Chapter 3 Flashcards
A standard unmodified/unqualified opinion audit report is issued when (4 conditions):
- All statements and required disclosures are included in the financial statements.
- Sufficient appropriate evidence has been accumulated
- Financial statements are presented fairly in accordance with GAAP or other appropriate accounting framework.
- No circumstances requiring the addition of an emphasis-of-matter paragraph or modification of the wording of auditor’s opinion in the report.
Differences between Public and nonpublic companies with financial statements
- Report title
- Opinion Paragraph
- Basis for Opinion
- Critical audit matter (addressed later)
- Signature, tenure and city and state of the auditor.
Parts of a Standard Unqualified opinion audit report public companies:
- Report title
- Auditor report address
- Auditor’s opinion
- Basis for opinion
- Critical audit matters*
- Definition of internal control over financial reporting*
- Inherent limitations of Internal control over financial reporting*
- Signature
- Tenure Disclosure
- Audit firm signature and address
- Audit report date
The Auditor reports can be issued as:
Separate reports or a combined reports.
Conditions for explanatory paragraph
- There is substantial doubt about the entity’s ability to continue as a going concern
- The auditor refers to the report of other auditors as the basis, in part, for the auditor’s own report
- There has been a change between periods in accounting principles or in the method of their application that has a material effect on the financial statements
- There has been a change in reporting entity, unless the change in the reporting entity results from a transaction or event. , such as the creation, cessation, or complete or partial purchase or disposition of a subsidiary or other business unit
- A material misstatement in previously issued financial statements has been corrected
Conditions for emphasis-of-matter paragraph
- Material related party transactions
- Subsequent events
- Comparability of the financial statements
- Material uncertainties disclosed in the footnotes
- A major catastrophe that has had or continues to have a significant effect on the entity’s financial position
Conditions requiring a modification of opinion (list 4)
- Auditor’s scope has been restricted
(a) Qualified (if condition imposed) or disclaimer of opinion (if client imposed), depending on materiality - Statements are not in conformity with GAAP
(a) Qualified (material but not highly material) or an adverse opinion (highly material), depending on the materiality of the item in question - Auditor is not independent
(a) Disclaimer of opinion - Although not required, a client-imposed scope restriction generally results in a disclaimer
Materiality Level: Immaterial means
User’s decisions are unlikely to be affected.
Materiality Level: Material means
User’s decisions are likely to be affected only if the information in question is important to the specific decisions being made.
Materiality Level: Highly Material
Most or all user’s decisions based on the financial statements are likely to be significantly affected.
Immaterial means what type of opinion
Unmodified or unqualified
Material means what type of opinion
Qualified or modified
Highly Material means what type of opinion
Disclaimer of Adverse
Conditions requiring a modification of opinion (3):
- Auditor’s scope has been restricted.
- Statements are not in conformity with GAAP.
- Auditor is not independent.
Auditor’s decision process for audit reports:
- Determine whether any condition exists requiring a departure from a standard unmodified opinion report.
- Decide the materiality for each condition.
Decide the appropriate type of report for the condition, given the materially level. - Decide the appropriate type of report for the condition, given the materiality level.
- Write the audit report.
- Determine if more than one condition requiring a departure for modification exists.
