Comprehensive Material Series Audit Reports (Auditing)
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Audit Reports
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Audit Reports
Comprehensive Material Series Audit Reports (Auditing)
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'...
comprehensive material series audit reports auditing
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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 in qualified 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 in the audit. The remainder briefly describes important
aspects of an audit.
5. Opinion paragraph. The final paragraph in the 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 in the
field.
The same seven parts are found in a qualified report as in an 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 in the auditor’s
report? Identify the most important information included in 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 in the auditor’s
report? Identify the most important information included in the
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 in the 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 thedates
thereof or a reference to the introductory paragraph.
3. A statement about whether the financial statements were presented fairlyand
in accordance 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 in satisfactory in all
respects except for the existence of a change in accounting principle
from FIFO to LIFO inventory valuation., which results in an
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 in the 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 in the financial
statements.
2. The three general standards have been followed in all respects on the
engagement.
3. Sufficient evidence has been accumulated and the auditor has conducted the
engagement in a manner that enables him or her to conclude that the three
standards of field work have been met.
,Comprehensive Material Series
financial reporting. What is the nature of the additional paragraphs
in the 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 in accordance with GAAP because such
adherence would result in misleading statements?
: When adherence to generally accepted accounting principles would result in
misleading financial statements there should be a complete explanation in a separate
paragraph. The separate paragraph should fully explain the departure and the reason
why generally accepted accounting principles would have resulted in misleading
statements. The opinion should be unqualified, but it should refer to the separate
paragraph during the portion of the opinion in which 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
in an 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 arefairly 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
, 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 in the
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 in generally
accepted accounting principles in the first year in which the changetook 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 in accounting principle
b. Change in reporting entity
c. Corrections of errors involving accounting principles.
An example of a change that affects consistency would be a change in the 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 in estimates, presentation, and
events rather than changes in accounting principles. For example, a change in the
estimated life of a depreciable asset will affect the comparability of the statements. In
that case, no explanatory paragraph for lack of consistency is needed, but the
information may require disclosure in the 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 in accordance 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 in the client's business.
14) Distinguish between a qualified opinion, adverse opinion, and a
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