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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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Describe the parts of the standard
unqualified audit report for non-public
entities under AICPA auditing standards.
1
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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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Specify the conditions required to issue the
standard unqualified audit report.

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2
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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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3
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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-
Oxley
Sec.404

2010
Legislation
Accelerated Filer
Non-accelerated
Filer
ICFR
Effectiveness
Audits
Permanent
Exemption
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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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Describe the five circumstances when an
unqualified report with an emphasis-of-
matter explanatory paragraph or modified
wording is appropriate.

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4
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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
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.
Financial
Statement
Comparability
Subsequent
Events
Related Party
Transactions
Material
Uncertainties
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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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Identify the types of audit reports that can be
issued when an unqualified opinion is not
justified.

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5
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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
Unqualified
Qualified
opinion only
Adverse
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Materiality
Level
Immaterial
Material
Highly
material
Significance in Terms of
Reasonable Users Decisions
Users decisions are unlikely
to be affected.
Users decisions are likely
to be affected.
Users decisions are likely
to be significantly affected.
Type of
Opinion
Unqualified
Qualified
Disclaimer
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
Unqualified
Qualified scope
and opinion
Disclaimer
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Draft appropriately modified audit reports
under a variety of circumstances.

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Auditors 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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8
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Determine whether any conditions exists
requiring a departure from a standard
unqualified report.

Decide
Materiality
Decide appropriate
type of report
Write
Audit
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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Understand proposed use of international
accounting and auditing standards by U.S.
companies.

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9
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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.

SEC
Developing
Workplan
If plan is approved?
2015
Implementation
of IFRS
into U.S.
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Copyright 2014 Pearson Education
Copyright
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