Materiality And Audit Reporting Audit Report Audit Opinion Lecture 4

Objective Relation Between Materiality And Audit Reporting The auditor report and its elements The auditor opinion and types of auditor opinion Circumstances Resulting In A Qualification

Relation Between Materiality And Audit Reporting Materiality is an essential consideration in determining the appropriate type of report for a given set of circumstances. Immaterial is when a misstatement in the financial statements is unlikely to affect the decisions of a reasonable user. A misstatement in the financial statements would affect a user’s decision, but the overall statements are still fairly stated and therefore useful. The highest level of materiality exists when users are likely to make incorrect decisions if they rely on the overall financial statements.

Relation Between Materiality And Audit Reporting Type of Opinion 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

Relation Between Materiality And Audit Reporting Materiality Decisions Failure to follow GAAP Audit report Unqualified Qualified opinion only Adverse

Relation Between Materiality And Audit Reporting Materiality Decisions Scope limitation Audit report It is more difficult to evaluate the materiality of potential misstatements resulting form a scope limitation than for a failure to follow GAAP. Unqualified Qualified scope and opinion Disclaimer

Relation Between Materiality And Audit Reporting It is more difficult to evaluate the materiality of potential misstatements resulting form a scope limitation than for a failure to follow GAAP.

AUDITING REPORT The technical opinion must state whether the accounting statements or document adequately represents the economic events that have arisen at the company according to the applicable accounting rules and practice. The technical opinion will be written and explained in the “independent auditor´s report”.

AUDITING REPORT Audit report: the formal document in which an auditor expresses a clear opinion as to whether the financial statements of an entity: Show a true and fair view of: Its position at a given date and The results of its operations for the accounting period ended on that date Have been properly prepared in accordance with the relevant statutory requirements. Compliance with contractual agreements. Summarized financial statements.

AUDITING REPORT An evaluation of the financial statements to determine: - if the accounting policies selected and applied are consistent with the financial reporting framework. - If the accounting estimates made by management are reasonable. - If the information presented in the financial statements is relevant, reliable, comparable and understandable. - If the financial statements provide sufficient disclosures to enable users to understand the effect of material transaction and events.

AUDITING REPORT Qualitative criteria of audit report: Relevance; Reliability; Any explanatory information included, such as in qualification, should be material; Timeliness; Comparability Understandability.

The Audit Report The title line of the audit report includes the word “Independent,” and usually, the report is addressed to the stockholders of the company. The audit report includes an introductory paragraph, a scope paragraph, an opinion paragraph, an explanatory paragraph referring to the audit of internal control, the name of the auditor or audit firm, and the date of the audit report.

4.6. AUDITING REPORT ELEMENTS OF THE AUDITOR’ S REPORT TITLE ADDRESSEE INTRODUCTORY PARAGRAPH MANAGEMENT’S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS AUDTOR’S RESPONSIBILITY AUDITOR’S OPINION OTHER REPORTING RESPONSIBILITIES AUDITOR’ S SIGNATURE DATE OF THE AUDITOR’S REPORT AUDITOR’S ADDRESS

AUDITOR’ S OPINION The auditor is responsible for forming and expressing a “technical opinion” on the financial statements with reference to the following: Whether they have been prepared and presented in accordance with the generally accepted accounting principles GAAP and rules. Whether principles and rules have been applied in a uniform manner as to the preceding financial year.

AUDITOR’ S OPINION Whether failure to apply one or several accounting principles or rules is considered fitting or inappropiate,. Events that may have happened between the closing date of the financial year and drafting the report.

AUDITOR’ S OPINION The diferents kinds of technical opinion : “Unqualified opinion”: when there are no reserves in the particular state of the previous points. “qualified opinion” or “adverse opinion”: when the reserves exist. “Disclaimer of opinion”: when there are important reserves about the diferent previous points and complementary details and information about the annual accounts are needed.

Types of Audit Opinions Unqualified opinion Expressed when auditor is satisfied in all material respects that financial reports are presented fairly in accordance GAAP ‘Except for’ – Qualified Opinion Issued when auditor has reservation about a specific matter or matters, but apart from these specific matters the remainder of financial report can be relied upon.

Unqualified Audit Report Exhibit 13.1 Example of an unqualified audit report (p. 608)

Unqualified Audit Report

Unqualified Audit Report

Qualification And Qualified Opinion Paragraph For An ‘Except For’ Opinion

Qualification And Qualified Opinion Paragraph For An ‘Except For’ Opinion

Types of Audit Opinions Adverse opinion Expressed when auditor’s reservations are of such magnitude or are so pervasive that they believe financial report, taken as a whole, is misleading and of little use to addressee of the audit report. This communicates that no reliance should be placed on financial report.

Qualification And Qualified Opinion Paragraph For Adverse Opinion

Types of Audit Opinions Disclaimer “Inability to form an opinion” Expressed when the auditor is unable to obtain adequate evidence to form an opinion on issues, the possible effects of which are material or pervasive to financial report taken as a whole. Presents that the auditor is unsure whether financial report as a whole is reliable.

Qualified Audit Opinion Paragraph For A Statement Of Inability For Form An Opinion

Types of Audit Opinions ‘Emphasis of matter’ Included at end of audit report to draw attention to certain matters that are considered relevant to the reader, but do not affect type of audit opinion issued. It is not a qualification, but is used to draw reader’s attention to matters (usually contained in a note to the accounts) that are relevant to the reader’s decision-making process.

‘Emphasis Of Matter’ Paragraph Relating To Inherent Uncertainties

Circumstances Resulting In A Qualification Disagreement with management (or those charged with governance) regarding financial report (e.g. over applicability of accounting standards or over asset valuations). Conflict between applicable financial reporting frameworks. Very rare in practice (e.g. difference between specific legislative requirements and accounting standards). Limitation on scope of audit (e.g. evidence auditor believes should exist but cannot get access to).

The Effect Of Materiality On The Audit Qualification The primary factor when considering whether to qualify an audit opinion, or attempting to determine what sort of qualification to apply, is the materiality of the subject matter giving rise to the qualification.

Circumstances That Result In A Modified Audit Report

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