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Audit Reports
Typology: Lecture notes
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A good place to start in your study of auditing is at the end. The end result of an audit is the audit report. An "unqualified" report suggests that the auditee (the company being audited) satisfactorily met all audit requirements, and is the most common result. Thus, an "unqualified" report is good news for the auditee. If the report is "qualified", this means that there were issues present that must be documented by the auditor.
A standard unqualified report contains seven parts, as illustrated in Figure 3-1:
The conditions that would result in an unqualified (or "clean") report are as follows:
If all of these conditions are met, then an unqualified report is rendered. However, not every report will meet these five conditions and there is a continuum of possibilities for the report:
Take note that the opinion gets increasingly unfavorable as you progress from 1-2, 2-3, and so on, in the list above.
According to the Sarbanes Oxley Act, the auditor must attest to the effectiveness of internal control over financial reporting; additionally, PCAOB Standard 2 requires integration of the internal control audit with the audit of the financial statements. These two efforts can be done in separate or combined reports. An example of a combined report is illustrated in Figure 3.3.
The auditor may choose to add an explanatory paragraph to the report, or modify the wording of the report, depending on circumstances that might exist. This is in spite of an otherwise unqualified report. Such conditions might be:
Your text suggests consideration of pervasiveness --in which the auditor considers how an error in one part of the accounting system affects other areas of the accounting system.
This section amplifies the considerations of several issues:
A procedure for writing the audit report has been developed, and consists of the following steps:
A decision table for unqualified reports with modified wording or explanatory paragraph is illustrated in table 3-2, and is briefly reproduced below:
GAAP Departure Unqualified Report
Unqualified Report with explanatory paragraph Substantial Going Concern Doubt
Unqualified Report
Unqualified Report with explanatory paragraph Justified GAAP Departure
Unqualified Report
Unqualified Report with explanatory paragraph Emphasis of a Matter Unqualified Report
Unqualified Report with explanatory paragraph
Use of Another Auditor Unqualified Report
Unqualified Report with modified wording
A decision table for conditions requiring departure from an unqualified report, also adapted from Table 3-2, is shown below:
Scope Restriction
Unqualified Qualified Scope and Qualified Opinion ("except for")
Disclaimer
Statements Not Following GAAP
Unqualified Additional paragraph and Qualified Opinion ("except for")
Adverse Opinion
Auditor Not Independent
Disclaimer Disclaimer Disclaimer
Table 3-3 in your text specifies the number of paragraphs, and locations of paragraphs in various types of reports.
Your text makes the point that internet annual reports are currently not subject to the scrutiny of auditors, as they are not considered documents.