BUSI0006 Auditing

LECTURE11
AUDITREPORTSONFINANCIALSTATEMENTS
FALLSEMESTER,2015

LEARNINGOBJECTIVE1

IDENTIFY AND DESCRIBE THE PRINCIPLES

UNDERLYING AUDIT REPORTING ON FINANCIAL
STATEMENTS

Copyright2014SouthWestern/CengageLearning

PRINCIPLESUNDERLYINGAUDIT
REPORTING
TheAmericanInstituteofCertifiedPublic
Accountants(AICPA)firstandseventhprinciples
governinganauditconductedinaccordancewith
generallyacceptedauditingstandards(GAAS)
describetheprinciplesunderlyingauditreporting
Theseprinciplesrequireauditorstoeither:
Expressanunqualifiedopinionontheentiresetof
financialstatementsandrelatedfootnotes,or
Statethereasonsthatsuchanopinioncannotbe
expressed
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PRINCIPLESUNDERLYINGAUDIT
REPORTING
Ifthereisamaterialdeviationfromgenerally
acceptedaccountingprinciples(GAAP):
Auditorshouldexplicitlystatethenatureofthe
deviationandthedollareffectssothatausercan
appropriatelymodifythefinancialstatements

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LEARNINGOBJECTIVE2
DESCRIBE THE INFORMATION THAT IS INCLUDED IN A
STANDARD UNQUALIFIED AUDIT REPORT ON FINANCIAL
STATEMENTS AND LIST THE REQUIREMENTS FOR ISSUING A
STANDARD UNQUALIFIED REPORT ON FINANCIAL STATEMENTS

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PARTSOFTHESTANDARD
UNQUALIFIEDAUDITREPORT
1.Reporttitle
2.Auditreportaddress
3.Introductoryparagraph
4.Scopeparagraph
5.Opinionparagraph
6.NameofCPAfirm
7.Auditreportdate

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AUDITORS
REPORT
BASICELEMENTS
(U.S.)FIGURE31

2012 Pearson Education, Auditing 14/e, Arens/Elder/Beasley

3-7

AUDITORS REPORT
BASICELEMENTS
(HONGKONG)

2012 Pearson Education, Auditing 14/e, Arens/Elder/Beasley

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REQUIREMENTSFORASTANDARDUNQUALIFIEDAUDIT
REPORTONTHEFINANCIALSTATEMENTSFORU.S.
PUBLICCOMPANIES
ThereshouldbenomaterialviolationsofGAAP
Disclosuresshouldbeadequate
Auditorshouldbeabletoperformallofthenecessary
procedures
Thereshouldbenochangeinaccountingprinciples
thathadamaterialeffectonthefinancialstatements
Theauditorshouldnothavesignificantdoubtabout
theclientremainingagoingconcern
Theauditorshouldbeindependent
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MODIFICATIONOFTHE STANDARD
UNQUALIFIEDREPORT
Whentheconditionsarenotpresent,auditorshould
modifythestandardunqualifiedreport
Optionsinclude:

Issueanunqualifiedopinionwithexplanatorylanguage
Qualifytheauditopinion
Issueanadverseopinion
Issueadisclaimer

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STANDARDUNQUALIFIEDAUDITREPORTS
U.S.NONPUBLICCOMPANIES
Introductoryparagraph Whatwasaudited
Managementsresponsibilityparagraph
Responsibilitiesofclientmanagement
Scopeparagraph Responsibilitiesoftheauditorand
thenatureoftheauditprocess
Opinionparagraph Auditorsopiniononthe
fairnessofthefinancialstatements
Forsomeengagements,financialstatementsmight
beauditedinaccordancewithmultipleauditing
standards
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NONU.S.COMPANIES
AuditorsrefertoISA700forguidance
ConsistentwiththeAICPAsAUC700withafew
terminologydifferences
Trueandfairview UsedinISA700;isnotusedinthe
UnitedStatesauditingstandards
Presentfairly,inallmaterialrespects GAAS
continuestorequiretheuseoftheterm

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LEARNINGOBJECTIVE3

DESCRIBE FINANCIAL STATEMENT AUDITS

REQUIRING AN UNQUALIFIED REPORT WITH
EXPLANATORY LANGUAGE AND IDENTIFY THE
APPROPRIATE AUDIT REPORT MODIFICATIONS

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UNQUALIFIEDAUDITREPORTSWITH
EXPLANATORYLANGUAGE
Usedtoexplain:

JustifieddeparturefromGAAP
InconsistentapplicationofGAAP
Substantialdoubtaboutclientbeingagoingconcern
Emphasisofsomematter,suchasunusuallyimportant
subsequentevents,risks,oruncertaintiesassociated
withcontingenciesorsignificantestimates
Referencetootherauditors

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EXPLANATORYLANGUAGE JUSTIFIED
DEPARTUREFROMGAAP
Rule203oftheAICPACodeofProfessionalConduct
permitsauditortoissueanunqualifiedopinionwhen
therehasbeenamaterialdeparturefromGAAP
Onlyiftheclientcandemonstrate,andauditoragrees,
thatduetounusualcircumstances,thefinancial
statementswouldhavebeenmisleadinghadGAAP
beenfollowed

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EXPLANATORYLANGUAGE JUSTIFIED
DEPARTUREFROMGAAP
Auditorshouldadd:
Aninformationalparagrapheitherbeforeorafterthe
opinionparagraphtodescribethedeparturefrom
GAAP
Itsapproximateeffects
ReasonsforwhichcompliancewithGAAPwouldresult
inmisleadingstatements

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EXPLANATORYLANGUAGE
INCONSISTENTAPPLICATIONOFGAAP
Changeinaccountingprinciples
FromoneGAAPtoanother FIFOtoLIFO
FromnonGAAPtoGAAP Cashbasistoaccrualbasis

Bothchangeswouldrequireauditortoaddan
explanatoryparagraphtotheauditreport

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EXPLANATORYLANGUAGE
INCONSISTENTAPPLICATIONOFGAAP
Changesinaccountingestimatesandaccountingfor
newtransactionsarenotconsideredchangesin
accountingprinciples
Changeinestimateaffectedbyanaccounting
principlerequiresanexplanatorylanguageinthe
auditreport
AS6requiresanadditionalparagraphforthe
correctionofanerrornotinvolvinganaccounting
principleforpubliccompanies
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EXPLANATORYLANGUAGE
INCONSISTENTAPPLICATIONOFGAAP
Theexplanatoryparagraphservesasaflagdirectingthe
usersattentiontotherelevantfootnotedisclosureif
clienthas:
Changedanaccountingprinciple
Reasonablejustificationforthechange
FollowedGAAPinaccountingforanddisclosingthis
change

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EXPLANATORYLANGUAGE SUBSTANTIALDOUBT
ABOUTTHECLIENTBEINGAGOINGCONCERN
Explanatoryparagraphshouldbeclearlywordedto
indicate:
Auditorssubstantialdoubtaboutclientscontinuing
asagoingconcern
Referencetomanagementsfootnote(s)explainingthe
problemsandplanstoovercometheproblem

Auditormaynotfeelcomfortableexpressingany
opinionforsomegoingconcernsituationsinwhich
clientisexperiencingseverefinancialdistress
Wouldissueadisclaimer
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EXPLANATORYLANGUAGE EMPHASIS
OFAMATTER
Significanttransactionswithrelatedentities
Importantsubsequentevents,suchasaboardof
directordecisiontodivestamajorsegmentofthe
business
Importantrisksoruncertaintiesassociatedwith
contingenciesorsignificantestimates

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EMPHASISOFMATTERPARAGRAPHSANDOTHERMATTER
PARAGRAPHSININDEPENDENTAUDITORSREPORTFOR
U.S.NONPUBLICCOMPANIES

Paragraphincluded:
IntheauditorsreportthatisrequiredbyGAAS,or
Attheauditorsdiscretion,andthatreferstoamatter
appropriatelypresentedordisclosedinthefinancial
statements
Thisparagraphshouldbeincludedimmediatelyafterthe
opinionparagraphintheauditorsreport
UsetheheadingEmphasisofMatter orother
appropriateheading

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EMPHASISOFMATTERPARAGRAPHSANDOTHERMATTER
PARAGRAPHSININDEPENDENTAUDITORSREPORTFOR
U.S.NONPUBLICCOMPANIES

Aclearreferenceto:
Thematterbeingemphasizedshouldbeincluded
Whererelevantdisclosuresthatfullydescribethe
mattercanbefoundinthefinancialstatementsshould
beincluded

Auditorshouldindicatethatauditorsopinionisnot
modifiedwithrespecttothematterbeing
emphasized

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EXPLANATORYLANGUAGE
REFERENCETOOTHERAUDITORS
Theprincipalauditor(groupengagementpartner)
needstodecidewhethertomentiontheother
auditorintheoverallauditreport
Caremustbetakenwhenrelyingonotherauditors
reports
Principalauditorshouldhaveparticipatedintheaudit
atasufficientlevel
Regardlessofreferencebeingmadeinauditorsreport
tothereportofanotherauditor,principalauditoris
responsiblefortheoverallopinion
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EXPLANATORYLANGUAGE
REFERENCETOOTHERAUDITORS
Iftheprincipalauditfirmchoosestomentionthe
otherfirmintheauditreport
Wordingofthestandardreportismodified
Noadditionalparagraphisneeded

Changeappearsin:
Introductoryparagraphtoindicatetheshared
responsibilityfortheoverallopinion
Scopeandopinionparagraphsmodifiedtoreference
theotherauditor
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EXPLANATORYLANGUAGE
REFERENCETOOTHERAUDITORS
Fornonpublicclients:
Extensivechangewouldappearintheauditors
responsibilitysection
Opinionparagraphwouldincludeareferencetothe
otherauditor

Iftheotherauditorsreportisqualified:
Principalauditormustconsiderwhetherthesubjectof
thequalificationisofsuchnatureandsignificancein
relationtotheoverallfinancialstatementsthatit
wouldaffecttheoverallopinion
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QUALIFIEDREPORTS,ADVERSE
REPORTS,ANDDISCLAIMERS
Whentheauditoraltersthewordingofthestandard
unqualifiedreportinamannerthataffectsthetype
ofopinionexpressed,thereportcannotbeissuedas
anunqualifiedopinion
Auditorwillprovideamodifiedopinion which
includes:
Aqualifiedopinion
Anadverseopinion,or
Adisclaimerofopinion

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LEARNINGOBJECTIVE4
DESCRIBE FINANCIAL STATEMENT AUDITS REQUIRING A
QUALIFIED REPORT AND IDENTIFY THE APPROPRIATE
AUDIT REPORT MODIFICATIONS

Copyright2014SouthWestern/CengageLearning

QUALIFIEDAUDITREPORTS
Situationsinwhichanauditorwillissueaqualified
report
AmaterialunjustifieddeparturefromGAAPthatisnot
pervasive
Inadequatedisclosurethatisnotpervasive
Ascopelimitationsuchthatthepossibleeffectsonthe
financialstatementsofundetectedmisstatements,if
any,couldbematerialbutnotpervasive

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QUALIFIEDREPORT MATERIALUNJUSTIFIED
DEPARTUREFROMGAAPTHATISNOTPERVASIVE
Qualifiedopinionwillbeexpressedifaclienthasa
departurefromGAAPthatcanbeisolatedtoone
item
Pervasive GAAPdepartures,affectingmorethanone
item,wouldresultinanadverseopinion
Pervasive:Describestheeffectsorthepossibleeffects
onthefinancialstatementsofmisstatementsthatare
undetectedduetoaninabilitytoobtainsufficient
appropriateauditevidence

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QUALIFIEDREPORT INADEQUATE
DISCLOSURE
Ifclientrefusestomakeappropriatedisclosures,
auditorshould:
Expressaqualifiedoradverseopinion,dependingon
pervasivenessofomitteddisclosures
Providetheomittedinformationintheauditreport,if
practicable

Explanatoryparagraph Shoulddescribethenature
oftheomitteddisclosures
Opinionparagraph Shouldbemodifiedtodescribe
natureofqualification
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QUALIFIEDREPORT SCOPE
LIMITATION
Restrictionsonscopeofaudit,whetherimposedbyclient
orbycircumstancesbeyondtheauditorsorclients
control,mayrequireauditortoqualifyanopinion
Insomesituationscircumstancesmaybesuchthata
disclaimerwouldbemoreappropriate

Circumstancesthatmaylimittheauditscope
Timingofthefieldwork

Inabilitytogathersufficientappropriateevidence
Inadequacyintheaccountingrecords

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LEARNINGOBJECTIVE5
DESCRIBE FINANCIAL STATEMENT AUDITS REQUIRING AN
ADVERSE REPORT AND IDENTIFY THE APPROPRIATE
AUDIT REPORT MODIFICATIONS

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ADVERSEAUDITREPORTS
Adversereportisappropriatewhenfinancial
statementscontain:
Pervasiveandmaterialunjustifieddeparturefrom
GAAP
Lackofimportantdisclosuresthatispervasive
Whenasignificantnumberofitemsinthefinancial
statementsviolateGAAP

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ADVERSEREPORT LACKOFIMPORTANT
DISCLOSURESTHATISPERVASIVE
Auditorcanissueanadverseopinionif:
Clientsfinancialstatementshaveomitteddisclosures,
suchthat
Financialstatementstakenasawholearenotpresented
fairlyinconformitywithGAAP

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LEARNINGOBJECTIVE6
DESCRIBE FINANCIAL STATEMENT AUDITS REQUIRING A
DISCLAIMER OF OPINION AND IDENTIFY THE
COMMUNICATION THE AUDITOR IS REQUIRED TO
PROVIDE

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AUDITREPORTSWITHADISCLAIMER
OFOPINION
Anauditorissuesadisclaimerofopinionreport
when:
Scopelimitationexists
Substantialdoubtexistsabouttheclientbeingagoing
concern
Thereislackofindependence

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DISCLAIMER SCOPELIMITATION
Scopelimitationscausedbycircumstancesaresuch
thatitisnotpossibletoformanopinion
Introductoryparagraphswordingmodifiedfora
scopelimitation
Scopeparagraphisomitted
Additionalparagraphisinsertedtodescribethescope
limitation(s)
Lastparagraphstatesthatnoopinioncanbeexpressed

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DISCLAIMER SCOPELIMITATIONFOR
NONU.S.COMPANIES
ISA705requiresauditortowithdrawfromaudit
whenauditorisunabletoobtainsufficient
appropriateauditevidencebecauseofa
managementimposedlimitation,and
Auditorconcludesthatpossibleeffectsonfinancial
statementsofundetectedmisstatementscouldbe
bothmaterialandpervasive

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DISCLAIMER SCOPELIMITATIONFOR
NONU.S.COMPANIES
ISA 705

U.S. Standards

Auditors required to withdraw

from audit

Auditors required to consider

withdrawal from the
engagement

If auditor concludes that possible

effects of undetected
misstatements could be both
material and pervasive

Auditor should consider whether

to withdraw or disclaim an
opinion on the financial
statements

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DISCLAIMER SUBSTANTIALDOUBTABOUT
THECLIENTBEINGAGOINGCONCERN
Auditormayissueadisclaimerofopinionifthereisa
substantialdoubtabouttheclientcontinuingasa
goingconcern
Insuchcases,auditorwouldbelievethatan
additionalparagraphtoanunqualifiedopinionisnot
appropriate

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DISCLAIMER AUDITORLACKING
INDEPENDENCE
Whenauditorslackindependencewithrespecttoa
client:
Theycannotperformanauditinaccordancewith
professionalauditingstandards
Theyareprecludedfromexpressinganopiniononthe
financialstatements

Insuchcases,aoneparagraphdisclaimershouldbe
issuedstatingthelackofindependence
Auditoromitsthereasonsforlackofindependence
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DISCLAIMER AUDITORLACKING
INDEPENDENCE
Reportwouldhavenotitleorsalutation
Suchasituationshouldrarelyoccur
Itcouldhappenwhenitisdiscoveredlateintheaudit
thatoneoftheauditorsontheengagementhada
financialinterestintheclient

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LEARNINGOBJECTIVE7
UNDERSTAND AUDITOR'S DECISION PROCESS FOR
CHOOSING AUDIT REPORT & NUMBER OF PARAGRAPHS IN
DIFFERENT AUDIT REPORTS

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AUDITORSDECISIONPROCESS
Determinewhetheranyconditionexists
requiringadeparturefromastandard
unqualifiedreport.
Decidethematerialityforeachcondition.
Decidetheappropriatetypeofreport.
Writetheauditreport.
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NUMBEROFPARAGRAPHS
INTHEREPORT
TypeofReport
Standardunqualified
Unqualifiedwithexplanatoryparagraph
Unqualifiedsharedreportwithotherauditors
Qualified opiniononly
4
Qualified scopeandopinion
4
Disclaimer scopelimitation
Adverse
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3
4
3

3
4
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