Chapter 4 Flashcards
[RC 4-3]
Why does the auditors report traditionally have standardized wording?
Hint: ISA/CAS 700, 705 and 706.
The auditors report is the most public output of a financial statement audit, and the auditing profession traditionally has preferred that all audit reports have very similar wording.
This way people using an audit report are less likely to interpret it in ways the auditor didn’t intend. The standardized wording is set out in the GAAS reporting standards (ISA/CAS 700, 705 and 706)
The 2016 new standards for reporting provide more customized information in their reports, to communicate more about “key audit matters” they found during a specific engagement [See ISA 701].
[RC 4-5]
What standards are followed for writing an auditor’s report?
The standardized wording is set out in the GAAS reporting standards, ISA/CAS 700, 705, and 706. More customization in reports allowed in standards as of 2016.
[RC 4-6]
What does the term unmodified audit opinion mean? What simpler term for this type of opinion is often used in practice?
An unmodified auditors opinion tells readers that the auditors believe the financial statements do indeed present the financial information fairly; often called a clean audit opinion.
Unqualified opinion was the term used before the CAS standards came into effect.
[RC 4-7]
What information is the auditor communicating to financial statement users when he or she issues an unmodified audit opinion?
It means the auditor has been able to obtain the evidence required by GAAS to support an opinion on the fair presentation of the financial statements, and this type of opinion indicates that the auditor believes, based on the audit performed, that the financial statements do indeed present the Financial information fairly.
[RC 4-10]
What are two main categories of problems that can prevent an auditor from issuing an unmodified audit opinion on GAAP financial statements?
Which type relates to managements responsibility is and which type relates to auditors responsibilities?
1) GAAP violations that have a material impact on fair presentation of the financial statements
2) audit scope limitations that impair the auditors ability to fully comply with GAAS for matters that would be material in the financial statements
The first type relates to managements responsibility to provide fairly presented financial statements, while the second relates to the auditors responsibility to conduct an audit that complies with GAAS.
Since many possible situations can result in an unmodified opinion, GAAS standardized the approaches for categorizing these problems into these two types.
[RC 4-12]
What kind of audit opinion is given if the scope of the audit engagement was limited but the problems would only affect isolated information in the financial statements?
What kind of report is used if there are audits of limitations that made it impossible for the auditor to determine if the financial statements as a whole are fairly presented for users?
For an audit scope limitation, if the problem is or could be significant to people using financial statements, but applies to only one or more isolated aspects of the financial statements, the auditor would issue a qualified opinion that describes the isolated impact of the limitations on performing the audit, but otherwise provides a clean opinion on the rest of the financial statements.
If the impact of the auditors inability to obtain audit evidence is so pervasive that it likely affects many aspects of the financial statements, it cannot be isolated and so a
disclaimer of opinion must be issued.
With a disclaimer of opinion the report says the auditor is unable to provide any opinion because it was impossible to get the audit evidence required to establish a reasonable assurance regarding fair presentation of the financial statement as a whole.
[RC 4-13]
What are the main components that GAAS require to be included in an auditor’s report on financial statements?
The auditors report will be addressed to the main stakeholders, usually the corporation shareholders, and to be dated and signed by the auditors at the end of the audit engagement.
The reporting standards of GAAS [As of 2015] set out four main segments that the auditors report must present:
1) intro paragraph stating the company name and the set of financial statements that were audited
2) management responsibility paragraph, listing management responsibilities for fair presentation of financial statements and for internal control as necessary to ensure financial statements are free of material misstatements due to fraud or error
3) auditor responsibility in three paragraphs outlining:
(i) The auditors responsibility to express an opinion based on conducting an audit in compliance with GAAS and ethical requirements
(ii) A summary of what an audit examination involves
(iii) A statement of the auditors belief that their procedures provided a sufficient and appropriate basis for their audit opinion
4) opinion paragraph on the fair presentation of the financial statements
If I modified opinion as required, the GAAS reporting standards also set of guidelines for how the auditor should explain the situation in the report, and the additional paragraphs of information the report must include.
[RC 4-16]
What does the term high level of assurance mean?
A high level of assurance also referred to as reasonable assurance, is a positive level of believe about some claim.
In the case of GAAP financial statement, The claim is one of the fair presentation, in all material respects, in accordance with the GAAP financial reporting framework.
