Chapter 3 Solutions Manual.docx

Chapter 3 Solutions Manual.docx

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Chapter3SolutionsManual

Chapter3

AuditReports

ReviewQuestions

3-1Auditor'sreportsareimportanttousersoffinancialstatementsbecausetheyinformusersoftheauditor'sopinionastowhetherornotthestatementsarefairlystatedorwhethernoconclusioncanbemadewithregardtothefairnessoftheirpresentation.Usersespeciallylookforanydeviationfromthewordingofthestandardunqualifiedreportandthereasonsandimplicationsofsuchdeviations.Havingstandardwordingimprovescommunicationsforthebenefitofusersoftheauditor’sreport.Whentherearedeparturesfromthestandardwording,usersaremorelikelytorecognizeandconsidersituationsrequiringamodificationorqualificationtotheauditor’sreportoropinion.

3-2Theunqualifiedauditreportconsistsof:

1.ReporttitleAuditingstandardsrequirethatthereportbetitledandthatthetitleincludesthewordindependent.

2.AuditreportaddressThereportisusuallyaddressedtothecompany,itsstockholders,ortheboardofdirectors.

3.IntroductoryparagraphThefirstparagraphofthereportdoesthreethings:

first,itmakesthesimplestatementthattheCPAfirmhasdoneanaudit.Second,itliststhefinancialstatementsthatwereaudited,includingthebalancesheetdatesandtheaccountingperiodsfortheincomestatementandstatementofcashflows.Third,itstatesthatthestatementsaretheresponsibilityofmanagementandthattheauditor'sresponsibilityistoexpressanopiniononthestatementsbasedonanaudit.

4.Scopeparagraph.Thescopeparagraphisafactualstatementaboutwhattheauditordidintheaudit.Theremainderbrieflydescribesimportantaspectsofanaudit.

5.Opinionparagraph.Thefinalparagraphinthestandardreportstatestheauditor'sconclusionsbasedontheresultsoftheaudit.

6.NameofCPAfirm.ThenameidentifiestheCPAfirmorpractitionerwhoperformedtheaudit.

7.Auditreportdate.Theappropriatedateforthereportistheendoffieldwork,whentheauditorhasgatheredsufficientappropriateevidencetosupporttheopinion.

Thesamesevenpartsarefoundinaqualifiedreportasinanunqualifiedreport.Therearealsooftenoneormoreadditionalparagraphsexplainingreasonsforthequalifications.

3-3Thepurposesofthescopeparagraphintheauditor'sreportaretoinformthefinancialstatementusersthattheauditwasconductedinaccordancewithgenerallyacceptedauditingstandards,ingeneraltermswhatthosestandardsmean,andwhethertheauditprovidesareasonablebasisforanopinion.

3-3（continued）

Theinformationinthescopeparagraphincludes:

1.Theauditorfollowedgenerallyacceptedauditingstandards.

2.Theauditisdesignedtoobtainreasonableassuranceaboutwhetherthestatementsarefreeofmaterialmisstatement.

3.Discussionoftheauditevidenceaccumulated.

4.Statementthattheauditorbelievestheevidenceaccumulatedwasappropriateforthecircumstancestoexpresstheopinionpresented.

3-4Thepurposeoftheopinionparagraphistostatetheauditor'sconclusionsbasedupontheresultsoftheauditevidence.Themostimportantinformationintheopinionparagraphincludes:

1.Thewords"inouropinion"whichindicatethattheconclusionsarebasedonprofessionaljudgment.

2.Arestatementofthefinancialstatementsthathavebeenauditedandthedatesthereoforareferencetotheintroductoryparagraph.

3.Astatementaboutwhetherthefinancialstatementswerepresentedfairlyandinaccordancewithgenerallyacceptedaccountingprinciples.

3-5Theauditor'sreportshouldbedatedFebruary17,2008,thedateonwhichtheauditorcompletedthemostimportantauditingproceduresinthefield.

3-6Anunqualifiedreportmaybeissuedunderthefollowingfivecircumstances:

1.Allstatements—balancesheet,incomestatement,statementofretainedearnings,andstatementofcashflows—areincludedinthefinancialstatements.

2.Thethreegeneralstandardshavebeenfollowedinallrespectsontheengagement.

3.Sufficientevidencehasbeenaccumulatedandtheauditorhasconductedtheengagementinamannerthatenableshimorhertoconcludethatthethreestandardsoffieldworkhavebeenmet.

4.Thefinancialstatementsarepresentedinaccordancewithgenerallyacceptedaccountingprinciples.Thisalsomeansthatadequatedisclosureshavebeenincludedinthefootnotesandotherpartsofthefinancialstatements.

5.Therearenocircumstancesrequiringtheadditionofanexplanatoryparagraphormodificationofthewordingofthereport.

3-7Theintroductory,scopeandopinionparagraphsaremodifiedtoincludereferencetomanagement’sreportoninternalcontroloverfinancialreporting,andthescopeoftheauditor’sworkandopiniononinternalcontroloverfinancialreporting.Theintroductoryandopinionparagraphsalsorefertotheframeworkusedtoevaluateinternalcont