Acct 407- chapter 3
Adverse
A highly material departure from GAAP. Example of:
of computing depreciation from straight line to an accelerated method (separate explanatory paragraph added)
An example of a change that affects consistency would be a change in the method
end of fieldwork
Audit Report Date:
accordance with auditing standards reasonable assurance free of material misstatement
Auditors responsibility: The first paragraph indicates that the auditor's responsibility is to express an opinion on the statements based on an audit conducted in ___, and that the audit provides ___ that the financial statements are___→ big enough to change the decision of a reasonable user of the financial statement.
•Change in accounting principle •Change in reporting entity •Corrections of errors involving accounting principles
Changes that affect the consistency of the financial statements may involve any of the following:
1. client will not permit the auditor to confirm material receivables. 2. engagement is not agreed upon until after the client's year-end when it may be impossible to physically observe inventories.
Examples of the scope of the audit being restricted:
inform the financial statement users of the nature of the audit procedures performed
Identify the most important information included in the scope paragraph?
-management's report, -auditor's work and opinion -framework -scope and opinion
In a separate audit report... The introductory, scope, and opinion paragraphs are modified to include reference to __ on internal control over financial reporting, and the scope of the ___ on internal control over financial reporting. Intro and opinion paragraphs also refer to the __ used to evaluate internal control. Two additional paragraphs are added between the __ and ___ paragraph that define internal control and describe the limitations of internal control.
Qualified
Inability to confirm the existence of an asset which is material but not extremely material in value. Example of:
Disclaimer
Material physical inventories not observed and the inventory cannot be verified through other procedures. Lack of independence by the auditor. Example of:
The name identifies the CPA firm or practitioner who performed the audit, and the city and state where the auditor is located. Partners sign the firm's name
Name and Address of the CPA firm:
Independent Audit Report
Report title:
when the auditor owns stock in the client's business.
The auditor is not independent example:
a separate explanatory paragraph is required to explain the change in generally accepted accounting principles in the first year in which the change took place.
The client has restated the prior-year statements because of a change from LIFO to FIFO. How should this be reflected in the auditor's report?
In our opinion... present fairly in all material respects GAAP
The final paragraph starts off with, ___. States the auditor's conclusions based on the results of the audit and gives a list of financial statements in accordance with ___.
the client insists upon using replacement costs for fixed assets.
The financial statements have not been prepared in accordance with generally accepted accounting principles example:
-performing procedures to obtain audit evidence -auditors judgement, consider the auditors assessment of the risks of material misstatement, whether due to fraud or error -considers internal control over financial reporting. (the assessment is not for the purpose of expressing an opinion on internal control) -evaluating accounting principles used, reasonableness of significant estimates, overall presentation of the F.S.
The information in the scope paragraph includes:
-"in our opinion" - restatement of the audited F.S -statement that the F.S were presented fairly and in accordance with GAAP
The most important information in the opinion paragraph includes:
the company, its stockholders, or the board of directors.
The report is usually addressed to:
-scope paragraph -auditors judgement and assessment of the risks of ----material misstatements -entity's internal control -evaluation of effectiveness
The second paragraph is the __ and is a factual statement about what the auditor did in the audit. The paragraph briefly describes important aspects of an audit, including that the procedures depend on the __ and ___ (Judgment is used to help the auditor decide how to audit; not perfect). The scope paragraph also indicates that the auditor considers the ___, but not for the purposes of expressing an opinion on the effectiveness of internal control over financial reporting. Also includes__ of __ of accounting policies and overall F.S. presentation.
sufficient and appropriate
The third paragraph indicates that the auditor believes the audit evidence is __ and __ to provide a basis for the audit opinion.
unqualified opinion, qualified as to opinion only, and adverse opinion
The three alternative opinions that may be appropriate when the client's financial statements are not in accordance with GAAP are:
1. the scope of the audit has been restricted 2. the financial statements have not been prepared in accordance with GAAP 3. auditor is not independent
The three conditions requiring a departure from an unqualified opinion are:
appropriate accounting principles internal control auditor's liability
This paragraph indicates that the financial statements are the responsibility of management, including selecting ___ and maintaining ___ over financial reporting. The manager's responsibility limits ___ because it doesn't dissolve the liability. Auditors are not responsible for the fraudulent numbers by managers.
-entity changed from one principle to another -a shared report involving the use of other auditors
Two examples of an unqualified report with an explanatory paragraph or modified wording are:
state the auditor's conclusions based upon the results of the audit evidence
What are the purposes of the opinion paragraph in the auditor's report?
-obtain audit evidence -auditor's judgement and consider the auditor's assessment of the risks of material misstatement, whether due to fraud or error. -auditor considers internal control (assessment is not for the purpose of expressing an opinion) -evaluating appropriateness
What are the purposes of the scope paragraph under the auditor's responsibility in the auditors report?
1. all statements (B/S, I/S, Statement of RE, Statement of Cash flows) 2. Evidence has been accumulated and can conclude that the audit is in accordance with GAAS 3. F.S. are presented in accordance with GAAP or IFRS 4. no addition of an explanatory paragraph needed
What four circumstances are required for a standard unqualified report to be issued?
-no reference is made to the other auditor. -Issue a shared opinion in which reference is made to the other auditor -The report may be qualified if the principal auditor is not willing to assume any responsibility for the work of the other auditor.
When another CPA has performed part of the audit, the primary auditor issues one of the following types of reports based on the circumstances.
scope restriction
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's control than for restrictions by the client.
improves communication and users are more likely to recognize and consider situations requiring a modification or qualification
Why is it desirable to have standard wording?
qualified opinion
appropriate when the deviation from GAAP is material but not highly material
adverse opinion
appropriate when the deviation is highly material.
immaterial (standard unqualified)
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).
disclaimer of opinion
is issued if the scope limitation is so material that the auditor cannot determine if the overall financial statements are fairly presented. 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 the auditor.
qualified report due to a scope limitation
is issued when the auditor can neither perform procedures that he or she considers necessary nor satisfy himself or herself by using alternative procedures, usually due to the existence of conditions beyond the client's or the auditor's control, but the amount involved in the financial statements is not highly material
unqualified report with explanatory paragraph (or modified wording)
is the same as a standard unqualified report except that the auditor believes it is necessary to provide additional information about the audit or the financial statements
Introductory Paragraph
makes the simple statement that the CPA firm has done an audit. (Positive assurance). Second, it lists the financial statements that were audited, including the balance sheet dates and the accounting periods for the income statement and statement of cash flows.
auditor's opinion
may be qualified by scope limitations caused by client restrictions or by limitations resulting from conditions beyond the client's control. The former occurs when the client will not, for example, permit the auditor to confirm material receivables or physically observe inventories.
A report qualified as to opinion
only results when the auditor has accumulated sufficient appropriate evidence but has concluded that the financial statements are not correctly stated. material, but not highly material, departures from GAAP.
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 is needed because the same method of depreciation is used in both years, but the information may require disclosure in the statements.
adverse opinon
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, or cash flows.
disclaimer opinion
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 Code of Professional Conduct between the auditor and the client.
qualified opinion
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 Report
there is either 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.
auditor's report
they inform users of the auditor's opinion as to whether or not the financial statements 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 unqualified report and the reasons and implications of such deviations.