audit reports

More documents

Recommendations

Info

a guarantee. The intent is to indicate that the conclusions are based on professional judgment. The phrase in our opinion indicates that there may be some information risk associated with the financial statements, even though the statements have been audited. The opinion paragraph is directly related to the first and fourth generally accepted auditing reporting standards listed on page 34. The auditor is required to state an opinion about the financial statements taken as a whole, including a conclusion about whether the company followed U.S. generally accepted accounting principles. One of the controversial parts of the auditor’s report is the meaning of the term present fairly. Does this mean that if generally accepted accounting principles are followed, the financial statements are presented fairly, or something more? Occa sionally, the courts have concluded that auditors are responsible for looking beyond generally accepted accounting principles to determine whether users might be misled, even if those principles are followed. Most auditors believe that financial statements are “presented fairly” when the statements are in accordance with generally accepted accounting principles, but that it is also necessary to examine the substance of transactions and balances for possible misinformation. 6. Name of CPA firm. The name identifies the CPA firm or practitioner who performed the audit. Typically, the firm’s name is used because the entire CPA firm has the legal and professional responsibility to ensure that the quality of the audit meets professional standards. 7. Audit report date. The appropriate date for the report is the one on which the auditor completed the auditing procedures in the field. This date is important to users because it indicates the last day of the auditor’s responsibility for the review of significant events that occurred after the date of the financial statements. In the audit report in Figure 3-1, the balance sheet is dated December 31, 2007, and the audit report is dated February 15, 2008. This indicates that the auditor has searched for material unrecorded transactions and events that occurred up to February 15, 2008. INTERNATIONAL AUDIT OPINIONS The standard unqualified audit report described in the preceding section is based on auditing standards generally accepted in the United States. Reporting in other countries is based on auditing standards in those countries. For example, the opinion paragraph from an audit report issued in the United Kingdom is as follows: In our opinion the financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of affairs of the company at 31st December 2007 and of the profit and cash flow of the company for the year then ended and have been properly prepared in accordance with the United Kingdom Companies Act of 1985 and Article 4 of the IAS Regulation. Conditions for Standard Unqualified Audit Report OBJECTIVE 3-2 Specify the conditions required to issue the standard unqualified audit report. The standard unqualified audit report is issued when the following conditions have been met: 1. All statements—balance sheet, income statement, statement of retained earnings, and statement of cash flows—are included in the financial state ments. 2. The three general standards have been followed in all respects on the engage - ment. 3. Sufficient appropriate evidence has been accumulated, and the auditor has conducted the engage ment in a manner that enables him or her to con clude that the three standards of field work have been met. 4. The financial statements are presented in accordance with U.S. generally accepted accounting prin ciples. This also means that adequate disclosures have been included in the footnotes and other parts of the financial state ments. 5. There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report. 48 PART ONE / THE AUDITING PROFESSION
FIGURE 3-2 Four Categories of Audit Reports Standard Unqualified The five conditions stated on page 48 have been met. Unqualified with Explanatory Paragraph or Modified Wording A complete audit took place with satisfactory results and financial statements that are fairly presented, but the auditor believes that it is important or is required to provide additional information. Qualified The auditor concludes that the overall financial statements are fairly presented, but the scope of the audit has been materially restricted or generally accepted accounting principles were not followed in preparing the financial statements. Adverse or Disclaimer The auditor concludes that the financial statements are not fairly presented (adverse), he or she is unable to form an opinion as to whether the financial statements are fairly presented (disclaimer), or he or she is not independent (disclaimer). When these conditions are met, the standard unqualified audit report, as shown in Figure 3-1, is issued. The standard unqualified audit report is sometimes called a clean opinion because there are no circumstances requiring a qualification or modification of the auditor’s opinion. The standard unquali fied report is the most common audit opinion. Sometimes circumstances beyond the client’s or auditor’s control prevent the issuance of a clean opinion. However, in most cases, companies make the appropriate changes to their accounting records to avoid a qualification or modification by the auditor. If any of the five requirements for the standard unqualified audit report are not met, the standard unqualified report cannot be issued. Figure 3-2 indicates the cate - gories of audit reports that can be issued by the auditor. The departures from a standard unqualified report are considered increasingly severe as one moves down the figure. Financial statement users are normally much more concerned about a dis - claimer or adverse opinion than an unqualified report with an explanatory para graph. These other categories of audit reports are discussed in following sections. COMBINED REPORTS ON FINANCIAL STATEMENTS AND INTERNAL CONTROL OVER FINANCIAL REPORTING UNDER SECTION 404 OF THE SARBANES–OXLEY ACT As discussed in Chapter 1, Section 404 of the Sarbanes–Oxley Act requires the auditor of a public company to attest to management’s report on the effectiveness of internal control over financial reporting. PCAOB Auditing Standard 2 requires the audit of internal control to be integrated with the audit of the financial statements. However, the auditor may choose to issue separate reports or a combined report, such as the one shown in Figure 3-3 (p. 50). The combined report on financial statements and internal control over financial reporting addresses both the financial statements and manage ment’s report on internal control over financial reporting: OBJECTIVE 3-3 Understand combined reporting on financial statements and internal control over financial reporting under Section 404 of the Sarbanes–Oxley Act. CHAPTER 3 / AUDIT REPORTS 49
Page 1 and 2: CHAPTER # 3 AUDIT REPORTS THE AUDIT
Page 3: FIGURE 3-1 Standard Unqualified Rep
Page 7 and 8: • The report includes a paragraph
Page 9 and 10: The auditor’s concern in such sit
Page 11 and 12: of the other auditor. The principal
Page 13 and 14: follow GAAP, but if the amounts are
Page 15 and 16: 1. Transactions are illegal or frau
Page 17 and 18: paragraph is the same as the third
Page 19 and 20: AUDITOR’S DECISION PROCESS FOR AU
Page 21 and 22: or for an unqualified shared report
Page 23 and 24: 3-9 (Objectives 3-4, 3-5) Distingui
Page 25 and 26: (3) a client-imposed scope limitati
Page 27 and 28: 3-29 (Objectives 3-4, 3-5, 3-6, 3-7
Page 29 and 30: (1) Unqualified—standard wording

audit reports

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?