Deck 15: Completing the Integrated Audit II: Audit Reporting

Question 1

What are the seven parts to the standard unqualified audit report?

Answer 1

a. Title: The title of the report is "Independent Accountant's (or Auditor's) Report."
b. Addressee: The addressee is the shareholders or the board of directors.
c. Introductory paragraph: The introductory paragraph specifies the assertions that were examined and the relative responsibilities of the auditor and management.
d. Scope paragraph: The scope paragraph provides a brief description of what the auditor has performed, including the type of assurance provided and limitations associated with the audit.
e. Opinion paragraph: The opinion paragraph indicates the auditor's conclusion based on established criteria.
f. Signature: The report is "signed" by the auditing/public accounting firm.
g. Report Date: The date of the report is the date on which the auditor completes the audit fieldwork.

Question 2

What will the form of the auditor's formal report depend on in a traditional audit? In an integrated audit?

Answer 2

a. If a traditional audit of the financial statements has been performed, the form of report will depend on the outcome of that audit; the completeness, credibility, and persuasiveness of the evidence obtained; the compliance (or lack thereof) with GAAP and GAAS; and management's willingness to adjust the financial statements for known errors. The form will also be influenced if issues arise regarding going concern, contingencies, other audit firm's involvement, related parties, independence, consistency or restriction on the scope of the audit.
b. If an integrated audit is performed, the auditor will also provide reports on management's assessment of the effectiveness of internal controls over financial reporting and the auditor's own assessment of the effectiveness of internal controls over financial reporting.

Question 3

What is the responsibility of management and of the auditor with regard to a client's accounting choices?

Answer 3

a. Financial statements are the responsibility of management, and management makes the decisions about how to structure transactions and account for them. Given the flexibility of many accounting standards and the control of the underlying transactions, management may be able to manipulate financial results using accounting legerdemain.
b. Auditors are responsible to provide an objective evaluation of the reasonableness of accounting choices made by management. If a client's accounting choices are excessively aggressive in maximizing reported earnings, the auditor must consider whether management is behaving appropriately, and whether some of the accounting choices cross the line from acceptable to inappropriate. Furthermore, just because a selected accounting treatment is acceptable within the standards does not mean that it is fair or desirable. Many abuses of financial reporting in the past few years were technically "correct" but ethically indefensible, as they did not portray the underlying economics of a transaction or events appropriately. Consequently, the auditor must maintain his or her skepticism when considering the appropriateness of management's accounting choices.

Question 4

What is the auditor's primary objective concerning contingent losses and what procedures does the auditor use to address contingent losses?

Question 5

What final procedures are performed by the auditor after all the necessary risk assessments and tests of management assertions have been completed?

Question 6

Who are the major groups that care about earnings quality and why do they care?

Question 7

What is the purpose of the representation letter?

Question 8

Why are attorney confirmations both the best evidence for contingent losses and the most problematic?

Question 9

What is the source of proposed adjustments and what does the auditor do about them?

Question 10

Describe circumstances that affect the risk of misstatement for a contingent loss.

Question 11

Your audit of a major company is almost complete. However, management is debating adjustments that are immaterial, have offsetting effects, or involve subjective estimates. Describe the negotiation factors that are likely to lead to a satisfactory outcome.

Question 12

Your audit of a major company is almost complete. However, management is debating adjustments that are immaterial, have offsetting effects, or involve subjective estimates. Describe your options and the negotiation process.

Question 13

What are the various ways the auditor communicates the results of the audit to interested parties?

Question 14

Concerning the auditor's evaluation of a client's accounting choices, what circumstances must the auditor take into account with regard to the client's quality of earnings?

Question 15

You are involved in the auditor of a major manufacturer of retail goods. What types of subsequent events are of interest to you?

Question 16

What is the task and purpose of the concurring partner?

Question 17

What is the importance of the review of audit documentation and conclusions? Describe the review process.

Question 18

What impact can the current environment and conditions have on the auditor's evaluation of the client's accounting policy choices?

Question 19

What circumstances would cause an auditor to issue an audit report as a dual date report?

Question 20

What information should be included in the representation letter?

Question 21

Under what circumstances will an unqualified report include an explanatory paragraph?