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Chapter 3
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Learning Objective 1
Describe the parts of the standard
unqualified audit report.
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Report title
Audit report address
Introductory paragraph
Scope paragraph
Opinion paragraph
Name of CPA firm
Audit report date
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Learning Objective 2
Specify the conditions required to issue
the standard unqualified audit report.
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Learning Objective 3
Understand reporting on financial
statements and internal control over
financial reporting under Section 404
of the Sarbanes-Oxley Act.
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Reporting on Internal
Control over Financial
Reporting
Auditors of public companies subject to
Section 404 of the Sarbanes-Oxley Act
must
report on the effectiveness of internal
control over financial reporting.
PCAOB Auditing Standard 5 requires
the audit of internal control to be integrated
with the audit of the financial statements.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
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Reporting on Internal
Control over Financial
Reporting
SarbanesOxley
Sec.404
2010
Legislation
Accelerated Filer
Non-accelerated
Filer
ICFR
Effectiveness
Audits
Permanent
Exemption
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Sarbanes-Oxley Act
Separate Report on Financial Statements and
Internal Control Over Financial Reporting
1.
2.
3.
4.
5.
6.
Introductory paragraph
Scope paragraph
Definition paragraph
Inherent limitations paragraph
Opinion paragraph
Cross-Reference Paragraph
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Learning Objective 4
Describe the five circumstances when
an unqualified report with an
explanatory paragraph or modified
wording is appropriate.
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Lack of Consistent
Application of GAAP
Auditors must note circumstances in
which accounting principles are not
consistently applied
Auditor should modify the report when a
material change occurs by adding an
explanatory paragraph in the report
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Emphasis of a Matter
Under certain circumstances, the CPA may
want to emphasize specific matters regarding
the financial statements, even though the
CPA intends to express an unqualified opinion.
Subsequent
Events
Related Party
Transactions
Financial
Statement
Comparability
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
Material
Uncertainties
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Learning Objective 5
Identify the types of audit reports that
can be issued when an unqualified
opinion is not justified.
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Departures from an
Unqualified Opinion
1. Scope limitation
2. GAAP departure
3. Auditor not independent
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Qualified Opinion
A qualified opinion report can result from
a limitation on the scope of the audit or
failure to follow generally accepted
accounting principles.
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Qualified Opinion
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Adverse Opinion
Auditor believes the financial statements are
not presented fairly in conformity with GAAP.
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Adverse Opinion
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Disclaimer of Opinion
It is issued when the auditor is unable
to be satisfied that the overall financial
statements are fairly presented.
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Disclaimer of Opinion
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Learning Objective 6
Explain how materiality affects audit
reporting decisions.
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Materiality
A misstatement in the financial statements
can be considered material if knowledge of
the misstatement would affect a decision
of a reasonable user of the statements.
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Levels of Materiality
Amounts are immaterial.
Amounts are material but do not overshadow
the financial statements as a whole.
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Materiality Decisions
Failure to
follow GAAP
Audit report
Unqualified
Qualified
opinion only
Adverse
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Relationship of Materiality
to
Type of Opinion
MaterialitySignificance in Terms of
Type of
Level
Reasonable Users DecisionsOpinion
Users decisions are unlikely
Immaterialto be affected.
Unqualified
Material
Qualified
Highly
Users decisions are likely Disclaimer
material to be significantly affected. or adverse
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
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Materiality Decisions
Dollar amount compared with a base
Measurability
Nature of the item
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Materiality Decisions
Scope
limitation
Audit report
Unqualified
Qualified scope
and opinion
Disclaimer
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Learning Objective 7
Draft appropriately modified audit
reports under a variety of
circumstances.
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Discussion of Conditions
Requiring Departure
Auditors scope has been restricted
Statements are not in conformity with GAAP
Auditor is not independent
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Learning Objective 8
Determine the appropriate audit report
for a given audit situation.
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Decide
Materiality
Decide appropriate
type of report
Write
Audit
Report
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Number of Paragraphs
in the Report
Type of Report
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Learning Objective 9
Understand proposed use of
international accounting and auditing
standards by U.S. companies.
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SEC
Developing
Workplan
If plan is approved?
2015
Implementation
of IFRS
into U.S.
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End of Chapter 3
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