Parts
of Audit Report
1. Report title. Auditing standards
require that the report be titled and that the title include the word
independent. For example, appropriate titles include “independent auditor’s
report,” “report of independent auditor,” or “independent accountant’s
opinion.” The requirement that the title include the word independent conveys
to users that the audit was unbiased in all aspects.
2. Audit report address. The report is
usually addressed to the company, its stockholders, or the board of directors.
In recent years, it has become customary to address the report to the board of
directors and stockholders to indicate that the auditor is independent of the
company.
3. Introductory paragraph. The first
paragraph of the report does three things: First, it makes the simple statement
that the CPA firm has done an audit. This is intended to distinguish the report
from a compilation or review report. The scope paragraph clarifies what is
meant by an audit.
Second,
it lists the financial statements that were audited, including the balance
sheet dates and the accounting periods for the income statement and statement
of cash flows. The wording of the financial statements in the report should be
identical to those used by management on the financial statements..
Third,
the introductory paragraph states that the statements are the responsibility of
management and that the auditor’s responsibility is to express an opinion on
the statements based on an audit. The purpose of these statements is to communicate
that management is responsible for selecting the appropriate generally accepted
accounting principles and making the measurement decisions and disclosures in
applying those principles and to clarify the respective roles of management and
the auditor.
4. Scope paragraph. The scope paragraph is
a factual statement about what the auditor did in the audit. This paragraph
first states that the auditor followed generally accepted auditing standards.
For an audit of a public company, the paragraph will indicate that the auditor
followed standards of the Public Company Accounting Oversight Board.
The
remainder of the scope paragraph discusses the audit evidence accumulated and
states that the auditor believes that the evidence accumulated was appropriate
for the circumstances to express the opinion presented. The words test basis
indicates that sampling was used rather than an audit of every transaction and
amount on the statements. Whereas the introductory paragraph of the report
states that management is responsible for the preparation and content of the
financial statements, the scope paragraph states that the auditor evaluates the
appropriateness of those accounting principles, estimates, and financial
statement disclosures and presentations given.
5. Opinion paragraph. The final paragraph
in the standard report states the auditor’s conclusions based on the results of
the audit. This part of the report is so important that often the entire audit
report is referred to simply as the auditor’s opinion. The opinion paragraph is
stated as an opinion rather than as a statement of absolute fact or a
guarantee. The intent is to indicate that the conclusions are based on
professional judgment. The phrase in our opinion indicates that there may be
some information risk associated with the financial statements, even though the
statements have been audited. The auditor is required to state an opinion about
the financial statements taken as a whole, including a conclusion about whether
the company followed U.S. generally accepted accounting principles. One of the
controversial parts of the auditor’s report is the meaning of the term present
fairly. Does this mean that if generally accepted accounting principles are
followed, the financial statements are presented fairly, or something more?
Occasionally, the courts have concluded that auditors are responsible for
looking beyond generally accepted accounting principles to determine whether
users might be misled, even if those principles are followed. Most auditors
believe that financial statements are “presented fairly” when the statements
are in accordance with generally accepted accounting principles, but that it is
also necessary to examine the substance of transactions and balances for
possible misinformation.
6. Name of CPA firm. The name identifies
the CPA firm or practitioner who performed the audit. Typically, the firm’s
name is used because the entire CPA firm has the legal and professional
responsibility to ensure that the quality of the audit meets professional standards.
7. Audit
report date. The appropriate date for the report is the one on which the
auditor completed the auditing procedures in the field. This date is important
to users because it indicates the last day of the auditor’s responsibility for
the review of significant events that occurred after the date of the financial
statements.
Categories of Audit Report
Categories of Audit Report
— Unqualified audit report
— Modified Audit Report
Unqualified audit
report
this is the simplest and most common report encountered, primarily because most sets of financial statements satisfy the various criteria as laid down in the statements of financial Accounting Standards (SFAS), Philippine Standards of Auditing (PSA) and statutes.
this is the simplest and most common report encountered, primarily because most sets of financial statements satisfy the various criteria as laid down in the statements of financial Accounting Standards (SFAS), Philippine Standards of Auditing (PSA) and statutes.
Unqualified opinion – is expressed when the auditor concludes that the
financial statements are presented fairly, in all material respects, in
accordance with the identified financial reporting framework.
Unqualified audit
report
this is the simplest and most common report encountered, primarily because most sets of financial statements satisfy the various criteria as laid down in the statements of financial Accounting Standards (SFAS), Philippine Standards of Auditing (PSA) and statutes.
this is the simplest and most common report encountered, primarily because most sets of financial statements satisfy the various criteria as laid down in the statements of financial Accounting Standards (SFAS), Philippine Standards of Auditing (PSA) and statutes.
Unqualified opinion – is expressed when the auditor concludes that the
financial statements are presented fairly, in all material respects, in
accordance with the identified financial reporting framework.
Among the circumstances that are
present in order to render an unqualified opinion are the following:
·
If proper accounting
records were kept;
·
Where the company has
a number of branches, if and whenthe information received from the branch
office was adequate;
·
Where applicable, if
the accounts are consistent with theprovisions of the Corporation Code;
·
If applicable
Statements of Financial Accounting Standards (SFAS), have been adopted by the
client;
·
If the opinion
expressed in the director’s statement to membersare consistent with the
auditor’s knowledge the client and
·
If any defects or
irregularities have been adequately disclosed.
Modified Audit Report
In certain circumstances, an auditor may not able to give a “clean” report on the financial statements.
In certain circumstances, an auditor may not able to give a “clean” report on the financial statements.
“An auditor’s report is
considered to be modified in the following situations:
Matters That Do Not
Affect the Auditor’s Opinion
•
emphasis of matter
Matters That Do
Affect the Auditor’s Opinion
•
qualified Opinion;
•
disclaimer of Opinion
•
adverse Opinion
Matters That Do Not
Affect the Auditor’s Opinion
Emphasis of matter paragraph – “An auditor’s report may be modified by adding an emphasis of matter paragraph(s) to highlight a matter affecting the financial statements which is included in a note to the financial statements that more extensively discusses the matter. The addition of such an emphasis of matter paragraph(s) does not affect the auditor’s opinion. The auditor may also modify the auditor’s report by using an emphasis of matter paragraph(s) to report matters other than those affecting the financial statements.” (Glossary of Terms, Preface to Philippine Standards on Auditing and Related Services) “The paragraph would preferably be included after the opinion paragraph and would ordinarily refer to the fact that the auditor’s opinion is not qualified in this respect.
Matters That Do
Affect the Auditor’s Opinion
An
auditor may not be able to express an unqualified opinion when either of the
following circumstances exist and, in the auditor’s judgment, the effect of the
matter is or may be material to the financial statements:
•
there is a limitation
in the scope of the auditor’s work; or
•
There is disagreement
with management regarding the acceptability of the accounting policies
selected, the method of their application or the adequacy of financial
statement disclosures.
The
circumstances described in (a) could lead to a qualified opinion or a
disclaimer of opinion. The circumstances described in (b) could lead to a
qualified opinion or an adverse opinion.
Qualified Opinion - a qualified
opinion should be expressed when the auditor concludes that an unqualified
opinion cannot be expressed but that the effect of any disagreement with
management , or limitation on scope is not so material and pervasive as to
require an adverse opinion or a
disclaimer of opinion. A qualified opinion should be expressed as being “except
for ‘’ the effects of the matter to which the qualifications relates.
Disclaimer of Opinion
– a disclaimer opinion should be expressed when the
possible effect of a limitation on scope
is so material and pervasive that the auditor has not been able to
obtain sufficient appropriate audit evidence and accordingly is unable to
express an opinion on the financial statements.
Adverse Opinion – an adverse opinion should be expressed when the
effect of a disagreement is so material and pervasive to the financial
statements that the auditor
Sarbanes Oxley act 404(Assessment of Internal Control)
This Act requires the auditor of a public company to attest to management’sreport on the effectiveness of internal control over financial reporting.PCAOB Auditing standard 2 requires the audit of internal control to be integratedwith the audit of the financial statements.
SOX Section 404 (Sarbanes-Oxley Act Section 404) mandates that all publicly-traded
companies must establish internal controls and procedures for financial
reporting and must document, test and maintain those controls and procedures to
ensure their effectiveness. The purpose of SOX is to reduce the possibilities
of corporate fraud by increasing the stringency of procedures and requirements
for financial reporting.
Reports
involving other parties
Assume Responsibility
•
If you accept
responsibility for the other auditor’s work (and it is unqualified) the
standard report may be issued without modification.
•
If the other auditors
report is qualified and the qualification is material to the financial
statements taken as a whole, you must qualify your report.
Shared Responsibility
•
The opinion is
unaffected (i.e. can be unqualified).
Assume No
Responsibility
•
A qualified opinion
or disclaimer, depending on materiality, is required.
Qualified
Opinion
•
Use the term “except
for” in the opinion paragraph to exclude a specific item from the auditor’s
opinion.
•
Qualified opinion is
appropriate when there is a:
-Material scope limitation
(qualified scope, additional paragraph, and qualified opinion)
-Material departure from GAAP
(additional paragraph, qualified opinion)
Disclaimer
•
Auditor cannot
express an opinion.
•
Disclaimer of opinion
is appropriate when:
-There is a highly material scope
limitation.
-There is a lack of independence
Relationship
of materiality to audit opinion
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 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.
Relationship of Materiality to Type of Opinion
MATERIALITY DECISIONS
Materiality
Information is material if its omission
or misstatement could influence the economic decisions of users taken on the
basis of the financial statements (IASB Framework).
Concept of Materiality
•
Auditor
Considerations
–
Circumstances
pertaining to the entity
–
Information needs of
those relying on financial statements
·
Purposes for
Preliminary Judgments
–
Scope decisions
–
Evaluation of known
misstatements
Preliminary Judgments about
Materiality
•
Planning Materiality
–
Circumstances change
–
Additional
information identified
·
Judgments at Two
Levels
–
Financial Statement
Level
–
Account Balance Level
Materiality at the Financial
Statement Level
•
Quantitative
Guidelines
–
No official guidelines
within auditing standards
–
5-10% of Net Income
before Taxes
–
½-1% of Total Assets
·
Qualitative
Considerations
–
Quantitatively
immaterial, qualitatively material
–
Illegal act by entity
Materiality – Quantitative
Example
Allocating Financial Statement
Materiality to Accounts
•
When financial
statement materiality is quantified
•
Must allocate to
individual accounts
•
Balance Sheet and
Income Statement accounts
•
Two Considerations
–
Material misstatement
amount of account
–
Probable cost of
verification
•
Sufficiency of
Evidence
–
Inverse relationship
–
Lower amount of
tolerable misstatement needs more evidence to obtain reasonable assurance
·
Evaluation of
Evidence
–
Reevaluate
preliminary materiality
–
Quantitative and
Qualitative considerations
Materiality is also linked closely to other accounting concepts and principles: