Audit Practice II: Week Two Quiz

Audit Practice and Procedures II - Week Two

• Topic: Audit Reports and Ethics
• Course: Audit Practice and Procedures II
• Week: Two
• Course: Fostering Leadership & Innovation
• Institution: The Commonwealth Caribbean (UCC)

First Class Recap

• Brief History of Auditing: Overview of the historical development of auditing.
• What is an Audit: Definition of an audit, covering the purpose and its objectives.
• Functions of Audit: Description of the roles and responsibilities of audit activities.
• Difference between Internal & External Auditing: Comparison between internal and external audits, including their goals, scope and responsibilities.
• Dynamics of Auditing/Understanding the Dynamics: Exploration of the interactions and situations involved in the auditing process.

What is an Audit Report?

• Definition: An audit report is a public document that expresses an auditor's opinion on a company's financial status. Results of audits vary in the types of results based on a company's standing.
• Summary: The report summarizes a company's financial status, including assets, liabilities, and the auditor's opinion.
• Purpose: Disclosures for consumers and investors. Often mandatory, companies also request them for diverse business reasons including obtaining investment
• Types of Results: Audit reports can have multiple outcomes depending on the audit's findings.

Audit Report Cont'd

• Accompanying Document: Audit reports are frequently accompanied by the company's annual report.
• Requirements: Banks, financial institutions, investors, creditors, and regulators often mandate audits.
• Clean Report: A clean report indicates that the company's financial statements comply fully with accounting standards.
• Errors: An unqualified report suggests that the financial statements may hold some errors.
• Importance: Investors rely heavily on audit reports to evaluate the financial health of a company, providing insights for critical decision making.

Types of Audit Reports

• Standard Unqualified Audit Report: Also called a clean report, signifies that no audit issues were found and the financial statements are compliant.
• Unqualified Report with Explanatory Paragraph or Modified Wording: A clean report was issued while supplying additional information as needed. For example, if an important or required additional information needs to be stated.
• Qualified Audit Report: An issue in the audit occurred, but the overall financial statements are still considered accurate.
• Adverse or Disclaimer Audit Report: The financial statements are not prepared or presented fairly.

Four Categories of Audit Reports

• Standard Unqualified: All previously stated conditions have been met.
• Unqualified with Emphasis of Matter: A standard unqualified report with additions of important information where additional needs to be specified.
• Qualified: Restrictions in the audit scope or noncompliance with accounting standards but overall statements are fairly presented.
• Adverse or Disclaimer: Financial statements may not be fairly presented, or a lack of independence in the auditing process.

The Standard Unqualified Audit Report

• Clean Report: A standard unqualified audit report is often referred to as a "clean" or "standard" report.
• No Adverse Comments: It doesn't include adverse comments or disclaimers regarding audit procedures.
• Financial Reporting Satisfaction: This type of report indicates that the auditor is satisfied with the financial reporting of the organization.
• Compliance: The auditor believes the company is compliant with governance principles and applicable laws.
• Free from Misstatements: The report is generally perceived as free from material misstatements by all parties involved.

The Auditor's Standard Unqualified Audit Report (eight distinct parts)

• Report Title: Includes the term "independent."
• Report Address: Typically addresses the company, stockholders, and/or a board.
• Introductory Paragraph: States the purpose of the audit and financial statements audited.
• Management's Responsibility: Outlines management's obligation in preparing financial statements that are free from misstatements.
• Auditor's Responsibility: Describes the auditing standards, procedures to obtain reasonable assurance, and limitation.
• Second & Third Paragraphs (Cont'd): Detailed explanation of the scope of the audit, evidence gathered, and how the audit was conducted. Discussion of sufficient and appropriate evidence and internal control evaluations. Also include a description of the scope and evidence accumulated in the audit.
• Opinion Paragraph: States auditor's conclusions on the financial statements and indicates it's based on professional judgment.
• Name and Address of the CPA firm: The auditor's identification and location.

Other Sections/Topics

• Audit Report Date
• Types of Audit Reports (again): Overview of the types again, focusing on more detail about each type.
• When is a Standard Unqualified Audit Report Issued?: Defines the conditions for a clean report.
• The Standard Unqualified Audit Report (again): Summarizes the content of the standard report, similar to the previous section on the topic. This includes specific paragraphs regarding scope, and overall audit findings.
• Disclaimer of Opinion: What happens when the auditor does not have enough evidence to provide a clear opinion.
• Adverse Opinion: When the auditor believes statements are materially misstated or misrepresented.
• Qualified Opinion: When the scope of the audit is limited or the statements are not consistently compliant with standards.

Ethics

• Definition of Ethics: Moral principles, values in business, and personal lives.
• Types of Ethical Standards: Principles, codes, regulations, church doctrine, and professional codes like those applied to CPAs.
• Why People Act Unethically: Two key reasons: differing ethical standards compared to society, and the choice to act selfishly.
• Ethical Dilemmas: Illustrations with common cases/situations including a man's wife stealing a drug and others.
• Resolving Ethical Dilemmas: Six-step process, including identifying facts, ethical issues, affected parties, alternatives, consequences and an appropriate action.

CPA Firms vs. Other Professionals

• Differences: CPA firms have a unique, stakeholder centric relationship, frequently working with the company management and often having limited interaction with users.
• Incentives: CPA firms have a high professional incentive for compliance to maintain credibility and maintain customer confidence.

Code of Professional Conduct

• Parts: Principles, Rules, Interpretations and Ethical rulings. Principle parts deal with ideals while enforceable rules and parts are based on specific details and consequences.
• Sections (in detail): Comprehensive details of principles, rules, interpretations, and rulings regarding professional conduct.

Additional Information

• References: List of relevant sources

Test your knowledge on the key topics of Week Two in Audit Practice and Procedures II, focusing on Audit Reports and Ethics. This quiz covers the definitions, history, and functions of auditing, along with the differences between internal and external audits. Dive into the dynamics of auditing and reinforce your understanding of this essential field.