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Copyright © 2007 Pearson Education Canada 3-1 Chapter 3: The Auditor’s Report.

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Presentation on theme: "Copyright © 2007 Pearson Education Canada 3-1 Chapter 3: The Auditor’s Report."— Presentation transcript:

1 Copyright © 2007 Pearson Education Canada 3-1 Chapter 3: The Auditor’s Report

2 Copyright © 2007 Pearson Education Canada 3-2 Chapter 3 objectives  What is the standard audit report? What are its component parts and when can it be issued?  Identify example of variations to the auditor’s standard report  Explain situations that could cause a problem with issuing the auditor’s opinion  When would the auditor provide an opinion on management’s report on internal control?

3 Copyright © 2007 Pearson Education Canada 3-3 Potential Users of Financial Statements  Investors (actual and potential)  Bank  Creditors and suppliers  Employees  Tax authorities  Customers  Can you think of anyone else?

4 Copyright © 2007 Pearson Education Canada 3-4 Importance of the audit report  It is the only information that is received directly from the auditor (financial statements and any attached annual report comes from management)  Standard wording helps the user identify exceptions

5 Copyright © 2007 Pearson Education Canada 3-5 Components of the Auditor’s Report (Text, pg. 58)  Title  Addressee  Paragraphs: – Introduction – Scope – Opinion  Signature  City  Date

6 Copyright © 2007 Pearson Education Canada 3-6 Title and Addressee  Title is normally simply “Auditor’s Report”  Addressee: Usually the shareholders, as they appoint the auditor

7 Copyright © 2007 Pearson Education Canada 3-7 Introductory paragraph in the auditor’s report  Explains that an audit has been performed  Lists the financial statements audited  Clarifies responsibilities between management and the auditor

8 Copyright © 2007 Pearson Education Canada 3-8 Explaining an audit  What do you think about the explanation of the audit?  What distinguishes a financial statement audit from other types of engagements such as a review or compilation?

9 Copyright © 2007 Pearson Education Canada 3-9 Scope paragraph  Explains what the auditor did during the audit – States that GAAS (generally accepted auditing standards) were followed – Communicates the concepts of reasonable assurance and materiality – Discusses the type of audit evidence accumulated; indicates sampling by means of the words ‘test basis’

10 Copyright © 2007 Pearson Education Canada 3-10 Opinion paragraph  Provides the auditor’s conclusions based upon the results of the audit  Usually stated with the term ‘presents fairly’

11 Copyright © 2007 Pearson Education Canada 3-11 Presenting fairly  What do you think “presents fairly” means?  Would that language be used on a daily basis?  How about other words such as “certify” or “accurate?” What differentiates these words?

12 Copyright © 2007 Pearson Education Canada 3-12 Name, place, date  Name: Normally, firm name is used rather than an individual (unless the firm is a sole proprietorship)  Place: The location of the firm  Date: The date on which substantial completion of field work occurred

13 Copyright © 2007 Pearson Education Canada 3-13 What could go wrong with the date?  What would happen if the auditor used the wrong date on the audit report?  Say, field work was completed on April 14, but the report was accidentally dated May 14 … what might go wrong?

14 Copyright © 2007 Pearson Education Canada 3-14 Practice problem 3-21 (p. 75)  A mixed-up auditor’s report  Understanding reporting issues requires that you know your accounting as well

15 Copyright © 2007 Pearson Education Canada 3-15 Providing additional information (Unqualified report)  (1) Non-GAAP financial statements: This could occur in accordance with regulatory legislation or contractual obligations  (2) Modified wording: For example, to provide additional information with respect to legislation or another auditor

16 Copyright © 2007 Pearson Education Canada 3-16 Providing additional information (Unqualified report, cont’d)  (3) Comparative statements: To explain that a report is being given on both financial statements  (4) Canada-U.S. reporting differences: To provide additional information about the difference.  (5) Changes in GAAP or their application: To explain the impact of the change

17 Copyright © 2007 Pearson Education Canada 3-17 Practice problem 3-20 (p. 74)  Take a careful look at the wording in the auditor’s report  Explain the relevance of particular phrases and why they are important to the audit report

18 Copyright © 2007 Pearson Education Canada 3-18 Types of audit report reservations (Table 3-1, page 65) Scope RestrictionNon-GAAP F/S Severe or misleading, i.e. material, and cannot be isolated DENIALADVERSE Material, but can be isolated (one or both conditions of scope restriction or non- GAAP condition can occur) QUALIFIED

19 Copyright © 2007 Pearson Education Canada 3-19 A tip to help you remember …  With a highly material scope restriction, you have been unable to gather enough information, so you say “I cannot provide an opinion” (the meaning of the word “denial”)  With highly material non-GAAP financial statements, you are disagreeing with the client, which is why you give an “adverse” or “opposing” opinion

20 Copyright © 2007 Pearson Education Canada 3-20 The role of materiality  When assessing the type of report to issue, the auditor considers whether the matter under consideration is: – Immaterial – Material but not pervasive – Material and pervasive such that the overall fairness of the financial statements is in question

21 Copyright © 2007 Pearson Education Canada 3-21 The difference between pervasive and “not pervasive”  Usually if something is material, but not pervasive, it is limited to one or two accounts and can be easily explained or easily described  If an issue is material AND pervasive, it likely affects many different accounts, or it affects a major issue about the business, such as the ability of the business to stay in operations

22 Copyright © 2007 Pearson Education Canada 3-22 Materiality in the context of GAAP departures  Materiality is considered in the context of a base (e.g., income, assets)  The potential error needs to be measurable  Depending upon the nature of the item, the dollar amount may not matter (e.g., illegal items may need to be considered even if very small)

23 Copyright © 2007 Pearson Education Canada 3-23 Materiality in the context of scope limitations  How do you consider the materiality of something that you have not seen?  How much inventory did you NOT count?  How many invoices were missing when you could not do the cut-off testing for accounts payable?

24 Copyright © 2007 Pearson Education Canada 3-24 Practice problem 3-22 (p. 75)  Brief situations that need to be assessed  What kind of audit report would you issue?

25 Copyright © 2007 Pearson Education Canada 3-25 Multiple conditions requiring a qualification  What if there is both a scope limitation and an instance of non-GAAP financial statements?  How would the auditor’s report be presented?

26 Copyright © 2007 Pearson Education Canada 3-26 Reliance on other auditors or a specialist  The primary auditor takes responsibility for the auditor’s opinion  Only the primary auditor’s name is used  The procedures for assessing qualifications, competence and integrity of both other auditors and specialists are similar (text, p. 70)

27 Copyright © 2007 Pearson Education Canada 3-27 Negative assurance  Inappropriate for an auditor’s report  Used for review engagements and prospectuses

28 Copyright © 2007 Pearson Education Canada 3-28 Reporting on internal control  Currently, PA firms must report on management’s assessment of internal controls for certain U.S. listed companies. This report may come into effect in Canada in 2007.  How does this type of report encourage high quality internal controls?

29 Copyright © 2007 Pearson Education Canada 3-29 Practice problem 3-28 (p. 78)  PAs can conduct a variety of work  How does the situation described in this question affect Jeffrey’s ability to work on financial statement audits?

30 Copyright © 2007 Pearson Education Canada 3-30 Take a look at a web page  What does a ‘real’ financial statement look like?  We have given several examples in our text book …  Pick the name of a large company in your area and visit their web site. Review the financial statements and compare their audit opinion to the one presented in this text.

31 Copyright © 2007 Pearson Education Canada 3-31 Practice problem 3-18 (p. 74)  What responsibility does the auditor have for information on the company’s web site that may be linked to electronic versions of the company’s annual financial statements and the auditor’s report?


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