A1-Audit Reports

Question 1

State the primary purpose of an audit.

Answer 1

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.

Question 2

Identify three inherent limitations of an audit.

Answer 2

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

Question 3

Which standards provide the most authoritative U.S. auditing guidance for nonissuers and issuers, and who issues those standards?

Answer 3

Nonissuers:
Statements on Auditing Standards (SASs), issued by the AICPA Auditing Standards Board.

Issuers:
Auditing Standards (ASs), issued by the Public Company Accounting Oversight Board (PCAOB) plus all SAS adopted by the PCAOB.

Question 4

Describe the role of the International Auditing and Assurance Standards Board (IAASB) and the use of International Standards of Auditing (ISAs).

Answer 4

IAASB is a standard setting board of the International Federation of Accountants (IFAC) that establishes ISAs.
Currently, over 100 countries are using or in the process of adopting ISAs.
ISAs do not override local laws/regulations or national standards that govern the audits of financial statements in a given country.

Question 5

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

Answer 5

Professional Skepticism
Professional Judgment
Ethical Requirements
Sufficient and Appropriate Audit Evidence
Compliance with GAAS

Question 6

List in order the primary sections of an unmodified audit opinion.

Answer 6

Title: Independent Auditor’s Report
Addressee: Based on the circumstances of the engagement
Introduction: We have audited the accompanying financial statements of…
Management’s Responsibility for the Financial Statements: Management is responsible for the preparation and fair presentation of the financial statements.
Auditor’s Responsibility: Our responsibility is to express an opinion on these financial statements based on our audit.
Opinion: In our opinion, the financial statements referred to above present fairly in all material respects, the financial position …
Report on Other Legal and Regulatory Requirements: If applicable

Question 7

What should be included in the introductory paragraph of the unmodified audit opinion?

Answer 7

The introductory paragraph should include:
~ The entity whose financial statements have been audited
~ A statement that the financial statements were audited
~ The title of each financial statement audited
~ Dates or periods covered by each financial statement

Question 8

What should be included in the Management’s Responsibility paragraph of the unmodified audit opinion?

Answer 8

~ An explanation that management is responsible for the preparation and fair presentation of the financial statements.
~ A statement that this responsibility includes the design, implementation, and maintenance of internal control.

Question 9

What should be included in the Auditor’s Responsibility paragraph of the unmodified audit opinion?

Answer 9

~ A statement that it is the auditor’s responbilbity to express and opinion on the financial statements based on the audit
~ A statement that the audit was conducted in accordance with auditing standards generally accepted in the United States of America
~ A statement that standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement
~ A description of the audit

Question 10

What should be included in the opinion paragraph of the unmodified audit opinion?

Answer 10

1. A statement that the financial statements present fairly, in all material respects, the financial position of the entity as of the balance sheet date and the results of operations and its cash flows for the period ended, in accordance with the applicable financial framework.
2. Identification of the applicable financial reporting framework and its origin.

Question 11

Identify the key differences in the auditor’s report under U.S. GAAS and the ISAs.

Answer 11

Requirements in Auditor’s Report under ISAs (not GAAS)
~ The introductory paragraph refers to the summary of significant accounting policies and other explanatory information.
~ The report may refer to “the preparation and fair presentation of the financial statements” (consistent with GAAS) or “the preparation of financial statements that give a true and fair view” (not allowed under GAAS).
~ The auditor’s responsibilty paragraph must include a statement that the auditing standards require that the auditor comply with ethical requirements.

Requirements in Auditor’s Report under GAAS (not ISAs)
~ Sufficient appropriate audit evidence should include evidence that the audit documentation has been reviewed.
~ The description of management responsibilities for the financial statements in the auditor’s report should not be referenced to a separate statement by management if such a statement is included in a document containing the auditor’s report.

Question 12

Define a component auditor and identify the three requirements that are necessary to reference a component auditor in the auditor’s report.

Answer 12

A component auditor is an auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit. The component auditor may be part of the group engagement partner’s firm, a network firm, or another firm.

Reference to the component auditor in the auditor’s report can be made if the following three requirements are met:
~ The component financial statements are prepared using the same financial reporting framework as the group financial statements.
~ The component auditor has performed an auidt in accordance with GAAS, or when required, the PCAOB.
~ The component auditor’s report is not restricted use.

Question 13

What are the responsibilities of a group engagement partner (team) when they assume responsibility for the work of a component auditor?

Answer 13

“No reference to the component auditor is made in the auditor’s report.

If the component is a a significant component due to its individual financial significance, it should be audited by the group engagement team or the component auditor.

When a component is deemed significant because of significant risks of material misstatement to the group financial statements, the group engagement team or component auditor should perform additional audit procedures pertaining to the potential risks identified.

Components that are not considered significant only require that analytical procedures be performed by the group engagement team.”

Question 14

When should an auditor’s opinion be modified?

Answer 14

“A modification to the auditor’s report is necessary when:
~ the auditor determines that the financial statements as a whole are materially misstated (GAAP issue); or
~ 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).”

Question 15

What is the purpose of an emphasis-of-matter paragraph and how is it used (reported) in an auditor’s report?

Answer 15

“The purpose of an emphasis-of-matter paragraph is to reference a matter that is appropriately presented in the financial statements, but is of such importance that it is fundamental to the user’s understanding of the financial statements.

Reporting requirements for an emphasis-of-matter paragraph include:
~ Placing the paragraph immediately after the opinion paragraph.
~ Using the heading ““Emphasis-of-Matter”” or other appropriate heading.
~ Describing the matter being emphasized and the location of relevant disclosures in the financial statements.
~ Indicating that the auditor’s opinion is not modified with respect to the matter emphasized.”

Question 16

Under what circumstances would an emphasis-of-matter paragraph be required in an auditor’s report?

Answer 16

“An emphasis-of-matter paragraph should be used in the auditor’s report when:
~ the auditor determines there is substantial doubt regarding the entity’s ability to continue as a going-concern for a reasonable time period;
~ there is a need to describe a justified change in accounting principle that has a material effect on the entity’s financial statements;
~ facts are subsequently discovered that lead to a change in the auditor’s opinion (note: an other-matter paragraph may also be appropriate); or
~ the financial statements are prepared in accordance with an applicable special purpose framework, other than regulatory basis financial statements intended for general use.”

Question 17

Under what circumstances would an auditor use an other-matter paragraph in an auditor’s report?

Answer 17

“Use of an other-matter paragraph is required in the auditor’s report if:
~ the auditor includes an alert in the audit report that restricts its use:
~ facts are subsequently discovered that lead to a change in auditor’s opinion (note: an emphasis-of-matter paragraph may also be appropriate);
~ prior period financial statements were audited by a predecessor auditor and the predecessor’s audit report is not reissued;
~ current period financial statements are audited and presented in comparative form with compiled or reviewed financial statements for the prior period;
~ prior to the release date, the auditor identifies a material inconsistency in other information included in a document with audited financial statements that requires revision and management refuses to make the revision;
~ the auditor chooses (or is required) to report on supplementary information presented with financial statements in the auditor’s report;
~ special purpose financial statements are prepared in accordance with a contractual/regulatory basis of accounting (requiring a restriction on the use of the auditor’s report); or
~ the auditor’s report on the financial statements includes a compliance report.”

Question 18

Evidence from what auditing procedures may lead the auditor to conclude that there is significant doubt about an entity’s ability to continue as a going concern?
ADMITS!

Answer 18

“Evidence obtained from following procedures may reveal going concern issues:
Analytical procedures
Debt compliance (review compliance)
Minutes (review from board meetings)
Inquiry of client’s legal counsel
Third parties (review financial support arrangements)
Subsequent events review”

Question 19

What conditions and events may indicate substantial doubt about an entity’s ability to continue as a going concern?
What is the going concern period?
FINE

Answer 19

“The following conditions and events may be indicative of substantial doubt:
~ Financial difficulties
~ Internal matters, such as labor difficulties, substantial dependence on a particular project, etc.
~ Negative trends
~ External matter, such as legal proceedings, new legislation, loss of a principal customer, natural disasters, etc.

The going concern period should not exceed one year under U.S. auditing standards, by may be greater than or equal to one year under ISAs.”

Question 20

What phrases must be included in a going concern emphasis-of-matter paragraph?

Answer 20

“Substantial doubt”
and
“Going concern”

Question 21

When there is a year-to-year lack of comparability (consistency) in an entity’s financial statements due to an acceptable change in accounting principle, how does the auditor reflect this in the current year’s auditor’s report?

Answer 21

“When the auditor concludes that the change in accounting principle is acceptable (justified), the auditor should include an emphasis-of-matter paragraph in the auditor’s report describing the change in accounting principle and provide a reference to the entity’s disclosure of the change.

If the justified change in accounting principle is deemed immaterial, no revision to the report is necessary.”

Question 22

How is an alert that restricts the use of the auditor’s written communication reflected in the auditor’s report and what items should be included in the alert?

Answer 22

“An other-matter paragraph is used to restrict the use of the auditor’s report when required by GAAS or when the auditor deems it necessary.

The alert that restricts the use of the auditor’s written communication includes:
~ a statement that the auditor’s written communication is intended solely for the information and use of the specified parties;
~ identification of the specified parties for whom use is intended; and
~ a statement that the auditor’s written communication is not intended to be and should not be used by anyone other than the specified parties.”

Question 23

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

Answer 23

“When audit evidence indicates that there is material misstatement of the financial statements.

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 financial statements.”

Question 24

Describe the circumstances in which a material misstatement of the financial statements my arise.

Answer 24

“Misstatements may arise in relation to:
~ The appropriateness of accounting policies
~ The application of accounting policies
~ The appropriateness of the financial statement presentation
~ The appropriateness or adequacy of disclosures in the financial statements”

Question 25

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

Answer 25

"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."

Question 26

Identify some causes of scope limitations.

Answer 26

"Restrictions on the auditor's ability to perform auditing procedures may be caused by: ~ Circumstances ~ Management ~ Inability to observe inventory ~ Inability to confirm receivables ~ Refusal of the client's attorney to respond to inquiry ~ Refusal of management to provide a representation letter"

Question 27

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?

Answer 27

Evidence that: 1. audit documentation has been reviewed; 2. financial statements have been prepared; and 3. management has taken responsibility for the financial statements.

Question 28

How do uncertainties affect the auditor's report?

Answer 28

"~ If management's analysis is supported and properly reported or disclosed, the auditor issues an unmodified opinion with no reference to the uncertainty in the audit report. Note: The auditor can add an emphasis-of-matter paragraph to the unmodified opinion if the auditor determines that further explanation of the uncertainty is necessary for the user's understanding of the financial statements. ~ If the auditor is unable to obtain sufficient audit evidence involving an uncertainty and its presentation or disclosure in the financial statements, the auditor should consider the need to express a qualified (GAAS) opinion or to disclaim an opinion due to a limitation in scope. ~ If the auditor concludes that the financial statements are materially misstated due to a departure from GAAP related to an uncertainty, the auditor should express a qualified (GAAP) or adverse opinion."

Question 29

If, during the current examination of comparative financial statements, the auditor discovers evidence that affects the prior statements and the opinion that was expressed, what action should be taken? Only DORCS change their mind!

Answer 29

"The auditor should update the opinion in the current year's report. If the opinion differs from the previous opinion, the reason(s) should be disclosed in a separate emphasis-of-matter or other-matter paragraph following the opinion paragraph. ``` The explanatory paragraph should disclose the: Date of the auditor's previous report Opinion type previously issued Reason for prior opinion Changes that have occurred Statement ""opinion...is different.""" ```

Question 30

The predecessor auditor should take what steps before reissuing an audit report on prior period financial statements?

Answer 30

"~ Read the statements for the current period. ~ Compare the previous audited statements with the current period statements. ~ Obtain a letter of representation from the successor auditor. ~ Obtain a letter of representation from management at or near the date of reissuance. ~ If unrevised, use the original report date, if revised, dual date the report."

Question 31

What is the effect on the audit report when the current period financial statements are audited and presented in comparative format with prior period financial statements that were not audited?

Answer 31

"If the prior period financial statements were review or compiled, an other-matter paragraph is added that includes: ~ a description of the service performed in the prior period; ~ the date of the prior period report; ~ a description of any material modifications in the report; and ~ a statement that the service was less in scope that an audit and does not provide a basis for expressing an opinion on the financial statements. If the prior period financial statements were not audited, reviewed, or compiled, the other matter paragraph should indicate this and state that the auditor assumes no responsibility for the financial statements."

Question 32

Define the two types of subsequent events.

Answer 32

"A recognized subsequent event relates to a condition that existed on or before the balance sheet date. Recognized subsequent events require financial statement adjustment. A nonrecognized subsequent event occurs after the balance sheet date. Nonrecognized subsequent events generally do not require financial statement adjustment, buy may require footnote disclosure."

Question 33

What procedures should the auditor perform during the subsequent period?

Answer 33

"Between the date of the financial statements and the date of the auditor's report (subsequent period), the auditor should: P = Review post balance sheet transactions R = Obtain a representation letter from management describing events that occurred during the subsequent period requiring adjustment to the financial statements I = Inquire with management or those charged with governance whether subsequent events occurred that could impact financial statements M = Review minutes of board and committee meetings E = Examine current interim financial statements and compare to financial statements under audit"

Question 34

After the date of the auditor's report, what actions should an auditor take regarding subsequent events?

Answer 34

None. While the auditor is responsible for investigating subsequent events until the date of the auditor's report, the auditor has no active responsibility to make inquiries or perform auditing procedures after that date.

Question 35

When and why is dual dating used?

Answer 35

Dual dating is used when subsequent events requiring financial statement adjustment or disclosure come to the auditor's attention after the original date of the audit report but before the audit report is issued. Dual dating extends the auditor's responsibility on ly for the particular subsequent event. The original date of the report is retained for the rest of the financial statements.

Question 36

After issuance of the report, what actions should an auditor take upon discovering information that materially affects the report?

Answer 36

"Determine whether there are persons relying or likely to rely on the financial statements. Advise the client to immediately disclose the new information to persons currently relying or likely to rely on the financial statements. This disclosure may take the form of revised financial statements, disclosures and revisions to any imminent financial statements, or notification that the financial statements and report should not be relied upon. Advise the client to discuss the new disclosures or revisions with the SEC, stock exchanges, and appropriate regulatory agencies. Ensure that appropriate steps have been taken by the client."

Question 37

What actions should an auditor take upon discovering omitted audit procedures?

Answer 37

"The auditor should: 1. Determine whether other procedures were adequate to compensate for the omitted procedures. 2. If not, and if there are people likely to be relying on the report, apply the omitted (or alternative) procedures. 3. If facts emerge that support a different opinion, advise the client to make appropriate disclosure and notification."

Question 38

What is the auditor's responsibility with respect to information accompanying the basic financial statements in a client-prepared document?

Answer 38

"The auditor should read the other information to determine that it is consistent with the audited financial statements and that there are no material inconsistencies or material misstatements of fact. The auditor may (but is not required to) report on the other information."

Question 39

What are the two objectives of engagements to report on supplementary information?

Answer 39

"1. To evaluate the presentation of the supplementary information in relation to the financial statements as a whole. 2. To report on whether the supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole."

Question 40

What procedures would an auditor perform related to supplementary information that is required by GAAP and accompanies the financial statements?

Answer 40

"Inquire regarding how the supplementary information was prepared, including changes from prior years and significant assumptions used. Determine whether the methods used are consistent with management's responses, audited financial statements, and other knowledge. Obtain written management representations regarding the required supplemental information. The auditor may (but is not required to) issue an opinion on the information."

Question 41

List several features of a report on the application of the requirements of an applicable financial reporting framework.

Answer 41

"~ Description of engagement, entity, and transaction ~ Reference to AICPA standards ~ Description of the appropriate application of the requirements of the applicable financial reporting framework to the specific transaction or type of report ~ Preparers are responsible for proper accounting ~ Differences in facts, circumstances, or assumptions may change the report ~ Restricted use paragraph"

Question 42

When accepting an engagement to audit financial statements prepared in accordance with a financial framework generally accepted in another country, the auditor should obtain an understanding of:

Answer 42

"~ The purpose for which the financial statements are prepared ~ Whether the financial reporting framework is a fair presentation framework ~ The intended users of the financial statements ~ The steps taken by management to ensure that the applicable financial reporting framework is acceptable under the circumstances"

Question 43

What are the reporting options for financial statements prepared in accordance with a financial reporting framework generally accepted in another country when the financial statements will be distributed outside the U.S. only? What if the financial state

Answer 43

"Distributed outside the U.S. only: ~ Report form of the other country or the report sent out in the ISAs (if applicable); or ~ U.S. style report modified to refer to the financial reporting framework generally accepted in another country. Distributed within the U.S.: Standard U.S. report with an emphasis-of-matter paragraph that: ~ Identifies the financial reporting framework. ~ Refers to the note in the financial statements describing the framework. ~ Indicates the framework differs from accounting principles generally accepted in the United States of America."