples

Materiality Level Type of Opinion Immaterial unqualified material Qualified highly material disclaimer or adverse

Materiality Level Type of Opinion Immaterial ________________ ____________ Qualified highly material ________________

Standard Unqualified- four conditions S.E.A.N Unqualified with emphasis-of-matter explanatory paragraph or modified wording- complete satisfactory audit, statements fairly presented, but auditor believes its important to add additional information) Qualified- overall financial statements fairly presented but scope of the audit limited or materially restricted or applicable accounting standards not properly followed. Adverse or Disclaimer-The auditor concludes that the financial statements are not fairly presented (adverse), he or she is unable to form an opinion as to whether the financial statements are fairly presented (disclaimer), or he or she is not independent (disclaimer).

Name the four categories on audit reports in order from good to bad

-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

Name the most important causes of the addition of an explanatory paragraph or a modification in the wording of the standard unqualified report under both AICPA and PCAOB audit standards:

Scope Limitations - restrictions from client (i.e. refusal to permit confirmation of inventory,receivables, etc) - restrictions from uncontrollable circumstances (i.e. after balance sheet date) Financial Statements not presented in accordance to GAAP Auditor not Independent

Name the three conditions that resulting in departure from an unqualified report

There are two significant audit reporting differences for public companies. First, the standard unqualified audit report is different for audits of financial statements of public companies. Second, auditors of larger public companies must also issue an opinion on internal control over financial reporting.

Name the two differences in audit reports for private vs public companies

1. All statements—balance sheet, income statement, statement of changes in stockholders' equity, 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 U.S. generally accepted accounting principles or other appropriate accounting framework. This also means that adequate disclosures 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. S (all financial statements included) E (sufficient appropriate evidence gathered and audit was performed in accordance to auditing standards) A (statements in accordance to GAAP wit disclosures) N (no circumstances requiring explanatory paragraph or modifications of the wordings)

Standard unqualified report is issued when the following conditions are met

disclaimer of opinion or an adverse opinion

The highest level of materiality exists when users are likely to make incorrect decisions if they rely on the overall financial statements. When the highest level of materiality exists, the auditor must issue either a _______________ or __________, depending on which conditions exist

b) false a qualified opinion using except for is appropriate (keyword: material) 2nd lvl of materiality

When the auditor concludes that a misstatement is material but does not over- shadow the financial statements as a whole, an unqualified opinion (using "except for") is appropriate. a) true b) false

Adverse Opinion

_______ is 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

Combined report on financial statements and internal control over financial reporting

________ is an 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

Disclaimer of Opinion

_________ is 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

__________ is a report issued when the auditor 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

Separate report on internal control over financial reporting

___________ is an 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

Standard unqualified report

___________ is 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.

Unqualified audit report with explanatory paragraph or modified wording

____________ an unqualified report in which the financial statements are fairly presented, but the auditor believes it is important, or is required, to provide additional information

Material misstatement

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