Neway_Audit-I-Chapter-6-Audit-Reports-PPT.pdf

Auditing assurances and principles one from Hawassa university students to exit exam reading materials

1. CHAPTER SIX
AUDIT REPORTS
ISA:-315, 700, 705,706, 710, 720
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2. STUDYOBJECTIVES
Afterstudyingthischapter,youshouldbeableto:
•Describethecircumstancesthatresultin
inclusionofadditionalexplanatorylanguagein
anunqualifiedauditreport.
•Discusshowmaterialityaffectstheconsideration
ofthetypeofauditreporttobeissued.
•Identifycircumstancesthatmayresultin
qualifiedopinions,adverseopinionsand
disclaimersofopinion.
•Describetheauditors'responsibilitiesfor
reportingoncomparativefinancialstatements.

3. •The(auditors')reportshalleithercontainan
expressionofopinionregardingthefinancial
statements,takenasawhole,oranassertionto
theeffectthatanopinioncannotbeexpressed.
•Whenanoverallopinioncannotbeexpressed,
thereasonsthereforeshouldbestated.
•Inallcaseswhereanauditor'snameis
associatedwithfinancialstatements,thereport
shouldcontainaclear-cutindicationofthe
characteroftheauditor'swork,ifany,andthe
degreeofresponsibilitytheauditoristaking.
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4. Auditors considerations to report
FinancialStatements
•Thereportingphaseofanauditbeginswhenthe
independentauditorshavecompletedtheirfieldworkand
theyhaveproposedanynecessaryadjustmentstotheclient.
Beforedraftingtheirreport,theauditorsmustreviewthe
client-preparedfinancialstatementsformandcontent,or
draftthefinancialstatementsonbehalfoftheclient.
•Financialstatementsgenerallyarepresentedincomparative
formforthecurrentyearandtheprecedingyearandare
accompaniedbyexplanatorynotes.
•Thefinancialstatementsforaparentcorporationusuallyare
consolidatedwiththoseofthesubsidiaries.
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5. Financial Statement Disclosures
•Thepurposeofnotestofinancialstatementsistoachieve
adequatedisclosurewheninformationinthefinancial
statementspreparedisinsufficienttoattainthisobjective.
•Althoughthenotes,likefinancialstatementsthemselves,are
representationsoftheclient,theindependentauditorsgenerally
assistindraftingthenotes.Thewritingofnotestofinancial
statementsisachallengingtaskbecausecomplexissuesmustbe
summarizedinaclearandconcisemanner.
•Adequatedisclosureinthenotestothefinancialstatementsis
necessaryfortheauditorstoissueanunqualifiedopiniononthe
financialstatements.
•TheFinancialAccountingStandardsBoard,theGovernment
AccountingStandardsBoard,andtheSecuritiesandExchange
Commissionhaveissuednumerouspronouncementsthathave
addedextensivedisclosurerequirements.Examplesofnote
disclosurerequirementsthathavebecomeapartofthebasic
financialstatementsincludethedisclosureofsignificant
accountingpolicies,accountingchanges,losscontingencies,
andleaseandpensioninformation.
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6. Cont…
•Inadditiontothenotedisclosuresthatarepartofthebasic
financialstatements,manyclientsarerequiredbythe
FASB,theGASB,ortheSECtopresentsupplementary
information.
•Asanexample,certaincompaniesarerequiredtodisclose
selectedinterimfinancialdatawiththeirannualfinancial
statements.
•Inevaluatingfinancialreportingdisclosures,theauditors
shouldkeepinmindthatdisclosuresaremeantto
supplementtheinformationinthefinancialstatementsand
nottocorrectimproperfinancialstatementpresentation.
•Thusanoteorsupplementaryschedule,nomatterhow
skillfullydrafted,doesnotcompensatefortheerroneous
presentationofaniteminthefinancialstatements.
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7. TYPES OF AUDIT REPORT
•Therearefourtypesofauditreports;
1.Anunqualifiedopinion--standardreport.Thisreportrepresentsa''
cleanopinion''andwhennoconditionsrequiringexplanatorylanguageexist.
•Anunqualifiedopinion--withexplanatorylanguageaddedtoreport.
Thisisanauditreportwithanunqualifiedopinionandexplanatory
languageresultingfromcertaincircumstances.Examplesofsuch
circumstancesarethoseinwhichotherauditorshaveperformedaportion
oftheaudit,orwhenmajoruncertaintiesexistwithrespecttothe
companybeingaudited.
2.Aqualifiedopinion.Aqualifiedopinionstatesthatthefinancial
statementsarepresentedfairly''exceptfor''theeffectsofsomematter.
Qualifiedreportsareissuedwhenthefinancialstatementsdepartmaterially
fromgenerallyacceptedaccountingprinciples,orwhenlimitationsare
placedonthescopeoftheauditors'procedures.Theproblems,while
materials,donotovershadowtheoverallfairnessofthestatements.
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8. Cont…
3.Anadverseopinion.Anadverseopinionstatesthatthe
financialstatementsarenotafairpresentation.
•Auditorswillissueanadverseopinionwhenthedeficiencies
inthefinancialstatementsaresosignificantthatthefinancial
statementstakenasawholearemisleading.Allsignificant
reasonsfortheissuanceofanadverseopinionshouldbeset
forthinanexplanatoryparagraph.
4.Adisclaimerofopinion.Adisclaimerofopinionmeansthat
duetoasignificantscopelimitation(orverymajoruncertainties),
theauditorswereunabletoformanopiniononthefairnessof
thefinancialstatements.Adisclaimerisneitherapositivenora
negativeopinion.
•Itsimplymeansthattheauditorsdonothaveanadequate
basisforexpressinganopinion.
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9. Expression of an opinion (contents of audit report)
TheAuditors'StandardReport
•Beforecontinuing,letusmentionafewdetailsaboutthisreport.Ithasatitlethat
includestheword''independent.''
•Thefirstparagraphisreferredtoastheintroductoryparagraph.Itclearly
indicatesthat(1)thefinancialstatementshavebeenaudited;(2)thefinancial
statementsaretheresponsibilityofmanagement,and(3)theauditors'
responsibilityistoexpressanopiniononthem.
•Thesecondparagraph,whichdescribesthenatureofanaudit,iscalledthescope
paragraph.
•Finally,theopinionparagraphpresentstheauditors'opiniononwhetherthe
financialstatementsareinconformitywithgenerallyacceptedaccounting
principles.
•NoticethatthereportissignedwiththenameoftheCPAfirm,notthenameof
anindividualpartnerinthefirm.Thissignaturestressesthatitisthefirm,notan
individualthattakesresponsibilityfortheauditors'report.IftheCPAperforming
theauditisasolepractitioner,thereportwillbesignedwiththeCPA'spersonal
signature.
•Alsonoticethedateunderthesignatureisthelastdayoffieldwork--thatis,the
dateuponwhichtheauditorsconcludetheirinvestigativeprocedures.Thisdateis
quitesignificant,becausetheauditorshavearesponsibilitytoperformprocedures
tothatdatetosearchforanysubsequenteventsthatmayaffectthefairnessofthe
client'sfinancialstatements. 9

10. An unqualified auditors' report may be issued only
when the following conditions have been met:
•Thefinancialstatementsarepresentedinconformitywith
generallyacceptedaccountingprinciples,includingadequate
disclosure.
•TheauditwasperformedinaccordancewithGAASincluding
nosignificantscopelimitationspreventingtheauditorsfrom
gatheringtheevidencenecessarytosupporttheiropinion.
•Whenconsideredmaterial,departurefromeitherofthese
conditionsresultsinasituationinwhichareportthatisother
thanunqualifiedisrequired.
•Additionally,whencertainotherconditionsexist,theauditors
addexplanatorylanguagetothestandardreport,butstill
expressanunqualifiedopinion.
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11. Cont…..
Materiality
•Auditorsmustqualifytheirreportwhenevertherearematerial
deficienciesintheclient'sfinancialstatements;whenthedeficiencies
areimmaterial,anunqualifiedreportmaybeissued.
•Accordingly,auditorsmustexerciseprofessionaljudgmenttoevaluate
thematerialityofanysuchdepartures.Atthisstageoftheaudit,the
auditorscanconsiderboththequantitativeandqualitativeeffectsof
thedeficiencies.Forexample,arelatedpartytransactionofa
relativelysmallamountmaybeconsideredtobematerial.
•Auditorsarerequiredtoissueanadverseopinionwhenthe
deficienciesinfinancialstatementsare''sosignificant''thataqualified
opinionwouldbeinappropriate.
•thetermmaterialtodescribeproblemssufficienttorequire
qualificationoftheauditors'report,butwhichdonotovershadowthe
fairnessofthestatements.Problemsovershadowingthefairnessofthe
statementswillbedescribedas''verymaterial''orascausingthe
statementstobe''substantiallymisleading.''
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12. Cont….
•Auditorsexpressanunqualifiedopiniononthe
client'sfinancialstatementswhentheyhaveno
materialexceptionsastothefairnessofthe
applicationofaccountingprinciplesandthere
havebeennounresolvedrestrictionsonthescope
oftheirengagement.
•Theunqualifiedopinionis,ofcourse,themost
desirablereportfromtheclient'spointofview.
•Theclientusuallywillmakeanynecessary
adjustmentstothestatementstoenablethe
auditorstoissuethistypeofopinion.
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13. Cont. …
ExplanatoryLanguageAddedtotheUnqualifiedOpinion
•Undercertaincircumstancesauditorsaddexplanatory
languagetothestandardreport,evenwhenissuingan
unqualifiedopinion.
•Addingtheadditionallanguageisnotregardedasa
qualificationbecauseitdoesnotlessentheauditors'
reportingresponsibilityforthefinancialstatements.
•Rather,thelanguagemerelydrawsattentiontoasignificant
situation.Auditorsaddexplanatorylanguagetoan
unqualifiedopiniontoindicatethatapartoftheauditwas
performedbyotherauditorstorefertoanuncertaintythat
couldhaveamaterialimpactonthefinancialstatements,
•toindicateaninconsistencyintheapplicationofaccounting
principles,toemphasizeamatter,andtoindicateajustified
departurefromofficiallyrecognizedaccountingprinciples.
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14. Cont.…
PartoftheAuditPerformedbyOtherAuditors:Onoccasion
itmaybenecessaryfortheprincipalauditorsofacompanyto
relyuponanotherCPAfirmtoperformaportionoftheaudit
work.ThemostcommonsituationinwhichCPAsrelyuponthe
workofotherauditorsisintheauditofconsolidatedentities.If
certainsubsidiarieshavebeenauditedbyotherCPAfirms,the
auditorsreportingontheconsolidatedparentcompanywill
usuallydecidetorelyupontheworkoftheseotherCPAsrather
thanconductanotherauditofthesubsidiaries.
•WhenmorethanoneCPAfirmparticipatesinanengagement,
theauditors'reportisissuedbytheprincipalauditorsthatis,
bytheCPAfirmthatdidthemajorityoftheauditworkandhas
anoverallunderstandingofthefinancialstatements.
•Theprincipalauditorshavetwobasicalternativesinwording
theirreport:
MakeNoReferencetotheOtherAuditors
MakeReferencetotheOtherAuditors:
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15. Uncertainties:Substantialuncertaintyastothe
outcomeofacontingencyaffectingtheclient's
financialstatementsmayrequiretheauditorsto
addanexplanatoryparagraphtotheirauditreport
toindicatetheexistenceoftheuncertainty.
•Itiswhenthecontingencyisreasonablypossible
thattheauditorsshouldconsideraddingan
explanatoryparagraphtotheirunqualified
opinion,basedonshouldconsideraddingan
explanatoryparagraphtotheirunqualified
opinion,basedonthematerialityofthe
contingencyandtheprobabilityofunfavorable
outcome.
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16. Cont,,,,
QuestionaboutACompany'sGoing--Concern
Status:Aspecialtypeofsignificantuncertainty
concernstheabilityofaclientcompanyto
continueasagoingconcern.Undergenerally
acceptedaccountingprinciples,bothassetsand
liabilitiesarerecordedandclassifiedonthe
assumptionthatthecompanywillcontinueto
operate.
•Conditionsthatmaycausetheauditorstoquestion
thegoingconcernassumptionincludenegative
cashflowsfromoperations,defaultsonloan
agreements,adversefinancialratios,work
stoppages,andlegalproceedings.
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17. IFRSNotConsistentlyAppliedIfaclientcompany
makesachangeinaccountingprinciple(includingachange
inthereportingentity),thenatureof,justificationfor,and
effectofthechangearereportedinanotetothefinancial
statementsfortheperiodinwhichthechangeismade.
•Anysuchchangehavingamaterialeffectuponthe
financialstatementswillalsorequiremodificationofthe
auditors'report,eventhoughtheauditorsareinfull
agreementwiththechange.
•Changesinaccountingestimatesneednotbereportedin
theauditors'report.
•Changesfromonegenerallyacceptedaccountingprinciple
toanothergenerallyacceptedaccountingprinciple,when
justified;donotresultinqualificationoftheauditors'
report.Thereportismerelymodifiedtohighlightthelack
ofconsistentapplicationofacceptableaccounting
principles.
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18. Cont…
EmphasisofaMatter:Auditorsalsomayissue
anunqualifiedopinionthatdepartsfromthe
wordingofthestandardreportinorderto
emphasizesomeelementwithintheclient's
financialstatements.
•Forexample,theauditorsmayaddanadditional
paragraphtotheirunqualifiedopinioncalling
attentiontoasignificantrelated-partytransaction
describedinanotetothefinancialstatements.
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19. QualifiedOpinions
•Aqualifiedopinionexpressestheauditors'reservationsaboutfair
presentationinsomeareasofthefinancialstatements.
•Theopinionstatesthatexceptfortheeffectsofsomedeficiencyinthe
financialstatements,orsomelimitationinthescopeoftheauditors'
examination,thefinancialstatementsarepresentedfairly.
•Allqualifiedreportsincludeaseparateexplanatoryparagraphbefore
theopinionparagraphdisclosingthereasonsforthequalification.
•Theopinionparagraphofaqualifiedreportincludestheappropriate
qualifyinglanguageandareferencetotheexplanatoryparagraph.
•Thematerialityoftheexceptiongovernstheuseofthequalified
opinion.Theexceptionmustbesufficientlysignificanttowarrant
mentioningintheauditors'report,butitmustnotbesosignificantas
tonecessitateadisclaimerofopinionoranadverseopinion.
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20. Someindications:-
DeparturefromaGenerallyAcceptedAccountingPrinciple:
Theauditorssometimesdonotagreewiththeaccounting
principlesusedpreparingthefinancialstatements.
•Usually,whentheauditors'objecticonsarecarefully
explained,theclientwillagreetochangethestatementsinan
acceptablemanner.Iftheclientdoesnotagreetomakethe
suggestedchanges,theauditorswillbeforcedtoqualifytheir
opinion(oriftheexceptionisverymaterial,toissuean
adverseopinion).
•Whenthereportisqualified,theintroductoryandscope
paragraphsofthestandardreportareunaffected.The
modificationinvolvesaddinganexplanatoryparagraph
followingthescopeparagraphandqualifyingtheopinion
paragraph.Thequalifyinglanguageusedintheopinion
paragraphalwaysbeginswiththetermexceptfor.
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21. ScopeLimitations:Limitationsinthescopeofanaudit
arisewhentheauditorsareunabletoperformanessential
auditprocedure.Limitationsmaybedueeitherto
circumstancessurroundingtheauditforexample,the
auditorswereengagedtoolate.
•Inthissituation,theprofessionalstandardsrequireissuance
ofaqualifiedopinion.Thebasisofthequalificationisthat
whenabalancesheetandstatementofincomeare
presented,astatementofcashflowsisrequired.However,if
onlyabalancesheetorastatementofincomeispresented,a
statementofcashflowsisnotrequired.
•Whenacircumstances-imposedscopelimitationis
involved,theauditorsattempttoperformalternative
procedurestogathersufficientcompetentevidentialmatter.
Ifsuchevidentialmatteriscollectedandtheauditors
believethatitissufficient,anunqualifiedopinionmaybe
issued.Insituationsinwhichalternativeproceduresdonot
providesufficientevidence,theauditorswilleitherqualify
theopiniontoreflectthescopelimitationordisclaiman
opinion.
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22. Anauditors'reportmaybequalifiedbecauseofbotha
scopelimitationandaseparateprobleminvolving
accountingprinciples.Thewordingofsuchareport
wouldincludetheappropriatequalifyinglanguageand
explanatoryparagraphsforbothtypesofqualifications.
•Notethateventhroughthismaybethe''fault''ofthe
client;itisconsideredacircumstance-imposedlimitation
becausetheclientisnotrefusingtoallowtheauditorto
performaprocedurewhichispossibletoperform.
•Whenthereareseveralsituationsrequiringthequalification
ofanopinion,theauditorsshouldconsiderthecumulative
effectsoftheseproblems.Iftheeffectoftheproblemsisto
overshadowthefairnessofthestatementsviewedasa
wholeortopreventtheauditorsfromforminganoverall
opinion,aqualifiedopinionwouldbeinappropriate.Insuch
cases,theauditorsshouldissueeitheranadverseopinionor
adisclaimerofopinion,dependinguponthecircumstances.
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23. Adverse Opinions
•Anadverseopinionistheoppositeofanunqualifiedopinion;itisan
opinionthatthefinancialstatementsdonotpresentfairlythe
financialposition,resultsofoperations,andcashflowsoftheclient,
inconformitywithgenerallyacceptedaccountingprinciples.When
theauditorsexpressanadverseopinion,theymusthaveaccumulated
sufficientevidencetosupporttheirunfavorableopinion.
•Theauditorsshouldexpressanadverseopinionifthestatementsare
solackinginfairnessthataqualifiedopinionwouldnotbewarning
enough.
•Whenevertheauditorsissueanadverseopinion,theyshoulddisclose
inaseparateparagraphoftheirreportthereasonsfortheadverse
opinionandtheprincipaleffectsonthefinancialstatementsofthe
matterscausingtheadverseopinion,iftheeffectscanbedetermined.
•Thus,anauditreportthatexpressesandadverseopiniongenerally
includesstandardintroductoryandscopeparagraphs,oneormore
explanatoryparagraphsprecedingtheopinionparagraphand
describingthereasonsfortheadverseopinion,andanopinion
paragraph.Becausethereasonsforanadverseopinionareusually
lengthyandcomplex.
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24. Disclaimer of Opinion
•Adisclaimerofopinionisnoopinion.Inanaudit
engagement,adisclaimerisrequiredwhensubstantialscope
restrictionsorotherconditionsprecludetheauditors'
compliancewithgenerallyacceptedauditingstandards.
•SubstantialCircumstance-ImposedScopeRestrictions:If
ascoperestrictionissoseverethataqualifiedopinionis
inappropriate,theauditorsshouldissueadisclaimerof
opinion.Thismighthappen,forexample,iftheauditorswere
engagedafteryear-endandtheclientdidnottakeaphysical
inventory.Adisclaimerissuedbecauseofascopelimitation
willomitthescopeparagraphofthestandardreportandwill
includeanexplanatoryparagraphdescribingthescope
limitationinitsplace.
•Thewordingoftheopinionparagraphwillchange
considerably,becausetheauditorsarenotexpressingan
opinion--rather,theyaresayingthattheyhavenoopinion.
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25. •Disclaimersofopinionbecauseofscoperestrictionsarerelatively
rare.Theauditorsshouldbeabletoforeseethesetypesofproblems
intheplanningstageoftheengagement.Theclientusuallywillnot
wanttoincurthecostofanauditifitisapparentfromthestartthat
theauditorsmustissueadisclaimerofopinion.
•ScopeRestrictionsImposedbytheClient:Theprofessional
standardsstatethatwhenclient-imposedrestrictionssignificantly
limitthescopeoftheaudit,theauditorgenerallyshoulddisclaiman
opiniononthefinancialstatements.
•Tworeasonsexistforthisrequirement.First,adisclaimeris
relativelyuselesstotheclient.Therefore,thefactthattheauditors
mayhavetoissueadisclaimerisasubstantialdeterrenttotheclient
imposinganyscoperestrictionsinthefirstplace.Second,aclient
whoimposedscoperestrictionsupontheauditorsapparentlyhas
somethingtohide.Anauditmustbeundertakenwithanatmosphere
oftrustandcooperation.Iftheclientisattemptingtoconceal
information,noauditcanensurethatalloftheproblemshavebeen
broughttolight.
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26. Cont…
DisclaimerbecauseofUncertainty:Anunqualified
opinionwithanexplanatoryparagraphisgenerally
appropriateforamaterialuncertaintythatisdescribed
adequatelyinnotestotheclient'sfinancialstatements.
However,thestandardsallowtheissuanceofa
disclaimerofopinionbecauseofamaterialuncertainty,
includingoneaboutthecompany'sabilitytocontinue
asagoingconcern.
OtherDisclaimersIssuedbyCPAs:Inthissection,we
havediscussedonlythosedisclaimersofopinionissuedin
auditengagements.CPAfirmsissuedisclaimersof
opinioninmanyothertypesofengagements
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27. Cont…
•DisclaimersAreNotAlternativestoAdverseOpinions.
•Adisclaimercanonlybeissuedwhentheauditorsdonot
havesufficientinformationtoformanopiniononthe
financialstatements.
•Iftheauditorshavealreadyformedanopinionthatthe
financialstatementsarenotafairpresentation,the
disclaimercannotbeusedasawaytoavoidexpressingan
adverseopinion.
•Infact,evenwhenauditorsissueadisclaimerofopinion,they
shouldexpressinexplanatoryparagraphsoftheirreportany
reservationstheyhaveconcerningthefinancialstatements.
•Thesereservationsincludeanymaterialexceptionsasto
generallyacceptedaccountingprinciples,including
disclosure.
•Inshort,theissuanceofadisclaimercanneverbeusedto
avoidwarningfinancialstatementusersaboutproblemsthat
theauditorsknowtoexistinthefinancialstatements.
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