Auditing and assurance services 14e by arens chapter 03

Audit Reports
Chapter 3
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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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Learning Objective 1
Describe the parts of the standard
unqualified audit report.

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Parts of the Standard
Unqualified Audit Report
1.
2.
3.
4.
5.
6.
7.

Report title
Audit report address
Introductory paragraph

Scope paragraph
Opinion paragraph
Name of CPA firm
Audit report date

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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Parts of the Standard
Unqualified Audit Report

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Learning Objective 2
Specify the conditions required to issue the
standard unqualified audit report.

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Conditions for Standard
Unqualified Audit Report
1. Includes all financial statements

2. Three general standards are met
3. Complies with the three standards of field work

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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Conditions for Standard
Unqualified Audit Report
4. Financial statements comply with GAAP
5. No circumstances require an explanatory
paragraph or report modification

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Four Categories of Audit
Reports

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Learning Objective 3
Understand reporting on financial
statements and internal control over

financial reporting under Section 404 of
the Sarbanes-Oxley Act.

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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.
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Reporting on Internal Control
over Financial Reporting
SarbanesOxley
Sec.404

2010
Legislation

Accelerated Filer

Non-accelerated
Filer

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ICFR
Effectiveness
Audits

Permanent
Exemption

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Sarbanes-Oxley Act
Separate Report on Financial Statements and
Internal Control Over Financial Reporting
1.
2.
3.
4.
5.
6.

Introductory paragraph
Scope paragraph
Definition paragraph

Inherent limitations paragraph
Opinion paragraph
Cross-Reference Paragraph

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Separate Report on ICFR

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Learning Objective 4
Describe the five circumstances when an
unqualified report with an explanatory
paragraph or modified wording is
appropriate.

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Unqualified Report with
Explanatory Paragraph
1. Lack of consistent application of generally

accepted accounting principles
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

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Lack of Consistent Application of
GAAP
Auditors must note circumstances in which
accounting principles are not consistently
applied
Auditor should modify the report when a
material change occurs by adding an
explanatory paragraph in the report

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Substantial Doubt About
Going Concern
 Significant recurring operating
losses or working capital deficiencies.

 Inability of the company to pay its
obligations as they come due.
 Loss of major customers, the
occurrence of uninsured catastrophes.
 Legal proceedings, legislation that
might jeopardize the entity’s ability to operate.
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Auditor Agrees with a Departure
from a Promulgated Principle
Departure may not require a qualified or
adverse opinion
The auditor must separately explain in the
audit report that adhering to the principle
would have produced a misleading result.
Circumstances are most unusual
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Emphasis of a Matter
Under certain circumstances, the CPA may
want to emphasize specific matters regarding
the financial statements, even though the
CPA intends to express an unqualified opinion.
Subsequent

Events

Related Party
Transactions

Financial
Statement
Comparability
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Material
Uncertainties
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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

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Reports Involving Other
Auditors

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Learning Objective 5
Identify the types of audit reports that can
be issued when an unqualified opinion is
not justified.

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Departures from an
Unqualified Opinion
1. Scope limitation
2. GAAP departure
3. Auditor not independent

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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.

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Qualified Opinion

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