Auditing For Dummies
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Three circumstances may preclude you from issuing an unqualified report when you complete your audit. For example, if your client limits what actions you can take and what records you can look at, and you can’t get enough competent evidence about one or more facets of its financial statements, you may deem that these particular areas aren’t fully audited.

A common example is when a client retains your firm to conduct the audit after the end of the year, and the physical inventory has already been taken. Obviously, you can’t observe the physical inventory process. If your other auditing procedures related to inventory assertions (such as purchasing and shipping) don’t give you enough evidence, you can’t issue an unqualified report.

You don’t prepare the financial statements under audit, so departures from generally accepted accounting principles (GAAP) are on your client’s shoulders. Because an unqualified report specifically states that the financial statements are “in conformity with accounting principles generally accepted in the United States of America”, you can’t issue an unqualified report if your client fails to use GAAP.

For example, say that the client adjusts its fixed assets to reflect fair market value instead of historic cost, which is cost plus any major renovations. If the dollar amount difference between historic cost and fair market value is material, you have a problem. This is a big no-no under GAAP.

You and your firm have to be independent in both fact and appearance. A conflict of interest, which affects independence (at least in appearance), involves having a personal or financial interest in the client. If you find out as you’re finalizing your audit that someone at your CPA firm lacks independence — he or she has an immediate family member working for the client, for example — you can’t issue an unqualified report.

Obviously, the CPA firm’s goal is to identify any conflicts of interest prior to accepting the company as a client. If independence is lacking, the firm has to refuse to accept the engagement. But if a lack of independence comes to light only at the end of the audit engagement, your firm can’t issue an unqualified report. Normally in this circumstance, the firm issues a disclaimer report.

About This Article

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About the book author:

Maire Loughran is a self-employed certified public accountant (CPA) who has prepared compilation, review, and audit reports for fifteen years. Additionally, she is a university professor of undergraduate- and graduate-level accounting classes.

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