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Chapter 19

BUS 426 Chapter Notes - Chapter 19: Financial Audit, Financial Statement, Audit Evidence

Business Administration
Course Code
BUS 426
Craig Emby

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Chapter 19
Audit Reports on Financial Statements
Audit Option and Reporting Responsibilities
- When auditors perform a financial statement audit, they have the responsibility to
o Form an opinion on the financial statements
o Issue the opinion in a written report that describes the basis of the conclusion
Uualified Idepedet Audito’s Repot
- A clean opinion
- The most common type of audit report
o Companies will typically make the required adjustments to the financial statements and
disclosures rather than receiving a qualified opinion
o The securities legislation in public companies requires an unqualified audit opinion
Unqualified Opinion
- Must meet the following conditions
o A audit engagement has been undertaken to express an opinion on financial statements
o The auditor followed general accepted auditing standards (GAAS)
o The auditor was able to perform all necessary procedures (ex. collecting SAAE)
o The financial statements are fairly presented in accordance with an appropriate applicable
financial reporting framework
o There are no circumstances that require to modify on the wordings of the report or add an
additional explanatory paragraph
Pat of the Stadad Uualified Audito’s Repot
- Key information included
o The auditor is independent (report title)
o The addressee the parties who have hired the auditor (board of directors)
o What was audited (introductory paragraph)
o Responsibilities of client management (management responsibility paragraph)
o Responsibilities of the auditor and the audit process (auditor responsibility paragraph)
o The auditor’s opiio o fairess of the fiaial stateets opiio paragraph
o Signature of audit firm
Either the firm name or the personal name (or both) can be used
o Auditor’s sigature
o A audit date date of the auditor’s report)
o The plae here the report as issued auditor’s address
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Qualified Reports, Adverse Reports, and Disclaimers
- Whenever the auditor believes that any variation in standard wording to the audit report is likely, the
auditor is required to communicate this fact to those charged with governance as soon as possible
- Whenever the auditor faces either a GAAP departure or a scope limitation, and it is material, a report
other than an unqualified report must be issued
- By modifying the report, the auditor brings to the readers’ attetio of a oers that auditors
have about the quality of the financial statements
o Four tpes of odified auditor’s reports issued under two conditions
Audito’s Judgeet aout Pevasiveess of Effet o the
Financial Statements
Material but not Pervasive
Material and Pervasive
Materially misstated (GAAP
Qualified (except for) opinion
Adverse Opinion
Inability to obtain SAAE (scope
Qualified (except for) opinion
Disclaimer of option
Qualified Reports
- Whenever an auditor issues a qualified opinion, he/she will use the term except for, except that, or
except as as in the opinion paragraph
- Details of the exception are provided in a separate paragraph
o Basis for Qualified Opinion, hih is prior to the Qualified Opinion paragraph
- The provincial securities commissions will not accept qualified statements from a public company
except in unusual situations
- May arise from an accounting related issue or an auditing related issue
o Accounting related issue
The report clearly states the nature and the amount of the misstatement, if it is known
and quantifiable
Auditors attempt to give the reader enough information to allow them to restate the
fiaial stateets to the orret aouts
More straightforward than an auditing related issue
Accounting Related Issue
- When the auditor knows the financial statements to be misleading because of material misstatement,
due to
o Inappropriate accounting treatment (ex. expensing capital assets)
o Inappropriate valuation or unreasonable estimate
Failure to provide an adequate allowance for doubtful accounts
o Failure to disclose essential information
Failure to adequately disclose a going concern problem or a material contingency
- The auditor should issue a qualified or adverse opinion, depending upon the pervasiveness of its
o An unwelcome influence or physical effect spreading widely throughout
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