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3-11
3-24 (continued)
an audit is.
7. The audit was made in accordance with auditing standards
than generally accepted accounting standards.
8. The word material is excluded from the statement in
responsibility (free of material misstatement).
9. Additional paragraph(s) should be included that describe
10. The opinion paragraph states that accounting principles
material respects.”
12. The opinion paragraph includes the words “generally accepted
13. The opinion should be qualified rather than being unmodified.
Qualifications are caused by the:
3-25
(a)
CONDITION
(b)
MATERIALITY
LEVEL
(c)
TYPE OF
REPORT
COMMENTS
1. None
Not applicable
Standard,
unmodified
The company has made
a business decision to
follow a different financing
method for use of delivery
trucks, which is
adequately disclosed.
There is no change of
accounting principle.
2. Substantial
doubt about
going concern
Material
Unmodified ─
Emphasis-
of-matter
explanatory
paragraph
Because the auditor has
substantial doubt about
the client’s ability to
continue as a going
concern, the auditor
should add an explanatory
paragraph to the
unmodified opinion.
3. None
Material
Standard,
unmodified
While the auditor engaged
a business valuation
specialist to gather
evidence about the fair
value of the investment,
the auditor would issue an
unmodified opinion given
he or she was able to
conclude that the
valuation specialist’s work
provides sufficient
appropriate evidence.
4. Failure to
follow GAAP
Highly material or
material. We
need additional
information
regarding the
auditor’s
preliminary
judgment about
materiality
Adverse
(if highly
material)
or
Qualified
(if material)
The materiality of twenty
percent of net earnings
before taxes would be
sufficient for many
auditors to require an
adverse opinion. That
materiality question is a
matter of auditor
judgment.
3-25 (continued)
(a)
CONDITION
(b)
MATERIALITY
LEVEL
(c)
TYPE OF
REPORT
COMMENTS
5. Scope of
the audit
has been
restricted
Highly material
Disclaimer
Because the client refuses
to allow the auditor to
expand the scope of his
audit, a disclaimer of
opinion is appropriate
rather than a qualified
opinion.
6. Lack of
independence
Not applicable
Disclaimer
Lack of independence by
audit personnel on the
engagement mandates
a disclaimer for lack of
independence.
3-26
(a)
CONDITION
(b)
MATERIALITY
LEVEL
(c)
TYPE OF REPORT
COMMENTS
1. Substantial
doubt about
going
concern
Material
(2) Unmodified ─
Emphasis-
of-matter
explanatory
paragraph
Because the auditor has
substantial doubt about the
client’s ability to continue as
a going concern, the auditor
should add an explanatory
paragraph to the unmodified
opinion.
2. Failure to
follow
GAAP
Material or
Highly material
(more information
is needed about
the size of the
misstatement)
(4) Qualified opinion
only—GAAP
departure
(7) Adverse
The failure to reduce the value
of the inventory for a decline
in value is a departure from
GAAP.
3-26 (continued)
(a)
CONDITION
(b)
MATERIALITY
LEVEL
(c)
TYPE OF REPORT
COMMENTS
3. None
Not applicable
(1) Unmodified—
standard
wording
There is no indication
questioning the ability of the
business to continue
operations. The auditor does
not add an explanatory
paragraph simply because
there is a risky business, but
the auditor could choose to
emphasize this matter in an
explanatory paragraph.
4. Change in
accounting
principle
Immaterial
(1) Unmodified—
standard
wording
The change in accounting
principle is immaterial and
thus disclosure is not
required.
5. None
Not applicable
(3) Unmodified—
nonstandard
report wording
U.S. auditing standards now
allow an auditor to perform an
audit in accordance with both
U.S. GAAS and ISAs. The
auditor’s responsibility
paragraph is modified to
indicate that audit was
conducted in accordance with
both standards.
6. Scope of the
audit has
been
restricted
Material or Highly
material
(1) Unmodified—
standard
wording
The scope of the audit was
initially restricted, but the
auditor was able to satisfy
himself or herself by
alternative procedures.
7. Report
involving
other
auditors
Material
(3) Unmodified—
nonstandard
report wording
This is a shared audit report in
which the auditor will identify
the portion of work done by
the other auditor in the auditor’s
responsibility paragraph and
still issue an unmodified
opinion. The absolute dollar
amounts of assets and
revenues or percentages
must be stated.
3-27
(a)
CONDITION
(b)
MATERIALITY
LEVEL
(c)
TYPE OF REPORT
COMMENTS
1. Failure to
follow
GAAP.
Highly material
or material,
depending upon
the amount of
the loss and the
auditor’s
preliminary
judgment about
materiality
(7) Adverse (if highly
material)
or
(4) Qualified opinion
— GAAP
departure (if
material)
Disclosure of this information is
required in a footnote. Failure
to do so is a violation of
GAAP and is likely to result in
a qualified opinion, or it could
be so material that it requires
an adverse opinion.
2. Scope of
the audit
has been
restricted.
Highly material
(6) Disclaimer
Failure of the client to allow the
auditor to inspect the minutes
book would be a material
client-imposed restriction.
Due to the importance of the
minutes book, a disclaimer
would be necessary. The
certified copy of all
resolutions and actions would
not be a satisfactory
alternative procedure.
3. Scope of
the audit
has been
restricted.
Not applicable
(1) Unmodified
opinion—
standard wording
Because the auditor was able
to obtain alternative evidence,
no scope qualification is
necessary. If there were such
a qualification, the opinion
would be qualified or a
disclaimer, depending on
materiality.
4. Failure to
follow
GAAP.
Material
(4) Qualified opinion
only—GAAP
departure
Retail Auto Parts has used
replacement cost inventory
rather than lower of cost or
market. It is not sufficiently
material to require an adverse
opinion.
5. None
Not applicable
Unmodified opinion—
standard wording
The change of estimated life is
a change of condition and not
a change in accounting
principles. Therefore, an
unmodified opinion is
appropriate since there is
adequate disclosure.
3-27 (continued)
(a)
CONDITION
(b)
MATERIALITY
LEVEL
(c)
TYPE OF REPORT
COMMENTS
6. Failure to
follow
GAAP.
Immaterial
(1) Unmodified
opinion—
standard wording
The amount is immaterial.
7. Scope of
the audit
has been
restricted.
Highly material
or material,
depending upon
the auditor’s
preliminary
judgment about
materiality.
(6) Disclaimer (if
highly material)
or
(5) Qualified
opinion—scope
limitation (if
material)
Because the auditor was
unable to become satisfied
about beginning inventories,
it is necessary to issue either
a qualified or disclaimer of
opinion on the income
statement and statement of
cash flows as well as the
beginning balance sheet. The
use of a qualified or disclaimer
would depend upon
materiality. An unmodified
opinion could be issued for the
current period balance sheet.
b. Auditing financial statements is a complex process that requires the
knowledge, experience, and judgment of professional auditors. Most
investors are not familiar with the details of the audit process and they
may not be able to appropriately evaluate many of the issues disclosed
management rather than the auditor.
c. The challenge for auditors when making disclosure of critical audit
matters will be determining which items should be communicated and
the nature and extent of that communication. Because most audits
3-17
3-29 a. There are a number of differences between the ISA 700 auditor’s
report and the unmodified opinion audit report for nonpublic entities
shown in Figure 3-1:
1 is in the report title.
3. The unmodified opinion audit report for nonpublic entities includes a
description of what the audit entails, including the auditor’s
consideration of internal control over financial reporting, accounting
4. While both reports acknowledge that the auditor obtains reasonable
5. While the wording differs between the two reports, both the ISA
basis for the opinion issued.
b. There are a number of differences between the ISA 700 auditor’s
report and the standard unmodified opinion audit report for public
companies shown in Figure 3-3.
same disclosure.
3. The unmodified opinion audit report for public companies includes a
brief description of what the audit entails, including the examination
4. While both reports acknowledge that the auditor obtains reasonable
assurance, the ISA reports provides additional information about
3-18
3-29 (continued)
auditor’s conclusion that the audit evidence obtained provides a
basis for the opinion issued
c. The ISA report’s discussion about the importance of auditor
independence provides more explicit emphasis on the independence
key aspects of the audit process and what the auditor has and has not
done.
3-30 a. The following information was obtained from the Form 10-K filing for
Google Inc., for the year ended December 31, 2015:
1. Ernst & Young, LLP is the auditor.
unmodified opinion audit report.
4. According to the auditor’s report on internal controls over financial
reporting, the auditor’s opinion is that Google maintained, in all
5. Both audit reports are dated February XX, 2016.
appropriate guidance in the reorganized standards.
1. Guidance for auditor reporting when there is a material change in
accounting principle is found in paragraphs .17A through .17E of
2. Guidance for considering an entity’s ability to continue as a going
concern is found in AS 2415, Consideration of an Entity’s Ability to
3-19
3-30 (continued)
Paragraphs .12 through .16 of AS 2415 provide guidance about
Documents Containing Audited Financial Statements. Paragraph
.04 of AS 2710 notes that the auditor has no obligation to perform
any audit procedures to corroborate the financial information
contained in the document; however, he or she should read the
other information and consider whether such information is
audited financial statements.
