Audit Ch 18

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standard unqualified financial statement audit report

issued when the audit has been performed in accordance with GAAS, the auditor has gathered sufficient evidence, and the auditor believes that the financial statements conform to GAAP

standard unqualified audit report elements

1. report title
2. addressee
3. introductory paragraph
4. scope paragraph
5. opinion paragraph
6. explanatory paragraph referring to the audit of internal control over financial reporting
7. name of the auditor
8. audit report date

**the auditor's opinions on the financial statements and the effectiveness of internal control are often presented together in a combined report format. HOWEVER, when two opinions are presented separately, the reports must have the same date and each must include an explanatory paragraph referring to the opinion expressed in the other report

**WHEN NOT UNQUALIFIEDan explanatory paragraph used to emphasize a specific matter that does not affect the audit opinion follows the opinion paragraph, while an explanatory paragraph that discusses the issue or issues leading to a qualified or adverse opinion is placed before the opinion paragraph (scope limitation explanatory paragraph is before opinion)

modification of wording

Opinion based in part on the report of another auditor

this results in a modification of the wording for the introductory, scope, and opinion paragraphs included in the standard unqualified audit report

still considered unqualified opinion

addition of an explanatory paragraph

-going concern
-lack of consistency in the financial statements due to accounting changes
-emphasis of a matter

these lead to the addition of an explanatory paragraph following the opinion paragraph without any modification to the wording of the introductory, scope, or opinion paragraphs

still considered unqualified opinion

opinion based in part on the report of another auditor

parts of audit completed by a separate unaffiliated public accounting firm; auditor must maintain principal auditor; in order to refer to other auditors in report/use their work the principal auditor must assess the professional reputation and independence of other auditor

an opinion may be expressed without referring to the work of the other auditors in the audit report -- principal auditor accepts full responsibility

principal auditor refers to the other auditors (not by name) and the portion they audited -- shares responsibility

going concern

a basic assumption that underlies financial reporting is that an entity will continue as a going concern (will stay in business); auditor has responsibility to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time (1 year); audit report should include an explanatory paragraph; auditor may disclaim an opinion on the entity; if the entity's disclosures with respect to its ability to continue as a going concern are inadequate, a departure from GAAP exists, resulting in a qualified or an adverse opinion

retrospective application

application of a different accounting principle to one or more previously issued financial statements, or to the statement of financial position at the beginning of the current period as if that principle had always been used, or a change to financial statements of prior accounting periods to present the financial statements of a new reporting entity as if it had existed in those prior years

change in accounting principle

example = change from straight-line depreciation to an acceleration method for depreciating equipment

affects comparability and consistency; requires explanatory paragraph

changes affecting consistency

1. change in accounting principle
2. change in reporting entity
3. correction of an error in principle

these affect comparability and consistency; require explanatory paragraph

change in reporting entity

example - consolidation

affects comparability and consistency; requires explanatory paragraph

correction of an error in principle

refers to client using an unacceptable accounting principle in prior years but changes to an acceptable accounting principle in the current year

affects comparability and consistency; requires explanatory paragraph

changes not affecting consistency

1. change in accounting estimate
2. correction of an error that does not involve an accounting principle
3. change in classification and reclassification
4. change expected to have a material future effect

affects comparability but not consistency; disclosed in notes

change in accounting estimate

example - change in the service life of a depreciable asset

affects comparability; disclosed in notes

correction of an error that does not involve an accounting principle

example - math error in previously issued financials

affects comparability, disclosed in notes

change in classification and reclassification

example - change in expense type

affects comparability; disclosed in notes

change expected to have a material future effect

change in accounting principle that has an immaterial effect in the current year but is expected to have a material effect in future years

affects comparability; disclosed in notes

emphasis of a matter

explanatory paragraph; example - significant related-party transactions and important events occurring after the balance sheet date; not req'd if info is in financials or footnotes

conditions for departure from an unqualified financial statement audit report

1. scope limitation -- inability/prevention to collect evidence
2. departure from GAAP
3. lack of independence of the auditor

qualified opinion

scope limitation or a specific departure from GAAP exists, but overall the financial statements present fairly in conformity with GAAP

qualified report always uses the words "except for"

auditor's opinion that financial statements present fairly, in all material respects, in accordance with GAAP (or other comprehensive basis of accounting), EXCEPT FOR a material misstatement that does not, however, pervasively affect users' ability to rely on the financial statements. Also issued for a scope limitation that is of limited significance

disclaimer of opinion

insufficient appropriate evidence to form an opinion on the overall financial statements or b/c there's a lack of independence

no opinion expressed

pervasive scope limitation arises or if auditor lacks independence

adverse opinion

financials do not present fairly due to a GAAP departure that materially affects the financial statements overall

auditor's opinion that the financial statements to not present fairly in accordance with GAAP (or other comprehensive basis of accounting) due to a pervasively material misstatement

scope limitation

results from inability to obtain sufficient appropriate evidence about some component of the financial statements; auditor is unable to apply all the audit procedures considered necessary; the pervasiveness of the scope limitation's effect on the financial statements determines whether the auditor should issue a qualified opinion or disclaim an opinion

if the auditor can overcome a scope limitation by performing alternative procedures, a standard unqualified audit report can be issued

lack of evidence that may preclude the auditor from issuing a clean opinion, usually resulting from an inability to conduct an audit procedure considered necessary

GAAS

Generally accepted auditing standards

standards against which the quality of the auditor's performance is measured

Materiality

magnitude of an omission or misstatement of accounting information that in light of surrounding circumstances makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced

other comprehensive basis of accounting

financial statements prepared under regulatory, tax, cash basis, or other definitive criteria having substantial support

Reasonable assurance

implies some risk that a material misstatement could be present in the financial statements without the auditor detecting it, even when the auditor has exercised due care

representation letter

a letter that corroborates oral representations made to the auditor by management or by other auditors and documents the continued appropriateness of such representations

unqualified opinion

opinion that the financials present fairly, in all material respects, the client's financial position, results of operations, and cash flows in accordance with GAAP ( or other comprehensive basis of accounting

CLEAN OPINION

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