CH 3

Question 1

Identify parts to standard unqualified audit report?

Answer 1

1) Report title
2) Audit report address
3) Introductory paragraph
4) Management’s responsibility
5) Auditor’s responsibility
6) Opinion Paragraph
7) Name and address of CPA firm
8) Audit report date

Question 2

Describe four categories of audit reports?

Answer 2

1) Standard unqualified ( four conditions have been met)
2) Unqualified with emphasis of matter explanatory paragraph or modified wording ( audit was satisfactory, but auditor suggests more information is needed)
3) Qualifed ( financial statements are fairly presented, but scope of audit has been materially restricted or applicable accounting standards were not followed in preparing the financial statements)
4) Adverse or Disclaimer ( financial statements are not fairly presented ( adverse) , auditor cannot form an opinion as to whether the financial statements are fairly presented ( disclaimer) or he or she is not independent ( disclaimer).

Question 3

What are the conditions for standard unqualified audit report?

Answer 3

1) includes all financial statements
2) Sufficient appropriate evidence
3) Financial statements present in accordance with US GAAP
4) No circumstances require an explanatory paragraph or report modification.

Question 4

What do Auditors have to include in their reports?

Answer 4

1) Auditors of public companies subject to section 404 of Sarbanes oxley act must report on the effectiveness of internal control over financial reporting
2) PCAOB auditing standard five requires internal control to be integrated with the audit of the financial statements

Question 5

What does Separate report on financial statements and internal control over financial reporting?

Answer 5

1) introductory paragraph
2) scope paragraph
3) Definition paragraph
4) In herent limitations paragraph
5) Opinion paragraph
6) Cross reference paragraph

Question 6

What is substantial doubt about going concern

Answer 6

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 entity’s ability to operate

Question 7

What does unqualified report with explanatory paragraph consist of?

Answer 7

1) lack of consistent application of GAAP
2) substantial doubt about going concern
3) emphasis of a matter
4) Reports involving other auditors

Question 8

What are causes for explanatory paragraph?

Answer 8

1) Lack on consistency ( change from LIFO to FIFO)
2) Substantial Doubt about going concern ( significant recurring losses in company’s business)
3) Emphasis of a matter ( a merger with a large company occurred after the balance sheet date)
4) Report involving other auditors ( A chartered accounting firm audited a subsidiary operating in Canada)

Question 9

Criteria required in reports involving other auditors

Answer 9

1) make no reference in the audit report
2) Make reference in the report ( modified wording report)
3) qualify the opinion

Question 10

Adverse opinion

Answer 10

Auditor believes the financial statements are not presented fairly in conformity with GAAP

Question 11

Criteria in departures from an unqualified opinion

Answer 11

1) Scope limitation ( two restrictions: imposed by clients and beyond control of auditor or client)
2) GAAP departure
3) Auditor not independent

Question 12

Define qualified opinion

Answer 12

when a report has limitations ( auditor cannot accumulate info) in

1) scope of the audit
2) failure to follow GAAP

Question 13

Terminology for qualified opinion

Answer 13

1) “Except for”

auditor is satisfied with FS but there is other issues

Question 14

Adverse opinion

Answer 14

when financial statements are so materially misstated or misleading.

absence of conformity

Question 15

Disclaimer opinion

Answer 15

Auditor has been unable to satisfy himself or herself because financial statements are fairly presented

occurs in reports that have severe limitations in scope or auditor has non-independent relationship

Question 16

Materiality

Answer 16

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

Question 17

example of immaterially

Answer 17

immediate expensing of office supplies rather than carrying the unused portion in inventory because the amount is insignificant

Question 18

What are materiality decisions for non GAAP conditions

Answer 18

1) dollar amount compared with base
2) Measurability
3) nature of the item

Question 19

Define levels of materiality

Answer 19

1) amounts are immaterial
2) Amounts are material but do not overshadow the financial statements as a whole
3) Amounts are so material or so pervasive that overall fairness of the statements is in question

Question 20

What is criteria in situations requiring more than one of the conditions requiring a departure from an unqualified report or modification?

Answer 20

The auditor is not independent and company does not follow GAAP

Scope limitation and substantial doubt of going concern

Going concern uncertainly exists ( or not adequately disclosed in a footnote)

Statements are not prepared, so they deviate from GAAP principles and lack consistency

Question 21

Describe auditor’s decision process

Answer 21

1) decide materiality
2) decide appropriate type of report
3) write audit report