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Chapter 3

Audit Reports

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Describe the parts of the standard
unqualified audit report for non-public
entities under AICPA auditing standards.
Specify the conditions required to issue the
standard unqualified audit report.
Understand reporting on financial
statements and internal control under
PCAOB auditing standards.

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Describe the five circumstances when an
unqualified report with an emphasis-of-
matter explanatory paragraph or modified
wording is appropriate.
Identify the types of audit reports that can
be issued when an unqualified opinion is
not justified.
Explain how materiality affects audit
reporting decisions.
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Draft appropriately modified audit reports
under a variety of circumstances.
Determine the appropriate audit report for
a given audit situation.
Understand use of international
accounting and auditing standards by U.S.
companies.

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1
Describe the parts of the standard
unqualified audit report for non-public
entities under AICPA auditing standards.

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1. Report title
2. Audit report address
3. Introductory paragraph
4. Management’s Responsibility
5. Auditor’s Responsibility
6. Opinion Paragraph
7. Name and Address of CPA firm
8. Audit report date

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2
Specify the conditions required to issue the
standard unqualified audit report.

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1. Includes all financial statements
2. Sufficient appropriate evidence
3. Financial statements present in accordance
with U.S.GAAP
4. No circumstances require an explanatory
paragraph or report modification

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Understand reporting on financial statements
and internal control under PCAOB auditing
standards.

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Auditors of public companies subject to
Section 404 of the Sarbanes-Oxley Act must
report on the effectiveness of internal
control over financial reporting.

PCAOB Auditing Standard 5 requires


the audit of internal control to be integrated
with the audit of the financial statements.

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Sarbanes- ICFR
Oxley Accelerated Filer Effectiveness
Sec.404 Audits

Permanent
2010 Non-accelerated
Filer Exemption
Legislation

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Separate Report on Financial Statements and
Internal Control Over Financial Reporting

1. Introductory paragraph
2. Scope paragraph
3. Definition paragraph
4. Inherent limitations paragraph
5. Opinion paragraph
6. Cross-Reference Paragraph

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4
Describe the five circumstances when an
unqualified report with an emphasis-of-
matter explanatory paragraph or modified
wording is appropriate.

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1. Lack of consistent application of generally
accepted accounting principles
2. Substantial doubt about going concern
3. Auditor agrees with a departure from
promulgated accounting principles
4. Emphasis of a matter
5. Reports involving other auditors

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Auditors must note circumstances in which
accounting principles are not consistently
applied

Auditor should modify the report when a


material change occurs by adding an
explanatory paragraph in the report

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 Significant recurring operating
losses or working capital deficiencies.
 Inability of the company to pay its
obligations as they come due.
 Loss of major customers, the
occurrence of uninsured catastrophes.
 Legal proceedings, legislation that
might jeopardize the entity’s ability to operate.

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Departure may not require a qualified or
adverse opinion

The auditor must separately explain in the


audit report that adhering to the principle
would have produced a misleading result.

Circumstances are unusual

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Under certain circumstances, the CPA may
want to emphasize specific matters regarding
the financial statements, even though the
CPA intends to express an unqualified opinion.

Subsequent Related Party


Events Transactions

Financial
Material
Statement
Uncertainties
Comparability

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1. Make no reference in the audit report

2. Make reference in the report


(modified wording report)

3. Qualify the opinion

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5
Identify the types of audit reports that can be
issued when an unqualified opinion is not
justified.

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1. Scope limitation

2. GAAP departure

3. Auditor not independent

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A qualified opinion report can result from
a limitation on the scope of the audit or
failure to follow generally accepted
accounting principles.

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Auditor believes the financial statements are
not presented fairly in conformity with GAAP.

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Issued when the auditor is unable
to be satisfied that the overall financial
statements are fairly presented.

Can arise only from a lack of


knowledge by the auditor.

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Explain how materiality affects audit reporting
decisions.

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

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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.

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Failure to
follow GAAP

Audit report

Qualified
Unqualified Adverse
opinion only

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Materiality Significance in Terms of Type of
Level Reasonable Users’ Decisions Opinion

Users’ decisions are unlikely


Immaterial to be affected. Unqualified

Users’ decisions are likely


Material to be affected. Qualified

Highly Users’ decisions are likely Disclaimer


material to be significantly affected. or adverse

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 Dollar amount compared with a base

 Measurability

Nature of the item

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Scope
limitation

Audit report

Qualified scope
Unqualified Disclaimer
and opinion

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Draft appropriately modified audit reports
under a variety of circumstances.

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 Auditor’s scope has been restricted

Statements are not in conformity with GAAP

Auditor is not independent

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Determine the appropriate audit report for a
given audit situation.

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Determine whether any conditions exists
requiring a departure from a standard
unqualified report.

Write
Decide Decide appropriate
Audit
type of report
Materiality Report

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The auditor is not independent.

There is a scope limitation.

Going concern uncertainty exists.

Statements are not prepared in


accordance with GAAP.

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9
Understand proposed use of international
accounting and auditing standards by U.S.
companies.

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Globalization of world’s capital markets are
leading to calls for a single set of accounting
standards to be used around the world.

2015
SEC Implementation
If plan is approved?
Developing of IFRS
into U.S.
Workplan

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Copyright

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without the prior written permission of the publisher. Printed in the
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