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									      Standard Unqualified Audit
                Report
• Must have independent in the title
• Addressed to Board or Stockholders
• Intro paragraph
  – CPA firm that did audit
  – List of which financial statements
  – period of financial statements
  – financial statements are responsibility of
    management
  – auditor only expresses an opinion
Standard unqualified audit report
• Scope paragraph
  –   reasonable assurance
  –   free of material misstatement
  –   evidence on a test basis
  –   assess accounting principals and estimates
       • name of country of principals
  – Audit is the basis of our opinion
Standard unqualified audit report
• Opinion paragraph
  – Financial Statements are presented fairly in all
    material respects in conformity with US GAAP
    or IFRS
• Name of firm
• Date of report (date fieldwork complete)
 What makes report unqualified?
• All financial statements are presented
• The 3 general standards are fulfilled
  – training
  – independence
  – due professional care
• The 3 fieldwork standards are met
  – planned and supervised
  – understanding of internal control
  – sufficient evidential matter
 What makes report unqualified?
• Conformity with GAAP (including
  disclosures)
• No extra paragraph is needed
            Audit Reports

• Standard Unqualified
• Unqualified with Explanatory 4th Paragraph
  or modified wording
• Qualified with Explanatory 3rd paragraph
• Adverse

• Disclaimer (no opinion)
        Internal Controls
   Sarbanes Oxley Section 404
         Separate report
• PCAOB Standard #5 requires the internal
  control audit and financial statement audit
  be integrated, however you can issue
  separate or combined reports
• See Figure 3-3 for separate report
        Internal Control
   Sarbanes-Oxley Section 404
         Separate report
• Intro, scope and opinion paragraphs all
  indicate “internal control over financial
  reporting”
• Management has responsibility for Internal
  Controls
• Criteria is COSO for report on internal
  controls
 Internal Control Sarbanes Oxley
           Section 404
          Separate report
• Scope paragraph
  – Standards of the PCAOB
• Definition paragraph
  – maintenance of records
  – GAAP
  – Fraud prevention
• Inherent limitations paragraph
      Unqualified report with
     explanatory 4th paragraph
• Reasons for paragraph
  – inconsistent GAAP (one year to next)
     • Change from FIFO to LIFO
     • correction of errors in principles
     • additional company added to consolidated reports
  – Going Concern problem (one year)
     •   reoccurring losses
     •   inability to pay obligations
     •   catastrophes
     •   legal proceedings
      Unqualified report with
     explanatory 4th paragraph
• Auditor agrees with departure from GAAP
• Need to emphasize something like related
  party disclosure
• Other auditors have been involved in some
  of the work
   When other auditors are used
• No reference in report if immaterial portion
  of audit or principal auditor reviewed work
  of other auditor
• Reference in the report if shared opinion
  (this does not require separate paragraph)
• Qualify the opinion when you (as auditor)
  are not willing to assume any responsibility
  for the other auditors work
    Departure from unqualified
              report
• Scope limitation
  – caused by client
  – caused by circumstances
• Not GAAP
• Auditor is not independent
             Other reports
• Qualified (except for 4th paragraph)
• Adverse --rarely used
• Disclaimer--cannot give an opinion due to
  scope limitation or non-independent auditor
             Other Reports
• Qualified (scope, opinion or both)
  – Use term “except for?
• Adverse– not used in the real world
• Disclaimer—
  – Severe scope limitation
  – Lack of independence of auditor
               Materiality
• A misstatement is material if knowing it
  would affect a decision of a reader of the
  financial statements
• We determine materiality by looking at the
  amounts of the misstatements in ratio to net
  income or total assets
• We combine unadjusted misstatements to
  get overall misstatements
        Levels of Materiality
• Amounts immaterial
• Amount is material but does not
  overshadow the financial statements as a
  whole
• Pervasive errors
         Decisions on Materiality
• Failure to follow GAAP
  – Dollar amounts in ratio and combined
    misstatements
  – measurability (lawsuits)
  – Nature of misstatement
     •   fraudulent
     •   affect future period
     •   psychic effect (trend of increasing earnings)
     •   contractual obligations (debt restrictions)
  – Scope limitations – potential errors
  Conditions requiring other reports

• Scope restrictions:
  – Auditee caused-- disclaimer
  – No one caused – qualified
• Types of scope restrictions
  – Observation of physical inventory
  – Confirmation of receivables
  – Auditor appointed after balance sheet date
        Qualified “Except as”
• Third paragraph added as qualification after
  scope paragraph (Figure 3-7)
                 Disclaimer
• Intro paragraph (Figure 3-8)
  – We were engaged to audit
• Second paragraph
  – Explain restrictions on audit
• Opinion
  – We do not express and opinion
     Qualified due to inadequate
             disclosure
• Third paragraph states the missing
  disclosure
• Most clients would rather change their notes
  to the financial statements rather than have
  the auditor disclose a fact that is not
  included.
    International Accounting and
         Auditing Standards
• IFRS – will be reviewed by the SEC and
  may be implemented as early as 2015
• Substitute IFRS in the place of GAAP in the
  report
• Do not confuse financial reporting standards
  with auditing standards
  – GAAP vs GAAS
  – IFRS vs ISA

								
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