©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Audit Reports Chapter 3 There are four types of audit reports: (1) Unqualified: Clean opinion or report تام, مطلق, خالي من التحفظات (2) Qualified متحفظ (3) Adverse رأي معاكس (4) Disclaimer امتناع عن ابداء الرأي

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Parts of the Standard Unqualified Audit Report اجزاء التقرير المطلق 1.Report titleعنوان التقرير The title should include the word ‘independent’ 2. Audit report address لمن يوجة التقرير To its stockholders 3. Introductory paragraphفقرة المقدمة It’s the first paragraph does three things The CPA firm has done an audit It tests the financial statements that were audited States that the statements are the responsible of management and the auditor’s responsibility is to express an opinion. 4. Scope paragraphفقرة نطاق التدقيق States that the audit is designed to obtain reasonable assurance about whether the statements are free from material misstatments

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Parts of the Standard Unqualified Audit Report اجزاء التقرير المطلق A test base indicate that sampling was used rather than an audit transactions and amounts on the statements. 5. Opinion paragraphفقرة ابداء الرأي states that the auditor conclusions based on the result of the audit. The phrase “ in our opinion” indicates that there may be some information risk associated with the financial statement, although the statements have been audited. 6. Name of CPA firmاسم شركة التدقيق 7. Audit report dateتاريخ تقريرالتدقيق the date of completion the audit work.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Conditions for Standard Unqualified Audit Report 1. All financial statements are included. 2. The three general standards have been followed in all respects on the engagement. 3. Sufficient evidence has been accumulated to conclude that the three standards of field work have been met.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Conditions for Standard Unqualified Audit Report 4. The financial statements are presented in accordance with generally accepted accounting principles. 5. There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Four Categories of Audit Reports 1. Standard unqualified تام, مطلق, خالي من التحفظات 3. Qualified تقرير متحفظ 2. Unqualified with explanatory paragraph or modified wording تام مع فقرة ايضاح او كلمات معدلة 4. Adverse or disclaimer تقرير معاكس او امتناع

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Sarbanes-Oxley Act This Act requires the auditor of a public company to attest to management’s report on the effectiveness of internal control over financial reporting. PCAOB Auditing Standard 2 requires the audit of internal control to be integrated with the audit of the financial statements.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Sarbanes-Oxley Act Combined Report on Financial Statements and Internal Control Over Financial Reporting 1. Introductory paragraph 2. Scope paragraph 3. Definition paragraph 4. Inherent limitations التقيدات المتوارثةparagraph 5. Opinion paragraph

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Unqualified Report with Explanatory Paragraph five circumstances when an unqualified report with an explanatory paragraph or modified wording is appropriate 1. Lack of consistent application of generally accepted accounting principles قصور في تطبيق المعايير المحاسبية بشكل ثابت 2. Substantial doubt about going concern شك كبير حول استمرارية الشركة 3. Auditor agrees with a departure from promulgated تشريعات رسميةaccounting principlesفي ظروف غير طبيعية 4. Emphasis of a matter 5. Reports involving other auditors

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Substantial Doubt About Going Concern شك مادي كبير حول استمرارية الشركة 1. Significant recurring operating losses orworking capital deficiencies.خسائر تشغيلية متكررة اوعجز مهم في راس المال التشغيلي 2. Inability of the company to pay its obligations as they come due.عدم مقدرة الشركة على دفع التزاماتها عندما يحين موعد سدادها 3. Loss of major customers, the occurrence of uninsured catastrophes.خسارة كبار العملاء, الحدث كراثة غي مؤمنة 4. Legal proceedings, legislation that might jeopardize the entity’s ability to operate. قضية قانونية مرفوعة ضد الشركة, تشريعات تعرض مقدرة الشركة واستمرارية التشغيل للخطر

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Auditor Agrees with a Departure from a Promulgated Principle The auditor must be satisfied and must state and explain, in a separate paragraph or paragraphs in the audit report, that adheringالالتزام to the principle would have produced a misleading result in that situation.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 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. تحت ظروف معينة ربما المدقق يريد ان يؤكد على حدث محدد له علاقة بالقوائم المالية بالرغم من ان نية المدقق اصدار تقرير نظيف. هذه الظروف مثل احداث مهمة لاحقة لتاريخ الميزانية

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Reports Involving Other Auditors 1. Make no reference in the audit report 3. Qualify the opinion 2. Make reference in the report (modified wording report)

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Learning Objective 5 Identify the types of audit reports that can be issued when an unqualified opinion is not justified.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Departures from An Unqualified Opinion 1. Scope limitation 2. GAAP departure 3. Auditor not independent

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Qualified Opinionالرأي المتحفظ A qualified opinion report can result from (1) a limitation on the scope of the audit or (2) failure to follow generally accepted accounting principles. The auditor use ‘ except for’ in the opinion paragraph The scope of the audit has been restricted, When the auditor has not accumulated sufficient evidence To conclude whether financial statement are stated in Accordance of GAAP نطاق او مجال التدقيق مقيد من قبل الشركة او ظروف اخرى, عندما لايستطيع المدقق تجميع ادلة كافي لتكوين رأي فيما اذا القوائم المالية تم اعدادها وفق المعايير المحاسبية المتعارف عليها.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Adverse Opinion رأي معاكس It is used only when the auditor believes that the overall financial statements are so materially misstated تحريف مادي or misleading that they do not present fairly the financial position or results of operations and cash flows in conformity طبقا لwith GAAP. يستخدم عندما يعتقد المدقق ان هناك تحريف مادي او تظليل ادى الى عدم عرض المركز المالي ونتيجة عمليات الشركة بشكل عادل. كما انها لم تعرض التدفق النقدي بشكل يتفق مع المبادىء المحاسبية المتعارف عليها

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Disclaimer of Opinion امتناع عن ابداء الرأي It is issued when the auditor is unable غير قادر to be satisfied that the overall financial statements are fairly presented. The adverse opinion report can ariseينشأ only when the Auditor has knowledge, after an adequate investigation, Of the absence of conformity.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder how materiality affects audit reporting decisions ? Materiality تعريف المادية A misstatement التحريفin the financial Statements can be considered material if knowledge of the misstatement would affect a decision of a reasonable user of the statements.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Levels of Materiality Amounts are immaterial.المقاديير المحرفة غير مادية Amounts are material but do not overshadow لايلقي بتاثيرة the financial statements as a whole. Amounts are so material or so pervasiveيتغلغل, يعم that overall fairness of the statements is in question.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Relationship of Materiality to Type of Opinion Materiality Level Significance in Terms of Reasonable Users’ Decisions Type of Opinion Users’ decisions are unlikely to be affected. ImmaterialUnqualified Users’ decisions are likely to be affected. MaterialQualified Users’ decisions are likely to be significantly affected. Highly material Disclaimer or adverse

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Discussion of Conditions Requiring Departure  Auditor’s scope has been restricted  Statements are not in conformity with GAAP  Auditor is not independent

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Auditor’s Decision Process Determine whether any condition exists requiring a departure from a standard unqualified report.  Decide the materiality for each condition  Decide the appropriate type of report  Write the audit report

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder More Than One Condition Requiring a Departure or Modification The auditor is not independent. There is a scope limitation. There is a substantial doubt about the company’s ability to continue as a going concern. There is a deviation in the statements’ preparation in accordance to GAAP.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder Number of Paragraphs in the Report Standard unqualified 3 Unqualified with explanatory paragraph4 Unqualified shared report with other auditors3 Qualified – opinion only4 Qualified – scope and opinion4 Disclaimer – scope limitation3 Adverse4 Type of Report