Chapter 18

Question 1

The standard unqualified audit report for a public company contains 8 elements:

Answer 1

1. Title
   -Must be included
   -Must include the word “Independent”
2. Audit report address
3. Introductory paragraph
   -Specifies an audit
   -Lists financial statements audited
4. Management Responsibility
5. Auditor’s Responsibility
   -Paragraph 1:
   Follow U.S. auditing standards
   -Reasonable assurance
   -Material misstatement
   -Paragraph 2:
   -Scope paragraph
   -Auditor considers internal controls
   -Paragraph 3:
   -Sufficient evidence to support opinion
6. Opinion:
   -In our opinion
   -Presented fairly
7. Name and address of CPA firm
8. Audit report date
   -Last day of fieldwork
   -Four conditions must be met:
   A. All financial statements included
   B. Sufficient appropriate evidence (follows auditing standards)
   C. Statements in accordance with GAAP
   D. No modifications needed

Question 2

The ASB’s clarity standards require a different format and some differences in content for audit reports relating to non-public companies. While the content of the ASB and PCAOB reports is essentially the same, their organization and terminology differ somewhat:

Answer 2

1. The term “unmodified” is used in the ASB report vs. the term “unqualified” in the PCAOB report.
2. The use of headings for each section of the ASB report. Two of these sections clearly delineate management’s and the auditor’s responsibilities.
3. The ASB report indicates that the audit was conducted “in accordance with generally accepted auditing standards” and is titled “Independent Auditor’s Report.” By comparison, the public company audit report is titled “Report of Independent Registered Public Accounting Firm” and indicates that the audit was conducted “in accordance with the standards of the Public Company Accounting Oversight Board (United States).”
4. The PCAOB report addresses the audit of internal control over financial reporting, which is required for public companies. By contrast, the ASB report indicates that while internal control was considered for the purpose of planning the financial statement audit, no opinion is expressed on the effectiveness of internal control over financial reporting.

Question 3

What are the reasons for an unqualified with an emphasis of a matter explanatory paragraph/modification?

Answer 3

A. Lack of consistent application of GAAP (explanatory)
B. Substantial doubt about going concern (explanatory)
C. Auditor agrees with GAAP departure (explanatory)
D. Emphasis of other matters (explanatory)
E. Reports involving other auditors (modification)
F. FOR PCAOB Audits – Reference to the report on ICFR (explanatory)

Question 4

What is a substantial doubt about going concern?

Answer 4

The auditor’s concern is that there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period (no more than one year).

Question 5

For reports involving other auditors, the primary auditor is called:

Answer 5

• Principal – PCAOB

- Group engagement partner – AICPA

Question 6

Reports involving an auditor of component are called:

Answer 6

Component auditor – AICPA

Question 7

What are the 3 alternatives for when the CPA relies on a different CPA firm to report part of the audit?

Answer 7

A. Make no reference in the audit report
-Why?
-Immaterial portion
-Other auditor is well known or closely supervised
-Principal has thoroughly reviewed work of other auditor
B. Make reference in the report (modified wording)
-Shared opinion
-Work of other auditor is material
-Modifications to responsibility and opinion paragraphs
C. Qualify the opinion
-Unqualified Assurance cannot be given.

Question 8

What are the 3 conditions requiring a departure from an unqualified report?

Answer 8

A. Scope Limitation – auditor has not accumulated sufficient appropriate evidence.
B. GAAP Departure.
C. Auditor is NOT independent (Requires disclaimer).

Question 9

What is a qualified opinion?

Answer 9

• Only used if overall financial statements are fairly stated
• Can be qualification of scope, opinion, or both
• Must use “except for” in the opinion paragraph

Question 10

What is an adverse opinion?

Answer 10

• Rarely used

- Auditor has knowledge of the absence of conformity with GAAP

Question 11

What is a disclaimer?

Answer 11

• Auditor is unable to satisfy
• May be due to severe scope limitation
• May be due to lack of independence
• May be due to “going concern” problem

Question 12

What is materiality?

Answer 12

• Knowledge of the misstatement will affect a decision of a reasonable user of the statements
• Influenced by pervasiveness