15.7 Flashcards
The auditor’s report refers to the U.S. GAAP-based financial statements, which are customarily considered to include the balance sheet and the statements of
Income, changes in equity, and cash flows.
The balance sheet, statement of income, statement of changes in equity, and statement of cash flows are the financial statements upon which the auditor customarily reports. Furthermore, provided that the entity has items of other comprehensive income, U.S. GAAP require that comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements that constitute a full set of financial statements. The format may be (1) one continuous statement consisting of net income and other comprehensive income (OCI) or (2) two separate but consecutive statements. The introductory paragraph identifies the titles of the entity’s financial statements. However, the statement of changes in equity and a separate statement of comprehensive income are not separately reported on the opinion paragraph. The reason is that changes in equity and comprehensive income are included in financial position, results of operations, and cash flows.
Does an auditor make the following representations explicitly or implicitly in the opinion paragraph when expressing an unmodified opinion?
Conformity with the applicable Financial reporting framework:
Adequacy of disclosure:
Explicitly
Implicitly
The opinion paragraph of the auditor’s report explicitly states whether the financial statements are in accordance with the applicable financial reporting framework, e.g., U.S. GAAP or IFRS. The adequacy of disclosure is implicit in the auditor’s report. Adequacy of disclosure is implied if the report does not mention disclosure.
A CPA is associated with the financial statements of an issuer but is not independent. With respect to the CPA’s lack of independence, which of the following actions by the CPA might confuse a reader of such financial statements?
Issuing a modified auditor’s opinion explaining the reason for the auditor’s lack of independence.
A modified opinion is a qualified opinion, adverse opinion, or disclaimer of opinion. When a CPA lacks independence, (s)he should disclaim an opinion and state specifically that (s)he is not independent. This guidance is in the AICPA’s pronouncement on compilations. It does NOT apply to engagements performed for issuers (public companies). Issuing a modified opinion would improperly imply that an audit was performed in accordance with GAAS (PCAOB AS 3320).
Which of the following phrases will an auditor most likely include in the auditor’s report on an engagement for a nonissuer when expressing a qualified opinion because of inadequate disclosure?
Except for the omission of the information.
A report qualified for inadequate disclosure includes a basis for qualified opinion paragraph preceding the opinion paragraph. The opinion paragraph states, “In our opinion, except for the omission of information described in the Basis for Qualified Opinion paragraph, the financial statements referred to above present fairly . . .”
The auditor’s judgment concerning the overall fairness of the presentation of financial position, results of operations, and cash flows is applied within the framework of
GAAP
Reporting standards require the auditor to state whether the audited entity’s financial statements are presented in conformity with GAAP. Without an applicable reporting framework, the auditor would have no uniform standard for judging fairness of presentation.
An auditor’s report in an audit of a nonissuer includes the following statement: “The financial statements referred to above do not present fairly the financial position, results of operations, or cash flows in conformity with U.S. generally accepted accounting principles.” This auditor’s report was most likely issued in connection with financial statements that are
Misleading.
The language quoted states an adverse opinion. The essence of an adverse opinion is that the statements reported on, as a whole, are materially and pervasively misstated. If financial statements fail to meet the standards, they are misleading.
When financial statements are materially but not pervasively misstated, an auditor may express a
Qualified opinion:
Disclaimer of opinion:
yes
no
A material misstatement results in either a qualified or an adverse opinion. The auditor must exercise judgment as to whether the misstatement is pervasive. If the misstatement is not pervasive, the auditor should express a qualified opinion.
An auditor may reasonably express a “subject to” qualified opinion for
Lack of consistency:
Departure form an applicable financial reporting framework:
No
No
The phrase “subject to” should not be used in any report. It is not clear or forceful enough (AU-C 705).
Morris, CPA, suspects that a pervasive scheme of illegal bribes exists throughout the operations of Worldwide Import-Export, Inc., a new audit client. Morris notified the audit committee and Worldwide’s legal counsel, but neither would assist Morris in determining whether the amounts involved were material to the financial statements or whether senior management was involved in the scheme. Under these circumstances, Morris most likely should
Disclaim an opinion on the financial statements.
Bribery is a violation of laws or governmental regulations. If the auditor is precluded by management or those charged with governance (e.g., the audit committee) from obtaining sufficient appropriate evidence to evaluate whether material noncompliance with laws or regulations has (or is likely to have) occurred, the auditor should disclaim an opinion or express a qualified opinion.
Trotman, Inc., a nonissuer manufacturing company, has engaged a CPA to audit its financial statements for the year ended June 30, Year 2. The CPA observed the physical inventory count at June 30, Year 2, but no physical inventory had been taken at June 30, Year 1. The CPA has not been able to become satisfied as to the value of the inventory at June 30, Year 1. Assuming that the financial statements are fairly presented in all other material respects, the CPA should
Disclaim an opinion on the results of operations and cash flows but express an unmodified opinion on the balance sheet.
An inability to obtain sufficient appropriate evidence may result from, among other things, circumstances related to the nature or timing of the work. An example is not being able to observe the counting of physical inventories at the beginning of the year. These inventories enter into the determination of net income and cash flows. If the possible effects of this scope limitation are material and pervasive to the results of operations and cash flows, the auditor cannot express an opinion on them. However, the auditor can express an unmodified opinion on year-end financial position.
An auditor has been engaged by the State Bank to audit the XYZ Corporation, a nonissuer, in conjunction with a loan commitment. The report would most likely be addressed to
the state bank.
Occasionally, an auditor is retained to audit the financial statements of an entity that is not his or her client. According to AICPA standards, the report customarily is addressed to the client and not to those charged with governance of the entity whose financial statements are being audited.
When management will not permit inquiry of outside legal counsel, the audit report will ordinarily contain a(n)
Disclaimer of opinion.
The auditor may be unable to determine the legality of certain acts or the amounts associated with them because of an inability to gather sufficient appropriate audit evidence. For example, management may not permit inquiry of external legal counsel. In these circumstances, the scope limitation requires a qualified opinion or a disclaimer. However, if (1) the auditor cannot obtain sufficient appropriate evidence because of a management-imposed limitation, and (2) the possible effects of undetected misstatements are material and pervasive, the auditor should disclaim an opinion or withdraw from the engagement.
A limitation on the scope of an audit sufficient to preclude an unmodified opinion is most likely to result when management
Is unable to obtain audited financial statements supporting the entity’s investment in a foreign subsidiary.
An auditor’s inability to obtain sufficient appropriate evidence may arise from, among other things, circumstances related to the nature or timing of the auditor’s work. An example is an inability, not resulting from a management-imposed limitation, to obtain audited financial statements of a long-term investee. If the possible effects are material, the auditor expresses a qualified opinion or disclaims an opinion, depending on pervasiveness.
In May Year 3, an auditor reissues the auditor’s report on the Year 1 financial statements at a former client’s request. The Year 1 financial statements are to be presented comparatively with subsequent audited statements. They are not restated, and the auditor does not revise the wording of the report. The auditor should
use the original report date on the reissued report.
Use of the original date in a reissued report removes any implication that records, transactions, or events after such date have been audited or reviewed. However, the predecessor auditor should perform the following procedures to determine whether the report is still appropriate: (1) read the statements of the subsequent period, (2) compare the prior statements with the current statements, and (3) obtain written representations from management and the successor auditor about information obtained or events that occurred subsequent to the original date of the report.
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
Management does not provide reasonable justification for a change in accounting principles.
If (1) the new principle and the method of accounting for the effect of the change are in accordance with the applicable reporting framework, (2) disclosures are adequate, and (3) the entity has justified that the principle is preferable, the auditor expresses an unmodified (unqualified) opinion. Otherwise, if the change is material, the misstatement results in expression of a qualified or an adverse opinion in the report for the year of change.
