A1 - Audit Reports

Question 1

What are the 3 classifications of audit guidance available?

Answer 1

1. Highest - AICPA SAS (non-issuers) and PCAOB AS (issuers)
   - auditor needs to use professional judgement
2. Middle - Interpretive Publications
   - Auditing Interpretations: Clarify specific SAS or AS provisions.
   - AICPA Audit and Accounting Guides: Offer detailed insights on applying standards in particular industries or contexts.
   - Auditing Statements of Position: Provide guidance on specific auditing issues that may arise.
   *While not as authoritative as the top-level standards, these publications are considered helpful for complying with SAS or AS.
3. Lowest - Other Auditing Publications
   - offer general info but have no authority
   - could be useful in understanding accounting issues
   - e.g. accounting journals, textbooks, CPE courses

Question 2

What are the 5 steps of the audit process?

Answer 2

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

Question 3

What is the difference between GAAS, AS, SAS, PCAOB, and AICPA?

Answer 3

• SAS is the detailed guidance, GAAS is the general principles and guidance, and both of these are set for nonissuers by the AICPA
• AS the equivalent of SAS and GAAS for issuers. It is the auditing standard set for issuers by the PCAOB

Question 4

What are management’s responsibilities in an audit?

Answer 4

1. Preparation of fair financial statements
2. D&I and maintenance of controls
3. Give auditor access to all personnel and evidence they need
4. Assessing the Entity’s Ability to Continue as a Going Concern
5. Preventing and Detecting Fraud
6. Compliance with Laws and Regulations
7. Providing Written Representations to the Auditor
8. Adjusting the Financial Statements for Known Errors

Question 5

What are the auditor’s responsibilities in an audit?

Answer 5

1. Professional Skepticism - questioning mindset
2. Ethical Requirements
3. Professional Judgement - application of knowledge to make informed decisions
4. Obtain Sufficient & Appropriate Audit Evidence
5. Comply with GAAS

Question 6

Do auditors give absolute assurance in an audit?

Answer 6

No. Can give reasonable assurance but NEVER absolute assurance. We can never be 100% certain that everything the company did is totally correct.

Question 7

What is the difference between an FS audit only and an integrated audit?

Answer 7

1. FS Audit Only
   - one opinion is rendered over only the FS
   - only required to have a limited understanding of ICs relevant to expressing an opinion on the FS
   - the objective is to gain reasonable assurance that the FS are materially without error
2. Integrated Audit
   - issue two opinions, one of the fairness of the FS and one on the operating effectiveness of ICs
   - auditor is required to perform extensive testing over ICs and issue an opinion over whether they are operating effectively as of a date

Question 8

What type of audit is required by issuers and non-issuers, FS only or integrated?

Answer 8

Issuers - need integrated
Non-issuers - can choose FS only or integrated

Question 9

What is the objective of an audit of ICs?

Answer 9

Express an opinion on the OPERATING EFFECTIVENESS of ICs

Question 10

What is an ERISA audit and what does ERISA stand for?

Answer 10

• An ERISA audit is a specific type of audit required for employee benefit plans, such as pension, 401(k), and health and welfare plans, to ensure they comply with legal and regulatory requirements.
• ERISA stands for the Employee Retirement Income Security Act of 1974, a federal law in the United States that sets minimum standards for retirement and health benefit plans in private industry.

Question 11

What are the objectives of an ERISA audit?

Answer 11

• Form an opinion on the ERISA plan financial statements based on an evaluation of the audit evidence obtained
• Express clearly the opinion through a written report
• Accept an ERISA plan audit engagement if the preconditions for accepting are present
• Appropriately plan and perform the audit, including procedures selected
• Perform procedures and report on supplementary information
• Report any findings

Question 12

What is the main consideration when forming an audit opinion?

Answer 12

Was sufficient appropriate audit evidence obtained?
- Non-issuer: AICPA SAS
- Issuer: PCAOB AS

Question 13

What is the difference between and unmodified and unqualified opinion? What does it mean to give one of these?

Answer 13

• Unmodified for nonissuers
• Unqualified for issuers
• Auditor was able to gather sufficient and appropriate evidence and the client followed the chosen framework (e.g. GAAP)

Question 14

What are the 4 types of modified opinions and auditor can issue?

Answer 14

1. Qualified Opinion due to FS Issues
   - able to gather sufficient appropriate audit evidence
   - there are misstatements in the FS that are material BUT NOT pervasive
2. Adverse Opinion
   - able to gather sufficient appropriate audit evidence
   - there are misstatements in the FS that are material AND pervasive
3. Qualified Opinion due to Audit Issues
   - unable to obtain sufficient and appropriate audit evidence
   - limitation on scope that is material BUT NOT pervasive
4. Disclaimer of Opinion
   - unable to obtain sufficient and appropriate audit evidence
   - limitation on scope that is material AND pervasive

Question 15

What are the required sections for an unmodified opinion (nonissuers)? What order do they go in?
Hint: OBRA

Answer 15

1. Opinion
2. Basis for Opinion
3. Responsibilities of Management
4. Auditor’s Responsibilities
   - 3 and 4 can go in any order

Question 16

What is included in the opinion section of an unmodified report?

Answer 16

Same as unqualified
○ Must have heading “opinion”
○ Type of engagement
○ Client name
○ What FS was audited (including dates)
○ Opinion using standard wording
○ State framework selected by management

Question 17

What is included in the basis for opinion section of an unmodified report?

Answer 17

○ Tells user which auditing standards were followed
○ Says that if you want to read more about auditor’s responsibility you can read that later
○ Auditor is independent
○ Auditor believes evidence is sufficient and appropriate

Question 18

What is included in the responsibilities of management section of an unmodified report?

Answer 18

○ Have to have header “Responsibilities of Management for the FS”
○ Management is responsible for FS and design, implementation, and maintenance of controls
○ Says that management evaluates going concern

Question 19

What is included in the auditor’s responsibilities section of an unmodified report?

Answer 19

○ Audit obtains reasonable (not absolute) assurance
○ Refers to GAAS
○ Professional skepticism
○ Identifying material misstatement
○ Obtaining understanding internal controls
○ Evaluating appropriateness of accounting policies
○ Auditor concludes on whether there are going concern issues

Question 20

What would happen if you were conducting an audit in accordance with two sets of standards? When would this occur?

Answer 20

• Auditor references both auditing standards in the:
  ○ Basis for opinion section
  ○ Auditor’s Responsibility section
• Occurs when:
  ○ Required (e.g. auditing a governmental entity)
  ○ Auditor is engaged by client to do so

Question 21

What would happen if the auditor was following AS and GAAS when only required to follow GAAS (i.e. auditing a nonissuer)?

Answer 21

PCAOB standards trump AICPA standards:
○ Use the PCAOB report
○ Amend the basis for opinion report to reference that they followed PCAOB and GAAS

Question 22

What are CAMs vs KAMs? Are they for issuers or nonissuers? Where would they be included in the auditor’s report? Are they required? What would prompt them to be included?

Answer 22

CAM = Critical Audit Matter (Issuer)
KAM = Key Audit Matters (Nonissuer)
Both are a section that may be included in a nonissuer’s report.

• add CAMs/KAMs to the audit report anywhere after the second section
• CAMs are required for issuers, KAMs are included at the discretion of the auditor
• depend on what the auditor believes needs to be drawn to the attention of the reader such as:
  ○ Areas that have a higher assessed RoMM
  ○ Areas requiring significant auditor/management judgement
  ○ Significant events

Question 23

What are the required sections for an unqualified opinion (issuers)? What order do they go in?

Answer 23

1. Opinion on the FS
2. Basis for Opinion
3. CAMs

Question 24

What is included in the opinion on the FS section of an unqualified report?

Answer 24

§ Heading is “opinion on the financial statements”
□ Slightly longer than for nonissuers
§ Intro sentence saying that an audit was performed
§ Dates of financial statements
§ Opinion rendered (and this is the best opinion possible)
§ Framework used by management

Question 25

What is included in the basis for opinion section of an unqualified report?

Answer 25

§ How we got comfortable with the FS
§ Auditing firm is registered with the PCAOB
§ Auditing standards followed
§ Goal of the audit - obtain reasonable assurance that FS is free from material misstatements
§ Procedures formed - testing basis, accounting principles, evaluation of estimates
□ Similar to nonissuer
§ Conclude by saying that the audit provides a reasonable basis for the opinion

*this would generally outline the responsibilities of the auditor and imply the responsibilities of management but is not as explicit as for an unmodified report

Question 26

What are the criteria for a CAM to be considered a CAM (3 of them)?

Answer 26

a) Matter was communicated to audit committee
b) Relates to accounts or disclosures material to the FS
c) Involves challenging, subjective, or complex auditor judgement

Question 27

What is included in the CAMs section (3 things)?

Answer 27

○ Heading - “critical audit matters”
○ Definition of CAMs
○ Tells user that the CAMs identified are not separate opinions

Question 28

What’s 4 things must be identified for each CAM?

Answer 28

○ Identify - each CAM in the audit report
○ Principle - describe the principal considerations that led the auditor to determine that CAM
○ Addressed - describes how the CAM was addressed in the audit
○ Disclosures - refers to the relevant financial statement accounts and disclosures

Question 29

If no CAMs were identified in the audit what would you do?

Answer 29

Still have a CAMs section and just say there were no CAMs identified.

Question 30

What type of audit would be conducted for a company with <$100m in annual revenue?

Answer 30

• Financial statement audit only
• Basis for opinion is updated to state:
  ○ Company is not required to have an audit over internal controls
  ○ As part of the audit, the auditor gained an understanding of internal controls but not for the purpose of issuing an opinion

Question 31

What is Form AP and how long do audit firms have to file it?

Answer 31

Form (AP) Audit Participants is a required report for public accounting firms auditing a public client that gives users more transparency into the audit including:
○ Name of issuer
○ Name of auditing firm
○ Date of audit report
○ Date of FS
○ Engagement partner
○ Whether other auditing firms participated in the audit

• Must be filed by 35th day after the audit report is filed with the SEC

Question 32

What are 6 examples of FS issues that could lead to a qualified or adverse opinion?

Answer 32

1. Not following selected framework (e.g. GAAP)
   ○ E.g. client should have been capitalizing leases, but they didn’t
   ○ Exception:
   § Client departs from GAAP and auditor agrees
   § Following GAAP would have created misleading financial statements
2. Inappropriate Accounting Principles
   ○ E.g. not consolidating if a parent owns >50% of a sub
3. Unreasonable Estimates
4. Inadequate Disclosure
   ○ GAAP says what needs to be disclosed based on certain situations
5. Incorrect Numbers
   ○ E.g. not recognizing transactions at the correct value
6. No reasonable justification for a change in accounting principles
   ○ E.g. FIFO to LIFO

Question 33

What would happen if the client wanted to omit a statement (e.g. changes in equity) from its audit? What if they only wanted the auditor to audit one statement to begin with?

Answer 33

1. Would result in a qualified opinion b/c a complete set of financials needs to be issued under US GAAP
2. Auditor can issue an opinion just on one FS but would need to specify in their report that this is a limited scope audit

Question 34

What are the 2 major changes to an unmodified report (nonissuer) if the report is instead qualified due to FS issues?

Answer 34

1. Opinion Section - will now state that the company fairly presents their financial position except for what is described in the Basis for Qualified Opinion section
2. Basis for qualified opinion section - new paragraph added that specifies that this is a qualified opinion, explains the issue, and quantifies the issue (if not quantifiable, then just need to let the user know)

Question 35

What are the 4 major changes to an unmodified report (nonissuer) if the report is instead adverse due to FS issues?

Answer 35

1. Opinion Section - will now state that b/c of what is discussed in the Basis for Adverse Opinion Section, the FS does not present fairly the company’s financial standing
   - “Does not present fairly” = adverse opinion
   - Tells user that they can’t rely on the FS b/c misstatements are too pervasive
2. Basis for Adverse Opinion Section - new paragraph added
   - Describes the departure from framework and attempts to quantify the effects (if possible)
3. Basis for Adverse Opinion Section - last sentence modification
   - Instead of the last sentence saying that the auditors have obtained appropriate and sufficient audit evidence for their “audit opinion”, it says for their “adverse audit opinion”
4. Would not report KAMs b/c it could overshadow the main point which is that they got a horrible opinion

Question 36

What are the 2 major changes to an unqualified report (issuer) if the report is instead qualified due to FS issues?

Answer 36

1. Additional wording that says that FS is fairly presented except for the effects of _____ described in the following paragraph
   - “except for” = qualified opinion
2. Following paragraph
   - Add a second paragraph in the opinion section detailing why a qualified opinion has been issued

Question 37

What are the 3 major changes to an unqualified report (issuer) if the report is instead adverse due to FS issues?

Answer 37

1. CAMs omitted - may overshadow terrible audit opinion being rendered
2. Wording changes in the opinion section that says the because of issues discussed in the following paragraphs, financial statements do not present fairly
   - “do not present fairly” = adverse opinion
3. Extra Paragraphs
   - Describes the FS issues

Question 38

What are examples of scenarios that restrict the scope of an audit?

Answer 38

• time constraints
• inability to observe or confirm something
• client attorney doesn’t respond to questions
• client restricts procedures that you can perform

Question 39

What are scenarios that will always result in a disclaimer?

Answer 39

• Auditor is not independent
• Unaudited financial statements
• Refusal by management to provide written representation and/or acknowledge that they are responsible for fair financial statements

Question 40

What causes a scope limitation?

Answer 40

1. Circumstances beyond the control of the entity (e.g. fire destroys inventory)
   - auditor would look for alternative procedures
2. Management imposed restrictions
   - auditor will ask management to stop it
   - if they won’t, then escalate to BoD or TCWG
   - if still won’t, then disclaimer or withdraw from engagement

Question 41

What is financial statement association?

Answer 41

Financial statement association occurs when an accountant is considered to be connected with a set of financial statements in such a way that users might rely on the accountant’s involvement. This association can happen in two main scenarios:
1. Accountant consents to the use of their name in connection with the FS
2. Accountant has prepared the FS, even if their name isn’t used

In both cases, the association means that users of the financial statements may believe the accountant has taken certain steps to ensure the accuracy or fairness of the information presented.

Question 42

Modifications of Audit Report for Qualified Opinion (Nonissuers) due to Audit Issues - Nonissuers

Answer 42

1. Heading changes
   ○ Opinion section - “qualified opinion”
   ○ Basis for opinion section - “basis for qualified opinion”
2. Add sentence to qualified opinion section
   ○ Say that FS is presented fairly except for the possible effects described in the basis for qualified opinion section
   § “except for” = qualified
   § “possible effects” - not sure what the effects are of this stuff
3. Extra paragraph in the basis for qualified opinion section
   ○ Add in an extra paragraph explaining the reasons for the inability to obtain evidence
4. Last sentence of basis for qualified opinion section
   ○ Say that it is a “qualified audit opinion” instead of just an “audit opinion”

Question 43

Modifications of Audit Report for Disclaimer of Opinion due to Audit Issues - Nonissuers

Answer 43

1. Heading changes
   ○ Opinion –> Disclaimer of Opinion
   ○ Basis for Opinion –> Basis for Disclaimer of Opinion
   ○ No KAMs if engaged to report KAMs
2. Disclaimer of Opinion Section
   a) Don’t say we audited the FS
   § Say “we were engaged to audit” the FS - shows that we didn’t actually perform an audit
   b) Say we do not express an opinion - that is what a disclaimer is
   c) Explain the b/c of the significance of the matters we are going to discuss in the “basis for disclaimer of opinion” section, we are not issuing an opinion on the FS
3. Basis for Disclaimer of Opinion
   ○ Add a paragraph explaining why they are getting this disclaimer of opinion
   ○ Just need to know that there is a new paragraph
4. Responsibilities of Management
   ○ Stays the same (this is true for any type of opinion)
5. Auditor’s Responsibilities
   ○ Much shorter
   ○ Say that we follow GAAS
   ○ Say that b/c of stuff described in the basis for disclaimer of opinion section, we couldn’t obtain appropriate audit evidence
   ○ Don’t talk about reasonable assurance we provide or procedures we perform b/c we don’t want anyone to think we’re providing any assurance whatsoever

Question 44

Changes when Qualified due to Audit Issues - Issuer

Answer 44

1. Qualified Opinion Section
   a) Opinion sentence changes - financial statements are fair except for the effects of the adjustments, if any
   § “effects of the adjustments, if any” - there might be adjustments, there might not be, we’re not sure
   b) Add a paragraph describing why we couldn’t obtain audit evidence
2. Basis for Qualified Opinion Section
   a) Modify to say that we conducted the audit in accordance with PCAOB except as discussed above
   § There’s one or two areas we couldn’t perform, other than that all good

Question 45

Changes when Disclaimer of Opinion - Issuer

Answer 45

1. Headings change
   a) Opinion –> “Disclaimer of Opinion”
   b) Basis for Opinion –> “Basis for Disclaimer of Opinion”
   c) CAMs - omitted
2. Disclaimer of Opinion Section
   a) “We were engaged to audit” instead of “we audited”
   § Don’t want to make it seem like we actually did audit
   b) Include a reference to the paragraph describing the reasons for the disclaimer
   c) Tell the user we couldn’t get sufficient and appropriate audit evidence - we are denying the opinion
   d) Include an extra paragraph describing the reasons for the disclaimer of opinion
3. Basis for Disclaimer of Opinion
   a) Keep that management is responsible for the FS and that we are independent
   b) Remove most other things

Question 46

What is an emphasis of matter paragraph? Is it used by issuers or nonissuers? How would you include it?

Answer 46

Used by the auditors of nonissuers when they want to draw special attention to something already disclosed somewhere or when required by GAAS. You would include by:
a) Use heading “Emphasis of Matter” or something else appropriate
§ Have to use “Emphasis of Matter” and nothing else if the auditor is also communicating KAMs
b) Describe the matter being emphasized and location of relevant disclosures in the FS
c) Indicate that the auditor’s opinion is not modified in regards to this specific matter

Question 47

When is an emphasis of matter paragraph required by GAAS?
Hint: CAP

Answer 47

§ Consistency - changes that affect consistency of FS between periods (e.g. change in accounting principles)
§ Audit Opinion - auditor decides to change their original opinion based on subsequently discovered facts
§ Purpose - specific purpose frameworks are being used

Question 48

When would you accrue, disclose, or do nothing for a lawsuit?

Answer 48

If the loss is probable and you can estimate the amount: accrue and disclose
If the loss is probable and you cannot estimate the amount: disclose
If the loss is reasonably possible and you can estimate the amount: disclose
If the loss is reasonably possible and you cannot estimate the amount: disclose
If the loss is remote: do nothing

Question 49

Would auditors normally issue emphasis of matter paragraphs for lawsuits?

Answer 49

Not unless the lawsuit is “unusually important”
- auditor would still get to choose whether to include it or not

Question 50

What is an other matter paragraph? Is it used by issuers or nonissuers? When would it be required?

Answer 50

• Used for nonissuers when auditor is referring to issues other than those disclosed in the FS that are relevant to users

When is Other Matters Paragraph Required:
a) Restrict use of report
§ Auditor only wants certain individuals to see the report
b) Subsequently discovered facts lead to a change in audit opinion
§ Can use emphasis of matter or other matter paragraph
c) Comparative financial statements are presented and:
i. Prior period statements were audited but not presented this year
ii. Current period FS is audited but prior year comparatives are not audited

Question 51

What is an explanatory paragraph? Is it used for issuers or nonissuers? Where would this go in an audit report?

Answer 51

• Explanatory paragraphs are used to draw attention to specific matters that are significant but don’t require a change in the audit opinion.
• Used by issuers
• Generally follows the opinion paragraph in an unmodified report

Question 52

Is consistency between periods in financial statement frameworks and principles implied or does it need to be stated explicitly?

Answer 52

Implied unless otherwise stated in am emphasis of matter or explanatory paragraph

Question 53

How does an auditor evaluate if a change in accounting principle is acceptable?

Answer 53

a) Is the newly adopted principle in accordance with the client’s selected framework?
b) Is the method of accounting for the change acceptable?
c) Are the disclosures related to the accounting change appropriate?
d) Is there a reasonable reason for the change?
- If all 4 criteria ARE met, then they would add an emphasis of matter (explanatory) paragraph to the auditor’s report
- If the 4 criteria ARE NOT met
○ Auditor decides if they need to modify the auditor’ opinion

Question 54

When an auditor is reporting on comparative financial statements, does the same opinion need to be issued on both years or sets of statements? Can an auditor issue different opinions on different financials within one set of financial statements (e.g. modified on the balance sheet and unmodified on the income statement?

Answer 54

Yes - different years can receive different opinions and even different statements within a year can receive different opinions

Question 55

What would happen if the auditor changed their audit opinion between comparative periods (e.g. last year was qualified but this year can be unmodified)?

Answer 55

• still indicate that PY is qualified
• add an emphasis of matter or other matter paragraph (nonissuer) or an explanatory paragraph (issuer) containing the following:
  a) Date - date of the auditor’s previous report
  b) Opinion - opinion type previously issued
  c) Reason - reason for the prior opinion
  d) Changes - changes that have occurred
  e) Statement - statement that the “opinion is different”
  “Only DORCS change their mind”

Question 56

What are the two situations that can occur if the client’s FS in PY was audited by another auditor?

Answer 56

1. Prior auditor’s report IS presented
   - prior auditor must obtain a statement from current auditor saying whether they found anything that materially affects the FS
   - prior auditor must obtain a letter from management saying whether there is anything that would change the opinion in PY
   - compare last year’s statements with CY statements
2. Prior auditor’s report IS NOT presented
   ○ New auditors are going to have their opinion on CY and add in an other-matter paragraph (nonissuer) or explanatory paragraph (issuer) saying:
   a) PY statements were audited by someone else
   b) PY type of opinion
   c) Reason for any modifications made to PY opinion
   d) Nature of any emphasis of matter, other matter, or explanatory paragraphs in PY report
   e) Date of predecessor’s report
   ○ Also have to add an other-matter paragraph (nonissuer) or explanatory paragraph (issuer) saying:
   a) Service performed in PY (review or compilation)
   b) Date of PY report

Question 57

What happens if the PY is not audited in any way?

Answer 57

• Add other-matter paragraph (nonissuer) or explanatory paragraph (issuer) stating that PY is unaudited and we take no responsibility for them
• If these are then presented in comparative form with CY audited FS, need to be very clearly marked

Question 58

What are the 3 things you need to understand about a component auditor before you hire them?

Answer 58

a) Independent
b) Competent
c) Repudiable

Question 59

What does the group engagement team decide in relation to a component auditor?

Answer 59

a) Extent to which group engagement team will be involved in component engagement audit
b) Which components are significant/insignificant
§ Significant - needs to be audited
§ Insignificant - just needs analytical procedures

Question 60

What are the two options to a group engagement team in terms of delegating responsibility for a component audit?

Answer 60

a) Group engagement team takes full responsibility of component audit
§ Group engagement team doesn’t make reference to a component auditor in audit report
§ Treat the component auditor like their staff
§ Determine what type of work to be performed
§ Review all work performed
b) Group engagement team divides responsibility of component audit
§ Group engagement would reference component auditor in audit report
§ Component auditor provides audit report to group engagement team
§ Group engagement partner determines the overall opinion on the group engagement based on their own work and the work of component teams

Question 61

How are Component Auditors Referenced in Audit Reports for issuers/nonissuers?

Answer 61

• Nonissuer
  ○ Only in opinion section
  ○ Say that opinion is based on group audit and report of other auditors
  ○ Add a paragraph talking about the portion of the FS that was audited by a component
  ○ Wouldn’t typically name the component auditor - just refer to them as “other auditors”
• Issuer
  ○ Reference made to component auditor in opinion and basis for opinion section
  ○ Referred to as “other auditors”
  ○ Add a paragraph talking about the portion of the FS that was audited by a component

Question 62

What are the two categories of subsequent events?

Answer 62

1. Recognized - if they relate to conditions that existed at the balance sheet date
   § Adjust FS amounts or disclosures
2. Non-recognized
   § Events that provide information about conditions that happened after the BS date
   § Don’t adjust number on FS
   § Consider disclosure

Question 63

What if management’s responsibility regarding the date they need to evaluate subsequent events through?

Answer 63

○ Issuers: FS issue date
○ Nonissuers: FS available to issue date

Question 64

What procedures should the auditor perform to gain an understanding of subsequent events. Likely to be tested.

Answer 64

○ Post Balance Sheet Transactions - review post balance transaction
§ Commonly tested example: changes in stock or long-term debt after year end
○ Representation Letter - auditor needs to read management representation letter to see whether management said there are subsequent events that would require adjustment or disclosure
○ Inquiry - ask questions about items that were accounted for that were preliminary or inconclusive at YE
§ Commonly tested example:
□ Litigation, claims against the company, assessments
□ New commitments, borrowings, or guarantees
□ Unusual transactions
○ Minutes - look at meeting minutes for big events during the subsequent period
○ Examine - auditor should examine latest available interim FS and compare with the YE FS

Question 65

What if: auditor issues report and then obtains information about a subsequent event that they should have been aware of?

Answer 65

1. is this info reliable
2. did this exist at the report date
   ○ Auditor is not responsible if it was not foreseeable
   - Third: would the individuals relying on this report think this information is important?
   ○ If yes:
   a) Need to advise the client to issue revised FS (along with new audit report)
   b) Advise the client to make disclosures and revisions to FS
   c) If effect can’t be determined on a timely basis, need to inform users of FS
   ○ If adjustments/disclosures are made after the original audit report, the auditor would then have to perform additional procedures. As a result, the auditor may either:
   a) Dual Date - extend auditor responsibility just for that particular subsequent event
   □ E.g. Jan 21, 2022, except as to Note 2, which is Feb 3, 2022
   □ Note 2 –> extend audit procedures until Feb 3
   □ All other notes –> audit procedures remain the same
   b) Use Later Date - extend auditor responsibility for ALL subsequent to report date
   □ E.g. Feb 3, 2022
   □ All notes –> extend procedures until Feb 3, 2022
   □ Much more work

Question 66

What if the client refuses to make appropriate action over subsequent events?
Hint: DAR

Answer 66

§ Disassociate: notify the client that they can’t use the audit report any more
§ Alert Agencies: notify any applicable regulators that the auditor’s report shouldn’t be used anymore
§ Relying Parties: notify people reliant on FS that the auditor’s report isn’t applicable any more

Question 67

What is “other information” included in financial statements?

Answer 67

Other information is financial/nonfinancial information (other than FS and auditor’s report) included in an entity’s annual report

Question 68

What is the auditor’s responsibility over other information?
Examiners like to test this

Answer 68

Auditor must read the information and determine if there are material inconsistencies with the rest of the report

Question 69

What happens if there are material inconsistencies between the other information and the audited FS when you are reviewing the other information management has presented?

Answer 69

Figure out where the error is:

If it’s in the other information:
a) discuss with management
b) if management refuses, discuss with TCWG and consider withdrawing from the engagement
*DO NOT issue a modified opinion - modified opinions relate only to information in the FS, not the other information

If it’s in the FS:
- ask management to change it
- if they refuse, issue a modified opinion

Question 70

Where is other information reported on in the auditor’s report for an issuer vs nonissuer?

Answer 70

• Nonissuer
  ○ Report other information in a separate section with heading “other information”
  ○ Appears anywhere after second section
  ○ References other information and clarifies auditor’s responsibility (e.g. auditor read it but didn’t audit it)
• Issuers
  ○ Don’t need an explanatory paragraph over other information
  ○ Could add if they want to

Question 71

What is supplemental information and what is the auditor’s responsibility over reporting on it? What are the objectives? What types of procedures would you perform?

Answer 71

• Optional engagement - client asks auditor to provide an opinion on supplementary information in relation to the FS
• Auditor will go through the report and find information in the supplementary information related to the FS
  ○ Auditor is not providing opinion on nonfinancial information, only on the financial information relating to the FS
• Two objectives in this type of engagement:
  1. Evaluate the presentation of the supplementary info in relation the FS
  2. Report on whether the supplementary information is fairly stated in relation to the FS
• Types of procedures performed:
  ○ Inquire of management
  ○ Compare and reconcile information to audited FS
  ○ Evaluate appropriateness and completeness
  ○ Obtain written representations from management

Question 72

How is supplemental information presented in the auditor’s report for nonissuers and issuers?

Answer 72

Nonissuers & Issuers (exact same):
○ Two options:
a) Report in separate section called “Supplementary Information”
b) Separate report
○ Paragraph should identify:
§ Supplemental info
§ Procedures performed
§ Opinion
□ If supplementary info is materially misstated and management refuses to correct info in the supplementary info:
® If included as a section of the report - modify the opinion
® If issued as a separate report - withhold the report

Question 73

What is required supplementary information? What is the auditor’s responsibility over this?

Answer 73

• Information that a standard setter (e.g. GASB, SEC) requires in addition the audited FS
• Auditor’s responsibility is to perform limited procedures on RSI

Common RSI includes schedules like management’s discussion and analysis (MD&A), pension schedules, or budgetary comparisons

Question 74

How is required supplementary information presented for issuers vs nonissuers?

Answer 74

• Nonissuers
  ○ Add explanatory section called “Required Supplementary Information” which includes:
  § If everything is okay with RSI - state that there are no issues
  § If there are issues - add whatever the issue is to that separate section
  § Should also say that RSI is management’s responsibility and we aren’t actually issuing an opinion on it
• Issuers
  ○ Explanatory paragraph ONLY IF there are issues
  § Would then talk about what the issue is in that explanatory paragraph

Question 75

What are the 6 types of special reporting frameworks?

Answer 75

1. Cash basis
2. Tax basis
3. Regulatory basis - designed by a specific regulatory body
4. Regulatory basis (general use) - prepared under regulatory requirements but intended for normal people
5. Contractual basis
6. Other basis

Question 76

For each of the 6 frameworks, answer yes/no to the following questions around reporting requirements:
a) Description of purpose for which special purpose FS are prepared
b) Emphasis of matter paragraph altering readers about the preparation in accordance with a special purpose framework
c) Other matter paragraph restricting the use of the auditor’s report

Answer 76

1. Cash basis
   a) No
   b) Yes
   c) No
2. Tax basis
   a) No
   b) Yes
   c) No
3. Regulatory basis
   a) Yes
   b) Yes
   c) Yes
4. Regulatory basis (general use)
   a) Yes
   b) No
   c) No
5. Contractual basis
   a) Yes
   b) Yes
   c) Yes
6. Other basis
   a) Yes - if the FS are restricted
   b) Yes
   c) Yes - if other basis is only suitable for specific users

Question 77

For special purpose frameworks, what are the 2 alterations that need to be made from a standard auditor’s report? What would be included in an emphasis of matter paragraph? What would be reported in an other matter paragraph?

Answer 77

Difference from Standard Auditor’s Report
a) Non-GAAP FS titles for special purpose frameworks
○ E.g. “Balance Sheet - Cash Basis”
○ Someone who looks at the FS needs to be able to tell immediately that the FS is using a different basis
b) Management’s responsibility section of auditor’s report should make reference to management’s responsibility for determining a good financial reporting framework to use

Emphasis of Matter Paragraph
- Indicates that FS is prepared using a special purpose framework
- Refers to FSN that describes the framework

Other Matter Paragraph
- Restricts use of the report for whatever parties it should be used by