Introduction to Audit Reports

Question 1

What basic responsibility does the Reporting Principle under the AICPA’s clarified auditing standards impose on an auditor?

Answer 1

Based on an evaluation of the audit evidence obtained, the auditor expresses, in the form of a written report, an opinion in accordance with the auditor’s findings or states that an opinion cannot be expressed.

Question 2

List the items comprising (i.e., the structure) of an unmodified audit report under the AICPA’s clarified auditing standards.

Answer 2

1. )Title
2. )Addressee
3. )Introductory paragraph
4. )Management responsibility section
5. )Auditor’s responsibility section
6. )Opinion paragraph
7. )Signature (with the city and state of the office responsible for the engagement)
8. )Date

Question 3

List the three alternatives to the unmodified audit report.

Answer 3

Qualified,
Adverse
Disclaimer of opinion

Question 4

If the prior period’s financial statements have been audited by a predecessor auditor whose report is not issued, the auditor should add an other-matter paragraph. What specific matters should that other-matter paragraph address?

Answer 4

1. )That the prior period financial statements were audited by a predecessor auditor
2. )The type of opinion expressed (and the reason for any modification)
3. )The nature of any emphasis-of-matter or other-matter paragraph
4. )The date of the predecessor’s report

Question 5

How is the audit report affected when an audit has been conducted in accordance with Public Company Accounting Oversight Board (PCAOB) standards but the audit is not within the jurisdiction of the PCAOB?

Answer 5

1. )Management’s responsibility for the fair presentation of the financial statements
2. )Management’s responsibility for the design, implementation, and maintenance of internal controls related to financial reporting

Question 6

What is the meaning of an unmodified audit report?

Answer 6

The financial statements are fairly stated according to generally accepted accounting principles (GAAP) (or other applicable accounting framework), and the auditor expresses no reservations.

Question 7

State the typical introductory sentence/paragraph of the auditor’s unmodified audit report on one year’s financial statements under the AICPA’s clarified auditing standards.

Answer 7

“We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as of December 31, 20X1, and the related statements of income, changes in stockholders’ equity and cash flows for the year then ended, and the related notes to the financial statements.”

Question 8

State the opinion paragraph of the unmodified audit report on one year’s financial statements under the AICPA’s clarified auditing standards.

Answer 8

“In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Company at December 31, 20X2 and 20X1, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.”

Question 9

If the auditor’s report includes a section after the opinion paragraph labeled “Report on Other Legal and Regulatory Requirements,” how should the introductory paragraph be labeled?

Answer 9

“Report on the Financial Statements”—ordinarily, the introductory paragraph does not have a label, but, in this case, it would.

Question 10

The AICPA replaced the former 10 criteria known as “GAAS” with 7 non-authoritative principles to be used as a framework for audit standard setting. What specific topics did the 4 “Reporting Standards” under the now-superseded GAAS address?

Answer 10

1. )GAAP – the report should identify whether the financial statements comply with GAAP.
2. )Consistency – the report should identify when accounting principles were not consistent.
3. )Disclosure – the report should identify when disclosure is inadequate.
4. )Opinion – the auditor should express an opinion on the financial statements as a whole.