Professional Documents
Culture Documents
PROFESSIONAL AUDITING
STANDARDS
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2.1.WHAT IS AUDITING STANDARDS?
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2.2.1. General Standards
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2.2.3. Standards of Reporting
The auditor must state in the auditor’s report:
1. Whether the financial statements are presented in accordance
with generally accepted accounting principles (GAAP)/IFRS
2. The audit report must state whether the GAAP/IFRS
3. has been consistently applied with that of the preceding period.
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3. When the auditor determines that informative
disclosures are not reasonably adequate, the auditor
must so state in the auditor’s report.
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Audit reports
2.4. Types of Audit Reports
Four Types/Categories of Audit Reports
1. Standard unqualified audit report
2. Unqualified with explanatory paragraph or modified wording
3. Qualified opinion
4. Adverse or disclaimer opinion
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2.4.1.Parts of the Standard Unqualified Audit Report/A Clean Opinion
This type of report is issued by an auditor when the financial statements
presented are free from material misstatements and are presented fairly in
accordance with the Generally Accepted Accounting Principles (GAAP), which
in other words means that the company’s financial condition, position, and
operations are fairly presented in the financial statements.
The auditor’s standard unqualified audit report contains seven distinct parts
1. Report title. Auditing standards require that the report be titled and that
the title include the word independent.
For example, appropriate titles include “independent auditor’s report,” “report
of independent auditor,” or “independent accountant’s opinion.
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2. Audit Report Address-to company, SH’s or BOD
3. Introductory paragraph – contains 3 things
A. CPA firm done the audit, B. Types of FS,
C. preparation of the FS is the responsibility of management
4. Scope paragraph- is a factual statement about what the auditor did in the
audit.
GAAP/GAAS, Also in this paragraph states that the audit is designed to
obtain reasonable assurance that whether financial information is free from
material misstatement, the evidence accumulated written in this paragraph.
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5.Opinion paragraph- states auditor’s conclusion based on the
result of the audit.
It is an opinion rather than a statement of absolute fact or a
guarantee, it is professional judgment, state FS is prepared according
to GAAP
6. Name of CPA firm- legal & professional responsibility /signature
7. Audit report date: The appropriate date for the report is the one on
which the auditor completed the auditing procedures in the field.
Specimen for Unqualified.doc
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Conditions for Standard Unqualified Audit Report
The standard unqualified audit report is issued when the following
conditions have been met:
1. All statements — balance sheet, income statement, statement of
retained earnings, and statement of cash flows—are included in the
financial statements.
2. The three general standards have been followed in all respects on
the engagement.
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3.Sufficient appropriate evidence has been accumulated, and the
auditor has conducted the engagement/commitment in a manner that
enables him or her to conclude that the three standards of field work
have been met.
4.The financial statements are presented in accordance with
GAAP/IFRS.
5. If there are no circumstances requiring the addition of an
explanatory paragraph or modification of the wording of the report.
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2.4.2. UNQUALIFIED AUDIT REPORT WITH
EXPLANATORY PARAGRAPH OR MODIFIED
WORDING
An unqualified audit report is issued, but the wording deviates from
the standard unqualified report. The unqualified audit report with
explanatory paragraph or modified wording meets the criteria of a
complete audit with satisfactory results and financial statements that are
fairly presented, but the auditor believes it is important or is required to
provide additional information.
Describe the 5 circumstances when an unqualified report with an
explanatory paragraph or modified wording is appropriate.
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A complete audit took place with satisfactory results and
financial statements that are fairly presented but the auditor
believes that it is important or is required to provide additional
information.
In a qualified, adverse, or disclaimer report, the auditor either has
not performed a satisfactory audit, is not satisfied that the financial
statements are fairly presented, or is not independent.
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Causes of such Audit Reports are:
1. Lack of consistent application of GAAP/IFRS
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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PROFESSIONAL QUALIFICATION REQUIREMENTS
• A professional accountant should perform professional
services with due care, competence and diligence and has a
continuing duty to maintain professional knowledge and skill
at a level required to ensure that a client or employer receives
the advantage of competent professional service based on up-
to-date development in practice, legislation and techniques.
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PROFESSIONAL ETHICS
• All recognized professions have developed codes of professional
ethics. Professional ethics refer to the basic principles of right
action for the member of a profession.
• Professional ethics may be regarded as a mixture of moral and
practical concepts.
• Thus the professional ethics of an accountant would signify his
behavior towards his fellows in the profession and other
professions and towards members of the public. 24
- Integrity: - An accountant should be straightforward, honest
and sincere in his approach to his professional work.
- Objectivity: - An accountant should be fair and should not
allow bias to override his objectivity.
- Independence: - When in public practice, an accountant should
both be and appear to be free of any interest which might be
regarded, whatever its actual effect, as being incompatible with
integrity and objectivity.
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- Confidentiality: - A professional accountant should respect the confidentiality
of information acquired in the course of his work and should not disclose any
such information to a third party without specific authority or unless there is a
legal or professional duty to disclose.
- Technical standards: - An accountant should carry out his professional work in
accordance with the technical and professional standards relevant to that work.
- Professional competence: - An accountant has a duty to maintain his level of
competence throughout his professional career. He should only undertake
works, which he or his firm can expect to complete with professional
competence.
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- Ethical behavior: - An accountant should conduct himself with a good reputation of the
profession and refrain from any conduct, which might bring discredit to the profession.
- Contingent fess: - The AICPA (American Institute of Certified Public Accountants) code
of professional conduct prohibits a CPA firm from rendering any professional services on
a contingent fee basis.
- Responsibilities to colleagues: - The auditor should promote cooperation and good
relations with other members of the profession.
- Advertising: - The advertising should not be false or misleading,” should not contravene
“professional good taste,” should not make “unfavorable reflection on the competence or
integrity of the profession,” and should not” involve a statement the contents of which”
cannot be substantiated.
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LEGAL RESPONSIBILITY AND LIABILITY OF
AUDITORS
• The auditor is responsible for his report. The auditor then has
certain duties to fulfill to the users of the financial statements
that he reports on.
• Responsibilities impose liabilities if things go wrong.
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Liable for what?
• The CPA can be sued under the following legal concepts.
(i) Prudent man concept: - The auditor is responsible for exercising due
professional care, and he is subject to lawsuit if he fails to do so.
(ii)Liable for acts of others: - The partners are jointly liable for civil
actions against a partner.
(iii)Lack of privileged communication: - CPAs do not have the right
under common law to withhold information from the courts on the
grounds that the information is privileged.
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MATERIALITY
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.
Levels of Materiality
Amounts are immaterial: When a misstatement in the financial statement exists but is unlikely to
affect the decision of a reasonable user, it is considered to be immaterial.
Amounts are material but do not overshadow the financial statements as a whole:
misstatement in the financial statement would affect a user’s decision but the overall statements are
still fairly stated and therefore useful.
Amounts are so material or so pervasive that overall fairness of the statements is in question:
highest level of materiality exists when users are likely to make incorrect decisions if they rely on
the overall financial statements when the highest level of materiality exists
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Audit reports
2.4. Types of Audit Reports
Four Types/Categories of Audit Reports
1. Standard unqualified audit report
2. Unqualified with explanatory paragraph or modified wording
3. Qualified opinion
4. Adverse or disclaimer opinion
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2.4.1.Parts of the Standard Unqualified Audit Report/A Clean
Opinion
This type of report is issued by an auditor when the financial statements
presented are free from material misstatements and are presented fairly in
accordance with the Generally Accepted Accounting Principles (GAAP),
which in other words means that the company’s financial condition, position,
and operations are fairly presented in the financial statements.
The auditor’s standard unqualified audit report contains seven distinct parts
1. Report title. Auditing standards require that the report be titled and that the
title include the word independent.
7. Audit report date: The appropriate date for the report is the one on
which the auditor completed the auditing procedures in the field.
Specimen for Unqualified.doc 34
Conditions for Standard Unqualified Audit Report
4. Emphasis of a matter
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The first four reports all require an explanatory
paragraph.
In each case, the 3 standard report paragraph are
included with out modification, and a separate
explanatory paragraph follows the opinion paragraph.
Only reports involving the use of other auditor use a
modified wording report. This report contains three
paragraphs and all three paragraphs are modified 40
1. Lack of Consistent Application of GAAP
E.g.
The existence of significant related party transaction
Important events occurring subsequent to the balance sheet date, etc.
Material uncertainties disclosed in the footnotes
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5. Reports Involving Other Auditors
When the CPA relies on a different CPA firm to perform
part of the audit, which is common when the client has
several widespread branches or subdivisions, the
principal CPA firm has three alternatives.
Only the second is an unqualified report with modified
wording.
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A . Make no reference in the audit report.
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B. Make reference in the report
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C. Qualified opinion-
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4.2.3. DEPARTURES FROM AN UNQUALIFIED AUDIT
REPORT
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Departures from An Unqualified Opinion
1. Scope limitation
2. GAAP departure
3. Auditor not independent
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3. The Auditor Is Not Independent
Independence ordinarily is determined by Rule 101 of the rules of
the Code of Professional Conduct.
Three main types of audit reports are issued under these
conditions:
1. Qualified Opinion
2. Adverse Opinion
3. Disclaimer Opinion.
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1. Qualified Opinion
A Qualified Opinion report is issued when the auditor encountered one of the
two types of situations which do not comply with generally accepted
accounting principles, however, the rest of the financial statements are fairly
presented.
This type of opinion is very similar to an unqualified or “clean opinion”, but
the report states that the financial statements are fairly presented with a
certain exception which is otherwise misstated.
A qualified opinion report can result from a limitation on the scope of the
audit or failure to follow generally accepted accounting principles. 53
2. Adverse Opinion
An Adverse Opinion is issued when the auditor
determines that the financial statements of client are
materially misstated and, when considered as a whole,
do not conform with GAAP.
It is used only when the auditor believes that the overall
financial statements are so materially misstated or
misleading that they do not present fairly the financial
position or results of operations and cash flows in
conformity with GAAP.
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5. Disclaimer of Opinion
Is issued when the auditor could not form, and consequently
refuses to present an opinion on the financial statements.
This type of report is issued when the auditor tried to audit an
entity but could not complete the work due to various reasons
and does not issue an opinion.
It is issued when the auditor is unable to be satisfied that the
overall financial statements are fairly presented.
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