1. Chapter Two Audit Reports
Auditing
Chapter Two
Audit Reports

2. Highlights Describe basic contents of Audit Report
Identify the 4 basic types of Audit Reports
What conditions apply to each type of report
Materiality - what is it?
Process involved in determining which report is appropriate

3. Audit Report - Standard Sections
1. Report Title - required by section
2. Addressee to whom report is address to often to Shareholders
3. Introduction Paragraph - identifies audit has been done,
clarifies what an audit means, lists statements audited, discusses parties’ responsibilities
4. Scope Paragraph - reasonable assurance and free from material misstatement - but not guarantee

4. Report title:
Auditor’s Report
Address:
To the Shareholders of Ace Company:
Introductory paragraph:
We have audited the balance sheets of Ace Company as at December 31, 2004 and the statements of income, retained earnings, and changes in financial position for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

5. Scope paragraph:
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

6. Opinion paragraph: Audit report date: Name of firm: February 27, 2005
In our opinion, these financial statements present fairly, in all
material respects, the financial position of Ace Company as
at December 31, 2004 and the results of its operations and the
changes in its financial position for the years then ended in
accordance with generally accepted accounting principles.
Name of firm:
Taylor & Tower, CAs
City:
Anywhere, any province
Audit report date:
February 27, 2005

7. Audit Report - Standard Sections
5. Opinion Paragraph - states auditor’s conclusion based on evidence obtained during audit
6. Name of Firm - one responsible for the audit
7. Place of issue - often indicated at foot of report
8. Auditor’s Report Date - one by which most audit procedures were completed by
- indicates last date of responsibility

8. Audit Report - Standard Sections
- Double dating of Audit report used when material even occurs after the completion of the field work but before report is issued

9. Audit Report Categories
Standard Unqualified
Unqualified with explanatory paragraph
Qualified
Adverse or Denial of Opinion

10. Most Common Type of Audit Report - Unqualified
Often called “Standards Audit Report”
All conditions of the standard audit have been meet
Auditors feel comfortable with rendering unqualified opinion on FS

11. Unqualified Opinion with Explanatory Paragraph
Audit completed but auditor believes additional information is required or of great importance
Statements still believed to present fairly all regular conditions have been met
For example - audit may have been conducted with basis of accounting different from GAAP
Explanation section/disclosure of additional information in the audit report follows in a new paragraph after the opinion one

12. Qualified Opinion Can also be called a “reserved” opinion
can result from a scope limitation (auditor’s field work restricted but only in one area) - often imposed by client or beyond client or auditors control
or failure to follow GAAP (small area of departure and effect can be quantified)

13. Qualified Opinion
Examples include: inappropriate accounting treatment, valuation or failure to disclose essential info
satisfied with overall financial statements as presenting fairly
should use terms - except for or except that or except as in opinion paragraph to outline exceptions
very rare to have this type of report

14. Adverse Opinion
Used only when auditor concludes that statements do not present fairly
i.e.. Materially misstated or misleading
normally due to GAAP departures

15. Denial of Opinion
Auditor does not feel confident that financial statements present fairly - unable to express an opinion
could be result of severe scope limitation or severe GAAP noncompliance
lack of knowledge - unable to give opinion
differs from adverse where there is knowledge of significant departure and can identify misstatements

16. Denial – Scope Restriction
Same introductory paragraph
Except as explained in the following paragraph, we
conducted our audit in accordance with generally accepted
auditing standards...
Explanatory third paragraph including $-effect
In view of the possible material effects on the financial statements of the matters described in the preceding paragraph, we are unable to express an opinion whether these financial statements are presented fairly in accordance with generally accepted accounting principles.

17. Materiality
Defn ( ) - misstatement in financial statements is considered to be material if the decision of a person who is relying on the financial statements would be changed
requires professional judgement to determine effect

18. Materiality Items to consider in determining materiality
compare dollar amount to base common ones include: income B4 taxes, total assets, current assets, and working capital
note need to add up all errors found to consider total plus look at pervasiveness
Measurability can we accurately measure the effects of this error
Nature of Item does this affect users decision for example is it fraud, may have future effects, send incorrect message, or may have other consequences (such as debt call or convent failure)

19. Materiality
Immaterial - misstatement in F/S unlikely to affect decision of user - can issue unqualified opinion (example bank balance is found to be in error $10 on a million dollar balance)
Pervasive - extent to which exception/error affects different parts of F/S

20. Materiality
Material item - not pervasive = would affect users decision need since not pervasive likely overall statements still useful.
If use overall still useful issue qualified opinion using “except for”
Material item - pervasive = affects decision plus other parts of the statement likely will overall statements
increased level of pervasiveness = adverse opinion more likely

21. Reliance on Specialists or Another Auditor
Primarily auditor responsible for audit regardless of personnel or specialists hired
Primary- responsible to check credentials, competence and integrity of specialist/auditor

22. Reliance on Specialists or Another Auditor
Normally use of a specialist or another auditor is not mentioned in audit report
Scope limitation = find out cannot rely on another auditor/specialist
if unqualified opinion appropriate- name of secondary auditor/specialist not mentioned
qualified or denial opinion - may mention name and explain reason(s) for qualification

23. Type of Audit Report
Level Materiality
Immaterial
Material
Material &
Pervasive
Scope Restriction Not GAAP
Standard Report Standard Report
Qualified report Qualified Report
Denial of Opinion Adverse Opinion