Chapter 18 Audit Notes
Chapter 18 Audit Notes ACCT 4150
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This 4 page Class Notes was uploaded by Victoria Andreski on Sunday April 24, 2016. The Class Notes belongs to ACCT 4150 at Clemson University taught by Nancy Harp in Spring 2016. Since its upload, it has received 12 views. For similar materials see Auditing in Accounting at Clemson University.
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Date Created: 04/24/16
CHAPTER 18—Reports on Audited Financial Statements What do we report on? • Financial statement “fairness” • Internal control “effectiveness” Types of Audit Opinions (SAS 58 & 79, AU 508) 1. Unqualified a. Standard wording b. Modified wording 2. Qualified 3. Adverse 4. Disclaimer The Auditor’s Standard Report o Know the 8 parts of the standard 3 paragraph report Reporting on the Financial Statement Audit: The Standard Unqualified Report Eight Elements 1. Report title 2. Addressee 3. Introductory paragraph 4. Scope paragraph 5. Opinion paragraph 6. Explanatory paragraph referring to the audit of ICFR 7. Name of auditor 8. Audit report date • The standard unqualified report is issued when the auditor has gathered sufficient evidence, the audit has been performed in accordance w/ PCAOB standards, & the financial statements conform to GAAP Reporting on the Financial Statement Audit: The Standard Unmodified Report Nine Elements 1. Report title 2. Addressee 3. Introductory paragraph 4. Management’s responsibility 5. Auditor’s responsibility 6. Scope paragraph 7. Opinion paragraph 8. Name of auditor 9. Audit report date • The standard unmodified report is issued when the auditor has gathered sufficient evidence, the audit has been performed in accordance w/ GAAS, & the financial statements conform to GAAP Adjustments to the Standard Unqualified/Unmodified Financial Statement Audit Report • Explanatory paragraph—reference to report on audit of ICFR • Explanatory paragraph—going concern • Modified wording—opinion based in part on the report of another auditor • Explanatory paragraph—lack of consistency • Explanatory paragraph—additional emphasis Use of Other Auditors 1. Willing to take full responsibilityà Unqualified Standard Report 2. Willing to share responsibilityà Unqualified Modified 3. Not willing to take responsibility OR other auditor’s report includes a material qualificationà Qualified Lack of Consistency • Changes affecting consistency o Change in accounting principle o Change in reporting entity o Correction of an error in principle • Changes NOT affecting consistency o Change in accounting estimate o Change expected to have a material future effect o Change in classification & reclassification Additional Emphasis • Under certain circumstances an auditor may want to emphasize a specific matter regarding the financial statements even though he/she intends to express an unqualified/unmodified opinion • This information should be presented in an explanatory paragraph Conditions for Departure from Unqualified/Unmodified Report • Scope limitation o Results from an inability to obtain sufficient competent evidence about some component of the financial statements o Issue a qualified opinion or a disclaimer • Departure from GAAP o Results when financial statements are materially affected by an unacceptable departure from GAAP o Issue a qualified opinion or adverse opinion • Lack of auditor independence o Results when auditor has some form of prohibited relationship w/ the client o Issue a disclaimer Departures from an Unqualified/Unmodified Financial Statement Audit Report • Qualified—“except for” • Disclaimer • Adverse Effect of Materiality: Pervasiveness Pervasive effects on the financial statements are those that: 1. Are not confined to specific elements, accounts, or items of the financial statements; 2. If so confined, represent or could represent a substantial proportion of the financial statements; or 3. With regard to disclosures, are fundamental to users’ understanding of the financial statements Applying this guidance requires a lot of auditor judgment! Special Reporting Issues • Different reports on comparative financial statements • Change in report on prior-period financial statements • Report by a predecessor auditor o The predecessor auditor should do the following before reissuing a report on prior-year financial statements published for comparative purposes: § 1. Read the financial statements of the current period § 2. Compare the prior-period financial statements reported on w/ the current-year financial statements § 3. Obtain a letter of representation from the current-year or successor auditor Other Information in Documents Containing Audited Financial Statements • The auditor has no responsibility beyond the financial information contained in the report, & he/she has o obligation to perform any audit procedures to corroborate the other information. However, the auditor is required to read the other information & consider whether it is consistent w/ the information contained in the audited financial statements o Annual reports o Registration statements Special Reports • Financial statements prepared on a comprehensive basis of accounting other than GAAP o Regulatory basis o Tax basis o Cash (or modified cash) basis o Contractual basis • Specified elements, accounts, or items of a financial statement o In some situations an auditor may be engaged to audit only part (or specified elements, accounts, or items) of the financial statements o Rather than auditing specified elements, accounts, or items, an auditor may be engaged to apply only agreed-upon procedures • Compliance w/ aspects of contractual agreements or regulatory requirements o The auditor provides negative assurance as to compliance w/ the provisions of contractual agreements or regulatory requirements
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