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Published by Hengky Jaya

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Published by: Hengky Jaya on Aug 08, 2008
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Comprehensive Material Series
Audit Reports
Explain why auditors’ reports are important to users of financialstatements and why it is desirable to have standard wording.
: Auditor's reports are important to users of financial statements because theyinform users of the auditor's opinion as to whether or not the statements are fairlystated or whether no conclusion can be made with regard to the fairness of theirpresentation. Users especially look for any deviation from the wording of thestandard unqualified report and the reasons and implications of such deviations.Having standard wording improves communications for the benefit of users of theauditor’s report. When there are departures from the standard wording, users aremore likely to recognize and consider situations requiring a modification orqualification to the auditor’s report or opinion.2)
List the seven parts of a standard unqualified audit report andexplain the meaning of each part. How do the parts compare withthose found in qualified report?
: The unqualified audit report consists of:1.
Report title
Auditing standards require that the report be titled andthat the title includes the word
 Audit report address
The report is usually addressed to the company,its stockholders, or the board of directors.3.
Introductory paragraph
The first paragraph of the report does threethings: first, it makes the simple statement that the CPA firm has donean
. Second, it lists the financial statements that were audited,including the balance sheet dates and the accounting periods for theincome statement and statement of cash flows. Third, it states that thestatements are the responsibility of management and that theauditor's responsibility is to express an opinion on the statementsbased on an audit.4.
Scope paragraph
. The scope paragraph is a factual statement aboutwhat the auditor did in the audit. The remainder briefly describesimportant aspects of an audit.5.
Opinion paragraph
. The final paragraph in the standard report statesthe auditor's conclusions based on the results of the audit.6.
Name of CPA firm
. The name identifies the CPA firm or practitionerwho performed the audit.7.
 Audit report date
. The appropriate date for the report is the one onwhich the auditor has completed the most important auditingprocedures in the field. The same seven parts are found in a qualified report as in an unqualifiedreport. There are also often one or more additional paragraphs explaining reasonsfor the qualifications.3)
What are the purposes of the scope paragraph in the auditor’sreport? Identify the most important information included in thescope paragraph.
: The purposes of the scope paragraph in the auditor's report are to inform thefinancial statement users that the audit was conducted in accordance with generallyaccepted auditing standards, in general terms what those standards mean, andwhether the audit provides a reasonable basis for an opinion. The information in the scope paragraph includes:
Comprehensive Material Series1.The auditor followed generally accepted auditing standards.2.The audit is designed to obtain
reasonable assurance
about whether thestatements are free of 
misstatement.3.Discussion of the audit evidence accumulated.4.Statement that the auditor believes the evidence accumulated wasappropriate for the circumstances to express the opinion presented.4)
What are the purposes of the opinion paragraph in the auditor’sreport? Identify the most important information included in theopinion paragraph.
: The purpose of the opinion paragraph is to state the auditor's conclusions basedupon the results of the audit evidence. The most important information in theopinion paragraph includes:1.The words "in our opinion" which indicate that the conclusions are basedon professional judgment.2.A restatement of the financial statements that have been audited and thedates thereof or a reference to the introductory paragraph.3.A statement about whether the financial statements were presented fairlyand in accordance with generally accepted accounting principles.5)
On February 17, 2006, a CPA completed the field work on thefinancial statements for the Buckheizer Technology Corporation forthe year ended December 31, 2005. The audit in satisfactory in allrespects except for the existence of a change in accounting principlefrom FIFO to LIFO inventory valuation., which results in anexplanatory paragraph to consistency. On February 26, the auditorcompleted the tax return and the draft of the financial statements.The final audit report was completed, attached to the financialstatements, and delivered to the client on March 7. What is theappropriate date on the auditor’s report?:
 The auditor's report should be dated February 17, 2006, the date on which theauditor completed the most important auditing procedures in the field.6)
What five circumstances are required for a standard unqualifiedreport to be issued?
: An unqualified report may be issued under the following five circumstances:1.All statements—balance sheet, income statement, statement of retainedearnings, and statement of cash flows—are included in the financialstatements.2.The three general standards have been followed in all respects on theengagement.3.Sufficient evidence has been accumulated and the auditor has conductedthe engagement in a manner that enables him or her to conclude thatthe three standards of field work have been met.4.The financial statements are presented in accordance with generallyaccepted accounting principles. This also means that adequatedisclosures have been included in the footnotes and other parts of thefinancial statements.5.There are no circumstances requiring the addition of an explanatoryparagraph or modification of the wording of the report.7)
Describe the additional information included in the introductory,scope, and opinion paragraphs in a combined audit report onfinancial statements and the effectiveness of internal control over
Comprehensive Material Series
financial reporting. What is the nature of the additional paragraphsin the audit report?
: The introductory, scope and opinion paragraphs are modified to include referenceto management’s report on internal control over financial reporting, and the scopeof the auditor’s work and opinion on internal control over financial reporting. Theintroductory and opinion paragraphs also refer to the framework used to evaluateinternal control. Two additional paragraphs are added between the scope andopinion paragraphs that define internal control and describe the inherent limitationsof internal control.8)
What type of opinion should an auditor issue when the financialstatements are not in accordance with GAAP because suchadherence would result in misleading statements?
: When adherence to generally accepted accounting principles would result inmisleading financial statements there should be a complete explanation in aseparate paragraph. The separate paragraph should fully explain the departure andthe reason why generally accepted accounting principles would have resulted inmisleading statements. The opinion should be unqualified, but it should refer to theseparate paragraph during the portion of the opinion in which generally acceptedaccounting principles are mentioned.9)
Distinguish between an unqualified report with explanatoryparagraph or modified wording and a qualified report. Give exampleswhen an explanatory paragraph or modified wording should be usedin an unqualified opinion.
: An unqualified report with an explanatory paragraph or modified wording is thesame as a standard unqualified report
that the auditor believes it isnecessary to provide additional information about the audit or the financialstatements. For a qualified report, either there is a scope limitation (condition 1) ora failure to follow generally accepted accounting principles (condition 2). Undereither condition, the auditor concludes that the overall financial statements arefairly presented. Two examples of an unqualified report with an explanatory paragraph ormodified wording are:1.The entity changed from one generally accepted accounting principleto another generally accepted accounting principle.2.A shared report involving the use of other auditors.10)
Describe what is meant by a reports involving the use of otherauditors. What are the three options available to the principalauditor and when should each be used?
: When another CPA has performed part of the audit, the primary auditor issuesone of the following types of reports based on the circumstances.1.No reference is made to the other auditor. This will occur if the otherauditor audited an immaterial portion of the statement, the otherauditor is known or closely supervised, or if the principal auditor hasthoroughly reviewed the other auditor's work.2.Issue a shared opinion in which reference is made to the other auditor. This type of report is issued when it is impractical to review the work of the other auditor or when a portion of the financial statements auditedby the other CPA is material in relation to the total.

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