Advanced Auditing

1. Advanced Auditing Dr. Mohamed A. Hamada Lecturer of Accounting Information Systems Chapter 2 Advanced Audit Reporting

2. the Audit Report • Reports are essential to audit and assurance engagements because they communicate the auditor’s findings. • The final stage in the auditing process is preparing the audit report, which communicates the auditor’s findings to users. • Reports differ in nature, but all must inform readers of the degree of correspondence between the information audited and established criteria.

3. The Purpose of the Audit Report • Definition of auditing: “... communicating results to interested users.” • Indicate whether the FS are in accordance with GAAP • Provide indication of what the FS would be like if GAAP were followed • Provide any company-omitted disclosures • Indicate any unusual aspects of the audit examination • Scope limitations • Division of responsibility • Indicate any unusual matters related to the company • Going concern uncertainty • Consistency

4. Four Categories of Audit Reports • Standard unqualified (clean opinion) • Unqualified with explanation paragraph or modified wording • Qualified • Adverse or disclaimer

5. Main Types of Audit Reports

6. Should be existed

7. The standard unqualified audit report is issued when the following conditions have been met: 1. All statements— balance sheet, income statement, statement of retained earnings, and statement of cash flows—are included in the financial statements. 2. General standards have been followed in all respects on the engagement. 3. Sufficient appropriate evidence has been accumulated, 4. The financial statements are presented in accordance with generally accepted accounting principles. GAAP 5. There are no conditions requiring any explanation or modification paragraph.

8. Standard Unqualified Report Opinion Paragraph • In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of (ABS) as of December 31, 2012, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.

9. Standard Unqualified Audit Report(Nonlisted Companies) Title Report of Independent Auditor Address to client To the Board of Directors and stockholders of Any company Audit notice Audit notice We have audited the accompanying balance sheets of Any company as of December 31, 1990 and 1989, and the related statements of income, retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. Management responsibility Identify the financial statements Auditor responsibility continued

10. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. Description of the audit No special mention of adequate disclosure or consistency Opinion on financial statements In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Any company as of December 31, 1990 and 1989, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Refer to GAAP Signature ___________________________________, CPA February 28, 1991 Date

11. Report Title Identification of Addressee Independent Auditor’s Report To the Board of Directors of Example Company Components of Auditor’s Report Item Example

12. Introduction Paragraph We have audited the accompanying balance sheets of Example Company as of December 31, 2001 and 2002, and the related statements of income, retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

13. Scope Paragraph We conducted our audits in accordance with generally accepted auditing standards. Those standards required that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

14. Scope Paragraph (continued) An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

15. Opinion Paragraph In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Example Company as of December 31, 2001 and 2002, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.

16. Name of CPA Firm Audit Report Date ANDERSON & ZINDER, P.C., CPAs February 28, 2003 Signatureand Date

17. The following are examples of changes that affect consistency and therefore require an explanation paragraph if they are material: 1. Changes in accounting principles, such as a change from FIFO to LIFO inventory valuation 2. Changes in reporting entities, such as the inclusion of an additional company in combined financial statements 3. Corrections of errors involving principles, by changing from an accounting principle that is not generally acceptable to one that is generally acceptable, including correction of the resulting error

18. A qualified opinion report • A qualified opinion report can result from a limitation on the scope of the audit or failure to follow generally accepted accounting principles • “In our opinion, exceptfor the effects of not capitalizing lease obligations, as discussed in the preceding paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of Ajax Company as of December 31, 2011, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.”

19. An adverse opinion • An adverse opinion is used only when the auditor believes that the overall financial statements are so materially misstated or misleading that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP.

20. An adverse opinion • “In our opinion, because of the effects of the matters discussed in the preceding paragraph, the financial statements referred to above do not present fairly, in conformity with accounting principles generally accepted, the financial position of Ajax Company as of December 31, 2011, or the results of its operations and its cash flows for the year then ended.”

21. EX: Adverse Opinion In our opinion, because of the effects of the matters discussed in the preceding paragraph, the financial statements referred to above do not present fairly, in conformity with accounting principles generally accepted in the United States of America, the financial position of XYZ Company as of December 31, 20X5, or the results of its operations or its cash flows for the year then ended.

22. A disclaimer of opinion • A disclaimer of opinion is issued when the auditor has been unable to satisfy himself that the overall financial statements are fairly presented. • The necessity for disclaiming an opinion may arise because of a severe limitation on the scope of the audit or a no independent relationship

23. A disclaimer of opinion • “Because we were unable to obtain audited financial statements supporting the Company’s investment in a foreign affiliate and we were unable to satisfy ourselves as to the carrying value of the investment or the equity in its earnings by means of other auditing procedures, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on these financial statements.

24. EX: Disclaimer of Opinion We were engaged... The Company did not make a count of its physical inventory, stated in the accompanying financial statements at $_____ as of December 31, 20X2. Further, evidence supporting the cost of property and equipment acquired prior to December 31, 20X1, is no longer available. The Company’s records do not permit the application of other auditing procedures to inventories or property and equipment. Since the Company did not take physical inventories and we were not able to apply other auditing procedures to satisfy ourselves as to inventory quantities and the cost of property and equipment, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on these financial statements.

26. Materiality • Materiality is an essential consideration in determining the appropriate type of report for a given set of circumstances. • For example, if a misstatement is immaterial relative to the financial statements of the entity for the current period, it is appropriate to issue an unqualified report. • A misstatement in the financial statements can be considered material if knowledge of the misstatement will affect a decision of a reasonable user of the statements.

27. Relationship between materiality and type of opinion

28. OBJECTIVE OF CONDUCTING AN AUDIT OF FINANCIAL STATEMENTS • The main purpose of an audit is to provide financial statement users with an opinion by the auditor on whether : • the financial statements are presented fairly, in all material respects, in accordance with the established criteria.

30. AUDITOR’S RESPONSIBILITIES The overall objectives of the auditor are: • (a) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, • thereby enabling the auditor to express an opinion • (b) To report on the financial statements, and communicate as required by auditing standards, in accordance with the auditor’s findings.

31. Misstatements • An instance where a financial statement assertion is not in accordance with the criteria against which it is audited (e.g. GAAP). • Misstatements may be classified as fraud, other illegal acts such as noncompliance with laws and regulations, or errors.

32. Errors Versus Fraud • Auditing standards distinguish between two types of misstatements: errors and fraud. • Either type of misstatement can be material or immaterial. • An error is an unintentionalmisstatement of the financial statements, • whereas fraud is intentionalmisstatement of the financial statements.

33. Auditing methodology • Audits are performed by dividing the financial statements into smaller segments or components. • The division makes the audit more manageable and aids in the assignment of tasks to different members of the audit team

34. smaller segments or components

35. Main phases of audit

36. Very thanks