The Audit Report Was Timely, but at What Cost?
CHAPTER
AUDIT REPORTS
THE AUDIT REPORT WAS TIMELY, BUT AT WHAT COST?
3
LEARNING OBJECTIVES
After studying this chapter, you should be able to
3-1 Describe the parts of the standard unqualified audit report. Specify the conditions required to issue the standard unqualified audit report. Understand combined reporting on financial statements and internal control over financial reporting under Section 404 of the Sarbanes–Oxley Act. Describe the five circumstances when an unqualified report with an explanatory paragraph or modified wording is appropriate. Identify the types of audit reports that can be issued when an unqualified opinion is not justified. Explain how materiality affects audit reporting decisions. Draft appropriately modified audit reports under a variety of circumstances. Determine the appropriate audit report for a given audit situation. Discuss the impact of e-commerce on audit reporting. 3-2 3-3
Halvorson & Co., CPAs was hired as the auditor for Machinetron, Inc., a company that manufactured high-precision, computer-operated lathes. The owner, Al Trent, thought that Machinetron was ready to become a public company, and he hired Halvorson to conduct the upcoming audit and assist in the preparation of the registration statement for a securities offering. Because Machinetron’s machines were large and complex, they were expensive. Each sale was negotiated individually by Trent, and the sales often transpired over several months. As a result, improper recording of one or two machines could represent a material misstatement of the financial statements. The engagement partner in charge of the Machinetron audit was Bob Lehman, who had significant experience auditing manufacturing companies. He recognized the risk for improper recording of sales, and he insisted that his staff confirm all receivables at year-end directly with customers. Lehman conducted his review of the Machinetron audit files the same day that Trent wanted to make the company’s registration
AUDIT REPORTS
THE AUDIT REPORT WAS TIMELY, BUT AT WHAT COST?
3
LEARNING OBJECTIVES
After studying this chapter, you should be able to
3-1 Describe the parts of the standard unqualified audit report. Specify the conditions required to issue the standard unqualified audit report. Understand combined reporting on financial statements and internal control over financial reporting under Section 404 of the Sarbanes–Oxley Act. Describe the five circumstances when an unqualified report with an explanatory paragraph or modified wording is appropriate. Identify the types of audit reports that can be issued when an unqualified opinion is not justified. Explain how materiality affects audit reporting decisions. Draft appropriately modified audit reports under a variety of circumstances. Determine the appropriate audit report for a given audit situation. Discuss the impact of e-commerce on audit reporting. 3-2 3-3
Halvorson & Co., CPAs was hired as the auditor for Machinetron, Inc., a company that manufactured high-precision, computer-operated lathes. The owner, Al Trent, thought that Machinetron was ready to become a public company, and he hired Halvorson to conduct the upcoming audit and assist in the preparation of the registration statement for a securities offering. Because Machinetron’s machines were large and complex, they were expensive. Each sale was negotiated individually by Trent, and the sales often transpired over several months. As a result, improper recording of one or two machines could represent a material misstatement of the financial statements. The engagement partner in charge of the Machinetron audit was Bob Lehman, who had significant experience auditing manufacturing companies. He recognized the risk for improper recording of sales, and he insisted that his staff confirm all receivables at year-end directly with customers. Lehman conducted his review of the Machinetron audit files the same day that Trent wanted to make the company’s registration