A1 - Audit Reports

Question 1

What best describes what is meant by the term generally accepted auditing standards?

Answer 1

Measures of the quality of the auditor’s performance.

*GAAS are measures of the quality of the auditor’s performance, and guide the auditor in the performance of a properly planned and executed audit.

Question 2

What is the specific language that is used within the standards to clarify the auditor’s level of responsibility?

Answer 2

“Must” or “is required” = Unconditional requirement, must be followed in all cases.

“Should” = Presumptively mandatory requirement.

“May”, “Might”, and “Could” = Explanatory material that does not impose a professional requirement for performance.

Question 3

What are the basic steps of the audit process?

Answer 3

1) Engagement Acceptance
2) Assess Risk and Plan Response
3) Perform Procedures and Obtain Evidence
4) Form Conclusions
5) Reporting

Question 4

Define applicable financial reporting framework.

Answer 4

Is the financial reporting framework that is acceptable in view of the nature of the entity and the objective of the financial statements, or that is required by law or regulation.

*US GAAP
*IFRS

Question 5

What are management’s responsibilities for audits?

Answer 5

*The preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework.

*The design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement due to error or fraud.

*Providing the auditor with access to information and persons within the entity needed to complete the audit.

Question 6

What does the preparation and fair presentation of the financial statements require?

Answer 6

• Identification of the applicable financial reporting framework.

*Preparation and fair presentation of the financial statements in accordance with the framework.

*Inclusion of an adequate description of the framework in the financial statements.

Question 7

What are the Auditor’s responsibilities for audit?

Answer 7

For expressing an opinion on the financial statements based on the audit.

*Also to comply with the five general GAAS requirements.

Question 8

What is professional skepticism?

Answer 8

Is an attitude that the auditor must apply when making professional judgements that provide the basis for the auditor’s actions.

*Do assume that management is dishonest nor honest.

*Look at conditions that indicate possible fraud.
*Contradicting audit evidence.

Impediments may be
-Unconscious human bias
-Inappropriate level of trust or confidence in management
-Wanting to avoid negative interactions with management or workers

Question 9

What is meant by Ethical Requirements?

Answer 9

Must be independent of an entity when performing an engagement in accordance with GAAS unless required by law or regulation.

Independence in both fact and appearance.

Question 10

Define Professional Judgment

Answer 10

Using knowledge and experience to make decisions about:

-Materiality
-Audit risk
-NET
-Evaluating whether sufficient, appropriate evidence has been obtained
-Evaluating managements judgments in applying the applicable financial reporting framework
-Drawing conclusions based on the audit evidence obtained.

Question 11

What is an integrated audit?

Answer 11

Where two opinions are rendered: one opinion on the fairness of the financial statements and one opinion on the operating effectiveness of internal controls over financial reporting.

*Nonissuer - Can choose to have a financial statement audit only or integrated audit.

*Issuer - Must perform an integrated audit.

Question 12

What are the objectives of the Financial Statement Audit?

Answer 12

*To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to error or fraud, which enables the auditor to express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework.

*To report on the financial statements and communicate as required by GAAS based on the auditor’s findings.

Question 13

What are the objectives of the audit of Internal Control Over Financial Reporting?

Answer 13

*Express an opinion on the effectiveness of the company’s internal control over financial reporting.

*Plan and perform the audit to obtain appropriate evidence that is sufficient to obtain reasonable assurance about whether material weaknesses exist as of the date specified in management’s assessment.

Question 14

Objectives of the ERISA Plan Financial Statements Audit

Answer 14

*Accept an ERISA plan audit engagement when the basis upon which it is to be performed has been agreed upon through establishing whether the preconditions for the audit are present.

*Appropriately plan and perform the audit, including procedures required by this SAS on the certified investment information when management elects an ERISA Section 103a3C audit.

*Form an opinion

*Express opinion through a written report.

*Appropriately communicate to management and those charged with governance reportable findings that the auditor has identified during the audit of the ERISA plan financial statements.

Question 15

Is it required for an auditor to authenticate audit evidence?

Answer 15

NO

• The auditor many accept records and documents as genuine unless the auditor has reason to believe the contrary.

Question 16

An auditor should be aware of subsequent events that provide evidence concerning conditions that did not exist at year end but arose after year end. These events may be important to the auditor because they may:

Answer 16

Require disclosure to keep the financial statements from being misleading.

*Conditions that did not exist at year end but arose after year end are Type 2 (nonrecognized) subsequent events that must be disclosed to keep the financial statements form being misleading.

Question 17

If an auditor becomes aware of material information existing at the date of the audit report, the auditor should advise the client to:

Answer 17

Issue revised financial statements.

Question 18

For each CAM identified, the audit report should include:

Answer 18

Identify it on a PAD!!

*IDENTIFICATION of the CAM

*Description of the PRINCIPAL considerations that led the auditor to determine that the matter was a CAM

*Description of how the CAM was ADDRESSED in the audit

*Reference to the relevant financial statement accounts or DISCLOSURES.

Question 19

If a company issues financial statements that purport to present financial position and results of operations but omits the related statement of cash flows, the auditor will normally conclude that the omission requires what opinion?

Answer 19

Qualified

Question 20

Practicable meaning?

Answer 20

That the information is reasonably obtainable from management’s accounts and records and that providing the information in the auditor’s report does not require the auditor to assume the position of a preparer of financial information.

*For example, the auditor is not expected to prepare a basic financial statement, such as an omitted statement of cash flows, or segment information and include it in the auditor’s report when management omits such information.

Question 21

What should an auditor do if they are not independent but required by law or regulation to report on the financial statements?

Answer 21

They should disclaim an opinion and should specifically state that the auditor is not independent. If they CHOOSE to provide the reasons for the lack of independence, they should include all reasons.

Question 22

If the financial statements are false, fraudulent, deceptive or misleading, that management refuses to correct them, and that modification of the CPA’s report is not sufficient to correct the item, what should the CPA do?

Answer 22

Withdraw from the engagement.

Question 23

What is uncertainty and what are the opinions on it?

Answer 23

A matter for which conclusive evidential matter concerning its outcome is not currently available and will not be available until sometime in the future.

*No material misstatement and sufficient evidence = Unmodified

*Material misstatement related to the uncertainty = Qualified or adverse

*Insufficient evidence (scope limitation) = Qualified or disclaimer

Question 24

What to do with uncertainties, like lawsuits?

Answer 24

If Loss is Can estimate loss amount Cannot estimate loss

Probable Accrue and disclose Disclose

Reasonably possible Disclose Disclose

Remote Generally ignore

Question 25

If a question indicates that an uncertainty (lawsuit) is “unusually important” even if uncertainty is appropriately accounted for, what may auditor do?

Answer 25

Add an emphasis-of-matter paragraph.

Question 26

Emphasis-of-matter vs Other matter vs Explanatory Paragraph

Answer 26

EOM (nonissuer) = Used when referring to a matter that is appropriately presented or disclosed in the financial statements.

Other matter (nonissuer) = Not disclosed in FS

Explanatory (issuer) = Used for issuer when PCAOB requires it.

*All these still represent an unmodified (unqualified) opinion. The additional language is used to highlight particular circumstances without modifying the opinion.

Question 27

When the prior year’s financial statements were not audited and the current year’s financial statements are being audited, the auditor is in essence facing….

Answer 27

A scope limitation. The beginning balances may not be ascertainable and therefore a disclaimer of opinion on the statements of income, retained earnings, and cash flows may be required.

Question 28

A former client requests a predecessor auditor to reissue the prior-year’s audit report in connection with the issuance of comparative financial statements by the client. What is the predecessor auditor’s responsibility?

Answer 28

The predecessor auditor should read the current report, compare it with the previous report, and obtain a letter of representation from the successor auditor when deciding the reissue the prior-year audit report.

Question 29

What event would an auditor issue a report that omits any reference to consistency?

Answer 29

*A change in the useful life used to calculate the provision for depreciation expense.

A change in accounting estimate (such as a change in the useful life of a depreciable asset) is accounted for prospectively and does not affect the comparability of financial statements between periods. Because the auditor’s unmodified opinion implies that consistency exists, no modification to the report is necessary.

Question 30

An auditor most likely would express an unmodified opinion and would not add emphasis-of-matter or other-matter paragraphs to the report if the auditor:

Answer 30

Believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed.