A-1 Audit Reports Flashcards
What conditions indicate possible fraud?
- Pressure
- Opportunity
- Rationalization
Independence in both fact and appearance.
The auditor must be independent of an entity when performing an engagement in accordance with GAAS unless:
a) GAAS provides otherwise
b) the auditor is required by law or regulation to accept the engagement and report on the financial statements
Exam Trick
Sufficient appropriate audit evidence and audit risk
Weak Internal Control =/= Adverse Opinon
General Rule
Unmodified Opinion
The addressee in the audit report is not to management.
What will the section “Management’s Responsibilities for the Financial Statements” of the audit report contain?
MR DIM
- heading “Management’s Responsibility for the financial statements.”
- Design, Implementation & Maintenance of internal control.
What will the section “Auditor’s Responsibility” of the audit report contain?
REPPORTS CRAME
- heading “auditor’s Responsibility”
- auditor is to Express an opinion
- auditor to Plan and perform audit
- audit involves Performing procedures to Obtain evidence
- assessment of Risks of material misstatement
- considers internal control (“Tests”) relevant to preparation and presentation of the financial Statements
- no opinion on the effectiveness of internal Control
- Reasonableness of significant Accounting estimates made by Management
- Evaluate overall presentation
Date of the auditor’s report in relation to responsibility of the auditor
The auditor’s report date shows the final date of auditor responsibility. For comparative financial statements, the audit report date for the most recent audit should be used.
Questions concerning the unmodified audit opinion
GAAS ————> Auditor’s responsibility paragraph
GAAP ————> Opinion paragraph
Three types of Modified Opinion
- Qualified (“Except For”)
- Adverse
- Disclaimer
Type of Unmodified Opinion for GAAP problem
Material
- Qualified “Except For”
Very Material (Pervasive)
- Adverse
Type of Unmodified Opinion for GAAS problem
Material
- Qualified “Except For”
Very Material (Pervasive) (Significant)
- Disclaimer
GAAP problems that may cause an Unmodified Opinion
- Accounting Policy
- Presentation
- Disclosures
- Estimates
GAAS problems that may cause an Unmodified Opinion
- Insufficient Evidence (Qualified or Disclaimer)
- Significant Going Concern Uncertainty (Disclaimer)
- Lack of Independence (Disclaimer)
An emphasis-of-matter paragraph is required in which circumstances?
- Substantial doubt about entity’s ability to continue as a going concern for a reasonable period of time
- To describe a justified change in accounting principles
- Change in audit opinion (may also be an other-matter paragraph, as appropriate)
- Financial statements prepared in accordance with applicable special purpose framework
Examples of events that may need an emphasis-of-matter paragraph, based on auditor judgment
- Uncertainty to outcome of litigation
- Major catastrophe
- Significant related party transactions
- Unusually important subsequent events
An other-matter paragraph is required in which circumstances?
- Alert in audit report that restricts the use of the report
- Change in audit opinion (may also be an emphasis-of-matter paragraph, as appropriate)
- Financial statements of prior period were audited by a predecessor auditor and that audit report is not reissued
- Current period financial statements are audited and presented in comparative form with prior period financial statements that were not audited
- Material inconsistency is identified and requires revision and management refuses to make the revision
- Report on supplementary information in the auditor’s report rather than a separate report
- To refer to required supplementary information
- A report on compliance is included in the auditor’s report
Examples of events that may need an other-matter paragraph, based on auditor judgment
- To describe reasons why the auditor cannot withdraw when the auditor is unable to obtain sufficient appropriate audit evidence due to a management-imposed scope limitation
- Law, regulation or generally accepted practice require or permit the auditor to provide further explanation of the auditor’s responsibilities
- The auditor has been engaged to report on more than one set of financial statements when each set of financial statements has been prepared in accordance with a different general purpose framework
Audit procedures to gather evidence for the basic principle of going concern
ADMITS
a. Analytical procedures
b. Debt compliance
c. Minutes from stockholder and board meetings
d. Inquiry of client’s legal counsel
e. Third parties’ confirmation of financial support arrangements
f. Subsequent events review
Based on procedures performed, what are conditions and events that may be indicative of substantial doubt?
FINE
- Financial difficulties
- Internal matters
- Negative trends
- External matters
Effects of going concern issues on the auditor’s report
Adequate Disclosure
- Unmodified with Emphasis-of-Matter Paragraph
Inadequate Disclosure
- GAAP issue
- Qualified or Adverse
Significant Going Concern Uncertainty
- GAAS issue
- Disclaimer
When the auditor is not independent but is required by law or regulation to report on the financial statements, the auditor should…
…disclaim an opinion and should specifically state that the auditor is not independent. If the auditor chooses to provide the reasons for the lack of independence, the auditor should include all reasons.
Effects of uncertainty on the auditor’s report
No Material Misstatement and Sufficient Evidence
- Unmodified
Material Misstatement Related to the Uncertainty
- GAAP issue
- Qualified or Adverse
Insufficient Evidence (Scope Limitation)
- GAAS issue
- Qualified or Disclaimer
If there is an updated audit opinion that differs from the previous opinion, the auditors should disclose the reason(s) in an emphasis-of-matter or other-matter paragraph that discloses what?
DORCS
- Date of the auditor’s previous report
- Opinion type previously issued
- Reason for the prior opinion
- Changes that have occurred
- Statement that the “opinion…is different.”
What procedures should the auditor perform during the subsequent period?
PRIME
- Post balance sheet transactions should be reviewed
- Representation letter should be obtained from management regarding any events that occurred during this time that may require adjustments or disclosures
- Inquiry of management
- Minutes of stockholders, directors, and other committee meetings should be read
- Examine latest available interim financial statements and compare to the audited financial statements
What is the subsequent period?
The period between the date of the financial statements and the date of the auditor’s report
Auditor’s responsibility after the original date of the auditor’s report
No active responsibility to make inquiries or perform procedures. However, if the auditor is aware of information before the report release date, then the auditor should determine if disclosures or adjustments are necessary.
If a client refuses to make necessary disclosures that financial statements cannot be relied upon, then the auditor must…
DAR
- Disassociate
- Alert agencies
- alert Relying parties
