Chapter 3 Notes

Question 1

standard unqualified audit report

Answer 1

contains eight distinct parts

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

Question 2

reasonable assurance

Answer 2

audit doesn’t completely eliminate the possibility of mis-statement

Question 3

material mistatement

Answer 3

means auditors are only responsible for searching for things that are material

Question 4

standard unqualified audit report is issued when

Answer 4

1. all statements balance sheet, income statement, statement of changes in stockholder equity, and statement of cash flows are included in the financial statements
2. Sufficient appropriate evidence has been accumulated
3. the financial statement are presented in accordance with US GAAP
4. there are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report

Question 5

standard unqualified report

Answer 5

intro paragraph
scope paragraph
opinion paragraph

Question 6

separate report on internal control over financial reporting

Answer 6

can be issued without the financial statements for internal controls or in a combined report

Question 7

combined report on financial statements and internal control over financial reporting

Answer 7

addresses both the financial statements and management’s report on internal controls

Question 8

unqualified audit report with explanatory paragraph or modified wording

Answer 8

meant to provide additional information on the audit

Question 9

examples for changes that affect consistency

Answer 9

1. changes in accounting principles, such as a change from FIFO to LIFO inventory valuation
2. changes in reporting entities, such as consolidation
3. corrections of errors involving principles

Question 10

changes that affect comparability but not consistency and don’t need to be included are

Answer 10

1. changes in an estimate
2. error corrections not involving principles
3. variations in format and presentation of financial info
4. changes because of substantially different transactions or events, such as endeavors in research and development or sale of a subsidiary

Question 11

going concern worries

Answer 11

1. significant recurring operating losses or working capital deficiencies
2. inability of the company to pay its obligations as they come due
3. loss of major customers, the occurrence of uninsured catastrophes
4. legal proceedings, legislation, etc

Question 12

reports with other auditors

Answer 12

when no reference is made to the other auditor then it might mean that they didn’t perform a substantial role in it

2. make reference in the report (modified wording report) - called a shared opinion or report
3. qualify opinion - required if the principal auditor is not willing to take responsibility of the work of another auditor

Question 13

departures from an unqualified reports

Answer 13

1. the scope of the audit has been restricted
2. the financial statements have not been prepared in accordance with GAAP
3. the auditor is not independent

Question 14

qualified opinion

Answer 14

report can result from a limitation on the scope of the audit or failure to follow GAAP

Question 15

adverse opinion

Answer 15

used only when the auditor believes that the overall financial statements are so materially misstated or misleading that they do not present fairly the financial position according to GAAP

Question 16

disclaimer of opinion

Answer 16

issued only when the auditor has been unable to satisfy themselves that the overall financial statements are fairly presented

Question 17

material

Answer 17

only if it will affect the decision of a reasonable user of the statements

Question 18

amounts are immaterial

Answer 18

a unqualified opinion is approprate

Question 19

amounts are material but do not overshadow the financial statements as a whole

Answer 19

a qualified opinion is appropriate

Question 20

highly material

Answer 20

disclaimer or adverse

Question 21

rule 203

Answer 21

rules for departure

Question 22

decision process report

Answer 22

1. determine whether departure is required
2. decide the materiality for each condition
3. decide the appropriate report for the condition
4. write the audit report