A1: Audit Reports Flashcards
An auditor’s responsibilities for audited financial statements are confined to the expression of the auditor’s opinion
An auditor’s responsibility is to express an opinion on financial statements based on an audit
The phrase “U.S. generally accepted accounting principles” is an accounting term that:
Encompasses the conventions, rules, and procedures necessary to define U.S. accepted accounting practice at a particular time
The literature pertaining to U.S. GAAP changes over time, and therefore U.S. generally accepted accounting principles can be said to encompass the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. U.S. GAAP is one of the financial reporting frameworks acceptable for preparation of financial statements. IFRS is another one.
Which of the following terms identifies a requirement for audit evidence?
Appropriate
The auditor must obtain sufficient appropriate audit evidence to afford a reasonable basis for the opinion
Which of the following correctly defines the term reasonable assurance?
A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement
Reasonable assurance is a high, but not absolute, level of assurance
Which of the following provides the most authoritative guidance for the auditor of a nonissuer?
General guidance provided by a Statement on Auditing Standards
General guidance provided by a Statement of Auditing Standards is the most authoritative level of auditing guidance for audits of nonissuers. Auditors are required to comply with SASs, and should be prepared to justify any departures
Which of the following accurately depicts the auditor’s responsibility with respect to Statements on Auditing Standards?
The auditor is generally required to follow guidance provided by the Standards, and should be able to justify any departures
An auditor of a nonissuer must conduct the audit in accordance with:
ASB standards
Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of:
Professional Skepticism
The auditor should plan and perform the audit with an attitude of professional skepticism. This attitude includes a questioning mind and a critical assessment of audit evidence, and recognizes that circumstances may exist that cause financial statements to be materially misstated
Which of the following is not an example of the application of professional skepticism?
Inquiring of prior year engagement personnel regarding their assessment of management’s honesty & integrity
The auditor should consider that fraud might occur regardless of any past experience with the entity. An assessment of management’s honesty and integrity performed during the previous year would not necessarily be relevant to the current year’s audit
Which of the following actions should a CPA firm take to comply with the AICPA’s quality control standards?
Establish policies to ensure that the audit work meets applicable professional standards
A quality control system consists of policies and procedures designed, implemented, and maintained to ensure that the firm complies with professional standards and appropriate legal & regulatory requirements, and that any reports issued are appropriate in the circumstances
When financial statements contain a departure from GAAP because, due to unusual circumstances, the financial statements would otherwise be misleading, the auditor should express an opinion that is:
Unmodified
When circumstances indicate that financial presentation in accordance with U.S. GAAP would be misleading, a departure from U.S. GAAP is permissible. In such cases, the auditor should issue an unmodified opinion because the financial statements are not materially misstated.
When a PCAOB auditing standards indicates that an auditor “could” perform a specific procedure, how should the auditor decide whether and how to perform the procedure?
By exercising professional judgement in the circumstances
The words “may”, “might”, and “could” describe actions and procedures that auditors have a responsibility to consider. Matters described in this fashion require the auditor’s attention and understanding. How and whether the auditor implements these matters in the audit will depend on the exercise of professional judgement in the circumstances consistent with the objectives of the standard
An auditor of a nonissuer exercising professional skepticism with respect to the risks of material misstatement due to fraud will most appropriately:
Consider the reliability of information to be used as audit evidence
An auditor exercising professional skepticism with respect to the risks of material misstatement due to fraud will most appropriately consider the reliability of information to be used as audit evidence
For an entity’es financial statements to be presented fairly in accordance with an applicable financial reporting framework, the framework selected should:
Include an adequate description of the framework in the financial statements
The preparation and fair presentation of the financial statements requires identification of the applicable financial reporting framework and inclusion of an adequate description of the framework, as well as preparation and fair presentation in accordance with the framework.
When disclaiming an opinion because of an insufficiency of audit evidence an auditor should refer to the situation in the:
Auditor’s Responsibility Paragragh: YES
Notes to the FS: NO
When a disclaimer of opinion is issued due to lack of sufficient audit evidence, the lack of evidence should be disclosed in the Auditor’s Responsibility paragraph and discussed in an additional paragraph before the opinion paragraph. This paragraph should be titled Basis for Disclaimer of Opinion
After considering an entity’s negative trends and financial difficulties, an auditor has substantial doubt about the entity’s ability to continue as a going concern. The auditor’s considerations relating to management’s plans for dealing with the adverse effects of these conditions most likely would include management’s plans to:
Increase ownership equity
The auditor considers any of management’s plans that might serve to mitigate the adverse effects of particular conditions & events. Typically, plans to increase ownership equity, to borrow money, to restructure debt, to sell assets, and/or to reduce or delay expenditures might all be considered mitigating factors
Auditor’s Report for an Unmodified Opinion “MR DIM REPPORTS CRAME”
Introduction
Management’s Responsibility (MR)
-> Design, Implementation, & Maintenance (DIM)
Auditor’s Responsibility (R)
-> Express an opinion (E)
-> Plan and perform an audit (P)
-> Perform procedures (P)
-> Obtain audit evidence (O)
-> assess Risk of material misstatement (R)
-> “Test” internal controls (T)
-> ensure fair presentation of the financial Statements (S)
does not express an opinion on internal Controls (C)
- > audit evaluates Reasonableness (R)
- > of significant Accounting policies/estimates (A)
- > made by Management (M)
- > as well as Evaluating the overall presentation (E)
State the primary purpose of an audit:
To provide FS users with an opinion on whether the financial statements are fairly presented, in all material respects, in accordance with the applicable financial reporting framework
Identify 3 inherent limitations of an audit:
- Nature of financial reporting
- Nature of audit procedures
- Timeliness of financial reporting and the balance of benefit and cost
Which standards provide the most authoritative U.S. auditing guidance for nonissuers and issuers, and who issues those standards?
Nonissuers: Statements on Auditing Standards (SASs), issued by the AICPA Auditing Standards Board (ASB)
Issuers: Auditing Standards (ASs), issued by the PCAOB plus all SASs adopted by PCAOB
Describe the role of International Auditing & Assurance Standards Board (IAASB) and the use of International Standards of Auditing (ISAs):
IAASB is a standard-setting board of the International Federation of Accountants (IFAC) that establishes (ISAs)
Currently, over 100 countries are using or are 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
What are the five general GAAS requirements related to the conduct of an audit? “SEJEC”
S: professional Skepticism E: Ethical requirements J: professional Judgement E: sufficient & appropriate audit Evidence C: Compliance with GAAS
What should be included in the introductory paragraph of the unmodified audit opinion?
- The entity whose FS have been audited
- A statement that the FS were audited
- The title of each FS audited
- Dates or periods covered by each financial statement
What should be included in the Management’s Responsibility paragraph of the unmodified audit opinion?
- 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 controls
