AUDITING CHAPTER 3
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Transcript of AUDITING CHAPTER 3
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AUDITINGCHAPTER 3ReportsByDavid N. Ricchiute
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GBW 8th ed., Ch. 32
TOPICSReports on audited financial statementsAudit report opinionsModifications to audit reportsUpdated reports & reports for foreign countriesReports on attest & assurance services
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GBW 8th ed., Ch. 33
AUDIT REPORT DEFINED
Audit report is a letter communicating What was audited Management’s responsibilities Auditor’s responsibilities What an audit entails Auditor’s opinion
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GBW 8th ed., Ch. 34
UNQUALIFIED OPINION DEFINED
Unqualified opinion in audit report means management’s assertions are fairly presented in the auditorApplies to quality of financial statements not to quality of entity as investment or credit risk
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GBW 8th ed., Ch. 35
STANDARD AUDIT REPORT OPINION
Unqualified opinion Independent auditor’s opinion
that management’s financial statements present fairly in all material respects the financial position, results of operations, & cash flows in conformity with GAAP
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GBW 8th ed., Ch. 36
SARBANES-OXLEYManagement’s responsibilities Reviewed entire annual/quarterly report Report does not contain untrue statement of
material fact or omit material fact Financial statements present fairly financial
condition & results of operations Establish, maintain, evaluate effectiveness of
internal controls Identified to auditors significant deficiencies, fraud
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GBW 8th ed., Ch. 37
ELEMENTS OF REPORTTitle: Independent Auditor’s ReportAddressee: shareholders, board of directorsIntroductory paragraphScope paragraphOpinion paragraphFirm signatureDate of report
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GBW 8th ed., Ch. 38
INTRODUCTORY PARAGRAPH
Statement that Financial statements were audited Financial statements are
management’s responsibility Auditor’s responsibility is to issue
opinion
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GBW 8th ed., Ch. 39
SCOPE PARAGRAPHStatement that Audit conducted in accordance with U. S.
GAAS GAAS requires planning, performing audit to
obtain reasonable assurance financial statements free from material misstatements
Audit includes Examining evidence on test basis Evaluating accounting principles & estimates Evaluating overall financial presentation
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GBW 8th ed., Ch. 310
MEANING OF SCOPE PARAGRAPH
Reasonable not absolute assurance implies auditor may Overlook immaterial misstatements Test samples rather than all
transactions & events
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GBW 8th ed., Ch. 311
USE OF STANDARD SCOPE PARAGRAPH-1
Implies auditor complied with all general standards Adequately trained & proficient Independent in mental attitude Exercised due professional care
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GBW 8th ed., Ch. 312
USE OF STANDARD SCOPE PARAGRAPH-2
Implies auditor complied with all fieldworks standards Planned engagement & supervised
assistants Obtained understanding of internal
control Obtained sufficient, competent evidential
matter
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GBW 8th ed., Ch. 313
OPINION PARAGRAPH
Statement of opinion Whether financial statements present
fairly in all material respects Financial position Results of operations Cash flows
In conformity with GAAP
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GBW 8th ed., Ch. 314
USE OF STANDARD OPINION PARAGRAPH
Implies compliance with reporting standards Financial statements presented in
accordance with U.S. GAAP Principles are applied consistently Disclosures are reasonably adequate Opinion applies to statements taken
as a whole
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GBW 8th ed., Ch. 315
SIGNIFICANCE OF AUDIT REPORT DATE
Last day of fieldworkLast day responsible for detecting subsequent eventsDual dating: financial statements revised for subsequent event after fieldwork date but before report releaseEvent date: date to which all responsibilities extended
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GBW 8th ed., Ch. 316
OTHER TYPES OF OPINIONS
Departures from GAAP or scope limitation require other opinion Qualified: sufficient evidence or
assertions fairly presented except for certain matter(s)
Adverse: assertions are not fairly presented
Disclaimer: auditor does not express an opinion usually due to insufficient evidence (scope limitation)
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GBW 8th ed., Ch. 317
STANDARDS FOR INTERNATIONAL REPORTS
US reporting standards are GAAPJapanese auditors use private sector reporting standardsGerman auditors use commercial law as reporting standards
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GBW 8th ed., Ch. 318
QUALIFIED OPINION
Except for effects of a matter, financial statements present fairly in all other material respects Statements depart materially from GAAP Management unable to justify material
change in accounting principle Scope of audit materially limited
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GBW 8th ed., Ch. 319
ADVERSE OPINIONManagement’s financial statements do not present fairly Financial statements depart from
GAAP Management unable to justify change
in accounting principle Effects of departure so highly material
that qualified opinion unwarranted
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GBW 8th ed., Ch. 320
DISCLAIMER OF OPINION
Auditor does not express opinion Scope limitation so material auditor
does not have reasonable basis to reach opinion
Auditor is not independent of management
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GBW 8th ed., Ch. 321
STANDARD REPORT MODIFICATIONS : Summary
Based in part on report of another auditorEmphasize a matterDeparture from GAAPInconsistencyScope limitationsGoing concernLack of independence
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GBW 8th ed., Ch. 322
MODIFICATIONS:Another Auditor
Principle auditor shares responsibility with another auditorModified wording in introductory & opinion paragraphs
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GBW 8th ed., Ch. 323
MODIFICATIONS:Emphasis of a Matter
Auditor wishes to emphasize a matter & still issue an unqualified opinionExplanatory paragraph added after opinion paragraphExample: The accompanying financialstatements have been re-stated
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GBW 8th ed., Ch. 324
MODIFICATIONS:Departure from GAAP With Agreement
Management’s financial statements depart from GAAP With auditor’s agreement
Unqualified opinion Explanatory paragraph after opinion
paragraph
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GBW 8th ed., Ch. 325
MODIFICATIONS:Limited Departure from GAAP
Management’s financial statements depart from GAAP Material departure from GAAP in
limited area Explanatory paragraph before opinion
paragraph & qualified opinion Example
As discussed in Note 2, the Bank has charged goodwill to shareholders’ equity but GAAP requires an asset
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GBW 8th ed., Ch. 326
MODIFICATIONS:Pervasive Departure from GAAP
Management’s financial statements depart from GAAP Pervasive departure from GAAP
Explanatory paragraph before opinion paragraph & adverse opinion
ExampleThe company carries property, plant, &
equipment at appraisal values but GAAP requires values not exceed cost.
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GBW 8th ed., Ch. 327
MODIFICATIONS:Justifiable Inconsistency
Management changes accounting principle(s) and justifies change Explanatory paragraph after opinion
paragraphExample As discussed in Note 3, the company changed
its method of accounting for goodwill & other intangibles
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GBW 8th ed., Ch. 328
MODIFICATIONS:Inconsistency not Justified
Management changes accounting principle(s) but fails to justify change Limited area
Explanatory paragraph before qualified opinion
Pervasive Explanatory paragraph before adverse
opinion
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GBW 8th ed., Ch. 329
MODIFICATIONS:Scope Limitation Limited Area
Prevent auditor from performing 1 or more necessary auditing procedures Limited area: Modify scope paragraph
Explanatory paragraph before qualified opinion Example
We were unable to obtain evidential matter supporting the Company’s representations regarding the contingent liability as discussed in Note 8.
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GBW 8th ed., Ch. 330
MODIFICATIONS:Pervasive Scope Limitation
Prevent auditor from performing 1 or more necessary auditing procedures Pervasive limitation
Modify introductory paragraph Omit scope paragraph Explanatory paragraph before disclaimer of
opinion Example
The Company did not give effect to all adjustments to the carrying value of assets & classification of liabilities resulting from bankruptcy proceedings
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GBW 8th ed., Ch. 331
MODIFICATIONS:Going Concern
When auditor retains substantial doubt as to ability of client to continue as a going concern (SAS 59)Explanatory paragraph after opinion paragraph
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GBW 8th ed., Ch. 332
MODIFICATIONS:Lack of Independence
Auditor is not independent of clientSAS 26 requires a 1-paragraph explanation with disclaimer of opinionExampleWe are not independent with respect to the
Trailways Company. . . .the balance sheet, statements of income, retained earnings, & cash flows were not audited by us. We do not express an opinion on them.
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GBW 8th ed., Ch. 333
REPORTS: COMPARATIVE STATEMENTS
When opinions differ Criteria for both opinions must be met
with explanatory paragraphsWhen opinion updated Update opinion paragraph & add
explanatory paragraph acknowledging change
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GBW 8th ed., Ch. 334
REPORTS ON ATTESTATION SERVICES
Letter communicating Management’s & attester’s
responsibilities Attester's opinion Management’s assertions (if written)
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GBW 8th ed., Ch. 335
UNQUALIFIED OPINION
Definition: unqualified opinion in attestation report means management’s assertions are fairly presented in the attester's opinion
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GBW 8th ed., Ch. 336
OTHER TYPES OF OPINIONS
Departures from attestation standards or measurement criteria require other opinion Qualified: assertions fairly presented except
for certain matter(s) Adverse: assertions are not fairly presented Disclaimer: attester does not express an
opinion usually due to insufficient evidence
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GBW 8th ed., Ch. 337
REPORTS FOR ASSURANCE SERVICESNot required
Short history of offering assurance services
Traditionally, reports not required Oscars Tony awards National book awards