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AUD EXAM > A1 > Flashcards

A1 Flashcards

1
Q

Which standard provide the most authoritative US auditing guidance for non-issuers and issuers, and who issues those standards?

A

Non-issuers: Statements on Auditing Standards (SASs) issued by the AICPA Auditing Standards Board

Issuers: Auditing Standards (ASs) issued by the Public Company Oversight Board (PCAOB)

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2
Q

State the primary purpose of an audit

A

To provide financial statement users with an opinion on whether the financial statements are fairly presented, in all material respects, in accordance with the applicable financial reporting framework

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3
Q

What are the five general GAAS requirements related to the conduct of an audit?

A 
Professional Skepticism 
Ethical Requirements 
Professional Judgement 
Sufficient and Appropriate Audit Evidence 
Compliance with GAAS
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4
Q

Identify three inherent limitations of an audit

A

The nature of financial reporting
The nature of audit procedures
Timeliness of financial reporting and the balance between benefit and cost

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5
Q

When should an auditors opinion be modified?

A
  • The auditor determines that the financial statements as a whole are materially misstated (GAAP issue)
  • The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement (GAAS issue)
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6
Q

List in order the primary sections of an unmodified audit opinion (non-issuer)

A
  • Title: Independent Auditor’s Report
  • Addressee: Based on the circumstances of the engagement
  • Introductory Paragraph: We have audited the accompanying FS of…
  • Management Responsibility for the Financial Statements: Management is responsible for the preparation and fair presentation of the FS
  • Auditor Responsibility: Our responsibility is to express an opinion on the FS based on our audit
  • Opinion: In our opinion, the FS referred to above present fairly, in all material respects, the financial position…
  • Report on Other Legal and regulatory requirements: if applicable
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7
Q

What should be included in the introductory paragraph of the unmodified audit opinion (non-issuer)

A
  • The entity whose FS have been audited
  • A statement that the FS were audited
  • The title of each FS audited
  • Dates or period covered by each FS
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8
Q

What should be included in the management’s responsibility paragraph of the unmodified audit opinion (non-issuer)

A
  • An explanation that management is responsible for the preparation and fair presentation of the FS in accordance with the applicable financial reporting framework
  • A statement that this responsibility includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error
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9
Q

What should be included in the auditor’s responsibility paragraph of the unmodified audit opinion (non-issuer)?

A
  • A statement that it is the auditors responsibility to express an opinion on the FS based on the audit
  • A statement that the audit was conducted in accordance with US GAAS
  • A statement that standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the FS are free from material misstatements
  • A description of the audit
  • A statement whether the auditor believes the audit evidence obtained is sufficient and appropriate to provide a basis for the auditor’s opinion
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10
Q

What should be included in the opinion paragraph of the unmodified audit opinion (non-issuer)

A
  • A statement that the FS present fairly, in all material respects, the financial position of the entity as of the balance sheet date and the results of operations and it’s cash for the period then ended, in accordance with the applicable financial framework
  • Identification of the applicable financial reporting framework and its origin
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11
Q

Where in the standard unmodified opinion (non-issuer) does the auditor refer to 1. The applicable financial reporting framework (GAAP or IFRS) and 2. Generally accepted auditing standards (GAAS)

A
  1. The applicable financial reporting framework is referred to in the management’s responsibility paragraph and opinion paragraph
  2. GAAS is referred to in the auditor’s responsibility paragraph
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12
Q

List in order the primary sections of an unqualified audit opinion (issuer)

A 
Title 
Addressee
Opinion 
Basis for Opinion 
Signature,Tenure, Location
Report Date
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13
Q

What should be included in the opinion section of the unqualified audit opinion (issuer)?

A
  • The name of the company whose FS have been audited
  • A statement identifying each FS and any related schedule that has been audited
  • Dates or periods covered by each FS and related schedule
  • A statement indicating that the FS were audited
  • An opinion that the FS present fairly, in all material respects, the financial position of the company as of the balance sheet date and the results of its operations and its cash flows for the period ended in conformity with the applicable financial reporting framework (ex. GAAP)
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14
Q

What should be included in the first paragraph under the Basis for Opinion section in the unqualified audit opinion (issuer)?

A
  • A statement that the FS are the responsibility of the company’s management
  • A statement that the auditor’s responsibility is to express an opinion on the FS based on the audit
  • A statement that the auditor is a public accounting firm registered with the PCAOB (United States) and is required to be independent with respect to the company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB
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15
Q

What should be included in the second paragraph under the Basis for Opinion section in the unqualified audit opinion (issuer)?

A
  • A statement that the audit was conducted in accordance with the standards of the PCAOB
  • A statement that PCAOB standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the FS are free of material misstatement, whether due to error or fraud
  • A statement that the audit included:
    •performing procedures to assess the risk of material misstatement
    •examining, on a test basis, evidence regarding the amounts and disclosures;
    •evaluating the accounting principles used and significant estimates made by management
    •evaluating the overall presentation of the FS
  • A statement that the auditor believes that the audit provides a reasonable basis for the auditor’s opinion
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16
Q

Where in the standard unqualified opinion (issuer) does the auditor refer to 1. the applicable financial reporting framework (GAAP) and 2. the standards of the Public Company Accounting Oversight Board (PCAOB)

A
  1. Opinion Paragraph

2. Second paragraph under the Basis for Opinion section

17
Q

The auditor’s report should not be dated earlier than the date on which the auditor has obtained sufficient appropriate audit evidence. This should include evidence that what three things have occurred?

A
  1. Audit documentation has been reviewed
  2. Financial statements have been prepared
  3. Management has taken responsibility for the FS
18
Q

What is the definition of a critical audit matter (CAM)

A

A matter that was communicated or required to be communicated to the audit committee and that:

  • relates to accounts or disclosures that are material to the FS; and
  • involved especially challenging, subjective, or complex auditor judgement

Note: audit reports for issuers must include any CAM’s or ayate that the auditor determined that there were no CAMs

19
Q

In determining critical audit matters (CAM’s), what factors should the auditor consider

A

The auditor’s assessment of the risks of material misstatement, areas of significant judgement or estimation by management, nature and timing of unusual transactions, the degree of subjectivity in applying audit procedures, and the extent of specialized skill or knowledge regarding a matter

20
Q

In most audits of issuers, how many CAM’s will an auditor normally identify

A

At least one

21
Q

For each CAM identified, what should the audit report of an issuer include (IPAD)

A
  • Identification of the CAM
  • Description of the Principal considerations that led the author to determine the matter was a CAM
  • Description of how the CAM was Addressed in the audit
  • Reference to the relevant financial statement accounts or Disclosures
22
Q

What should the auditor of an issuer do if the auditor determines there are no CAMs

A

State: We determined that there are no critical audit matters

23
Q

When would an auditor use professional judgement to determine whether to issue a qualified opinion or an adverse opinion?

A
  • when audit evidence indicates that there is material misstatement of the FS
  • a qualified opinion is issued when the auditor concludes that misstatements, individually or in the aggregate, are material but not pervasive to the financial statements
  • an adverse opinion is issued when the auditor concludes that misstatements, individually or in the aggregate, are both material and pervasive to the FS
24
Q

Describe the circumstances in which a material misstatement of the FS may arise

A

Misstatements may arise in relation to:

  • the appropriateness of accounting policies
  • the application of accounting policies
  • the appropriateness of the FS presentation
  • the appropriateness of the adequacy of disclosures in the financial statements
25
Q

If an opinion is qualified due to material misstatement of the FS on an issuer audit report, where does the paragraph explaining the qualification appear?

A

A paragraph should be placed immediately following the opinion paragraph. There is no heading for this paragraph and it should include:

  • all substantive reasons that lead the auditor to conclude that there has been a departure from GAAP
  • Disclosure of the principal effects of the subject matter on the qualification on financial position, results of operations and cash flows, if practicable
    •If the effects are not reasonably determinable, the report should state so
    •If such disclosures are made in a note to the financial statements, the explanatory paragraph may be shortened by referring to it
26
Q

Compared to a standard unqualified opinion for an issuer, determine the paragraph that are modified in an audit export when the following opinions are issued due to financial statement issues (misstatements)

  1. Qualified
  2. Adverse
A
  1. Opinion Section - Except for
    Additional Paragraph
    Basis for Opinion Section - standard

2.
Opinion Section - do not present fairly
Additional Paragraph
Basis for Opinion Section - standard

27
Q

Is an auditor required to report on CAMs when issuing an adverse opinion

A

No, the auditor is not required to report on CAMs when an adverse opinion is expressed

28
Q

When would an auditor use professional judgement to determine whether to issue a qualified opinion or a disclaimer of opinion?

A
  • When there is a limitation on the scope of the audit
  • A qualified opinion is issued when an auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion and the auditor determines that the possible effects could be material but not pervasive
  • A disclaimer of opinion is expressed when the auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion and the auditor determines that the possible effects could be both material and pervasive
29
Q

Identify some examples of scope limitations

A

Restrictions on the auditor’s ability to perform auditing procedures may be caused by:

  • time constraints
  • inability to observe inventory
  • inability to confirm receivables
  • inability to obtain audited FS of a consolidated invested
  • restrictions on the use of auditing procedures
  • inadequacy of accounting records
  • refusal of the client’s attorney to respond to inquiry
  • refusal of management to provide a representation letter
30
Q

What situations may result in a disclaimer of opinion in an audit report

A
  • Pervasive inability to obtain sufficient appropriate audit evidence
  • Lack of independence (always results in a disclaimer)
  • Going concern uncertainty (note: if adequate disclosure of going concern exists, the auditor may choose between an unqualified opinion with an explanatory paragraph or a disclaimer of opinion)
31
Q

If an opinion is modified on a non issuer audit report, where does the paragraph explaining the modification appear?

A

This would appear prior to the opinion paragraph. The “basis for modification” paragraph should use the appropriate heading such as:

  • basis for qualified opinion
  • basis for adverse opinion
  • basis for disclaimer of opinion

AUD EXAM (6 decks)

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