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

Copyright © 2007 Pearson Education Canada 3-1

Chapter 3: The Auditor’s Report

Copyright © 2007 Pearson Education Canada

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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?


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Potential Users of Financial Statements

Investors (actual and potential)

Bank Creditors and suppliers Employees Tax authorities Customers Can you think of

anyone else?


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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


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Components of the Auditor’s Report (Text, pg. 58)

Title Addressee Paragraphs:

– Introduction– Scope– Opinion

Signature City Date


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Title and Addressee

Title is normally simply “Auditor’s Report”

Addressee: Usually the shareholders, as they appoint the auditor


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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


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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?


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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’


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Opinion paragraph

Provides the auditor’s conclusions based upon the results of the audit

Usually stated with the term ‘presents fairly’


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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?


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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


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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?


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Practice problem 3-21 (p. 75)

A mixed-up auditor’s reportUnderstanding reporting issues

requires that you know your accounting as well


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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


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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


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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


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Types of audit report reservations (Table 3-1, page 65)

Scope Restriction Non-GAAP F/S

Severe or misleading, i.e. material, and cannot be isolated

DENIAL ADVERSE

Material, but can be isolated (one or both conditions of scope restriction or non-GAAP condition can occur)

QUALIFIED QUALIFIED


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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


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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


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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


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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)


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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?


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Brief situations that need to be assessed

What kind of audit report would you issue?


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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?


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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)


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Negative assurance

Inappropriate for an auditor’s report Used for review engagements and

prospectuses


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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?


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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?


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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.


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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?

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

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