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    Chapter 22 - Modifications To The Independent Auditor's Report - CANOSA, Danica Mae T

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    Chapter 22 - Modifications To The Independent Auditor's Report - CANOSA, Danica Mae T

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    Danica Mae Canosa
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    Chapter 22_Modifications to the Independent Auditor's Report_CANOSA, Danica Mae T

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    11 views33 pages

    Chapter 22 - Modifications To The Independent Auditor's Report - CANOSA, Danica Mae T

    Uploaded by

    Danica Mae Canosa

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 33

    Maligayang Araw!

    AUDITING AND ASSURANCE


    PRINCIPLES

    CANOSA, Danica Mae T.


    Chapter 22
    Modifications to the
    Independent
    Auditors Report
    Modifications to the
    Independent Auditor’s
    Report
    INTRODUCTION

    ISA / PSA 705 (Revised) states


    that it deals with the auditor’s
    responsibility to issue an
    appropriate report in
    circumstances when forming an
    opinion in accordance with ISA /
    PSA 700 (Revised) “Forming an
    Opinion and Reporting on
    Financial Statements.
    Modified Opinion

     Qualified opinion
     Averse opinion
     Disclaimer opinion
    Modified Opinion

    The decision regarding which


    type of modified opinion is
    appropriate depends upon

    a) Nature of the matter giving


    rise to the modification
    b) Pervasiveness of the effects
    or possible effects of the matter
    Pervasive effects on the FS
    are those that, in the auditor’s
    judgment:

    a) Are not confined to specific


    elements, accounts, or items of
    the financial statements
    b) If so confined, represent or
    could represent a substantial
    proportion of the FS
    c) In relation to disclosure, are
    fundamental to users’
    understanding of the FS
    Objective
    Objective

    The objective of the auditor is


    to express clearly an appropriately
    modified opinion on the FS that is
    necessary when:

    a) Nature of the matter giving


    rise to the modification
    b) Pervasiveness of the effects
    or possible effects of the matter
    Probability-
    Proportional-to-
    size Sampling
    Technique
    Probability-Proportional-to-Size
    Sampling Technique (PPS)

    ➔ auditors use to estimate the maximum amount


    of overstatement of a recorded amount with
    measurable level of risk of making a decision
    error
    ➔ sometimes referred to as peso-unit
    sampling(PU) or cumulative-monetary-amount
    sampling (CMA)
    Advantages

     increases the likelihood of including high peso-


    value items in the sample
     allows auditor to compute the sample size and
    evaluate the results by hand or by means of
    tables
     is easy to use
     enables the auditor to state conclusion in a peso
    amount
    Disadvantages

     The assumption that the audited value of a


    sampling unit is neither less than zero nor greater
    than the book value may not be consistent with
    the auditor’s objective.
     Negative balance or zero balances cannot be
    audited.
     When misstatements are found, the upper
    misstatement limit may be too high to be useful.
    Classical Variables
    Sampling
    Technique
    Classical Variable Sampling Models

    ➔ use normal distribution theory to evaluate


    selected characteristics of a population on the
    basis of a sample of items constituting the
    population
    Variations of Classical Variables Sampling

     Mean-per-unit estimation
     Difference estimation
     Ratio estimation
     The regression approach
     Difference and ratio estimation
     Stratification
    Steps in Variables Sampling for Substantive
    Tests

    1. Determine the objective(s) of the test.


    2. Define population and sampling unit.
    3. Determine the initial sample size.
    4. Using random sampling techniques to identify
    the actual items to audit.
    5. Evaluate the sample results.
    6. Document the sampling procedure.
    Reaching a Conclusion in PPS Sampling

    To reach a conclusion, the audit must consider


    not only the statistical results but also the qualitative
    aspects of the findings.

    However, when the auditor finds, for example,


    that the upper misstatement limit exceeds tolerable
    error, recorded book value may be overstated. If this
    occur, the auditor could:
    Reaching a Conclusion in PPS Sampling

     examine additional logical units from the


    population,
     perform additional substantive tests directed
    toward the same audit objective, and
     following the above steps, have the client correct
    errors found, reduce the upper misstatement limit
    accordingly and compare the revised upper
    misstatement limit with tolerable error.
    Nonstatistical
    Sampling for
    Substantive Tests
    Nonstatistical Sampling for
    Substantive Tests

    ★ The major difference between statistical


    and nonstatistical are in the procedures to
    determine the sample size and evaluate
    the sample results.
    Nonstatistical Sampling for
    Substantive Tests

    ★ The auditor may decide not to quantify the


    factors used to arrive at the sample size,
    although they will consider the
    relationships.
    Ratio Method

    ★ They divide the sum of the misstatements


    in the audited sample by the book value of
    the sample, and they then multiply the
    result by the book value of the population.
    Average Difference Method

    ★ Auditors divide the sum of the


    misstatements in the audited sample by
    the number of items in the sample, and
    they then multiply the result by the
    number of items in the population.
    Short
    Quiz
    Short
    Qu iz
    1. Statistical sampling provides a technique for
    a. exactly defining materiality
    b. greatly reducing the amount of substantive testing
    c. eliminating judgment in testing
    d. measuring the sufficiency of evidential matter
    Short
    Qu iz
    2. When planning a sample for a substantive test of
    details, an auditor should consider tolerable
    measurement for the sample. This consideration should
    a. be related to the auditor’s assessment of inherent risk
    b. not be adjusted for qualitative factors
    c. be related to preliminary judgements about materiality
    levels
    d. not be changed during the audit process
    Short
    Qu iz
    3. When using classical variables sampling for
    estimation, an auditor normally evaluates the sampling
    results by calculating the possible error in either
    direction. This statistical concept is known as
    a. Precision
    b. Reliability
    c. Projected error
    d. Standard deviation
    Short
    Qu iz
    4. Which of the following most likely would be an
    advantage in using classical variables sampling rather
    than PPS?
    a. An estimate of the standard deviation of the population’s
    recorded amounts is not required.
    b. The auditor rarely needs the assistance of a computer
    program to design an efficient sample.
    c. Inclusion of zero and negative balances generally does not
    require special design considerations.
    d. None of the above.
    Short
    Qu iz
    5. Which of the following sampling methods would be
    used to estimate a numerical value measurement of a
    population, such a peso value?
    a. Discovery sampling
    b. Numerical sampling
    c. Sampling for attributes
    d. Sampling for variables
    Answe
    rs
    1. D
    2. C
    3. A
    4. C
    5. D
    Thank
    you!

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