Standard Unqualified Audit Report
8 Distinct Parts:
1.Report Title - Must include word Independent
2.Audit Report Address - Addressed to company
3.Intro Paragraph - Indicates CPA Firm has performed an audit, what was audited, and notes.
4.Mgmt Responsibility -
5.Auditor Responsibility - 3
Standard Unqualified Audit Report for NON-PUBLIC COMPANIES is issued when:
Also called a "Clean Opinion"
Most Common Audit Opinion
1. All Statements have been addressed
- BS, Income Statement, Stmt of Stockholders Equity, SCashFlows
2. Sufficient Appropriate Evidence - has been accumulated.
- Auditor has conducted the engagement in a manner that enables him/her to conclude the audit
Four Categories of Audit Reports:
1. Standard Unqualified
2. Unqualified w/ Emphasis-of-Matter Explanatory Paragraph or Modified Wording
3. Qualified
4. Adverse or Disclamer
1. Standard Unqualified
Four Conditions of a Std. Unqualified Audit report have been met.
2. Unqualified w/ Emphasis-of-Matter Explanatory Paragraph or Modified Wording
A complete audit took place w/ Satisfactory results and financial statements that were fairly presented, BUT the auditor believes that it is important or is required to provide additional information.
3. Qualified
Auditor concludes that the overall financial statemnts are fairly presented, but the scope of the audit has been materially restricted or applicable accounting standards were not followed in preparing the financial statements
4. Adverse or Disclamer
Auditor concludes that the financial statements are NOT fairly presented (adverse), they are unable to form an opinion as to whether the Financial Statements are fairly presented (disclaimer), or he/she is not an independent auditor (disclaimer).
Standard Unqualified audit report for PUBLIC COMPANIES
Same steps for the report, but has 3 paragraphs.
1st Paragraph - Intro paragraph; When audit was performed & what was audited, auditors responsibility (Consolidated version of Std Unq. for non-publics)
2nd Paragraph - Scope Paragraph; Similar to Non-publi
Report on Internal Control over Financial Reporting
- More common than Combined report on Financial Statements & Internal Control over Financial Reporting
- Introductory, Scope, Opinion Paragraphs describe scope of work + opinion on internal control over Fin Reporting, Intro highlights mgmt's responsibilit
Unqualified Audit Report w/ Emphasis of Matter Explanatory Paragraph of Modified Wording (pt 2)
Most Important Causes under AICPA & PCAOB:
1. Lack of Consistent Application of GAAP
2. Substantial doubt about going concern
3. Auditor agrees w/ a departure from promulgated accounting principles
4. Emphasis of other matters
5. Reports involving other a
Consistency vs Comparability
Auditor must be able to distinguish b/w changes that affect consistency & those that may affect comparability, but not affect consistency.
- Examples of changes that affect consistency & therefore require an explanatory paragraph if they are material:
- C
Going Concern Issues
Auditor is responsible under auditing standards to evaluate whether the company is likely to continue as a growing concern.
Examples:
- Significant recurring operating loses or working capital deficiencies
- Inability of the company to pay its obligations
Auditor Agrees with a Departure from a Promulgated Principle
Examples :
- Existence of material related party transactions
- Important events occurring subsequent to the balance sheet date
- Description of accounting matters affecting the comparability of the financial statements with those of the preceding year
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When a CPA relies on a different CPA to perform part of the audit, the PRINCIPLE CPA FIRM has 3 alternatives
1. Make no Reference in the Audit Report
- Followed when other auditor audited an immaterial portion of the statements
- Other auditor is well known or closely supervised by principal auditor
- Principal auditor has thoroughly reviewed the other auditor's
Departure from Unqualified Audit Reports
When any of the 3 conditions requiring a departure from an unqualified report exists and is material, a report other than an unqualified report must be issued.
1. Scope of Audit has been Restricted (Scope Limitation)
- Restrictions imposed by client
- Restrictions imposed beyond auditor or client's control.
2. Financial Statements have not been prepared in accordance w/ GAAP (GAAP Departure)
3. Auditor is not In
Audit reports that are issued under these conditions:
Qualified Opinion
Qualified Opinion
- Results from Limitation of scope or failure to follow GAAP
- Can ONLY be used when the auditor concludes that the overall financial statements are fairly stated.
- Can take the form of a qualification of BOTH the SCOPE & THE OPINION or
Audit reports that are issued under these conditions:
Adverse Opinion
Adverse Opinion:
- Only used when the auditor believes that the overall financial statements are so materially misstated or misleading that hey do not present fairly the financial position or results of operations and cash flows in conformity with GAAP.
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Audit reports that are issued under these conditions:
Disclaimer of Opinion
Disclaimer of Opinion:
-Issued when the auditor has been UNABLE TO SATISFY HIMSELF that the overall financial statements were fairly presented.
- May arise because of SEVERE limitation on the scope of the audit OR a nonindependent relationship under the C
Materiality
- Essential Consideration in determining the appropriate type of report for a given set of circumstances.
- In situations of lesser materiality, a qualified opinion is appropriate.
- A misstatement in the Financial statements can be material if knowledge
Levels of Materiality
1. Amounts are Immaterial
- When a misstatement in the financial statements exists but is unlikely to affect the decisions of a reasonable user, it is considered to be immaterial.
- Unqualified opinion is therefore appropriate.
2. Amounts are Material but
Materiality Decisions - Non GAAP Conditions
When a client fails to follow GAAP, the audit report will be unqualified, qualified opinion only, or adverse, depending on the materiality of the departure.
Dollar Consideration
Primary concern in measuring materiality.
Common bases to determine benchmarks can include net income, total assets, current assets, and working capital.
Measurabilty
Some misstatements cannot be accurately measured back to the dollar amount.
Nature of the Item being Measured
1. Transactions are Illegal / Fraudulent
2. An item may materially affect some future period, even though it is immaterial when only the current period is concerned.
3. An item has a "psychic" effect (Item changes a small loss to a small profit)
4. An ite
Materiality Decision - Scope Limitations Conditions
When there is a scope limitation w/in an Audit, the report will be unqualified, qualified scope & opinion, or disclaimer, depending on the materiality of the scope limitation.
Scope Restrictions
- Appropriate response is to issue an unqualified report, a qualification of scope & opinion, or a disclaimer of opinion, depending on materiality.
- Client Imposed Restrictions:
- Auditor should be concerned about the possibility that MGMT is trying to p
Statements that are not within conformity to GAAP
When the Auditor knows that the statements were not prepared within conformity w/ GAAP, & the client is not able or is unwilling to correct he misstatement, he/she must issue a Qualified or an Adverse opinion, depending on the materiality of the item.
Code of Professional Conduct - Rule 203
Permits a departure from GAAP when the auditor believes that adherence to these would result in misleading financial statements, though this is rare.
Non-Independent Auditors
- A Disclaimer of Opinion is required even though all the audit procedures considered necessary in the circumstances were performed.
- The lack of Independence overrides any other scope limitations.
- One paragraph audit report; No mention of the performa
Decision Process for Audit Reports
First: Assesses whether any conditions requiring departure from a standard unqualified report.
-If no conditions exist, the auditor issue a standard unqualified audit report
Second: If yes to above, determine materiality
-For departures from GAAP / Scope
Writing the Audit Report
- Auditors often encounter situations involving more than one of the conditions requiring a departure from an unqualified report
- The auditor should modify their opinion FOR EACH condition unless one has the effect of neutralizing the others.
- Examples: