A1 Audit Report Flashcards
M1 Professional Standards:
An audit engagement requires the auditor to performed the audit in accrodanace with generally accepted auditing stanadards (GASS). Statement of Audit Standards (SAS) AU-C the standard body is the AICPA for nonissuers or private co. : audits of historical f/s, special reports, interim f/s(where the annual f/s has been audited. Public co.accounting oversight bd.(PCAOb); audiing standards PCAOB AS are for issurers or public co.: audits of historical f/s, special reports, interim f/s. Generally Accepted Gov. Auditing standards (GAGAS) for Governmental Accountability Office: for government agency, organizations, programs and entities that recieve governemtn funds.: financial of performance audits of gov. organization, programs and agency that recieved govt. fundng. Statement of Standards for Attestation Engagements (SSAE) AT-c governed by the AICPA to provide guidnance for attestation enegaements : examination, review, or agreed-upon procedures report on a subject matter or an assertation about a subject matter that is the responsibilty of another party. Statement of Standards for accounting and review services (SSARS) ar-c VIA aicap to provide guidance on unaudited f/s and financial information for nonissurers (private): prepation, compilation,and review of historical financial statements,information and proforma, and forecast. Code of professional conduct: ET, AICPA provide members (AICPA) with guidelines for behavior in the conduct on the professional affairs. Statement of QC standards QC AICPA: Guidance on CPA firms qc systems consisting of policies and procedures designs in compiling with standards and legal and regulatory requirement reporting. for CPA firms providing audits, attestation, accounting and review services.
What are the audit guidance for the GAAS hierarchy
- Most Authoritative: Apply professional judgement based on SAS nonissurers (private) and PCOAB issurers (public) and be prepared to justify any departure from presume mandatory requirements. Specific language that used within standards to clarify the auditors level of responsibility: Must or is required: Unconditional requirements that must be followed which requirements are relevant. Should: Indicate a presumed mandatory requirement must be followed except in rare circumstanances when departure from standard is permitted if there is appropriate justification, alternative and documentation. May, might, and could: indicate explanatory material that DOES NOT impose a professional requirement for performance. 2. Interpretive Publications: (Right in the middle most authoritative and least authoritative): are publication on how SAS should be applied. They are not considered standards. they are considered guidance for auditors. auditors must be able to explain and justify how achievement done without uses standards. Examples include: Auditing interpretation of GAAS, exhibits to GAAS, auditing guidance in AICPA Audit an dAccounting Guides, and AIPCA Audinging Statement of Positions (SOP). 3. Other Auditing Publications: (Least Authoritative) /these publications are helpful to auditors: Condiered proving guidance Be able to expain when doing procedure with out publications. Publication references: Auditing articale : Journaly of accounting or other a=professional accoutning journal, aditing articles, AICPA CPA lettes textbooks,.
A defition of the term GAAS
Is a measure of the quality of an auditors performance and guide the auditor in a properly planned audit.
In the hierarchy of authoritative language, could means
Could, May, and mght, indicate explanatory material that DOES NOT impose a professional requirment for perfomance.
auditor must have a attention and understanding of subject matter. must used his professional judgement.
the term GAAP is an accounting term that
GAAP changes over time so: GAAP : encompassed the convention, rules, and procedures necessary to define U.S. accepted accounting practices at a particular time.
Most authoritative guidance for issuser and nonissurers are
PCOAB and AS issuer public. AICPA SAS non issurer private.
Which term is used within standard as presumed mandatory
Should: all case must follow
M2: Audit Engagement.
Auditor comply to applicable framework: GAAP, IFRS, Special Purpose: contractual or regulation procedure. Management responsibility is with: F/S and I/C in accrodance with their framework. Auditor responsibility is to Attest (examin) functions and give an opinion on f/s based on 1. professional skepticism: : -judgement, make assessment yourself each year and DO NOT RELY ON OTHER AUDITORS OPINION WHO CONDUCTED AUDIT PROEVIOS YEAR. - audit evident that contradicts other auditors evidence. - rely on documentation and respond to inquiries that may be used as audit evidence -indicate possible fraud - in some case suggest the need for audit procedures in addition to GAAS. - auditors should never assume that mangment is dishonest nor assume unquestioned honesty. -use third party confirmations 2. comply with relevant eithical requirements: - comply with egagement and be independent in both fact and apperance. - AICPA Code of Professional Conduct. -State Board -applicable regulatory agencies -comply with GAAS 3. excercising professional judgement throught the audit: - in planning and performing audit -make decision on 1 materiality 2. audit risk 3. NET: Nature: (a) control test on segration of dututies, approval by management on certain dollar thresholds and reconciling accounts and (b) substance test: proving intangible asset, cash, a/r and inventory balance; Extent based on I/c is more work need or less work based on strength of I/c; and timing: strong accounting system review interim f/s or weak review y- bal. 4. evaluate whether sufficient appropriate evidence ( to support audit opinion and not f/s) has been obtain. 5. Drawing conclusion based on the audit evidence obtained. 4. obtain sufficient appropriate audit evidence: must have reasonable assurance based on obtaining evidence to reduce risk to an acceptable low level on audit opinion. EXAM TRICK; WEAK I/C DOES NOT EQUAL ADVERSE OPINION. SOME TIMES MORE WORK NEEDS TO BE CONDUCTED ON WEAK SYSTEM AND LESS ON STRONG SYSTEMS. 5. comply with GAAS: via audit standards of PCOAB ( public issurers; Interational standards on Auditing ISA for IFRS; Gov. auding standards:GAGAS; audit standards for specific jurisdication or countries. Reasonable Assurance and inherent (can happen any way) limitation of an audit; Must have reasonable assurance that audit is free from material misstatements whether due to error or fraud. high but not absolute level of assurance.in or to obtain reasonable assurance auditor must : 1. plan the work and supervise 2. determine and apply materiality levels 3. identify and assess risk of material misstatement,whether fraud or error. 4. obtain sufficient appropriate evidence. Nature of Financial reporting: some f/s are subject to inherent levels of variability must test a/r and bad debt, inventory and obsolete, PPE, life and salvage; Intangible cash and cash equiv, invest balances, impairments, and warranties; contingencies and lawsuits. Nature of audit procedures; there must be practical and legal limits on an auditors ability to obtain evidence including : managment may not have given auditors all the information, fraud concealed that it is difficult to detemine. An audit is neither an investigation into wrong doing nor does the auditor have specific legal powers. Fraud are intentional and errors are unintentional. Timeliness of financial reporting and the balance between cost and benefit; - plan audit so that it is performed effectively -direct audit to the most expected risk area of materaial misstatement -using testing and other means of examining population of missistatements. Determine nature and scope of the engagment by auditors, aucdit committee and management: -some audits are single periods ( 1 FY) or multi periods -may be on complete f/s, single f/s or specific elemnent (A/r), account, programs, or items of a f/s. Overall objective of audit engagement: 1 of 2 objective of F/s audit: to obtain reason assuarnce that they are free from material misstatements due to fraud or errors.which enable an auditor to form an opinion required by GAAS. non issure+ 20f 2 objective of f/s and i/c: issurer: Express an opinion on the effectiveness of company’s i/c of f/s -Plan and perform the audit to obtain reasonable assuarnce that they are free from material misstatements due to fraud or errors.which enable an auditor to form an opinion required by GAAS. non issure+
A term that identifies a requirement of audit evidence is
Getting the APPROPRIATE information to determine the audit evidendence to obtain a reasonable opinion. Non get resonable. resonable is based on audit opinon.
An auditor is exercising professional skepticism if he does not rely on information given to him by client or authenticate
does not rely and not authenitcate.
To obtain reasonable assurance should an auditor that an audit is free from material misstatement he should paan and supervise assistant work or examin all evidnence
plan and supervise assistant. No reviewing all evidence not a effiecient or effective way to conduct an audit.
M3: Forming an Audit Opinion
An auditor should form an opinion f/s are presented fairly in all material respect in accordance to financial reporting framework, GAAP, IFRS, Auditor should take into account the following - sufficient evidence was obtain require by GAAS - f/s are prepared in accordance with framework/ - f/s adequately disclose the significant accounting policies selected and applied and including a decription of applicable framework. - reasonable accounting estimates by management -f/s is relevant, reliable, comparable, and understandable - f/s provide adequate disclosure to enable the intended users to understand the effect of materials transactions and events the information conveyed. - termanology used on f/s including titles are appropriate - overall structure of f/s are presented fairly. f/s include related notes of underlying tranasctions and events in a manner that achieve fair presentation. DEPARTURE FROM GAAP IS PERMISSABLE IF F/S WOULD OTHERWISE BE MISLEADING { UNMODIFIED.UNQUALIFIED OPINION} MUST EXPLAING WHY DEPARTED FROM GAAP. Auditor uses GAAS guidelines to perform audit ( how inventory s/b observed). Auditor refers to GAAP for financial reporting framework. to evaluate how transaction are recorded and reported fairly presented.( land should not be depreciated.) Types of Opinions: 1. Unmodified (non issuer) or Unqualifed (issuer) = Clean opinion.f/s present fairly, in all material respect, the financial position, results of ops, and CF of the entity in conformity with applicable financial reporting frameworks. Doesn’t mean good resource for investor if company is doing bad audit f/s are presented fairly. things that are non material are considered unmodified or unqualified. 2. Modified: f/s as a whole are materially misstated or auditor is unable to obtain sufficient appropriate audit evidence to conclude that the f/s as a whole are free from material missstatments. 2A. Types of modified opinions: a. Qualified opinion: GAAP or GAAS: except for the effects of the matters to which the qualifiication relates, the f/s are presented fairly in all material respect to financial position, results of ops. CF in conformity with framework. If there is a failed GAAP disclosure on one line item, it would be considered Qualified opinion due to f/s issue. If audit could not obtain vendor inform on ap and represent 20% of liab, would be considered a Qualified opinion due to audit issue b. Adverse :GAAP f/s do not present fairy the financial position…… if management refuse to correct an transaction, ie, fixed assets are not properly depreciated then f/s are not presented fairly. adverse opinion. Pervasive and GAAP problem. B/s wrong, i/s wrong, RE, wrong. c. disclaimer GAAS: auditor does not express an opinion of the f/s. don’t know and don’t say. No piece meal ( part if uqualified and part is disclaimed.) Definition of pervasive: effects on the f/s on the auditors professional judgement based on: -thing are not confined to specific elements, accounts, or items on f/s -if so confined, represent substantial proportion of the f/s ; or - are disclosures fundamental to the users understanding of the f/s GAAP GAAS Materiallity of problem f/s are material inability misstate to obtain sufficient appropriate audit evidence none material unmodified unqualified material problem but non pervasive qualified qualified material and pervasive adverse disclaimer very material problem withdraw: F/s: false, fraud, deceptive, missleading.
does change in estimated on f/s require an emphasis on matter of fact paragraph
no estimate do not require this writing.
A1 Sim 1: When you can not gather enough information to from an opinion is this a GAAP problem or GA;AS problem
First thing is to find out if the problem is a GAAP or GAAS problem. This is a GAAS problem not enough information. Scope limitation. This Sim was based on group audit and auditors were unable to get all financial information. in this type of problem ask; is the a gaap or gaas problem. this is a gaas problem due to scope limitation. if material = qualified if material and pervasive; disclaimer if something is non material = unmodified or unqualified. if material and pervasive yet not scope limitation than adverse. or gaap problem Scope limitation: if material but not pervasive than it is an qualified opinion.: also called MODERATE Flow on audit: opinion: modified; intro paragraph: no need to change intro; auditor responsibility paragraph: modify sentence should be for the basis of opinion; Opinion paragraph: modify; Basis of opinion: ALWAYS A CHANGE IN BASIS WHEN THERE IS QUALIFIED (insert preceeding (or before) or insert following: insert preceeding or before to explain basis of modified opinion. If problem is material and pervasive than it is disclaimer also called: HIGH Flow on audit: opinion: disclaimer; intro paragraph: modify always whether it is GAAP of GAAS” we were engaged to audit f/s and not we audited f/s; auditor responsibility paragraph: modify; Opinion paragraph: modify; Basis of opinion: (insert preceeding (or before) or insert following: insert preceeding opinion If it is non or immaterial than it is unmodified or unqualified. Flow on audit: opinion: unmodified; intro paragraph: no change; auditor responsibility paragraph: no change; Opinion paragraph: no change; Basis of opinion: (insert preceeding (or before) or insert following: not required GAAP problems are adverse problem: we have enough information but the F/s are wrong.
M4: Unmodified nonissurer private (clean opinion)
- Contents for Audit report: - Title: auditors independents should be put in the title section - Addressee: GR; report should be addr ess to BOD or Audit committee etc. not Management. - Intro Paragraph: ID entity of audited f/s; state f/s have been audited; identify title of each f/s (b/s, i/s sfc, oe); and specify date(s0 of period(s) covered by each f/s. -Mgt Responsible:Mgmt responsible for f/s and the desgn, implementation and maintenance of i/c relevant to prep. and fair presentation of f/s free from material misatement due to fraud and errorwithing the framework of GAAP (IFRS) -Auditor responsibilty section: Resonsible to express and opinion of f/s om accordance with GAAS and auditor has planned and perform audit and assess risk to obain evidence for reasonable assurance that f/s are free from material misstatements due to fraud or error. Also has considered and test i/c relevent to f/s and evaluated mangement accounting estimates and accounting policies used. -Auditor Opinion: Explicit statement on f/s were presented fairly on f/s titles and ID applicable framework could also include PCAOB if required.. -Other responsibilities: report inany other legal or regulatory responsibilities -Auditor signature: manual and printed plus firms names -Auditors adrress -date of auditors report: should be dated no earlier than the date on which suditor has obtained sufficient appropriate audit evidence to base f/s: such as documentation. all f/s including notes, management has state is it respnisble for f/s when there are comparative sttements, the most recent audit shoud be used for date. There can be two sets of standards: GAAS in the Audit responsibilty and PCAOB in accordance with GAAS in the opinion section.
Unqualified issuer public opinion (clean opinion)
- content of the Audit Report: - title: must include Report of independent registered public accounting firm (PCAOB compliance) -Addressee: to BOD and Shareholders. Not Mgmnt -Opinion (in the 1rs section): name ofcompany being audited; statement ID each type on f/s; date of period covered by f/s and related schedule that has been audited; Explicit statement on f/s were presented fairly on f/s titles and ID applicable framework could also include PCAOB if required. Basis of opinion: a statement that says managemt is responsible for f/sand auditor responsible to express and opinion; auditior are registered with PCAOB and required to be in conducted in accordance with PCOAB standards and apply rules and regs of SEC; auditors plan and perform audit to otain reasonable assurance of ff/s free of material and missleading statement due to error and fraud, perform procedures to assess risk,; examin and test i/c and evidence n f.s; evaluate accounting prin and estimates and overall f/s critical audit matter(CAM) this is person judgemtn section that auditors do, It does not alter opinion. CAM ID in ID CAM; decription of principal conderations that led to auditors CAM, descrip of how CAMwas addressed; refererence f/s account or disclosure and include items discussed on CAM. If CAM not ID, auditor included in letter there were no CAM after discussing CAM requirements. -Language that could be disclaiming, qualifying,restricted or minimizing auditor’s responsibility is not appropriate and not used in CAM -Auditor has the option of discussing prior CAM matters- -Based on SEC act 17a-5 (broker and dealers, ( and Invest Co. Act 1940( other than BD companies, companys such asemplyee puch, saving, and simular paln and emerging growth com are not applicaable to CAM. -Management report of IC: normally unqualified co. must have audit and IC reports A5. If not or auditor was not engage to perform ic, he must write something that saids that. -Required auditor reporting of certain audit participants: Form AP for public co for each audit must be submitted to PCAOB within 35 daysof file with SEC about the audit with the follwing: Name of audit firm, name if issurere, date of audit report; date of most recent f/s in audit report; name of engagement partner on recent audit prior ID number,; city and state, whether another firm participated (just lie staff, full name, back ground check needed, and % of number of hours worked.
M4 MCQs: should the audit report include a reference to the US for GAAP and GAAS
yes
is obtaining evidence that is sufficient and appropriate and explicit statement and consistent application of accounting principles and implicit statement
Yes. We believe that the audit evidece = explicit Consistent and examination are implied.or implicit.
Is the audit included evaluating significant est. made by mngmt and disclosure provided reasonable assurance a basic statement in the audit report
audit included evaluating significant est. made by mngmt= yes disclosure provided reasonable assurance a basic statement in the audit report = no
Where is the audit responsibilty to express and opinion on f/s for non issure under GAAS
Under the Auditors responsibility
When an auditor is asked to do an audit by his client on anther company. Who does the auditor address the audit report to
the Client
If there is an single yera audit conducted will audit review prior audit to make sure auditor gave an unmodified opinion
No. this is not relevant. he would still express unmodified.
Does the introductary paragraph speak to nature of engagemetn and specific f/s covered and dates covered.
Yes.
A veer from uS GAAP that leads to an unmodified would not included a statement on sampling risk factors
It would not include this.
Opinion should not include reviews in explicit statement
correct
Is performing procedures to obtain audit evidence an disclosures in f/s part of audit report expressing unmodified or other opinions
yes. this is in the auditors responsibility.
If an opinion is material but not pervasive what type of opinion is it
Qualified
A1 M4 Sim 1:
Remember you first want to know if something is an accounting issue or an audit issue. 1. For example a change in Dep method and using new est and methods prospectively. is fin. So this is an accounting issue but done correctly, however not consistent from last year. Would give a unmodified report and write an emphasis of matter paragraph folowing the opinion paragraph to let readers know o new method was not consistent with previous years. 2. Contingency loss that is possible but not prob. and can not est loss based on attorney letter that was given to auditor. Here, this is another accounting issue wher company followed gaap so auditor should give unmodified and issue wothout modification report becasue audit shoud not ad condition when not necessary. 3. Client refuse to make material JE on capitalization of Lease. No audit problem auditor got information. this is GAAP problem. since can’t determine could be qualifeid or adverse . Modify audit responsibility, Modify opinion because client did not make adjustments thate were not in line with gaap. and add basis for opinion preceeding opinion paragraph.
M5 Modified Opinion Due to F/S issues
GAAP problems: qualified opinion: misstatement is material but not pervasive Adverse: when both material and pervasive Common GAAP problems that I will see on exam: 1. GAAP consistency change ( unjustified) = auditor disagree. 2. Inadequate Dlsclosure 3. Departure from GAAP not jusitified 4. Unreasonable accounting est. Other non GAAP problems 1. Nature of Material Misstatement: based on - appropriation and application of accounting policies - appropriation and disclosure of presentation of f/s 2. Appropriateness of accounting policy: - not in accordance to framework i.e. GAAP - transaction are not presented in a way to achieve fair presentation -had not compiled financial reporting in framework of GAAP 3 Application of Accounting Policies -not applying accounting policy with framework -not applyied policy between periods consistently -there are errors in accounting policy 4. Appropriateness of f/s presentation or disclosure -f/s does not include all disclosure -f/s does not provide disclosure needed to achieve fair presentation -Certain financial statements (SCF) have been omitted or left out of presentation. Lead to a qualified opinion. None issuer Qualified Opinion Audit Report: -Intro Paragraph same -Management responsibilty same - Auditor responsibility: modify to state that “Auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for a qualified audit opinion. -Basis for Q opinion: this is before opinion paragraph and states reason for qualified: *description and quantification of financial impact *an explanation of how disclosure are misstated if there is a material misstatement *a description of nature of omitted information and inclusion of the omitted information or practicable information was reasonable but SCF was left out. -Qualified Opinion paragraph: this will state the auditor for a fair free stated f/s “except for matters describe in opinion. Make sure omission does not include: fraud, false, deceptive, misleading information, if it does withdraw,=. Audit responsibility has ‘basis of opinion’ actually written is it. Basis for Qualified opinion: give reason for opinion Qualified opinion paragraph express opinion and reinterate basis paragraph. Adverse Opinion Report: both very material and pervasiive GAAP problem None issuer Qualified Opinion Audit Report: -Intro Paragraph same -Management responsibilty same - Auditor responsibility: modify to state that “Auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for an adverse opinion. -Basis for Adverse opinion: this is before opinion paragraph and states reason for Adverse: *description and quantification of financial impact *an explanation of how disclosure are misstated if there is a material misstatement *a description of nature of omitted information and inclusion of the omitted information or practicable information was reasonable but SCF was left out. -Qualified Opinion paragraph: this will state the auditor for a fair free stated f/s “except for matters describe in opinion. Make sure omission does not include: fraud, false, deceptive, misleading information, if it does withdraw,=. Audit responsibility has ‘basis of opinion’ actually written is it. Basis for Adverse opinion: give reason for opinio Adverse opinion paragraph express opinion, because of the significance of the matters describe in the basis for the adverse opinion paragraph. the f/s do not present fairly in accordance with applicable framework GAAP. Signature we have served on audit section city and state Date
Qualified Opinion Issuer
1st section section title and first sentence are the same -2nd sentence has opinion section: is modified to include appropriate language (except for, or with the exception of ) and reference to the paragraph that the disclosure all of the qualified opinion. - Additional paragraph no heading and include all substantive reason for qualified opinion; this is before opinion paragraph and states reason for qualified: *description and quantification of financial impact *an explanation of how disclosure are misstated if there is a material misstatement *a description of nature of omitted information and inclusion of the omitted information or practicable information was reasonable but SCF was left out. -Basis for Opinion: same a standard -CAM- Same as standard. Signature we have served on audit section city and state Date Adverse: 1st section section title and first sentence are the same -2nd sentence has opinion section: is modified to include appropriate language (except for, or with the exception of ) and reference to the paragraph that the disclosure all of the adverse opinion. financial statements do not present fairly stated in conform with GAAP in US - Additional paragraph no heading and include all substantive reason for qualified opinion; this is before opinion paragraph and states reason for qualified: *description and quantification of financial impact *an explanation of how disclosure are misstated if there is a material misstatement *a description of nature of omitted information and inclusion of the omitted information or practicable information was reasonable but SCF was left out. -Basis for Opinion: same a standard Reason -CAM- Same as standard. Signature we have served on audit section city and state Date
M5 MCQS: When would a Diclaimer happen and not happen
Disclaimer are when something major is negative to audit such as:; unable to obtain f/s on consolidated entity; management refuse access to information need for audit,; inventory was not counted at year-end. Not disclaimer but could be qualified opinion: management can not justify change in accounting principle or unable to contain adequate related party transactions or omission of SCF.
unmodified opinion would not be justified when something bad is material
Yes. Also an unjustified departure from GAAP that is not material can still be unmodified.
When an adverse opinion is giving should there be a separate paragraph disclosing basis for the opinion
Yes. Also remember that substansive reason is in the basis adverse opinion section
substansive reason is in the basis adverse opinion section is before the opinion paragraph
yes
Can an audit use in our opinion with accounting principles vary from GAAP but statements are fairly presented
No. It must say in our opinion except for. The original sentence would be considered inappropriate.
During an audit management does not let auditors speak with legal is this an adverse or withdrawal situation
it is a withdraw.
Disclaimer or withdraw happen when auditors can’t get information. Adverse happens when auditor have information and it pervasive and very material misstated. Qualified just material and not pervasive.
Yes
M6 Modified Opinions Due to Aud”it Issues
Audit Issues that are GAAS Problem =”Except for” in the basis of opinion. : Either Qualified Opinion or Disclaimers 1.1 Qualified Opinion that are GAAS problems. Happens when auditor is unable to obtain sufficient appropriate audit evidence on which to opinion and any undedected misstatements could be material but not pervasive. Disclaimer: Auditor is unable to obtain sufficient appropriate audit evidence on which to base opinion and undetected misstatement could be both MATERIAL AND PERVASIVE or auditor in not independent ( could be an accountant with company). Example of Scope limitations The following are GAAS problems 1. insufficient evidence 2. Going concerns 3. Auditor is not independent 4. time constraints 5. Inability to obtain appropriate audit evidence on: -observe inventory -confirm a/r - unable to obtain audited f/s of a consolidated investee -restricted use of audit procedures -inadequacy of accounting records 5. Refusal of management to provide written Cause of Scope limitation: if auditors can not confirm inventory that means COGS is not confirmed which means Net income not confirmed which means i/s not confirmed and RE not confirmed and b/s not confirmed. However if managment does not give auditor customer list for a/r confirmed but auditor can find alternative for example look at one customer on a/r and see if he paid account balance that is approved by management then use it. Management Scope limitation then this would be a qualified opinion or disclaimer. EXAM TRICK: IF MANAGEMENT WON’T LET YOU REVIEW, NEVER ADVERSE OPINION JUST QUALIFIED ( material)OR DISCLAIMER ( very material and pervasive). if auditor work is substantial completed then withdraw not possible, he would chose to put in the other-matter paragraph of audit: describing the reason why auditor can not withdraw when due scope limitation. Unaudited f/s GAAS problem; when accountant is associated with company and presents f/s and used his name or prepard f/s. Must Disclaim: For PCAOB standard without audit or review,it is a disclaimer. Requirement for unaudited: 1/ associated accountant must read the f/s for errors 2. Disclaim my accompany unaud f/s or placed on them 3. “unaudited must be marked on each page 4. If client refuses to correct errors, auditor should add a paragraph explaining the nature and the departure from GAAP. Also Audit should considered withdrawing also due to false,deceptive, fraud, misleading.
Nonissuer Reports Qualified Opinion GAAS Problem: material
`Introduction is the same Management responsibility is the same Audit responsibility first paragraph is the same. (this is were you write in accordance with GAAS via SAS or PCAOB) Then modified for qualified opinion to state: “Auditor believes that the audit evidence obtained is sufficient and appropriate to provided to provide a basis for the qualified audit opinion”. Basis for the Opinion Paragraph ( always before opinion paragraph: This paragraph should describe the reasons for the inability to obtain sufficient appropriate audit evidence. Qualified Opinion Paragraph: when the auditor express a qualified opinion due to unable to obtain sufficient appropri. evidence, paragraph should state that in auditors opinion stating” except for the possible effects of the matter(s) described in the basis for qualified opin paragraph, the f/s are presented fairly, in all materials respect, in accordance with financial reporting framework GAAP. EXAM TRCIK: MUST USE EXACT WORDING IN QUALIFIED OPINION. NO ADDITIONAL WORDS SUCH AS “ IN OUR OPINION OR “EXCEPT FOR THE ABOVE MENTION LIMITATION ON THE SCOPE OF THE AUDIT” IS NOT ACCEPTABLE.
Disclaimer Opinion: non issuer: very material and pervasive
Intro paragraph: Modify the statement to say “auditor was engaged to audit f/s” Management Responsibility: same Auditor Responsibility: Modifiy description to “ Our resposnibility is to express an opinion on the f/s based on conducting the audit in accordance to auditing standards generally accepted in the US. Because of the matter(s) described in the basis of disclaimer of opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Basis for Disclaimer of opinion paragraph (before opinion paragraph) Heading is”Basis for Disclaimer of Opinion”. Paragraph should describe the reason for inability to obtain sufficient appropriate audit evidence. Disclaimer of Opinion Paragraph: When disclaim should state in opinion paragraph. “Because of the significance of the matter(s) describe in the basis for disclaimer of opinion paragraph, the auditor has not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion; and appropriate audit evidence to provide a basis for an audit opinion; and Accordingly, the auditor does not express an opinion on the f/s
Issuer Reports Qualified Material GAAS Problem
NO Intro section 1st section is the Opinion sections. Second sentence modified and should read : “ Except for” and reference Qualified Opinion Paragraph: when the auditor express a qualified opinion due to unable to obtain sufficient appropri. evidence, paragraph should state that in auditors opinion stating” except for the possible effects of the matter(s) described in the basis for qualified opin paragraph, the f/s are presented fairly, in all materials respect, in accordance with financial reporting framework GAAP. Next: additional paragraph (immediately following the opinion section): Describe the reason for the inability to obtain sufficient appropriate audit evidence.’ Basis of Opinion: Same as standard: This paragraph should describe the reasons for the inability to obtain sufficient appropriate audit evidence. Except the 2nd sentence should describe the departure from UNQUALIFIED CAM : Same as issuer report: critical audit matter(CAM) this is person judgemtn section that auditors do, It does not alter opinion. CAM ID in ID CAM; decription of principal conderations that led to auditors CAM, descrip of how CAMwas addressed; reference f/s account or disclosure and include items discussed on CAM. Audit Signature We have served as the Co. Auditor since (year) City State Date
Disclaimer Issuer Very material and pervasive: GAAS problem
Audit Report 1. 1st section: Disclaimer of Opinion section. -Section title: Disclaimer of Opinion of the F/s. -use words “ were engaged to audit instead have audited. -Reference to the paragraph describing the reason for disclaimer -State audit was not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion -disclaimer opinion “ do not express an opinion” is given on the f/s as a whole. 2. Additional Paragraph (immediately after disclaimer opinion) . -Give all substantive reason for disclaimer -Disclose of any reservation regarding fair presentation of f/s in conform with framework or GAAP 3. Basis of Disclaimer: Modifiy to include -Section title “Basis of Disclaimer of Opinion - Eliminate sentence “ Our responsibility to express… and We conducted our audit in accordance with 4. CAM not applicable. EXAM TRICK: NO EVIDENCE OR NO WORK = NO AUDIT OPINION = DISCLAIMER. (NOT EVEN A BAD ADVERSE OPINION.)
Is “except for” uses for qualified opinion and “disclaimer of opinion” used for Disclaimer
Yes
In the Audit Opinion, after you write the : except for the possible effects of the matter(s) described in the basis for qualified opin paragraph, the f/s are presented fairly, Do you write :”IN ALL materials respect, in accordance with financial reporting framework GAAP”.
YES
what does preclude mean
prevent someone from doing something
MCQ M6 : A scope limitation sufficient to preclude(prevent someone from doing something) an umodified is the same as
Refuse of management to acknowledge f/s responsibiity or an impact of f/s = scope limitation. introductorary paragraph includes f/s responsibility of management.
What is true about modifications to the independent auditor’s unmodified opinion report for a non issuer
auditor would modified opinion when there is a scope limitation (f/s) or a departure from GAAP.
If an auditors was unable to obtain sufficient appropriate evidence or inadequate records the auditor would issue a
qualified or disclaimer
if an auditor can not verify inventory due to management restriction and can’t not alternative method, he would issue a disclaimer
Yes. especially if inventory is 35% of all asset. This a major material.
if auditor is unable to determine accounting est. would this be a disclaimer
No. would result in a material misstatement. = qualified or adverse.
If an auditor can obtain audit evidence on all f/s except opening bal of inventory, what should be opinion of b/s and i/s
B/s unmodified because able to confirm ending bal. disclaimer on i/s because inventory opening bal impact COG which impact i/s and net income, SCF, Statement of shareholder equity.
If auditor issue a qualified opinion due to lack of sufficient evidence, opinion paragraph pertains to the scope limitation or impact of f/s and lack of sufficient audit evidence
yes.
in disclaimer of a non issuer due to not GAAS compliant would the audit responsibility and opinion paragraphs be omitted
NO. The audit responsibility paragraph is in the issuer report PCAOB.
IS a adverse situation a departure from GAAP
yes When there is a departure from GAAP and departure is very material and pervasive
What are the rules on a disclaimer
When there is a significant scope limitation (f/s) When the auditor is not independent When the f/s are not audited
Rules on Adverse
When there is a departure from GAAP and departure is very material and pervasive
Rules on unmodified
maybe be issued even when departure from GAAP and f/s trans. are immaterial
Rules of qualified
Issued when the effect of the GAAP departure is material but not very material or pervasive.
When would you amend or make changes to the intro paragraph
When the auditor has disclaimed the audit. he would use “auditors was engaged to audit f/s and not we audited f/s. All other opinion use we audited.
Can there be an change in words in the opinion wording for except for
no.
If a audit is not independent but is reporting f/s by fed law does he write in disclaimer that he is not independent and reason for lack of independent
yes to writing on not being independent and no on reason of why lack of independent.
What is an emphasis-of- matter paragraph and additional detail on is
-it would be used to describe a material effect of f/s - when there is a going concern. -when there is a justified departure from GAAP use cash basis -heading of paragraph is Emphasis of matter - in subsequent events the lead to change in audit opinion -does not impact auditors clean unmodified opinion
Can susequent events be in emphasis of matterial fact and other matters
yes
Where is emphasis of material fact positioned
After opinion paragraph and before other matters paragraph.
M7 Emphasis-of-matters and explanatory paragraphs are alerts to readers of audited f/s
What is an emphasis-of- matter paragraph and additional detail on is = GAASP -it would be used to describe a material effect of f/s - when there is a going concern. -when there is a justified departure from GAAP use cash basis or special purpose -justified change in accounting principles -heading of paragraph is Emphasis of matter - in subsequent events the lead to change in audit opinion -does not impact auditors clean unmodified opinion
Where is emphasis of material (EOM) fact positioned
After opinion paragraph and before other matters paragraph.
Also EOM is a professional judgement call when the following and impact on f/s
- uncertainty related to litigation or regulatiry action - major catastrophy -significant related party trans. - unusually important subsequent
What are more detail judgement for EOM non issuer
Contigency: -Probable can est loss; Accrue and disclose can not est loss; disclose -Reasonable possible; disclose; can not est disclose -Remote ; ignore all
Other-Matters (OM) paragraph non issuer
these are alerts other than disclosed in presented auditor responsibilty, audit reprot, or f/s that are relevent to users understanding of audit f.s, . Report requirement are; -OM immrdiately after 1st opinion, 2nd EOM -heading s/b Other Matter - describe OM and the location of relevatn discloser about f/s Use of OM paragraph is require for the following: -when an alert is included that audit report is restricted -Subsequent facts discovered that may lead to change in audit opinion -f/s of prior pd. lead to change in opinion both EOM and OM -Current f/s were compared and reviewed with prior period. but prior period was not. -prior audit report date had material iinconsistency in OM that mgment refuse to make revisions - Supplemental infor in audit report and not in a separate report. -Refer to supplemental info that a designated accounting standard setter requires accompany an entity f/s -restrict the use of auditors report when special purpose framework are needed in accordance with contract or regulatory basis of accounting - report on compliance OM judgement call be auditor -describe why auditor can not withdraw from audit -law, regulation, or general accepted accounting practice require or permit further explanation. -audit f/s prepared in accordance with special purpose framework
Explanatory paragraph (EP) issuer
included in audit report of PCAOB. does not affect the auditors (clean) opinion. Report Requirements: should include the appropriate title and describe the matter emphasized and relevant location of discloser on f/s. Use of EP require when there is a ; - going concern -material change between periods in accounting principles or methods of the applications -Change in reporting entity -Change in an investee year-end result in transaction or events, or creation or complete or partial disolve of subsidiary or business unit of segment -change in investee year end tht is material effect on f/s -other information that is material that can impct f/s -select info required by SEC Reg s-k that was yr opinion omitted - supplemental info that was omitted , departs from framework, auditor is unable to remove substantial doubt about supplement infor conform to requirement of framework -prior yr audit report is not present* -prior ye opinion is updated* - mgment is require to report on i/c financial reporting but not required to be audited* *no title need when are the EP. Judgement calls of EP; simular to EOM and OM; -describe why auditor can not withdraw from audit -law, regulation, or general accepted accounting practice require or permit further explanation. -audit f/s prepared in accordance with special purpose framework
Other Audit consideration EP
-Lack of Consistency;does not compare yr to yr -Acceptabilty of change in accounting principle based on new adopted in accordance to framework; method is acceptable; disclosure to change are acceptable and adequate; justified and preferable -Circumstance that affect consistancy 1. a change in accounting estimate is inseparable from change in accounting principle ( note; if it was change change in est that was not inseparable; prospective and not a lack of consistancy) 2. Correction of an error in accounting principle 3. change in reporting entity that results in f/s that effect different reporting entity 4. Correction of a material misstatement in previous issued f/s. 5. significant investment accounted for using the equity method that was inconsistent from previous yr. make a change in accounting principle that is material/ Effect of Accept change if immaterial; no revision if material, EP needed and describe the change in accounting prin. and provide reference to entity disclosure change.
Alerts that restrict the use of the auditors written communicatio
Required by GAAS when auditor is restricted in auditor written communication the following are alerts on written communications - measurement and disclosure criteria that are suitable for only a limited number of users who have an adequte understanding of the criteria -measurement or disclosure criteria are available only to a specified parties - matters are not primary objective of the audit engagement ; commonly referred to as a by-product Contents of alerts. unless specifically required by GAAS, alerts of audit written comm should include the following; -written comm solely for use of the specified parties -indentify specified parties -statement that written comm. is not intended to be and should not be used by anyone other than specified parties. Sample Om or EP; This report is intended solely for the information and use of the ( list or ref specified parties) and is not intended to be used by anyone other than the specified parties. -describe why auditor can not withdraw from audit -law, regulation, or general accepted accounting practice require or permit further explanation. -audit f/s prepared in accordance with special purpose framework
how to write an audit report with EP or OM or EMP
- intro paragraph 2, mangement responsibilty 3 Audit responsibilty 4 what we do 5 how we perform audit 6 opinion 7 EOM 8 EP or OM
M7 MCQs: When the audit agrees the the material change in accounting principle the auditor will be
referring to the change in the EOM and not issuing a qualified opinion or concur explicity ( this would be implied)
An auditor would issue a unmodified and not write up a EOM or OM when a loss is material that is probable and disclosed
yes
Under us GAAS standard, a Contigency loss that is accrued and or reported or disclosed does not have to EOM. if not disclosed unmodifed and EOM
True
if there is a change in accounting principle that is not material is it disclosed in EOM or om
no
if a entity f/s are reported and presented fairly and comform with framwork does it apply with previous year
no.
Om is used by audit when prior to the audit date, the auditor identify a material inconsistency in f/s that management refuse to revise
yes.
an accounting principle change that is not material in current yr audit but material in next year audit should be given an umodified
yes. since material next year and not this year.
M8: Reporting with Different opinions and other auditors
- When it is different reporting opinion; unmodified prior year with current year qualified non issuer; - appropriate address = same - management responsibility = same - Audit report same except for final statement. “We believe that audit evidence we have obtain is sufficient and appropriate to provide a basis for our opinion. -Basis of qualified (before opinion) describe reason for qualified -Qualified opinion; except for the effects of f/s. describe again via summary, f/s referred to abo’ve are presented fairly, in all material respect co. as of 20x1 and 20x0 Auditor signature auditor’s city and state date of the auditors report 2. unmodified current with disclaimer prior year of i/s, oE, Scf. non issuer; - appropriate address = same - management responsibility = same Auditors responsibility; include “ the explanation in the basis for disclaimer of opinion paragraph, we conducted our audit in accordance with auditing standards generally accepted in US -Basis of disclaimer opinion 20x1 ops and CF Give reason of why disclaiming -opinion give summary reason why GAAS problem Auditor signature auditor’s city and state date of the auditors report
Unqualified prior year with current year qualified Issuer
- Adress bod and shareholders 2. Opinion -Except for sentences only discuss current year qualified decision. Further sentences discuss comparison f/s 3. Addition paragraph give reason for current year qualilfied opinion. 4. Basis of opinion = describe reason and we conducted audit in PCAOB compliance 5 CAM Auditor signature auditor’ s city and state date of the auditors report