Learning Objective 1

Describe the parts of the standard

unqualified audit report.
Audit Reports
Chapter 2

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Parts of the Standard Parts of the Standard

Unqualified Audit Report Unqualified Audit Report
1. Report title
2. Audit report address
3. Introductory paragraph
4. Scope paragraph
5. Opinion paragraph
6. Name of CPA firm
7. Audit report date

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Conditions for Standard

Learning Objective 2
Unqualified Audit Report
Specify the conditions required to issue the
standard unqualified audit report. 1. Includes all financial statements

2. Three general standards are met

3. Complies with the three standards of field work

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 Conditions for Standard
Unqualified Audit Report
4. Financial statements comply with GAAP

5. No circumstances require an explanatory

paragraph or report modification

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Four Categories of Audit Reports 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 Reporting on Internal Control

over Financial Reporting over Financial Reporting
Auditors of public companies subject to Section Sarbanes- ICFR
404 of the Sarbanes-Oxley Act must Effectiveness
Oxley Accelerated Filer
report on the effectiveness of internal Audits
control over financial reporting. Sec.404

PCAOB Auditing Standard 5 requires Permanent

the audit of internal control to be integrated 2010 Non-accelerated
Filer Exemption
with the audit of the financial statements. Legislation

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 Sarbanes-Oxley Act Separate Report on ICFR
Separate Report on Financial Statements and
Internal Control Over Financial Reporting

1. Introductory paragraph
2. Scope paragraph
3. Definition paragraph
4. Inherent limitations paragraph
5. Opinion paragraph
6. Cross-Reference Paragraph

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Unqualified Report with

Learning Objective 4
Explanatory Paragraph
Describe the five circumstances when an 1. Lack of consistent application of generally
unqualified report with an explanatory accepted accounting principles
paragraph or modified wording is 2. Substantial doubt about going concern
appropriate. 3. Auditor agrees with a departure from
promulgated accounting principles
4. Emphasis of a matter
5. Reports involving other auditors

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Lack of Consistent Application of Substantial Doubt About

GAAP Going Concern
Auditors must note circumstances in which
 Significant recurring operating
accounting principles are not consistently
losses or working capital deficiencies.
applied
 Inability of the company to pay its
obligations as they come due.
Auditor should modify the report when a  Loss of major customers, the
material change occurs by adding an occurrence of uninsured catastrophes.
explanatory paragraph in the report  Legal proceedings, legislation that
might jeopardize the entity’s ability to operate.

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 Auditor Agrees with a Departure
Emphasis of a Matter
from a Promulgated Principle
Departure may not require a qualified or Under certain circumstances, the CPA may
adverse opinion want to emphasize specific matters regarding
the financial statements, even though the
The auditor must separately explain in the CPA intends to express an unqualified opinion.
audit report that adhering to the principle
would have produced a misleading result. Subsequent Related Party
Events Transactions

Circumstances are most unusual Financial

Material
Statement
Uncertainties
Comparability
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Reports Involving Other Reports Involving Other

Auditors Auditors
1. Make no reference in the audit report

2. Make reference in the report

(modified wording report)

3. Qualify the opinion

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Departures from an
Learning Objective 5
Unqualified Opinion
Identify the types of audit reports that can 1. Scope limitation
be issued when an unqualified opinion is
not justified. 2. GAAP departure

3. Auditor not independent

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 Qualified Opinion 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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Adverse Opinion Adverse Opinion

Auditor believes the financial statements are

not presented fairly in conformity with GAAP.

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Disclaimer of Opinion Disclaimer of Opinion

It is issued when the auditor is unable

to be satisfied that the overall financial
statements are fairly presented.

It can arise only from a lack of

knowledge by the auditor.

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 Learning Objective 6 Materiality

Explain how materiality affects audit A misstatement in the financial statements

reporting decisions. 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 Materiality Decisions

Failure to
follow GAAP
Amounts are immaterial.

Amounts are material but do not overshadow Audit report

the financial statements as a whole.

Amounts are so material or so pervasive that Qualified

overall fairness of the statements is in question. Unqualified Adverse
opinion only

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Relationship of Materiality to
Materiality Decisions
Type of Opinion
Materiality Significance in Terms of Type of  Dollar amount compared with a base
Level Reasonable Users’ Decisions Opinion
Users’ decisions are unlikely  Measurability
Immaterial to be affected. Unqualified
Nature of the item
Users’ decisions are likely
Material to be affected. Qualified

Highly Users’ decisions are likely Disclaimer

material to be significantly affected. or adverse
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 Materiality Decisions Learning Objective 7

Scope Draft appropriately modified audit reports

limitation under a variety of circumstances.

Audit report

Qualified scope
Unqualified Disclaimer
and opinion

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Discussion of Conditions
Learning Objective 8
Requiring Departure
Determine the appropriate audit report for a
 Auditor’s scope has been restricted given audit situation.
Statements are not in conformity with GAAP

Auditor is not independent

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More Than One Condition Requiring

Auditor’s Decision Process a Departure or Modification

Determine whether any condition exists The auditor is not independent.

requiring a departure from a standard
unqualified report. There is a scope limitation.

Going concern uncertainty exists.

Write
Decide Decide appropriate
Audit
type of report Statements are not prepared in
Materiality Report accordance with GAAP.

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 Number of Paragraphs
Learning Objective 9
in the Report
Type of Report Understand proposed use of international
accounting and auditing standards by U.S.
companies.

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Proposed Use of International

Accounting and Auditing Standards
by U.S. companies
Globalization of world’s capital markets are
leading to calls for a single set of accounting
standards to be used around the world.
End of Chapter 3
2015
SEC Implementation
If plan is approved?
Developing of IFRS
into U.S.
Workplan

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