MODERN AUDITING 7th Edition

1
MODERN AUDITING 7th Edition

• William C. Boynton
• California Polytechnic State University at San
  Luis Obispo
• Raymond N. Johnson
• Portland State University
• Walter G. Kell
• University of Michigan

Developed by Dr. Raymond N. Johnson, CPA Gregory
K. Lowry, MBA, CPA
John Wiley Sons, Inc.
2
Chapter 20 Reporting on Audited Financial
Statements

• Standards of Reporting
• The Standard Auditors Report
• Departures from the Standard Auditors Report
• Other Reporting Considerations

3
1st Reporting Standard

• The report shall state whether the financial
  statements are presented in accordance with
  generally accepted accounting principles.

4
1st Reporting Standard

• The auditors opinion as to conformity with GAAP
  should be based on his or her judgment as to
  whether
• The accounting principles selected and applied
  have general acceptance
• The accounting principles are appropriate in the
  circumstances
• The financial statements, including the related
  notes, are informative of matters that may affect
  their use, understanding, and interpretation
• The information presented in the financial
  statements is classified and summarized in a
  reasonable manner
• The statements reflect the underlying events and
  transactions in a manner that presents the
  financial position, results of operations, and
  cash flows within reasonable and practicable
  limits

5
2nd Reporting Standard

• The report shall identify those circumstances in
  which such principles have not been consistently
  observed in the current period in relation to the
  preceding period.
• Objectives
• Assurance about comparability
• Reporting when comparability has been affected by
  material changes in accounting principles

6
3rd Reporting Standard

• Informative disclosures in the financial
  statements are to be regarded as reasonably
  adequate unless otherwise stated in the report.
• Objectives
• Assurance about disclosure
• Reporting when disclosure is inadequate

7
4th Reporting Standard

• The report shall either contain
• An expression of opinion regarding the financial
  statements, taken as a whole, or
• An assertion to the effect that an opinion cannot
  be expressed. When an overall opinion cannot be
  expressed, the reasons therefore should be
  stated.
• In all cases where an auditors name is
  associated with financial statements, the report
  should contain a clear-cut indication of the
  character of the auditors work, if any, and the
  degree of responsibility the auditor is taking.

8
The Standard Auditors Report

• Title Independent Auditors Report
• Introductory Paragraph
• Scope Paragraphs
• Opinion Paragraph
• Signature
• Date

9
Non-Standard Auditors Reports

• Unqualified Opinion with Additional Explanatory
  Language
• Departures from GAAP
• Qualified Opinion
• Adverse Opinion
• Scope Limitations
• Qualified Opinion
• Disclaimer of Opinion

10
Unqualified Opinion with Additional Explanatory
Language

• Inconsistent application of GAAP
• Change to an acceptable method that is adequately
  disclosed
• Going concern
• Substantial doubt
• Emphasis of a matter
• Auditor choice

11
Unqualified Opinion with Additional Explanatory
Language

• Report Format
• Standard Introductory Paragraph
• Standard Scope Paragraph
• Standard Opinion Paragraph
• Explanatory Paragraph

12
Unqualified Opinion with Additional Explanatory
Language

• Shared Scope
• The decision not to refer
• Auditor is well known to the principle auditor
• Work has been performed under the principle
  auditors guidance and review
• Principle auditor reviews programs and working
  papers
• The decision to refer
• Does not meet criteria above
• Inquiries made about professional reputation
• Representation from other auditor about
  independence
• Auditor outside the U.S. is knowledgeable about
  US GAAP and US GAAS

13
Unqualified Opinion with Additional Explanatory
Language

• Shared Scope Report Format
• Modify Introductory Paragraph to describe sharing
  of scope
• Modify Scope Paragraph to Indicate that opinion
  was based on your audit, and the audit of other
  auditors.
• Modify Opinion Paragraph to indicate you opinion
  was based on your audit and the report of other
  auditors

14
Unqualified Opinion with Additional Explanatory
Language

• Nonconformity with GAAP Necessary for Fair
  Presentation
• Standard Introductory Paragraph
• Standard Scope Paragraph
• Explanatory Paragraph
• States circumstances
• Explains that the use of an alternative principle
  is justified
• Standard Opinion Paragraph

15
Departure from GAAP

• Qualified Opinion or Adverse Opinion
• Difference between Qualified and Adverse
• The dollar magnitude of the effects
• The significance of the item to the client
• The pervasiveness to the misstatement (number of
  statements items affected)
• The effect of the misstatement on the financial
  statements taken as a whole

16
Qualified Opinion

• Report Format
• Standard introductory paragraph
• Standard scope paragraph
• Explanatory paragraph that describes the nature
  and magnitude of the departure from GAAP.
• Qualify opinion on the financial statements and
  refer to the preceding paragraph.

17
Adverse Opinion

• Report Format
• Standard introductory paragraph
• Standard scope paragraph
• Explanatory paragraph that describes the nature
  and magnitude of the departure from GAAP.
• Issue an adverse opinion that financial
  statements do not present fairly and refer to the
  preceding paragraph.

18
Scope Limitations

• Qualified Opinion or Disclaimer of Opinion
• Qualified Opinion
• Material
• Circumstance Imposed
• Hired after the beginning of the year
• Inadequate records
• Disclaimer of Opinion
• Material Client Imposed
• Very Material Circumstance Imposed

19
Qualified Opinion - Scope

• Report Format
• Standard introductory paragraph
• Refer to a following paragraph that describes the
  scope limitation and then continue with the
  standard scope paragraph
• Explanatory paragraph that describes the nature
  and magnitude of the scope limitation.
• Express a qualified opinion in the opinion
  paragraph with reference to the explanatory
  paragraph.

20
Disclaimer of Opinion

• Report Format
• Omit the last sentence of the introductory
  paragraph
• Omit the scope paragraph
• Explanatory paragraph that describes the nature
  and magnitude of the scope limitation.
• Disclaim opinion on the financial statements.

21
Other Reporting Considerations

• Reporting when the CPA is not independent
• Circumstances concerning comparative financial
  statements
• Information accompanying audited financial
  statements
• Financial statements prepared for use in other
  countries.

22
Auditor is Not Independent

• One paragraph report stating
• That the auditor is not independent,
• The financial statements were not audited, and
• The firm does not express an opinion on the
  financial statements.

23
Comparative Financial Statements

• Different Opinions (AU 508.67)
• Updating an opinion (AU 508.68)
• Change in auditors (AU 508.70)

24
Information Accompanying Audited Financial
Statements

• Supplementary information is an essential part of
  an entitys financial reporting. (AU 550 / 558)
• Limited procedures
• Inquiry
• Comparison of the information for consistency
  with other available data
• Standard report, except
• Required supplementary information is omitted
• Material departure from prescribed guidelines
• Auditor unable to complete prescribed procedures
• Auditor is unable to remove substantial doubts
  about whether the information conforms to
  prescribed guidelines

25
Financial Statements Prepared for Use in Other
Countries (AU 534)

• If for use in Other Country ONLY
• U.S. Style Report
• Report of the Other Country
• If for use in the U.S.
• Qualified or Adverse Opinion, depending upon the
  departure from U.S. GAAP