Audit Chapter 3

The auditor must use the term __ in the __ when issuing a qualified report.

"except for"; opinion paragraph

The standard unqualified audit report is issued when the following conditions have been met: __

(1) all statements are included, (2) the three general standards have been followed, (3) sufficient appropriate evidence has been accumulated, i.e., the three standards of field work have been met, (4) the financial statements are in accordance with GAAP, and (5) there are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report

What three alternatives does a CPA firm have when relying on different CPA firms to perform parts of the audit?

1. Make no reference in the audit report. 2. Make reference in the audit report (modified wording report). 3. Qualify the opinion.

What's the common definition of materiality as it applies to both accounting and auditing?

A misstatement in the financial statements can be considered material if the knowledge of the misstatement will affect a decision of a reasonable user of the statements.

__ requires the auditor of a public company to attest to management's report on the effectiveness of internal control over financial reporting.

Section 404(b) of the Sarbanes-Oxley Act

An __ is used only when the auditor believes that the overall __.

adverse opinion; 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

What are the different levels of materiality?

amounts are immaterial; amounts are material but do not overshadow the financial statements as a whole; amounts are so material or so pervasive that overall fairness of the statements is in question

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

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

A __ is issued when the auditor has been unable to satisfy __.

disclaimer of opinion; himself or herself that the overall financial statements are fairly presented.

If any of the __ for the standard unqualified report are not met, the standard unqualified report __.

five requirements; cannot be issued

In a qualified, adverse, or disclaimer report, the auditor either __

has not performed a satisfactory audit, is not satisfied that the financial statements are fairly presented, or is not independent.

What are the five most important causes of an explanatory paragraph or modification of the wording of the standard unqualified report?

lack of consistent application of GAAP; substantial doubt about going concern; auditor agrees with a departure from promulgated accounting principles; emphasis of a matter; reports involving other auditors

material misstatement

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

Common bases include __.

net income, total assets, current assets, and working capital

The __ is considered the least severe type of departure from an unqualified report.

qualified opinion

A __ can be used only when the auditor concludes that __.

qualified opinion report; the overall financial statements are fairly stated.

A __ can result from limitation on the scope of the __.

qualified opinion; audit or failure to follow GAAP

qualified opinion

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

adverse opinion

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

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

What are the four categories of audit reports?

standard unqualified, unqualified with explanatory paragraph or modified wording, qualified, and adverse or disclaimer

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

Only reports involving __ use a modified wording report. This report contains __ paragraphs.

the use of other auditors; three

unqualified audit report with explanatory paragraph or modified wording

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

When there is a scope restriction, the appropriate response is to issue an __.

unqualified report, a qualification of scope and opinion, or a disclaimer of opinion, depending on materiality