Announcements: Sunday, April 16 Sunday, April 16

Announcements
1. All chapter slide decks are available on UM Learn

2. Additional bank reconciliation exercise problems are available
on UM Learn
3. The homework assignment for Chapter 16 is available on
Mylab and due Wednesday, April 12, at 9:00 a.m.
4. The homework assignments for Chapter 17 and 18 are
available on Mylab and due Sunday, April 16, at 9:00 a.m.
5. Data analytics project 2 is due Sunday, April 16, at 9:00 a.m.
6. Practice final is available on Mylab
Copyright © 2022 Pearson Canada Inc. 18 - 1

Announcements
• Final exam
– Time: Friday, April 14, from 1:30 p.m. to 3:30 p.m.
– Location: E2-130 EIT Complex; Seats 1 – 40
– Content:
 Not comprehensive; covers chapters 9-12 and 16-18
– Only materials covered in the lectures will be on the
exam
 60 multiple-choice questions
 Closed-book exam; no cheat sheets are allowed
 Bubble sheets to be used. Please bring pencils
 Some questions involve calculation. Please bring a
financial calculator; cell phones are not allowed
Auditing: The Art and Science of Assurance
Engagements
Fifteenth Canadian Edition
Chapter 18
Audit Reports on Financial
Statements

Learning Objectives
1. Explain the auditor’s reporting responsibilities.
2. Specify the conditions required to issue the unmodified audit
opinion.
– Describe the elements of the auditor’s report with an unmodified
audit opinion.
– Explain the auditor’s reporting responsibilities in relation to going
concern.
– Identify key audit matters that are required to be disclosed in an
audit report.
– Understand the issues that may arise during the course of an
audit that could require an Emphasis of Matter or Other Matter
paragraph to be included in the audit report.

Learning Objectives
7. Apply professional judgment to determine if the audit opinion
must be modified.
8. Describe financial statement audits where the auditor decides
that a qualified audit opinion is necessary and explain the
required modifications.
that an adverse opinion is necessary and explain the required
modifications.
that a disclaimer of opinion is necessary.

The Audit Opinion and the Auditors’
Reporting Responsibilities
• When auditors perform the financial statement audit,
they have the responsibility to:
(1) form an opinion on the financial statements, and
(2) issue the opinion in a written report that describes
the basis of the conclusion.

Four Types of Audit Opinions
• Unqualified / unmodified audit opinion (clean opinion)
• Qualified audit opinion
• Adverse opinion
• Disclaimer
Blank Material but Not Pervasive Material and Pervasive
Financial statements are Qualified (except for) opinion Adverse opinion
materially misstated
(GAAP departure).
Inability to obtain sufficient Qualified (except for) opinion Disclaimer of opinion
appropriate audit evidence
(scope limitation).

The Unmodified Audit Opinion
• An unmodified audit opinion, or a “clean opinion,” is
the most common type of audit report.
– It is the most common report because companies will
typically make the required adjustments to the financial
statements and disclosures rather than receive a
qualified opinion.
– In the case of public companies, securities legislation
requires an unmodified audit opinion.

Five Necessary Conditions for Unmodified
Audit Opinions
1. An audit engagement has been undertaken to express an
opinion on financial statements.
2. The auditor followed generally accepted auditing standards
(GAAS).
– Auditors cannot issue an unmodified opinion if they are not
independent
3. The auditor was able to perform all necessary procedures.
– Auditors cannot form an opinion without performing all
necessary procedures.
– If auditors cannot perform all necessary procedures, they
should qualify or disclaim an opinion

Five Necessary Conditions for Unmodified
Audit Opinions
4. The auditor was able to obtain sufficient appropriate evidence
to conclude that the financial statements as a whole are free
from material misstatement.
– If auditors was unable to obtain sufficient appropriate
evidence, they should qualify or disclaim an opinion
5. The financial statements, which include the balance sheet, the
income statement, the statement of retained earnings, the
cash flow statement, and the notes to the financial statements,
are fairly presented in accordance with an appropriate
applicable financial reporting framework.
4. If auditors identify material departures from the applicable
financial reporting framework, they should issue a qualified or
adverse opinion
Identify and Disclose Key Audit Matters
• Key audit matters are matters that, in the auditor's
professional judgment, were of most significance in
the audit of the entity’s financial statements of the
current period. Example:
1. Areas of higher assessed risk of material
misstatement and items that require significant
judgment (such as estimates);
2. Items for which the auditor encountered significant
difficulty (such as in obtaining sufficient evidence);
and
3. Modifications to the planned approach due to control
deficiencies.
By their very nature, issues related to going concern
are key audit matters

Emphasis of Matter(s) Paragraph
• The emphasis of matter paragraph does not affect the audit opinion;
however, there may be certain matters that, even if they are clearly
disclosed in the financial statement, are such that the auditor
considers it necessary to draw the user’s attention to them. The
paragraph follows immediately after the basis of opinion section.
– Material uncertainty for going concern
– Significant uncertainty regarding the future outcome of exceptional
litigation or regulatory action.
– Early application of a new accounting standard that has a
pervasive effect on the financial statements.
– A major catastrophe that has had or continues to have an impact
on the entity.
– Threats of expropriation of assets.
– Significant transactions with related parties.
– Unusually important subsequent events.
Reporting Material Uncertainty for Going
Concern
• The going concern basis of accounting is the default basis of
accounting under which financial statements are prepared. The
assumption is that the firm is a going concern, which means that the
firm is financially stable enough to meet its obligations and continue its
business for the foreseeable future.
• The firm is no longer a going concern when, for example, it is no

longer financially viable as a business and faces imminent liquidation.
In such cases, the firm cannot use the going concern basis of
accounting.
• Instead, it should prepare its financial statements under the liquidation

basis of accounting.
• Using the going concern basis when it should not be used will have a
material and pervasive effect on the financial statements. Hence, the
auditor will issue an adverse opinion.
Concern
• It is possible that the auditor concludes that the firm is still
a going concern but certain events or conditions may cast
doubt about the firm's ability to be a going concern.
– To paraphrase in plain language: "We think the client
will continue to exist; but there's some risk that it will go
bankrupt.“
• When this situation happens, it can lead to the following

scenarios:
1. No material uncertainty exists
2. Material uncertainty exists

No Material Uncertainty Exists
• The auditor identifies events or conditions that may cast
doubt on the entity’s ability to continue as a going concern.
Based on the audit evidence obtained, the auditor
concludes that no material uncertainty exists.
• In such case, the auditor issues an unmodified opinion
with additional explanatory discussion about the events in
the key audit matter paragraph.
• To paraphrase in plain language: "We think the client will
continue to exist; yeah there's some risk that the client will
go bankrupt, but the risk is not substantial."

Material Uncertainty Exists
• The auditor concludes that material uncertainty exists
related to events or conditions that may cast doubt on the
entity’s ability to continue as a going concern.
• This situation leads to the following two scenarios:
1. The client adequately discloses such uncertainty in
the financial statements.
2. The client does not adequately disclose such
uncertainty in the financial statements.

Material Uncertainty Adequately Disclosed
• The client adequately discloses such uncertainty in the
financial statements. In this case, the financial statements
are still fairly stated.
• The auditor issues an unmodified opinion with additional
explanatory discussion about the material uncertainty in
the going concern paragraph and key audit matter
paragraph.
continue to exist; but there's a substantial risk that it will go
bankrupt. This risk has been appropriately disclosed in the
financial statements."

Material Uncertainty Inadequately
Disclosed
• The client does not adequately disclose such uncertainty
in the financial statements. The failure to disclose is a
material departure from GAAP.
• Depending on the departure's pervasiveness, the auditor
issues a qualified or adverse opinion.
continue to exist; but there's a substantial risk that it will go
bankrupt. This risk has not been appropriately disclosed in
the financial statements."

Concern
Condition Reporting
The use of the going-concern basis Adverse opinion
of accounting is inappropriate.
A description of this circumstance in the
Basis for Adverse Opinion section
Reference the Basis of Adverse Opinion

The use of the going-concern basis Unmodified opinion Material Uncertainty
of accounting is appropriate, but a
material uncertainty exists related Related to Going Concern paragraph
to events or conditions that may (with reference to the note in the financial
cast significant doubt on the statements that describes the material
entity’s ability to continue as a uncertainty)
going concern.
Reference to Material Uncertainty Related
Disclosures in the financial to Going Concern in Key Audit Matters
statements are adequate

Condition Reporting
The use of the going-concern basis of Qualified or adverse opinion is
accounting is appropriate, but a appropriate Description of this
material uncertainty exists related to circumstance in the Basis for
events or conditions that may cast
doubt on the entity’s ability to continue Qualified/Adverse Opinion section
as a going concern. Reference the Basis for
Disclosures in the financial Qualified/Adverse Opinion in the Key

statements are inadequate or omitted. Audit Matters section
The use of the going-concern basis of Unmodified opinion
accounting is appropriate, but events
or conditions were identified that may Report as a Key Audit Matters
cast doubt on the entity’s ability to
continue as a going concern.
Based on the audit evidence

obtained, the auditor concludes that
no material uncertainty exists (a close
call).

The Going Concern section immediately
follows the basis of opinion paragraph
and is before the key matters section

Other Matter(s) Paragraph
• The auditor may consider it necessary to use the audit report to
communicate to users relevant information not in the financial
statements.
– Law, regulations, or a common practice requires or permits
the auditor to elaborate on certain matters.
– The auditor has other reporting responsibilities that are in
addition to the financial statements.
– The entity has prepared more than one set of financial
statements.
– The financial statements were prepared for a special
purpose.

The other matter(s) paragraph can appear in various places. If there is a key audit
matters section in the report, the auditor may place other matter(s) after the Key
Audit Matters section

Key Audit Matters vs Emphasis of Matter
and Other Matter
• The emphasis of matter and other matter paragraphs are
not substitutes for Key Audit Matters.
• There may be instances when a matter is not a Key Audit
Matter (because it did not require significant auditor
attention), but is fundamental to users’ understanding of
the financial statements, the audit, the auditor’s
responsibilities, or the auditor’s report (such as a
subsequent event).

Double Dating of the Auditor’s Report
• Double dating is done when a material event occurs after
the date of the auditor’s report and before the date the
report is issued.
• The preference is for the auditor to do additional fieldwork
based upon the revised, reapproved financial statements
so that the audit report applies to the whole set of financial
statements (CAS 560.11).
• However, if it is possible for the auditor to conduct work
separately for the material event, the auditor may double
date the report as follows:
– March 1, 2021, except for Note 17, which is as of April 2,
2021.
Quiz
• Bianca Jones was engaged to conduct the audit of Smilicor
Company (a toy distributor) three months after its year-end date.
Bianca was unable to conduct an audit of the opening inventory
but was able to obtain evidence to satisfy herself with respect to
the opening balances. She was also able to conduct audit
procedures for other opening balances; for example, by
observing fixed assets. What type of audit opinion would
Smilicor receive?
• A) disclaimer
• B) adverse
• C) modified
• D) unmodified
Quiz
• Bianca Jones was engaged to conduct the audit of Smilicor
Company (a toy distributor) three months after its year-end date.
Bianca was unable to conduct an audit of the opening inventory
but was able to obtain evidence to satisfy herself with respect to
the opening balances. She was also able to conduct audit
procedures for other opening balances; for example, by
observing fixed assets. What type of audit opinion would
Smilicor receive?
• A) disclaimer
• B) adverse
• C) modified
• D) unmodified
Quiz
• The standard unmodified audit report in the auditor
responsibility section states that the audit is designed
to
• A) discover all errors and/or irregularities.
• B) discover material errors and/or irregularities.
• C) obtain reasonable assurance that the statements
are free of material misstatement.
• D) conform to a generally accepted financial reporting
framework.

Quiz
• The standard unmodified audit report in the auditor
responsibility section states that the audit is designed
to
• A) discover all errors and/or irregularities.
• B) discover material errors and/or irregularities.
• C) obtain reasonable assurance that the
statements are free of material misstatement.
• D) conform to a generally accepted financial reporting
framework.

Quiz
• An audit report has the following date: "February 28,
2021, except for Note 10, which is as of March 17,
2021." This is an example of
• A) a qualified opinion.
• B) a notice to reader.
• C) a double-dated audit report.
• D) a modified opinion.

Quiz
• An audit report has the following date: "February 28,
2021, except for Note 10, which is as of March 17,
2021." This is an example of
• A) a qualified opinion.
• B) a notice to reader.
• C) a double-dated audit report.
• D) a modified opinion.

Four Types of Audit Opinions
• Unqualified / unmodified audit opinion (clean opinion)
• Qualified audit opinion
• Adverse opinion
• Disclaimer
Blank Material but Not Pervasive Material and Pervasive
Financial statements are Qualified (except for) opinion Adverse opinion
materially misstated
(GAAP departure).
Inability to obtain sufficient Qualified (except for) opinion Disclaimer of opinion
appropriate audit evidence
(scope limitation).

Qualified Audit Opinions
• Whenever an auditor issues a qualified opinion, he
or she must use the term except for or, less frequently,
except that or except as in the opinion paragraph.
• Details of the exception are provided in a separate
paragraph, “Basis for Qualified Opinion,” which follows
the Qualified Opinion paragraph.
• The provincial securities commissions will not accept
qualified statements from a public company except in
unusual situations.

Qualified Report: Financial Statements Are
Materially Misstated but Not Pervasive (1 of 2)
• CAS 705.A3 highlights the causes of financial
misstatements:
– An inappropriate accounting treatment (for example,
expensing capital assets);
– An inappropriate or unreasonable estimate (for
example, failure to provide an adequate allowance for
doubtful accounts); and
– A failure to disclose essential information in an
informative manner (for example, failure to adequately
disclose a going concern problem or a material
contingency).

Qualified Report: Scope Limitation That Is Material but Not Pervasive

Reliance on Another Auditor or a Specialist
• In Canada, the group auditor takes responsibility for the
audit opinion, and only the name of the group auditor
appears on the auditor’s report.
• If the group auditor is unable to remedy the quality of the
component’s auditors’ work, and the group auditor decides
that he or she is unable to rely upon the work of the
component auditors, a qualified opinion or disclaimer of
opinion is the most appropriate course of action.
• In the explanation of the qualification or in the basis for
disclaimer paragraph, the auditor could mention the name
of the component auditor in explaining the reason for the
qualification (scope limitation).
Reliance on Another Auditor or a Specialist
• In the case of reliance on a specialist, such as an actuary,
the auditor would normally not mention the specialist or
reliance on the specialist, because if the quality of work of
the specialist is poor, the auditor could hire another
specialist.
• However, if the auditor believes that a qualified opinion or
disclaimer of opinion is appropriate and the qualification
arises because of an inability to rely on the work of the
specialist, the explanation of the qualification in the basis
paragraph would mention the name of the specialist in
explaining the reason for the qualification (scope
limitation).
Adverse opinion: financial statements contain material and pervasive misstatements

Disclaimer of Opinion
• When a disclaimer of opinion is required, the
introductory statement is modified to indicate that the
auditors were engaged to audit (rather than that they
conducted the audit).
• The auditor’s responsibility section is severely
truncated, reflecting the fact that an audit could not be
conducted, while an explanatory basis paragraph is
included prior to the renamed and revised disclaimer
of opinion paragraph.

Quiz
• A PA finds that the client has not capitalized a material
amount of leases in the financial statements. When
considering the materiality of this departure from
IFRS, the PA's reporting options are
• A) qualified or adverse opinion.
• B) unmodified or disclaimer of opinion.
• C) unmodified or qualified opinion.
• D) unmodified opinion with an Emphasis of Matter
paragraph.

Quiz
• A PA finds that the client has not capitalized a material
amount of leases in the financial statements. When
considering the materiality of this departure from
IFRS, the PA's reporting options are
• A) qualified or adverse opinion.
• B) unmodified or disclaimer of opinion.
• C) unmodified or qualified opinion.
paragraph.

Quiz
• An auditor has found that the client is suffering financial
difficulty and that the going-concern status is seriously in
doubt. The client has not placed good disclosures in the
financial statements. Which of the following audit report
alternatives must the PA choose?
• A) qualified or adverse opinion
• B) disclaimer of opinion
• C) unmodified opinion
paragraph

Quiz
• An auditor has found that the client is suffering financial
difficulty and that the going-concern status is seriously in
doubt. The client has not placed good disclosures in the
financial statements. Which of the following audit report
alternatives must the PA choose?
• A) qualified or adverse opinion
• B) disclaimer of opinion
• C) unmodified opinion
paragraph

Quiz
• The auditor's report of the Samcorp Company
indicates that the auditor is unable to form an opinion
on whether the financial statements of the company
are fairly presented due to scope restrictions, and
unavailable and incomplete records. The auditor's
report
• A) is unmodified.
• B) is qualified.
• C) is adverse.
• D) is a disclaimer of opinion.
Quiz
• The auditor's report of the Samcorp Company
indicates that the auditor is unable to form an opinion
on whether the financial statements of the company
are fairly presented due to scope restrictions, and
unavailable and incomplete records. The auditor's
report
• A) is unmodified.
• B) is qualified.
• C) is adverse.
• D) is a disclaimer of opinion.

Announcements: Sunday, April 16 Sunday, April 16

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Announcements: Sunday, April 16 Sunday, April 16

Uploaded by

Copyright:

Available Formats

Announcements

1. All chapter slide decks are available on UM Learn

Copyright © 2022 Pearson Canada Inc. 18 - 1

Copyright © 2022 Pearson Canada Inc. 18 - 3

Copyright © 2022 Pearson Canada Inc. 18 - 4

Copyright © 2022 Pearson Canada Inc. 18 - 5

Copyright © 2022 Pearson Canada Inc. 18 - 6

Copyright © 2022 Pearson Canada Inc. 18 - 7

Copyright © 2022 Pearson Canada Inc. 18 - 8

Copyright © 2022 Pearson Canada Inc. 18 - 9

Copyright © 2022 Pearson Canada Inc. 18 - 18

• The firm is no longer a going concern when, for example, it is no

• Instead, it should prepare its financial statements under the liquidation

• When this situation happens, it can lead to the following

Copyright © 2022 Pearson Canada Inc. 18 - 21

Copyright © 2022 Pearson Canada Inc. 18 - 22

Copyright © 2022 Pearson Canada Inc. 18 - 23

Copyright © 2022 Pearson Canada Inc. 18 - 24

Copyright © 2022 Pearson Canada Inc. 18 - 25

Reference the Basis of Adverse Opinion

Copyright © 2022 Pearson Canada Inc. 18 - 26

Disclosures in the financial Qualified/Adverse Opinion in the Key

Based on the audit evidence

Copyright © 2022 Pearson Canada Inc. 18 - 27

Copyright © 2022 Pearson Canada Inc. 18 - 28

Copyright © 2022 Pearson Canada Inc. 18 - 29

Copyright © 2022 Pearson Canada Inc. 18 - 30

Copyright © 2022 Pearson Canada Inc. 18 - 31

Copyright © 2022 Pearson Canada Inc. 18 - 35

Copyright © 2022 Pearson Canada Inc. 18 - 36

Copyright © 2022 Pearson Canada Inc. 18 - 37

Copyright © 2022 Pearson Canada Inc. 18 - 38

Copyright © 2022 Pearson Canada Inc. 18 - 39

Copyright © 2022 Pearson Canada Inc. 18 - 40

Copyright © 2022 Pearson Canada Inc. 18 - 41

Copyright © 2022 Pearson Canada Inc. 18 - 43

Copyright © 2022 Pearson Canada Inc. 18 - 46

Copyright © 2022 Pearson Canada Inc. 18 - 47

Copyright © 2022 Pearson Canada Inc. 18 - 49

Copyright © 2022 Pearson Canada Inc. 18 - 50

Copyright © 2022 Pearson Canada Inc. 18 - 51

Copyright © 2022 Pearson Canada Inc. 18 - 52

You might also like