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.

Chapter 3
Audit Reports

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Describe the five circumstances when an

unqualified report with an emphasis-ofmatter 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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Describe the parts of the standard

unqualified audit report for nonnon-public
entities under AICPA auditing standards.

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1. Report title
2. Audit report address
3. Introductory paragraph
4. Managements Responsibility
5. Auditors 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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3
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
t l over financial
fi
i l reporting.
ti
PCAOB Auditing Standard 5 requires
the audit of internal control to be integrated
with the audit of the financial statements.

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Separate Report on Financial Statements and

Internal Control Over Financial Reporting

SarbanesOxley
Sec 404
Sec.404

2010
Legislation
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Accelerated Filer

Non-accelerated
Filer

ICFR
Effectiveness
Audits

1. Introductory paragraph

2. Scope paragraph
3. Definition paragraph
4. Inherent limitations paragraph
5. Opinion paragraph

Permanent
Exemption

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6. Cross-Reference Paragraph

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4
Describe the five circumstances when an
unqualified report with an emphasis-ofmatter 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 entitys ability to operate.
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Departure may not require a qualified or

adverse opinion
Th auditor
dit mustt separately
t l explain
l i in
i the
th
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
Events

Financial
Statement
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

Related Party
Transactions

Material
Uncertainties
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22

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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

A qualified opinion report can result from

a limitation on the scope of the audit or
failure to follow generally accepted
accounting
ti principles.
i i l

2. GAAP departure
p
3. Auditor not independent

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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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6
Explain how materiality affects audit reporting
decisions.

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Amounts are immaterial.

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

Amounts are material but do not overshadow

th financial
the
fi
i l statements
t t
t as a whole.
h l
Amounts are so material or so pervasive that
overall fairness of the statements is in question.

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Failure to
follow GAAP

A dit reportt
Audit

Unqualified

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Qualified
opinion only

Adverse

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Materiality
Level

Significance in Terms of
Reasonable Users Decisions

Type of
Opinion

Immaterial

Users decisions are unlikely

t b
to
be affected.
ff t d

Unqualified

Material

Users decisions are likely

to be affected.

Qualified

Highly
material

Users decisions are likely

to be significantly affected.

Disclaimer
or adverse

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Scope
limitation

Dollar amount compared with a base

Measurability

A dit reportt
Audit

Nature of the item

Unqualified

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Disclaimer

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Auditors scope has been restricted

Draft appropriately modified audit reports

under a variety of circumstances.

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Qualified scope
and opinion

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Statements are not in conformity with GAAP

Auditor is not independent

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Determine whether any conditions exists

requiring a departure from a standard
unqualified report.

Determine the appropriate audit report for a

given audit situation.
Decide
Materiality

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Decide appropriate
type of report

Write
Audit
Report

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The auditor is not independent.

There is a scope limitation.

Understand proposed use of international

accounting and auditing standards by U.S.
companies.

Going concern uncertainty exists.

Statements are not prepared in
accordance with GAAP.

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Globalization of worlds capital markets are

leading to calls for a single set of accounting
standards to be used around the world
world.

SEC
Developing
Workplan

If plan is approved?

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2015
Implementation
of IFRS
into U.S.

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Copyright

All rights reserved. No part of this publication may be reproduced,

stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise,
without the prior written permission of the publisher. Printed in the
United States of America.
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