1st Half of AUD Flashcards
Issuers vs nonissuers
- Issuers = public companies, must perform an intergrated audit
- Nonissuers = private companies, may perform a FS audit only or an integrated audit
Standard setting body for issuers, nonissuers, and government organizations for generally accepted auditing standards (GAAS)
1) Issuers - PCAOB (PCAOB AS)
2) Nonissuers - AICPA (Statements of Auditing Standards (SAS))
3) Government - Governmental Accountability Office (GAGAS)
Inherent limitations
1) The nature of financial reporting - some FS items are subject to inherent level of variability because they are based off of management judgments (AR bad debt, obsolete inventory)
2) The nature of audit procedures - Management may not provide complete information, or fraud may be concealed in which it is difficult to detect (Impairments, law suits, etc)
3) Timeliness of financial reporting and the balance between cost and benefit
Fraud vs Error
- Fraud = intentional
- Error = unintentional
What to take into account when forming an opinion on the financial statemetns
1) Whether sufficient appropriate audit evidence was obtained (as required by GAAS) and
2) Whether the financial statements are prepared in accordance with the requirements of the applicable framework (ie GAAP)
Departure from GAAP in FS
Departure from GAAP is permissible if financial statements would be otherwise misleading (unmodified/unqualified opinion)
Types of Opinions
1) Unmodified / Unqualified (GAAS/GAAP) - clean opinion
2) Qualified Opinion (GAAS or GAAP) - except for… financial statements are presented fairly. Material.
3) Adverse opinion (GAAP) - financial statements do not present fairly the financial position. Material and pervasive.
4) Disclaimer of opinion (GAAS) - the auditor does not express an opinion on the FS. Material and pervasive.
Contents of the Audit Report for an unmodified opinion
1) Title - “Independent” Auditors Report
2) Addressee - GR: Not management
3) Intro paragraph
4) Managements Responsibility section (GAAP)
5) Auditors responsibility section (GAAS)
6) Auditor opinion (GAAP)
7) Other reporting requirements
8) Auditors Signature
9) Auditors Address
10) Date of the Auditors report - dual dating
Management’s Responsibility section: Unmodified opinion
MR DIM
- Heading: Managements(M) Responsibility(R)
- A statement that this responsibility includes the design(D), implementation(I), and maintenance(M) of internal controls
Auditor’s Responsibility section: Unmodified opinion
REP PORTS CRAME
- Heading: Auditor’s Responsibility (R)
- A statement that it’s the responsibility of the auditor to express(E) an opinion
- A statement that standards require the auditor to plan(P) and perform the audit
- An audit involves performing(P) procedures to obtain(O) audit evidence
- Includes the assessment of risks(R)
- Auditor considers internal control (T-‘tests’) relevant to the fair presentation of the financial statements(S) (with or without opinion on the effectiveness of internal controls(C) )
- Audit includes evaluating accounting policies used and the reasonableness(R) of significant accounting(A) estimates made by management(M), as well as evaluating(E) the overall presentation of the FS
Contents of the Audit Report for an unqualified opinion
1) Title - “Report of Independent Registered Public Accounting Firm”
2) Addressee: GR not management
3) Opinion section: 1st section (GAAP)
4) Basis for opinion section (PCAOB)
5) Critical Audit Matters
6) Signature
7) Report Date: final date of the auditors resoponsibility
Basis for Opinion section: Unqualified opinion
RR AA PP MM EE EE
- Responsibility
- auditor is a public accounting firm and audit was conducted in accordance with standards of the PCAOB
- Plan and perform
- Free of material misstatement
- examining evidence
- evaluating estimates
Critical Audit Matter (CAM)
A matter that was communicated to the audit committee that:
1) relates to accounts or disclosures that are material to the FS and
2) involved especially challenging, subjective or complex auditor judgment
For each CAM identified, the audit report should include
IPAD
1) Identification (I) of the CAM
2) description of the principal (P) considerations
3) description of how the CAM was addressed (A) in the audit
4) reference to the relevant accounts or disclosures (D)
Filing of Form AP
Public company/issuer. Must include the name of the engagement partner
Do confirmations provide evidence on valuation?
Can confirmation be based on single transactions rather than entire customer balances?
No they do not provide reliable evidence on valuation, only existence and rights.
Yes, it may be easier for certain respondents to given information on one transaction.
Is the assessment of fraud risk required in a review of annual financial statements?
No
What is the main difference between an audit and a review?
An audit requires an understanding of internal control, whereas a review does not (unless it is an interim review where the annual FS are audited)
Similarities of an audit and review
Both provide assurance (a review provides negative assurance) and both require independence
Which of the following are required as part of an auditor’s planning process?
1) Understanding the design of controls
2) Determining whether controls have been implemented
3) Evaluating the operating effectiveness of controls
4) Documenting the understanding of internal control
1) Yes
2) Yes
3) No
4) Yes
Improper disclosure of a going concern situation
GAAP violation = qualified or adverse opinion
When is an emphasis of matter paragraph required? (GAASP)
G - There is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time
A - To describe a justified change in accounting principle
A - A change in audit opinion
S/P - The FS are prepared in accordance with applicable special purpose framework
Subsequent event evaluation period (management)
Management is responsible up to date financial statements are issued
Subsequent period
The period between the date of the FS and the auditors report
Subsequent period procedures to be performed (PRIME)
P - Post Balance Sheet Transactions
R - Representation letter
I - Inquiry of legal counsel and management
M - Minutes, review minutes from subsequent period
E - Examine the latest available interim FS and compare with the FS under audit
