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AUDIT & ASSURANCE
Audit Report
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LEARNING OUTCOMES
describe the parts of the standard
unqualified audit report
describe the conditions required to issue
the standard unqualified audit report.
Identify the types of audit reports that can
be issued when the unqualified opinion is
not justified
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Topic & Structure of the lesson
Types of audit report
Conditions for standard unqualified audit report
Unqualified report with explanation
Consistency versus comparability Substantial doubt about going concern
Emphasis on a matter
Departures from an unqualified opinion
Qualified opinion Adverse opinion
Disclaimer of opinion
Auditors decision process
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Key Terms you must be able to use
Adverse opinion
Disclaimer opinion
M
aterial misstatement Qualified opinion
Unqualified opinion
Matter of attention
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INTRODUCTION
This chapter describe the auditors
standard unqualified audit report and the
four categories of audit reports The auditors decision process in choosing
the appropriate audit report to issue are
discussed
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FIVE CATEGORIES OF AUDIT
REPORT
Standard unqualified
Unqualified with explanatory paragraph or
modified wording Qualified (Except for)
Adverse
Disclaimer
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CONDITIONS FOR STANDARD
UNQUALIFIED AUDIT REPORT
All financial statements are included
The general standards have been followed
in all respects on the engagement Sufficient evidence has been accumulated
to conclude that the standards of field
work have been met.
The financial statements are presented in
accordance with generally accepted
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UNQUALIFIED REPORT WITH
EXPLANATION
Lack of consistent application of generally
accepted accounting principles.
Substantial doubt about going concern Auditor agrees with a departure from
promulgated accounting principles
Emphasis of matter Reports involving other auditors
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CONSISTENCY VERSUS
COMPARABILITY
Changes that affect consistency and
require an explanatory paragraph if they
are material:Changes in accounting principles
Changes in reporting entities
Corrections of errors involving principles
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CONSISTENCY VERSUS
COMPARABILITY
Changes that effect comparability but not
consistency:
changes in an estimateerror corrections not involving principles
variation in format and presentations of
financial informationChanges because of substantial difference
in transaction or events
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SUBSTANTIAL DOUBT ABOUT
GOING CONCERN
Significant recurring operating losses or
working capital deficiencies
Inability of the company to pay itsobligations as they come due
Loss of major customers, the occurrence
of uninsured catastrophes Legal proceedings, legislation, that might
jeopardize the entitys ability to operate.
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AUDITOR AGREES WITH A
DEPARTURE FROM A
PROMULGATED PRINCIPLES The auditor must be satisfied and must
state and explain, in a separate paragraph
or paragraphs in the audit report, thatadhering to the principles would have
produced a misleading result in that
situation.
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EMPHASIS ON A MATTER
Under certain circumstances, the CPA
may want to emphasize specific matters
regarding the financial statements, eventhrough the CPA intends to express an
unqualified opinion.
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REPORTS INVOLVING
OTHERS AUDITORS
make no reference in the audit report
make reference in the report (modified
wording report) qualify the opinion
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DEPARTURES FROM AN
UNQUALIFIED OPINION
Scope limitation
GAAP departure
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 acceptedaccounting principles.
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ADVERSE OPINION
It is used only when the auditor believes
that the overall financial statements are so
materiality misstated or misleading thatthey do not present fairly the financial
position or results of operations and cash
flows in conforming with GAAP.
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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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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.
Levels of materiality
Amounts are immaterial
Amounts are material but to 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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RELATIONSHIP OF MATERIALITY
TO TYPE OF OPINION
Materiality Level Significance in terms of
reasonable users
decisions
Type of opinion
Immaterial Users decisions are
unlikely to be affected.
Unqualified
Material Users decisions are likely
to be affected
Qualified
Highly material Users decisions are likely
to be significantly affected.
Disclaimer or Adverse
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MATERIALITY DECISIONS
Scope limitation
Audit report
Unqualified Qualified scope Disclaimer
and opinion
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MATERIALITY DECISIONS
Failure to follow GAAP
Audit report
Unqualified Qualified opinion Adverse
only
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DISCUSSION OF CONDITIONS
REQUIRING DEPARTURE
Auditors scope has been restricted
Statements are not in conformity with
GAAP Auditors is not independent
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SCOPE RESTRICTED BY
CLIENT OR CONDITIONS
immaterial Material Extremely material
Unqualified report Qualified scope,
additional paragraph,
and qualified opinion
(except for)
Disclaimer of opinion
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THE AUDITOR IS NOT
INDEPENDENT
immaterial Material Extremely material
Disclaimer of opinion
(regardless of
materiality)
Disclaimer of opinion
(regardless of
materiality)
Disclaimer of opinion
(regardless of
materiality)
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GOING CONCERN
Fundamental assumption in the
preparation of financial statement
ISA 570 Going Concern Ability as a going concern for a reasonable
period of time 1 year
Going concern problem considerdisclosure in audit report
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FINANCIAL INDICATORS FOR
GOING CONCERN
Net liability or net current liability position
Fixed term borrowing approaching maturity
without realistic prospect of renewal
Negative operating cash flow
Adverse key ratio
Substantial operating losses
Inability to pay creditors on due dates
Change from credit to cash payment with
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OPERATING AND OTHER INDICATORS
FOR GOING CONCERN
Loss of key management without
replacement
Loss of a major market, franchise, license
Shortage of raw material, obsolescene of
main products
Pending lawsuit
Changes in legislation affecting the entity
Non compliance with statutory requirement
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Question & Answer Session
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Next Session
THE END
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