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Chapter 3
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Learning Objective 1
Describe the 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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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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2010 Legislation
Non-accelerated Filer
Permanent Exemption
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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
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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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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 Financial Statement Comparability
2012 Pearson Education, Auditing 14/e, Arens/Elder/Beasley
Material Uncertainties
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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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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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Adverse Opinion
Auditor believes the financial statements are not presented fairly in conformity with GAAP.
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Adverse Opinion
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Disclaimer of Opinion
It is issued when the auditor is unable to be satisfied that the overall financial statements are fairly presented.
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Disclaimer of Opinion
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Learning Objective 6
Explain how materiality affects audit reporting decisions.
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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.
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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.
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Materiality Decisions
Failure to follow GAAP Audit report
Unqualified
Adverse
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Materiality Decisions
Dollar amount compared with a base
Measurability
Nature of the item
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Materiality Decisions
Scope limitation Audit report
Unqualified
Disclaimer
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Learning Objective 7
Draft appropriately modified audit reports under a variety of circumstances.
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Learning Objective 8
Determine the appropriate audit report for a given audit situation.
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Decide Materiality
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Learning Objective 9
Understand proposed use of international accounting and auditing standards by U.S. companies.
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If plan is approved?
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End of Chapter 3
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