Learning Objective 1

Audit Reports Describe the parts of the standard

unqualified audit report.

Chapter 3

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Parts of the Standard

Learning Objective 2
Unqualified Audit Report
1. Report title Specify the conditions required
2. Audit report address
to issue the standard unqualified
3. Introductory paragraph
4. Scope paragraph audit report.
5. Opinion paragraph
6. Name of CPA firm
7. Audit report date

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Conditions for Standard Conditions for Standard

Unqualified Audit Report Unqualified Audit Report
1. All financial statements are included. 4. The financial statements are presented in
accordance with generally accepted
2. The three general standards have been accounting principles.
followed in all respects on the engagement.
5. There are no circumstances requiring the
3. Sufficient evidence has been accumulated addition of an explanatory paragraph or
to conclude that the three standards of modification of the wording of the report.
field work have been met.

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 Four Categories of Audit
Learning Objective 3
Reports
1. Standard unqualified Understand combined reporting
2. Unqualified with explanatory paragraph on financial statements and
or modified wording internal control over financial
3. Qualified reporting under Section 404 of
4. Adverse or disclaimer
the Sarbanes-Oxley Act.

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Sarbanes-Oxley Act Sarbanes-Oxley Act

This Act requires the auditor of a public Combined Report on Financial Statements and
Internal Control Over Financial Reporting
company to attest to managements
report on the effectiveness of internal 1. Introductory paragraph
control over financial reporting. 2. Scope paragraph
3. Definition paragraph
PCAOB Auditing Standard 2 requires
4. Inherent limitations paragraph
the audit of internal control to be integrated
with the audit of the financial statements. 5. Opinion paragraph

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Unqualified Report with

Learning Objective 4
Explanatory Paragraph
Describe the five circumstances 1. Lack of consistent application of generally
accepted accounting principles
when an unqualified report with 2. Substantial doubt about going concern
an explanatory paragraph or 3. Auditor agrees with a departure from
promulgated accounting principles
modified wording is appropriate. 4. Emphasis of a matter
5. Reports involving other auditors

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 Substantial Doubt About Auditor Agrees with a Departure
Going Concern from a Promulgated Principle
1. Significant recurring operating losses The auditor must be satisfied and must state
or working capital deficiencies. and explain, in a separate paragraph or
2. Inability of the company to pay its paragraphs in the audit report, that adhering
obligations as they come due. to the principle would have produced a
3. Loss of major customers, the occurrence misleading result in that situation.
of uninsured catastrophes.
4. Legal proceedings, legislation that might
jeopardize the entitys ability to operate.

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Reports Involving Other

Emphasis of a Matter
Auditors
Under certain circumstances, the CPA may 1. Make no reference in the audit report
want to emphasize specific matters regarding
the financial statements, even though the 2. Make reference in the report
CPA intends to express an unqualified opinion. (modified wording report)

3. Qualify the opinion

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Departures from An
Learning Objective 5
Unqualified Opinion
Identify the types of audit reports 1. Scope limitation
that can be issued when an
2. GAAP departure
unqualified opinion is not justified.
3. Auditor not independent

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 Qualified Opinion Adverse Opinion

A qualified opinion report can result from It is used only when the auditor believes
a limitation on the scope of the audit or that the overall financial statements are
failure to follow generally accepted so materially misstated or misleading that
accounting principles. they do not present fairly the financial
position or results of operations and cash
flows in conformity with GAAP.

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Disclaimer of Opinion Learning Objective 6

It is issued when the auditor is unable Explain how materiality affects

to be satisfied that the overall financial
statements are fairly presented. audit reporting decisions.

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Materiality Levels of Materiality

A misstatement in the financial statements Amounts are immaterial.

can be considered material if knowledge of
the misstatement would affect a decision Amounts are material but do not overshadow
of a reasonable user of the statements. 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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 Relationship of Materiality to
Materiality Decisions
Type of Opinion
Materiality Significance in Terms of Type of Failure to
Level Reasonable Users Decisions Opinion follow GAAP
Users decisions are unlikely
Immaterial to be affected. Unqualified Audit report

Users decisions are likely

Material to be affected. Qualified
Qualified
Highly Users decisions are likely Disclaimer Unqualified Adverse
opinion only
material to be significantly affected. or adverse
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Materiality Decisions Materiality Decisions

Dollar amount compared with a base Scope

limitation

Measurability
Audit report

Nature of the item

Qualified scope
Unqualified Disclaimer
and opinion

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Discussion of Conditions
Learning Objective 7
Requiring Departure
Draft appropriately modified Auditors scope has been restricted
audit reports under a variety
Statements are not in conformity with GAAP
of circumstances.
Auditor is not independent

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 Learning Objective 8 Auditors Decision Process

Determine the appropriate audit Determine whether any condition exists

requiring a departure from a standard
report for a given audit situation. unqualified report.

Decide the materiality for each condition

Decide the appropriate type of report

Write the audit report

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More Than One Condition Requiring Number of Paragraphs

a Departure or Modification in the Report
The auditor is not independent. Type of Report
Standard unqualified 3
There is a scope limitation. Unqualified with explanatory paragraph 4
Unqualified shared report with other auditors 3
There is a substantial doubt about Qualified opinion only 4
the companys ability to continue Qualified scope and opinion 4
as a going concern. Disclaimer scope limitation 3
Adverse 4
There is a deviation in the statements
preparation in accordance to GAAP.
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Impact of E-Commerce on
Learning Objective 9
Audit Reporting
Discuss the impact of e-commerce Most public companies provide access to financial
information through their home Web page.
on audit reporting.
Under auditing standards, the auditor has no
obligation to perform any procedures to
corroborate the other information.

Auditing standards note that electronic sites

are not considered documents.

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 End of Chapter 3

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