A1: Audit Reports Flashcards
Opinion Elements/Paragraphs
Intro Paragraph
Management’s Responsibility
Auditor’s Responsibility
Basis for Modification/Opinion
Opinion
Emphasis of Matter Paragraph
Other Matters Paragraph
Report on Other Legal/Regulatory Responsibilities
Elements of Management’s Responsibility Paragraph
M – Management’s
R – Responsibility
(for preparation and fair presentation of financial statements)
D – Design
I – Implementation, and
M – Maintenance (of internal controls)
Elements of Auditor’s Responsibility Paragraph
R – auditor’s Responsibility
E – Express opinion on financial statements
P – Plan and perform the audit
P – Perform procedures to
O – Obtain evidence
R – assess Risks of material misstatement due to fraud or error
T – (Test) consider internal control relevant to
S – preparation and fair presentation of financial Statements
C – not for purpose of opining on Controls
R – evaluate Reasonableness of
A – Accounting estimates of
M – Management and
E – Evaluate overall financial statement presentation
Elements of Opinion Paragraph
Financial statements present fairly, in all material respects, financial position, in accordance with applicable reporting framework
Identify applicable reporting framework
Where reference to GAAS/other audit standard?
Auditor’s Responsibility Paragraph
Where reference to GAAP/other financial reporting framework?
Opinion Paragraph
Opinion changes if refer to other auditor?
Modify auditor’s responsibility
Modify Opinion
Opinion changes if do not?
None
When to issue qualified opinion?
Statements materially misstated or unable to obtain evidence to conclude statements are free from material misstatements
Opinion differences (Qualified)?
Modify Auditor’s Responsibility Paragraph (evidence supports qualified opinion)
Basis of Qualified Opinion Paragraph
Modify Opinion Paragraph (Except for…[matter in Basis of Opinion Paragraph], present fairly…)
When to issue adverse opinion?
Statements contain pervasive (very material) misstatements
Opinion differences (Adverse)?
Modify Auditor’s Responsibility Paragraph (evidence supports adverse opinion)
Basis of Adverse Opinion Paragraph
Modify Opinion Paragraph (Because of [matter in Basis of Opinion Paragraph], not presented fairly…)
When to issue disclaimer of opinion?
Unable to obtain sufficient evidence to provide basis for an opinion that no pervasive (very material/significant) material misstatement
(significant scope limitations, significant going concern uncertainty, lack of independence)
Opinion differences (Disclaimer)?
Modify Intro Paragraph (engaged to audit)
Modify Auditor’s Responsibility (Because of matters discussed in [Basis of Modification paragraph], unable to obtain sufficient evidence to provide opinion)
Basis for Disclaimer (describe why unable to obtain sufficient evidence)
Modify Opinion (Because of matters in [Basis paragraph], unable to obtain sufficient evidence and therefore does not express an opinion)
When use Emphasis of Matters Paragraph?
Required: Going Concern, Justified accounting principle change has material effect, Change prior opinion (eg, now in compliance with GAAP), use of other special purpose financial reporting framework
Maybe: uncertainty relating to litigation or regulation, major catastrophe, major related party transactions, important subsequent events
Going Concern Procedures?
A – Analytical Procedures D – Debt compliance M – Minutes I – Inquiry of legal counsel T – Third parties (confirm support arrangements) S – Subsequent events
Going Concern Paragraph Language?
“Substantial doubt” and “going concern”
Do not say “for 1 year”
Also option to Disclaim an Opinion due to significant going concern uncertainty
Qualified or Adverse if inadequate disclosure regarding going concern issue
Consistency/Change in Accounting Principle
Immaterial: no change to report
Otherwise: emphasis-of-matter paragraph until new principle applied to all periods presented
Common GAAP Issues (Qualified or Adverse Opinion)
- unjustified change in accounting principle
- inadequate disclosure
- unjustified departure from/violation of GAAP
- unreasonable accounting estimates
Withdrawal?
Report is false, fraudulent, deceptive or misleading
Common GAAS Issues (Qualified or Disclaimer)
- uncertainty
- scope limitations (opinion refers to possible effect on financial statements, not the limitation itself)
- independence
- unaudited financials (disclaimer)
Prior year’s financials not audited
Likely scope limitation – disclaimer on all statements other than Balance Sheet if unable to determine beginning year Inventory
Update Prior Opinion – why?
Often when now in conformity with GAAP
What needed in new opinion?
D – Date of prior report O – Opinion previously given R – Reason for prior opinion C – Changes occurred S – Statement that opinion is different
Prior audit by other auditors:
-predecessor reissues report?
- get reps letters from new auditor and management about changes/modifications
- reissue opinion with old date (if no changes) or dual date (if revised)
Prior audit by other auditors:
-report not reissued?
-opinion only on current period and include other-matter paragraph (type of old opinion and reasons for any modification or emphasis or other matters)
Prior year financials not audited by anyone
-were reviewed or compiled?
-other matter paragraph: service done previously, any modifications, statement that service was weaker than audit or didn’t provide opinion on financials
Prior year financials not audited by anyone
-not audited, reviewed or compiled?
-other matter paragraph: previously not audited/reviewed and no responsibility for prior period statements
Types of subsequent Events
Type I – Recognized Events – conditions on or before balance sheet date – adjustment to statements
Type II – Nonrecognized Events –conditions after balance sheet date – disclosure required
Procedures to check for subsequent events
P – Post-balance sheet transactions R – Rep letter from management I – Inquiries of management/attorneys M – Minutes of meetings E – Examine interim financials
Auditor responsibility after original report date
No active responsibility
If become aware of events before report release, may be necessary to adjust financials or disclosures – if management does not, may need to issue Qualified or Adverse Opinion
Auditor discover facts after report released
-if materially affects report and persons relying on statements: advise client to update statements/disclosures
-if client refuses: DAR
Dissociate report from financials
Alert regulatory agencies
Notify relying parties that report shouldn’t be relied upon
Discover omitted audit procedures
- Were omitted procedures material to report?
- Were alternative procedures adequate to compensate for omission?
- if people relying on report, apply omitted (or alternative procedures)
Responsibility for other information
- read for any material inconsistencies
- if inconsistency, management refuses to revise, notify board and: describe in Other Matters Paragraph, withhold use of report, or withdraw from engagement
- or may include Other Matter Paragraph disclaiming opinion on other information
Engaged to Report on supplemental information
- objectives: evaluate presentation of such info in relation to financials as a whole, and report whether such info is fairly stated in relation to financials
- info must be derived from info used to prepare audited financials
- must obtain rep letter from management
- report in separate report or Other Matters Paragraph
Required Supplementary Information
- limited procedures required: inquiries of management, see if consistent with financials, obtains rep letter from management
- Other Matters Paragraph: Disclaim opinion on the info, report any deficiencies/omissions/ uncertainties, or that info is included and auditor did required procedures
Report on Application of Reporting Framework to transaction
- may not report on hypothetical transaction
- accountant need not be independent
- must: understand transaction, review requirements of framework, consult with continuing accounting
- report: describe engagement, performed under AICPA standards, transaction and findings, restriction of use (management, board, previous/current auditors), disclose if not independent
Report on Financials prepared under non-GAAP (or non-IFRS)
- non US distribution: use report of other country or US form
- US distribution: use US form with emphasis-of-matter paragraph noting the relevant framework, and that it differs from GAAP
