Audit Chapter 16

Unqualified Report

Clean report, free from material misstatements

Qualified “except for”

Financial statements are presented fairly except for one narrow issue

Disclaimer

When there’s a pervasive material scope limitation or lack of independence

Adverse

When financial statements are not fairly presented due to pervasive material departure from reporting framework

Elements of Standard Unmodified Audit Report (Private)

1. Title

2. Address

3. Opinion section

4. Basis for opinion paragraph

5. Management’s responsibility paragraph

6. Auditor’s responsibility paragraph

7. Signature

8. Date

Elements of Standard Unqualified Audit Report (Public)

1. Title

2. Address

3. Opinion paragraph

4. Paragraph referencing the audit of internal control

5. Basis for opinion paragraph

6. Scope paragraph

7. Critical audit matters

8. Signature

9. Date

10. Auditor tenure

Why do we use modifications to the standard report?

Sometimes circumstances arise that require the auditor to add explanatory language to the standard unqualified report

What changes affect consistency in financial statements?

Changes in:

1. Accounting principle

2. Reporting entity

3. Correction of misstatements

What changes do not affect consistency in financial statements?

Changes in:

1. Accounting estimates

2. Classifications

3. Potential material future effects

Use of modifications to the standard report

1. Going concern

2. Financial statements are not consistent

3. Emphasis added at discretion of auditor

4. Opinion based in part on the report of another auditor

Scope Limitations

Results from an inability to obtain sufficient appropriate evidence about some component of the financial statements

GAAP departures

Results when financial statements are materially affected by a departure from GAAP

Independence Issues

Results when auditor has some form of prohibited relationship with the entity

How should auditors handle scope limitations?

Issue either a qualified opinion or disclaimer

How should auditors handle GAAP departures?

Issue either a qualified or adverse opinion

How should auditors handle independence issues?

Issue a disclaimer

What is the auditor’s responsibility for other documents?

Read for consistency with audited statements but no obligation to corroborate

What distinguishes a compilation engagement?

CPA assembles statements from source documents with no testing or assurance

What characterizes a review engagement?

Analytical procedures and management inquiries without substantive testing

What are the three types of pervasive effects?

1. Not confined to specific elements

2. Represent substantial portion

3. Fundamental to user understanding

Elements of the standard report in ICFR

1. Title

2. Address

3. Opinion paragraph

4. Paragraph referencing the financial statement audit

5. Basis for opinion paragraph

6. Scope paragraph

7. Definition and inherent limitations paragraph

8. Signature

9. Date