Chapter 17: Audit Reports Flashcards
What is the purpose of an audit report?
Describe the CPA’s associations with the F/S and provide the CPA’s opinion, if applicable, about the F/S
When are CPAs considered to be associated with F/S?
anytime the public has reason to believe that CPA is somehow involved in the development or examination of the F/S
What must the CPA’s report communicate?
Must clearly inform public exactly what CPA did and what responsibility CPA is taking for F/S
What are the three types of reports CPAs issue on assurance services?
1) Positive assurance, 2) Negative assurance, 3) Disclaimer
What are reviews?
accounting service that involves making inquiries and performing analytical reviews to provide reasonable basis for expressing limited assurance that there are no material modifications that should be made to F/S so that they conform to GAAP, negative assurance
What are compilations?
where auditors take management’s representations and create F/S, no assurance provided
What are the 5 basic types of reports an auditor can issue as a result of an audit engagement?
1) Unqualified report, 2) Unqualified report with a 4th paragraph, 3) Qualified Report, 4) Adverse Report, 5) Disclaimer
What is an unqualified report?
states F/S are fairly stated in accordance with GAAP and audit in accordance with GAAS
What is an unqualified report with a 4th paragraph?
states F/S fairly stated in accordance with GAAP and audit in accordance with GAAS, but paragraph added to report to alert reader to something in F/S
When is an unqualified report with a 4th paragraph issued?
Whenever everything is okay, but there is something about the F/S that the auditor wants to bring to the readers’ attention
When is an unqualified report with a 4th paragraph required to be issued?
1) Lack of GAAP consistency, 2) Going-concern (unless issues disclaimer), 3) GAAP departure auditor agrees with
When does a lack of GAAP consistency occur?
whenever company has changed GAAP method for specific type of transactions from prior to current year
What does a lack of GAAP consistency affect?
comparability of F/S from year to year
What causes a 4th paragraph for lack of consistency?
changes in the method of GAAP
When does a lack of GAAP consistency arise?
1) Change in method of accounting for specific transaction, 2) Change in reporting entity, 3) Correction of error in principle
What conditions do not require a 4th paragraph?
1) Change in accounting estimate, 2) Change in type of transaction, 3) Correction of an error that does not involve an accounting principle, 4) Change in classification of F/S item, 5) Changes that have an immaterial effect today but may have a material effect on future F/S
When is an unqualified opinion with a 4th paragraph for going concern issued?
when auditor has reason to believe that company will cease to exist within next year
When is an unqualified opinion with a 4th paragraph for an agreed-upon departure from GAAP issued?
when client uses method of accounting other than GAAP to prepare F/S and CPA believes method used by client is correct method client should be using, CPA believes GAAP might be misleading
When is an unqualified opinion with a 4th paragraph for emphasis of matter issued?
when there is a significant issue auditor wishes to bring to attention of F/S users
What is a qualified report?
states that “except for” a matter discussed in separate paragraph, F/S are fairly stated
When is a qualified report issued?
1) GAAP violation that has material effect on financial statements, 2) audit scope restriction that results in auditor being unsure about accuracy of some material aspect of F/S
What is a GAAP violation?
1) Client fails to use GAAP, 2) Uses an acceptable method of GAAP but auditor believes that even though it is an accepted method it cause F/S to be misleading, 3) Omissions of key footnotes or key F/S
When does a scope restriction occur?
when an auditor is unable to apply audit tests and auditor is unsure about accuracy of some F/S item
What is the result of client imposed scope restrictions?
unless there is good reason for scope restriction, auditor should carefully consider whether client is trying to hide something that preferred test would pick up but alternate test would not
What report will auditor’s issue when there is a client imposed restriction?
Disclaimer of opinion
What is an adverse report?
when F/S not fairly stated
When is an adverse report issued?
when there is a GAAP violation that has material effect on F/S and financial statements are fraudulent
What determines whether an auditor issues a qualified or adverse report?
depends on whether auditor believes that audit report can sufficiently explain the problems to F/S readers
What do auditors do in a qualified report?
add paragraph stating what the problem is and what the correct numbers and missing information should be
When is an auditor likely to move from a Qualified Report to an Adverse Report?
when the materiality (magnitude) or pervasiveness (how spread out it is) of the problem gets beyond a certain level
What is a disclaimer of opinion?
auditor is not expressing any opinion on the fairness of the F/S
When is a disclaimer of opinion issued?
when there was not an audit performed in accordance with GAAS or there is a going concern issue
What scenarios require a disclaimer to be issued?
1) Auditor did not conduct an audit but was in some way associated with F/S, 2) Audit firm is not independent or loses independence with respect to client, 3) Scope restriction that auditor deemed significant enough to conclude audit did not meet evidence collection requirements of GAAS 3rd Standard of Field Work
When is a disclaimer of opinion due to a scope restriction issued?
when there has been a material scope restriction auditor
What are the conditions that result in a disclaimer of opinion due to a scope restriction?
client imposed scope restriction or item in question is material or pervasive
What is an audit report composed of?
1) Title, 2) Addressee, 3) Introductory Paragraph, 4) Scope Paragraph, 5) Opinion Paragraph, 6) Firm Name, 7) Date
What is the title of an audit report for a public company?
“Report of Independent Registered Public Accounting Firm”
What is the title of an audit report for a non-public company?
“Independent Auditor’s Report”
Who is the addressee of an audit report?
whoever the auditor expects to be primary user of report, never be addressed to management
What is contained in the introductory paragraph?
1) Which F/S are covered by audit, 2) F/S are management’s responsibility, 3) Auditor’s responsibility is to issue opinion on F/S
What does the scope paragraph describe?
what an audit is and what its limitations are
What does the opinion paragraph express?
auditors’ opinion on F/S fairness based on audit evidence obtained
What date is the audit report dated?
the last day of significant audit field work
What is added as the last paragraph of a public company’s audit report?
describes that an audit of the client’s internal controls was also conducted and refers reader to opinion on internal control effectiveness
What is added to an audit report with an unqualified opinion with a 4th paragraph?
paragraph inserted after opinion paragraph to explain whatever it is that auditor desires or is required to point out
What is added to an audit report with a qualified opinion?
1) Paragraph between scope and opinion paragraph to explain problem and amounts involved, 2) Phrase in opinion paragraph: In our opinion, except for matter discussed above….
What is added to an audit report with an adverse opinion?
1) Paragraph inserted between scope and opinion paragraph to explain problem but specific amounts not discussed, 2) Opinion paragraph states F/S do not fairly present the financial standing of company
What two elements do all disclaimers have in common?
1) Explain reason for disclaimer, 2) Contain disclaimer language
