1) Explain why auditors’ reports are important to users of financial statements and why it is desirable to have standard wording.
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Audit Reports
1) Explain why auditors’ reports are important to users of financial statements and why it is desirable to have standard wording.
2) List the seven parts of a standard unqualified audit report and explain the meaning of each part. How do the parts compare with those found in quali...
1 explain why auditors’ reports are important to users of financial statements and why it is desirable to have standard wording
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Comprehensive Material Series
Audit Reports
1) Explain why auditors’ reports are important to users of financial
statements and why it is desirable to have standard wording.
: Auditor's reports are important to users of financial statements because they
inform users of the auditor's opinion as to whether or not the statements are fairly
stated or whether no conclusion can be made with regard to the fairness of their
presentation. Users especially look for any deviation from the wording of the
standard unqualified report and the reasons and implications of such deviations.
Having standard wording improves communications for the benefit of users of the
auditor’s report. When there are departures from the standard wording, users are
more likely to recognize and consider situations requiring a modification or
qualification to the auditor’s report or opinion.
2) List the seven parts of a standard unqualified audit report and
explain the meaning of each part. How do the parts compare with
those found inqualified report?
: The unqualified audit report consists of:
1. Report title Auditing standards require that the report be titled and
that the title includes the word independent.
2. Audit report address The report is usually addressed to the company,
its stockholders, or the board of directors.
3. Introductory paragraph The first paragraph of the report does three
things: first, it makes the simple statement that the CPA firm has done
an audit. Second, it lists the financial statements that were audited,
including the balance sheet dates and the accounting periods for the
income statement and statement of cash flows. Third, it states that the
statements are the responsibility of management and that the
auditor's responsibility is to express an opinion on the statements
based on an audit.
4. Scope paragraph. The scope paragraph is a factual statement about
what the auditor did inthe audit. The remainder briefly describes
important aspects of an audit.
5. Opinion paragraph. The final paragraph inthe standard report states
the auditor's conclusions based on the results of the audit.
6. Name of CPA firm. The name identifies the CPA firm or practitioner
who performed the audit.
7. Audit report date. The appropriate date for the report is the one on
which the auditor has completed the most important auditing
procedures inthe field.
The same seven parts are found ina qualified report as inan unqualified
report. There are also often one or more additional paragraphs explaining reasons
for the qualifications.
3) What are the purposes of the scope paragraph inthe auditor’s
report? Identify the most important information included inthe scope
paragraph.
: The purposes of the scope paragraph inthe auditor's report are to inform the
,Comprehensive Material Series
1. The auditor followed generally accepted auditing standards.
2. The audit is designed to obtain reasonable assurance about whether the
statements are free of material misstatement.
3. Discussion of the audit evidence accumulated.
4. Statement that the auditor believes the evidence accumulated was
appropriate for the circumstances to express the opinion presented.
4) What are the purposes of the opinion paragraph inthe auditor’s
report? Identify the most important information included inthe
opinion paragraph.
: The purpose of the opinion paragraph is to state the auditor's conclusions based
upon the results of the audit evidence. The most important information inthe
opinion paragraph includes:
1. The words "in our opinion" which indicate that the conclusions are based
on professional judgment.
2. A restatement of the financial statements that have been audited and the
dates thereof or a reference to the introductory paragraph.
3. A statement about whether the financial statements were presented fairly
and inaccordance with generally accepted accounting principles.
5) On February 17, 2006, a CPA completed the field work on the
financial statements for the Buckheizer Technology Corporation for
the year ended December 31, 2005. The audit insatisfactory inall
respects except for the existence of a change inaccounting principle
from FIFO to LIFO inventory valuation., which results inan
explanatory paragraph to consistency. On February 26, the auditor
completed the tax return and the draft of the financial statements.
The final audit report was completed, attached to the financial
statements, and delivered to the client on March 7. What is the
appropriate date on the auditor’s report?
: The auditor's report should be dated February 17, 2006, the date on which the
auditor completed the most important auditing procedures inthe field.
6) What five circumstances are required for a standard unqualified
report to be issued?
: An unqualified report may be issued under the following five circumstances:
1. All statements—balance sheet, income statement, statement of retained
earnings, and statement of cash flows—are included inthe financial
statements.
2. The three general standards have been followed inall respects on the
engagement.
3. Sufficient evidence has been accumulated and the auditor has conducted
the engagement ina manner that enables him or her to conclude that
the three standards of field work have been met.
4. The financial statements are presented inaccordance with generally
accepted accounting principles. This also means that adequate
disclosures have been included inthe footnotes and other parts of the
,Comprehensive Material Series
financial reporting. What is the nature of the additional paragraphs
inthe audit report?
: The introductory, scope and opinion paragraphs are modified to include reference
to management’s report on internal control over financial reporting, and the scope
of the auditor’s work and opinion on internal control over financial reporting. The
introductory and opinion paragraphs also refer to the framework used to evaluate
internal control. Two additional paragraphs are added between the scope and
opinion paragraphs that define internal control and describe the inherent limitations
of internal control.
8) What type of opinion should an auditor issue when the financial
statements are not inaccordance with GAAP because such adherence
would result inmisleading statements?
: When adherence to generally accepted accounting principles would result
inmisleading financial statements there should be a complete explanation ina
separate paragraph. The separate paragraph should fully explain the departure and
the reason why generally accepted accounting principles would have resulted
inmisleading statements. The opinion should be unqualified, but it should refer to
the separate paragraph during the portion of the opinion inwhich generally
accepted accounting principles are mentioned.
9) Distinguish between an unqualified report with explanatory
paragraph or modified wording and a qualified report. Give examples
when an explanatory paragraph or modified wording should be used
inan unqualified opinion.
: An unqualified report with an explanatory paragraph or modified wording is the
same as a standard unqualified report except that the auditor believes it is
necessary to provide additional information about the audit or the financial
statements. For a qualified report, either there is a scope limitation (condition 1) or
a failure to follow generally accepted accounting principles (condition 2). Under
either condition, the auditor concludes that the overall financial statements are
fairly presented.
Two examples of an unqualified report with an explanatory paragraph or
modified wording are:
1. The entity changed from one generally accepted accounting principle
to another generally accepted accounting principle.
2. A shared report involving the use of other auditors.
10) Describe what is meant by a reports involving the use of other
auditors. What are the three options available to the principal
auditor and when should each be used?
: When another CPA has performed part of the audit, the primary auditor issues
one of the following types of reports based on the circumstances.
1. No reference is made to the other auditor. This will occur if the other
auditor audited an immaterial portion of the statement, the other
, Comprehensive Material Series
3. The report may be qualified if the principal auditor is not willing to
assume any responsibility for the work of the other auditor. A
disclaimer may be issued if the segment audited by the other CPA is
highly material.
11) The client has restated the prior-year statements because of a
change from LIFO to FIFO. How should be this reflected inthe
auditor’s report?
: Even though the prior year statements have been restated to enhance
comparability, a separate explanatory paragraph is required to explain the change
ingenerally accepted accounting principles inthe first year inwhich the change took
place.
12) Distinguish between changes that affect consistency and those
that may affect comparability but not consistency. Give an example
of each.
: Changes that affect the consistency of the financial statements may involve any
of the following:
a. Change inaccounting principle
b. Change inreporting entity
c. Corrections of errors involving accounting principles.
An example of a change that affects consistency would be a change inthe
method of computing depreciation from straight line to an accelerated method. A
separate explanatory paragraph is required if the amounts are material.
Comparability refers to items such as changes inestimates, presentation, and
events rather than changes inaccounting principles. For example, a change inthe
estimated life of a depreciable asset will affect the comparability of the statements.
inthat case, no explanatory paragraph for lack of consistency is needed, but the
information may require disclosure inthe statements.
13) List the three conditions that require a departure from
unqualified opinion and give one specific example of each those
conditions.
: The three conditions requiring a departure from an unqualified opinion are:
1. The scope of the audit has been restricted. One example is when the
client will not permit the auditor to confirm material receivables.
Another example is when the engagement is not agreed upon until
after the client's year-end when it may be impossible to physically
observe inventories.
2. The financial statements have not been prepared inaccordance with
generally accepted accounting principles. An example is when the
client insists upon using replacement costs for fixed assets.
3. The auditor is not independent. An example is when the auditor owns
stock inthe client's business.
14) Distinguish between a qualified opinion, adverse opinion, and a
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