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Audit Reports

Learn about the structure of audit reports, including the title, address, introductory paragraph, scope, opinion, CA firm's name, and report date. Explore different categories of audit reports, such as standard unqualified, qualified, adverse, or disclaimer. Discover conditions for standard unqualified reports, instances of qualified opinions, and the significance of materiality in audit opinions. Gain insight into international accounting standards and the SEC's proposed roadmap for IFRS adoption in the U.S.

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Audit Reports

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  1. Audit Reports Chapter 3 Instructor: ArshadHasan

  2. Parts of the StandardUnqualified Audit Report 1. Report title 2. Audit report address 3. Introductory paragraph 4. Scope paragraph 5. Opinion paragraph 6. Name of CA firm 7. Audit report date

  3. Four Categories of Audit Reports 1. Standard unqualified 2. Unqualified with explanatory paragraph or modified wording 3. Qualified 4. Adverse or disclaimer

  4. Conditions for StandardUnqualified Audit Report 1. All financial statements are included. 2. The three general standards have been followed in all respects on the engagement. (Proficiency, Independence, Professional Care) 3. Sufficient evidence has been accumulated to conclude that three standards of field work have been met. (Planning, Understanding, Audit Evidence) 4. The financial statements are presented in accordance with IFRS / generally accepted accounting principles. 5. There are no circumstances requiring the addition of an explanatory paragraph / modification of wording of report.

  5. Unqualified Report with Explanatory Paragraph 1. Lack of consistent application of generally accepted accounting principles / IFRS 2. Substantial doubt about going concern 3. Auditor agrees with a departure from promulgated accounting principles 4. Emphasis of a matter 5. Reports involving other auditors

  6. Substantial Doubt AboutGoing Concern 1. Significant recurring operating losses or working capital deficiencies. 2. Inability of the company to pay its obligations as they come due. 3. Loss of major customers, the occurrence of uninsured catastrophes. 4. Legal proceedings, legislation that might jeopardize the entity’s ability to operate.

  7. Auditor Agrees with a Departurefrom a Promulgated Principle The auditor must be satisfied and must state and explain, in a separate paragraph or paragraphs in the audit report, that adhering to the principle would have produced a misleading result in that situation.

  8. Emphasis of a Matter Under certain circumstances, the CA may want to emphasize specific matters regarding the financial statements, even though the CA intends to express an unqualified opinion. Existence of significant related party transactions Events occurring subsequent to balance sheet date Matters affecting comparability of financial statements Material uncertainties disclosed in footnotes

  9. Reports Involving Other Auditors 1. Make no reference in the audit report 2. Make reference in the report (modified wording report) 3. Qualify the opinion

  10. Departures from AnUnqualified Opinion 1. Scope limitation 2. GAAP departure 3. Auditor not independent

  11. Qualified Opinion A qualified opinion report can result from a limitation on the scope of the audit or failure to follow generally accepted accounting principles.

  12. Adverse Opinion It is used only when the auditor believes that the overall financial statements are so materially misstated or misleading that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP.

  13. Disclaimer of Opinion It is issued when the auditor is unable to be satisfied that the overall financial statements are fairly presented.

  14. Reporting on Internal Control over Financial Reporting Auditors of public companies subject to Section 404 of the Sarbanes-Oxley Act must report on the effectiveness of internal control over financial reporting. PCAOB Auditing Standard 5 requires the audit of internal control to be integrated with the audit of the financial statements.

  15. Sarbanes-Oxley Act Separate Report on Financial Statements and Internal Control Over Financial Reporting 1. Introductory paragraph 2. Scope paragraph 3. Definition paragraph 4. Inherent limitations paragraph 5. Opinion paragraph 6. Cross Reference Paragraph

  16. Materiality A misstatement in the financial statements can be considered material if knowledge of the misstatement would affect a decision of a reasonable user of the statements.

  17. Levels of Materiality Amounts are immaterial. Amounts are material but do not overshadow the financial statements as a whole. Amounts are so material or so pervasive that overall fairness of the statements is in question.

  18. Relationship of Materiality toType of Opinion Materiality Level Significance in Terms of Reasonable Users’ Decisions Type of Opinion Immaterial Users’ decisions are unlikely to be affected. Unqualified Material Users’ decisions are likely to be affected. Qualified Highly material Users’ decisions are likely to be significantly affected. Disclaimer or adverse

  19. Materiality Decisions • Dollar amount compared with a base • Measurability • Nature of the item

  20. Proposed use of international accounting and auditing standards by U.S. companies Globalization of world’s capital markets are leading to calls for a single set of accounting standards to be used around the world. The SEC has a proposed roadmap that could lead to the use of IFRS by U.S. public companies beginning in 2014

  21. End of Chapter 3

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