AUDITING - SOLUTION MANUAL SUMMARY STUDY GUIDE Comprehensive Material Series Audit Reports The Audit Process-Audit Responsibilities and objectives The Audit Process-Audit Evidence

Audit Reports 1) Explain why auditors’ reports are important to users of financial statements and why it is desirable to have standard wording. : Auditor's reports are important to users of financial statements because they inform users of the auditor's opinion as to whether or not the statements are fairly stated or whether no conclusion can be made with regard to the fairness of their presentation. Users especially look for any deviation from the wording of the standard unqualified report and the reasons and implications of such deviations. Having standard wording improves communications for the benefit of users of the auditor’s report. When there are departures from the standard wording, users are more likely to recognize and consider situations requiring a modification or qualification to the auditor’s report or opinion. 2) List the seven parts of a standard unqualified audit report and explain the meaning of each part. How do the parts compare with those found in qualified report? : The unqualified audit report consists of: 1. Report title Auditing standards require that the report be titled and that the title includes the word independent. 2. Audit report address The report is usually addressed to the company, its stockholders, or the board of directors. 3. Introductory paragraph The first paragraph of the report does three things: first, it makes the simple statement that the CPA firm has done an audit. Second, it lists the financial statements that were audited, including the balance sheet dates and the accounting periods for the income statement and statement of cash flows. Third, it states that the statements are the responsibility of management and that the auditor's responsibility is to express an opinion on the statements based on an audit. 4. Scope paragraph. The scope paragraph is a factual statement about what the auditor did in the audit. The remainder briefly describes important aspects of an audit. 5. Opinion paragraph. The final paragraph in the standard report states the auditor's conclusions based on the results of the audit. 6. Name of CPA firm. The name identifies the CPA firm or practitioner who performed the audit. 7. Audit report date. The appropriate date for the report is the one on which the auditor has completed the most important auditing procedures in the field. The same seven parts are found in a qualified report as in an unqualified report. There are also often one or more additional paragraphs explaining reasons for the qualifications. 3) What are the purposes of the scope paragraph in the auditor’s report? Identify the most important information included in the scope paragraph. : The purposes of the scope paragraph in the auditor's report are to inform the financial statement users that the audit was conducted in accordance with generally accepted auditing standards, in general terms what those standards mean, and whether the audit provides a reasonable basis for an opinion. The information in the scope paragraph includes: Comprehensive Material Series 1. The auditor followed generally accepted auditing standards. 2. The audit is designed to obtain reasonable assurance about whether the statements are free of material misstatement. 3. Discussion of the audit evidence accumulated. 4. Statement that the auditor believes the evidence accumulated was appropriate for the circumstances to express the opinion presented. 4) What are the purposes of the opinion paragraph in the auditor’s report? Identify the most important information included in the opinion paragraph. : The purpose of the opinion paragraph is to state the auditor's conclusions based upon the results of the audit evidence. The most important information in the opinion paragraph includes: 1. The words "in our opinion" which indicate that the conclusions are based on professional judgment. 2. A restatement of the financial statements that have been audited and the dates thereof or a reference to the introductory paragraph. 3. A statement about whether the financial statements were presented fairly and in accordance with generally accepted accounting principles. 5) On February 17, 2006, a CPA completed the field work on the financial statements for the Buckheizer Technology Corporation for the year ended December 31, 2005. The audit in satisfactory in all respects except for the existence of a change in accounting principle from FIFO to LIFO inventory valuation., which results in an explanatory paragraph to consistency. On February 26, the auditor completed the tax return and the draft of the financial statements. The final audit report was completed, attached to the financial statements, and delivered to the client on March 7. What is the appropriate date on the auditor’s report? : The auditor's report should be dated February 17, 2006, the date on which the auditor completed the most important auditing procedures in the field. 6) What five circumstances are required for a standard unqualified report to be issued? : An unqualified report may be issued under the following five circumstances: 1. All statements—balance sheet, income statement, statement of retained earnings, and statement of cash flows—are included in the financial statements. 2. The three general standards have been followed in all respects on the engagement. 3. Sufficient evidence has been accumulated and the auditor has conducted the engagement in a manner that enables him or her to conclude that the three standards of field work have been met. 4. The financial statements are presented in accordance with generally accepted accounting principles. This also means that adequate disclosures have been included in the footnotes and other parts of the financial statements. 5. There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report. 7) Describe the additional information included in the introductory, scope, and opinion paragraphs in a combined audit report on financial statements and the effectiveness of internal control over Comprehensive Material Series financial reporting. What is the nature of the additional paragraphs in the audit report? : The introductory, scope and opinion paragraphs are modified to include reference to management’s report on internal control over financial reporting, and the scope of the auditor’s work and opinion on internal control over financial reporting. The introductory and opinion paragraphs also refer to the framework used to evaluate internal control. Two additional paragraphs are added between the scope and opinion paragraphs that define internal control and describe the inherent limitations of internal control. 8) What type of opinion should an auditor issue when the financial statements are not in accordance with GAAP because such adherence would result in misleading statements? : When adherence to generally accepted accounting principles would result in misleading financial statements there should be a complete explanation in a separate paragraph. The separate paragraph should fully explain the departure and the reason why generally accepted accounting principles would have resulted in misleading statements. The opinion should be unqualified, but it should refer to the separate paragraph during the portion of the opinion in which generally accepted accounting principles are mentioned. 9) Distinguish between an unqualified report with explanatory paragraph or modified wording and a qualified report. Give examples when an explanatory paragraph or modified wording should be used in an unqualified opinion.