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Audit Reports and Communication Principles of Auditing: An Introduction to International Standards on Auditing - - Ch. 12

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Title: Audit Reports and Communication Principles of Auditing: An Introduction to International Standards on Auditing - - Ch. 12


1
Audit Reports and Communication Principles of
Auditing An Introduction to International
Standards on Auditing - - Ch. 12
  • Rick Stephan Hayes,
  • Roger Dassen, Arnold Schilder,
  • Philip Wallage

2
The objectives of the auditor are
  • To form an opinion on the financial statements
    based on an evaluation of the conclusions drawn
    from the audit evidence obtained and
  • To express clearly that opinion through a written
    report that also describes the basis for that
    opinion.

3
  • In order to form an opinion, the auditor shall
    conclude as to whether the auditor has obtained
    reasonable assurance about whether the financial
    statements as a whole are free from material
    misstatement, whether due to fraud or error.
  • The auditors conclusion shall take into account
  • Whether sufficient appropriate audit evidence has
    been obtained
  • Whether uncorrected misstatements are material,
    individually or in aggregate and next slide

4
The auditors conclusion shall also take into
account whether the financial statements
  • Are prepared, in all material respects, in
    accordance with the requirements of the
    applicable financial reporting framework
  • Disclose significant accounting policies
  • Use estimates made by management that are
    reasonable
  • Use information that is relevant, reliable,
    comparable, and understandable
  • Provide adequate disclosures and uses appropriate
    terminology

5
Management Responsibility for Audit Report - SOx
  • Sox Requires that the principal executive officer
    or officers and the principal financial officer
    or officers, certify in each report filed with
    the SEC the following
  • the signing officer has reviewed the report
  • the report does not contain any untrue statement
    of a material fact or omit to state a material
    fact
  • the financial statements, and other financial
    information, fairly present in all material
    respects the financial condition of the company 
  • the signing officers
  • are responsible for establishing and maintaining
    internal controls
  • have evaluated the effectiveness of the companys
    internal controls and
  • have presented in the report their conclusions
    about the effectiveness of their internal
    controls based on their evaluation

6
Corporate Responsibility for Audit Report under
SOx (cont.)
  • Requires that the principal executive officer or
    officers and the principal financial officer or
    officers, certify in each report filed with the
    SEC the following
  • the signing officers have disclosed to the
    companys auditors and the audit committee of the
    board of directors
  • all significant deficiencies in the design or
    operation of internal controls which could
    adversely affect the companys ability to record,
    process, summarize, and report financial data and
    have identified for the companys auditors any
    material weaknesses in internal controls and
  • any fraud, whether or not material, that involves
    management or other employees who have a
    significant role in the companys internal
    controls

7
Contents of the Auditor's Report (AS 5)
  • title,
  • Addressee (not required PCAOB AS 5)
  • opening or introductory paragraph
  • scope paragraph (describing the nature of an
    audit)
  • Definition paragraph
  • Limitations paragraph
  • opinion paragraph containing an expression of
    opinion on the financial statements,
  • the date of the report, the auditor's address,
    and auditors signature

8
Example PCAOB sample audit report from Audit
Standard No. 5 NEXT SLIDES
9
Report of Independent Registered Public
Accounting Firm Introductory paragraph We have
audited the accompanying balance sheets of W
Company as of December 31, 20X8 and 20X7, and the
related statements of income, stockholders'
equity and comprehensive income, and cash flows
for each of the years in the three-year period
ended December 31, 20X8. We also have audited
management's assessment, included in the
accompanying title of managements report, that
W Company maintained effective internal control
over financial reporting as of December 31, 20X8,
based on Identify control criteria, for example,
"criteria established in Internal
ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the
Treadway Commission (COSO)." . W Company's
management is responsible for these financial
statements, for maintaining effective internal
control over financial reporting, and for its
assessment of the effectiveness of internal
control over financial reporting. Our
responsibility is to express an opinion on these
financial statements and an opinion on the
company's internal control over financial
reporting based on our audits.
10
Scope paragraph We conducted our audits in
accordance with the standards of the Public
Company Accounting Oversight Board (United
States). Those standards require that we plan and
perform the audits to obtain reasonable assurance
about whether the financial statements are free
of material misstatement and whether effective
internal control over financial reporting was
maintained in all material respects. Our audits
of the financial statements included examining,
on a test basis, evidence supporting the amounts
and disclosures in the financial statements,
assessing the accounting principles used and
significant estimates made by management, and
evaluating the overall financial statement
presentation. Our audit of internal control over
financial reporting included obtaining an
understanding of internal control over financial
reporting, assessing the risk that a material
weakness exists, testing and evaluating the
design and operating effectiveness of internal
control based on the assessed risk, and
performing such other procedures as we considered
necessary in the circumstances. We believe that
our audits provide a reasonable basis for our
opinions.
11
Definition paragraph A company's internal
control over financial reporting is a process
designed to provide reasonable assurance
regarding the reliability of financial reporting
and the preparation of financial statements for
external purposes in accordance with generally
accepted accounting principles. A company's
internal control over financial reporting
includes those policies and procedures that (1)
pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets
of the company (2) provide reasonable assurance
that transactions are recorded as necessary to
permit preparation of financial statements in
accordance with generally accepted accounting
principles, and that receipts and expenditures of
the company are being made only in accordance
with authorizations of management and directors
of the company and (3) provide reasonable
assurance regarding prevention or timely
detection of unauthorized acquisition, use, or
disposition of the company's assets that could
have a material effect on the financial
statements.
12
Inherent limitations paragraph Because of its
inherent limitations, internal control over
financial reporting may not prevent or detect
misstatements. Also, projections of any
evaluation of effectiveness to future periods are
subject to the risk that controls may become
inadequate because of changes in conditions, or
that the degree of compliance with the policies
or procedures may deteriorate. Opinion
paragraph In our opinion, the financial
statements referred to above present fairly, in
all material respects, the financial position of
W Company as of December 31, 20X8 and 20X7, and
the results of its operations and its cash flows
for each of the years in the three-year period
ended December 31, 20X8 in conformity with
accounting principles generally accepted in the
United States of America. Also in our opinion, W
Company maintained, in all material respects,
effective internal control over financial
reporting as of December 31, 20X8, based on
Identify control criteria, for example,
"criteria established in Internal
ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the
Treadway Commission (COSO)." . Signature City
and State or Country Date
13
ISA 700 Auditors Opinion on F/S
  • INDEPENDENT AUDITORS REPORT
  • Appropriate Addressee
  • Introductory Paragraph (Report on Financial
    Statements)
  • Managements Responsibility for the Financial
    Statements
  • Auditors Responsibility
  • Opinion
  • Report on Other Legal and Regulatory Requirements
    Form and content of this section of the
    auditors report will vary depending on the
    nature of the auditors other reporting
    responsibilities.
  • Auditors signature
  • Date of the auditors report
  • Auditors address

14
ISA 700 Sample Audit Report
  • INDEPENDENT AUDITORS REPORT
  • Appropriate Addressee
  • Report on the Financial Statements
  • We have audited the accompanying financial
    statements of ABC Company, which comprise the
    statement of financial position as at December
    31, 20X1, and the statement of comprehensive
    income, statement of changes in equity and
    statement of cash flows for the year then ended,
    and a summary of significant accounting policies
    and other explanatory information.

15
  • Managements Responsibility for the Financial
    Statements
  • Management is responsible for the preparation
    and fair presentation of these financial
    statements in accordance with International
    Financial Reporting Standards, and for such
    internal control as management determines is
    necessary to enable the preparation of financial
    statements that are free from material
    misstatement, whether due to fraud or error.
  • Auditors Responsibility
  • Our responsibility is to express an opinion
    on these financial statements based on our audit.
    We conducted our audit in accordance with
    International Standards on auditing. Those
    standards require that we comply with ethical
    requirements and plan and perform the audit to
    obtain reasonable assurance about whether the
    financial statements are free from material
    misstatement.

16
  • An audit involves performing procedures to
    obtain audit evidence about the amounts and
    disclosures in the financial statements. The
    procedures selected depend on the auditors
    judgment, including the assessment of the risks
    of material misstatement of the financial
    statements, whether due to fraud or error. In
    making those risk assessments, the auditor
    considers internal control relevant to the
    entitys preparation and fair presentation of the
    financial statements in order to design audit
    procedures that are appropriate in the
    circumstances, but not for the purpose of
    expressing an opinion on the effectiveness of the
    entitys internal control. An audit also includes
    evaluating the appropriateness of accounting
    policies used and the reasonableness of
    accounting estimates made by management, as well
    as evaluating the overall presentation of the
    financial statements.
  • We believe that the audit evidence we have
    obtained is sufficient and appropriate to provide
    a basis for our audit opinion.

17
  • Opinion
  • In our opinion, the financial statements
    present fairly, in all material respects, (or
    give a true and fair view of) the financial
    position of ABC Company as at December 31, 20X1,
    and (of) its financial performance and its cash
    flows for the year then ended in accordance with
    International Financial Reporting Standards.
  • Report on Other Legal and Regulatory Requirements
  • Form and content of this section of the
    auditors report will vary depending on the
    nature of the auditors other reporting
    responsibilities.
  • Auditors signature
  • Date of the auditors report
  • Auditors address

18
The opinion expressed in the auditor's report may
be one of four types
  • Unmodified
  • (unqualified),
  • Three Modified Opinions
  • qualified,
  • adverse, or
  • disclaimer of opinion

Q
U
A
D
19
Unqualified Audit Opinion Also called
Unmodified Opinion
  • Unmodified (unqualified) opinionThe opinion
    expressed by the auditor when the auditor
    concludes that the financial statements are
    prepared, in all material respects, in accordance
    with the applicable financial reporting
    framework.
  • Most common type of audit report
  • Called clean opinion
  • Used for more than 90 per cent of all audit
    reports
  • Other audit reports are referred to as modified
    opinion. (adverse opinion, disclaimer of opinion,
    and qualified opinion).

20
An Unmodified (Unqualified) Audit Opinion should
be expressed when the auditor concludes that
the financial statements are prepared, in all
material respects, in accordance with the
applicable financial reporting framework.
21
The objective of the auditor is to express
clearly an appropriately modified opinion on the
financial statements that is necessary when
  • The auditor concludes, based on the audit
    evidence obtained, that the financial statements
    as a whole are not free from material
    misstatement or
  • The auditor is unable to obtain sufficient
    appropriate audit evidence to conclude that the
    financial statements as a whole are free from
    material misstatement.

22
Auditors Qualified Opinion
  • Express a qualified opinion when
  • The auditor, having obtained sufficient
    appropriate audit evidence, concludes that
    misstatements, individually or in the aggregate,
    are material, but not pervasive, to the financial
    statements or
  • The auditor is unable to obtain sufficient
    appropriate audit evidence on which to base the
    opinion, but the auditor concludes that the
    possible effects on the financial statements of
    undetected misstatements, if any, could be
    material but not pervasive.

23
Auditors Adverse Opinion ( ISA 705)
  • The auditor shall express an adverse opinion
    when the auditor, having obtained sufficient
    appropriate audit evidence, concludes that
    misstatements, individually or in the aggregate,
    are both material and pervasive to the financial
    statements.

24
Auditors Disclaimer of Opinion (ISA 705)
  • The auditor shall disclaim an opinion when the
    auditor is unable to obtain sufficient
    appropriate audit evidence on which to base the
    opinion, and the auditor concludes that the
    possible effects on the financial statements of
    undetected misstatements, if any, could be both
    material and pervasive.

or interaction of multiple uncertainties on F/S
25
ISA 705 Appendix Types of Modified Opinions
Auditors Judgment about the Pervasiveness of the Effects or Possible Effects on the Financial Statements Auditors Judgment about the Pervasiveness of the Effects or Possible Effects on the Financial Statements
Nature of Matter Giving Rise to the Modification Material but Not Pervasive Material and Pervasive
Financial statements are materially misstated Qualified opinion Adverse opinion
Inability to obtain sufficient appropriate audit evidence Qualified opinion Disclaimer of opinion
26
Basis for Modification Paragraph
  • When the auditor modifies the opinion on the
    financial statements, the auditor shall, in
    addition to the specific elements required by ISA
    700, include a paragraph in the auditors report
    that provides a description of the matter giving
    rise to the modification. The auditor shall place
    this paragraph immediately before the opinion
    paragraph in the auditors report and use the
    heading Basis for Qualified Opinion, Basis for
    Adverse Opinion, or Basis for Disclaimer of
    Opinion, as appropriate.

27
An Emphasis of a Matter Paragraph with an
Unmodified (Unqualified) Opinion
  • An auditors unqualified report is sometimes
    expanded upon to explain matters that do not
    affect the auditors opinion, but should be
    emphasized to the financial statement user.

28
ISA 706 Emphasis of Matter Paragraphs and Other
Matters Paragraphs in the Independent Auditors
Report (Not in text)
  • The auditors report should emphasize a matter
    when it is necessary to
  • (a) Draw users attention to matters presented or
    disclosed in the financial statements that are of
    such importance that they are fundamental to
    users understanding of the financial statements
    or
  • (b) Draw users attention to any matters other
    than those presented or disclosed in the
    financial statements that are relevant to users
    understanding of the audit, the auditors
    responsibilities or the auditors report.

29
  • Report of Independent Registered Public
    Accounting Firm
  • Standard Introductory Paragraph
  • Standard Scope Paragraph
  • Standard Opinion Paragraph
  • Required Emphasis Paragraphs
  • Emphasize those matters that are important in
    understanding the financial statement
    presentation, including significant management
    judgments and estimates and areas with
    significant measurement uncertainty. Discuss the
    audit procedures performed on these significant
    matters. This discussion should not include
    matters that the company has not disclosed in the
    financial statements and should make reference to
    the notes in the financial statements that
    disclose each matter.
  • Signature
  • City and State or Country
  • Date

30
When the auditor includes an Emphasis of Matter
paragraph in the auditors report, the auditor
shall
  • (a) Include it immediately after the Opinion
    paragraph in the auditors report
  • (b) Use the heading Emphasis of Matter,
  • (c) Include in the paragraph a clear reference to
    the matter being emphasized and to where relevant
    disclosures that fully describe the matter can be
    found in the financial statements and
  • (d) Indicate that the auditors opinion is not
    modified in respect of the matter emphasized

31
An auditor might write an Emphasis of a Matter
paragraph
  • If there is a significant uncertainty which may
    affect the financial statements, the resolution
    of which is dependent upon future events
  • Examples of uncertainties that might be
    emphasized include
  • the existence of related party transactions,
  • important accounting matters occurring subsequent
    to the balance sheet date
  • matters affecting the comparability of financial
    statements with those of previous years (e.g.
    change in accounting methods)
  • Litigation, long-term contracts, recoverability
    of asset values, losses on discontinued
    operations
  • To highlight a material matter regarding a going
    concern problem.

32
Going Concern
33
In a going concern judgment, the objectives of
the auditor are
  • To obtain sufficient appropriate audit evidence
    about the appropriateness of managements use of
    the going concern assumption in the preparation
    and presentation of the financial statements
  • To conclude, based on the audit evidence
    obtained, whether a material uncertainty exists
    related to events or conditions that may cast
    significant doubt on the entitys ability to
    continue as a going concern and
  • (c) To determine the implications for the
    auditors report.

34
Going Concern Disclosure
  • The disclosure should
  • Highlight the existence of a material uncertainty
    relating to the event or condition that may cast
    significant doubt on the entitys ability to
    continue as a going concern
  • Draw attention to the note in the financial
    statements
  • the principal events or conditions that may cast
    significant doubt on the entitys ability to
    continue as a going concern
  • there is a material uncertainty related to events
    or conditions that may cast significant doubt on
    the entitys ability to continue as a going
    concern

35
Reports involving other auditors and experts
  • ISA 620 suggests that when expressing an
    unmodified (unqualified) opinion the auditor
    should not refer to the work of an expert in her
    report as such a reference might be misunderstood
    to be a qualification of the auditor's opinion or
    a division of responsibility. If the auditor
    references the work of an expert in the auditors
    report because it is relevant to a modification
    to the auditors opinion, the auditor shall
    indicate this does not reduce the auditors
    responsibility for that opinion.

36
Communications With Those Charged With Governance
  • The objective of the auditor is to provide those
    charged with governance with timely observations
    arising from the audit that are significant and
    relevant to their responsibility to oversee the
    financial reporting process including
  • Qualitative aspects of the entitys accounting
    practices
  • Significant difficulties encountered during the
    audit
  • Significant matters arising from the audit that
    were discussed with management
  • Other matters arising from the audit that are
    significant to the oversight of the financial
    reporting process

37
Auditor Communications to Governance Entity
  • Audit matters of governance interest to be
    communicated by the auditor to the board or audit
    committee ordinarily include
  • Material deficiencies in internal control
  • Non-compliance with laws and regulations.
  • Fraud involving management
  • Questions regarding management integrity
  • The general approach and overall scope of the
    audit
  • The selection of, or changes in, significant
    accounting policies and practices that have a
    material effect on the financial statements

38
Auditor Communications to Governance Entity (cont)
  • Audit matters of governance interest to be
    communicated by the auditor to the board or audit
    committee ordinarily include
  • The potential effect on the financial statements
    of any significant risks and exposures, such as
    pending litigation, that requires disclosure in
    the financial statements
  • Significant audit adjustments to the accounting
    records
  • Material uncertainties related to the entitys
    ability to continue as a going concern
  • Disagreements with management about matters that
    could be significant to the entitys financial
    statement.
  • Expected modifications to the auditors report

39
Governance Structures
  • The structures of governance vary from country to
    country reflecting cultural and legal
    backgrounds.
  • In some countries, the supervision function, and
    the management function are legally separated
    into different bodies, such as a supervisory
    (wholly or mainly non-executive) board and a
    management (executive) board.
  • In other countries, like the U.S., both functions
    are the legal responsibility of a single, unitary
    board.

40
Reporting Fraud and Error
  • If the auditor has identified a fraud or has
    obtained information that indicates that a fraud
    may exist, the auditor shall communicate these
    matters on a timely basis to the appropriate
    level of management
  • The auditor shall determine whether there is a
    responsibility to report the occurrence or
    suspicion to a party outside the entity. The
    auditors legal responsibilities may override the
    duty of confidentiality in some circumstances.

41
Reporting of Non-compliance with Laws
  • If non compliance is suspected, the auditor
    should communicate to those charged with
    governance.
  • If the auditor concludes that the noncompliance
    has a material effect on the financial
    statements, and has not been properly reflected
    in the financial statements, the auditor should
    express a qualified or an adverse opinion.
  • The auditor shall determine whether the auditor
    has responsibility to report the identified or
    suspected non-compliance to parties outside the
    entity.

42
Long-Form Audit Report
  • In many countries it is customary for the auditor
    to prepare a long-form report to the Audit
    Committee of an entitys board of directors in
    addition to the publicly published short-form
    report discussed in this chapter.
  • A long- form report ordinarily includes
  • Overview of the Audit Engagement
  • Analysis of Financial Statements
  • Risk Management and Internal Control
  • Optional Topics
  • Auditor independence and quality control
  • Fees

43
  • XBRL is a freely licensed, open technology
    standard that makes it possible to store and/or
    transfer data along with the complex hierarchies,
    data-processing rules and descriptions.
  • Permits the automatic exchange and reliable
    extraction of financial information across all
    software formats and technologies, including the
    Internet
  • Reduces the need to enter financial information
    more than one time, reducing the risk of data
    entry error and eliminating the need to manually
    key information for various formats

44
Continuous Reporting and Auditing
  • Continuous reporting is the real-time disclosure
    of transaction data.
  • Embedded audit modules (EAM) are database
    software routines that are placed at
    predetermined points to gather information about
    transactions or events within the system that
    auditors deem to be material. EAMs allow
    auditors to proactively monitor auditable
    conditions.

45
Thank You for Your Attention
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