A1: Audited Financial Statements: The Basics

Question 1

State the primary purpose of an audit

Answer 1

To provide F/S users with an opinion on whether the F/S are fairly presented, in all material respects, in accordance with the applicable financial reporting framework

Question 2

ID 3 inherent limitations of an audit

Answer 2

1. the nature of financial reporting 2. the nature of audit procedures 3. timeliness of financial reporting and the balance between benefit and cost

Question 3

What are the 5 general GAAS requirements related to the conduct of an audit

Answer 3

(S) Professional Skepticism (E) Ethical Requirements (J) Professional Judgment (E) Sufficient and Appropriate Audit Evidence (C) Compliance with GAAS

Question 4

List in order the primary sections of an unmodified audit opinion

Answer 4

Title, Addressee, Introduction, MGT’s responsibility, Auditor’s responsibility, Opinion, Report on Other Legal and Regulatory Requirements (if applicable)

Question 5

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

Answer 5

The entity whose F/S have been audited, a statement that the F/S were audited, the title of each F/S audited, dates or periods covered by each F/S

Question 6

What should be included in the MGT’s responsibility paragraph of the unmodified audit opinion?

Answer 6

An explanation that MGT is responsible for the preparation and fair presentation of the F/S; a statement that this responsibility includes the design, implementation, and maintenance of I/C

Question 7

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

Answer 7

A statement that it is the auditor’s responsibility to express an opinion on the F/S based on the audit; A statement that the audit was conducted in accordance with auditing standards generally accepted in the U.S.; A statement that standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the F/S are free from material misstatement; a description of the audit

Question 8

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

Answer 8

A statement that the F/S 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 then ended, in accordance with the applicable financial framework; Identification of the applicable financial reporting framework and its origin.

Question 9

Define a component auditor

Answer 9

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

Question 10

ID the 3 requirements that are necessary to reference a component auditor in the auditor’s report.

Answer 10

Reference to the component auditor in the auditor’s report can be made if the following requirements are met:

• The component auditor has performed an audit in accordance with GAAS, or when required, the PCAOB
• The component auditor’s report is not restricted use

Question 11

When should an auditor’s opinion be modified?

Answer 11

A modification to the auditor’s report is necessary when:

• the auditor determines that the F/S as a whole are materially misstated (GAAP issue); or
• the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the F/S as a whole are free from misstatement (GAAS issue).

Question 12

What is the purpose of an emphasis-of-matter paragraph?

Answer 12

The purpose of an emphasis-of-matter paragraph is to reference a matter that is appropriately presented in the F/S but is of such importance that it is fundamental to the user’s understanding of its F/S.

Question 13

How is the emphasis-of-matter paragraph used (reported) in an auditor’s report?

Answer 13

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 F/S
• Indicating that the auditor’s opinion is not modified with respect to the matter emphasized.

Question 14

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

Answer 14

• 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 described a justified change in accounting principle that has a material effect on the entity’s F/S;
• facts are subsequently discovered that lead to a change in the auditor’s opinion; or
• the F/S are prepared in accordance with an applicable special purpose framework, other than regulatory basis F/S intended for general use

Question 15

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

Answer 15

• 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;
• prior period F/S were audited by a predecessor auditor and the predecessor’s audit report is not reissued;
• current period F/S are audited and presented in comparative form with compiled or reviewed F/S for the prior period;

Question 16

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

Answer 16

(A) Analytical procedures (D) Debt compliance (M) Minutes (I) Inquiry of client’s legal counsel (T) Third parties (S) Subsequent events review

Question 17

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

Answer 17

(F) Financial difficulties (I) Internal matters, such as labor difficulties, substantial dependence on a particular project (N) Negative trends (E) External matters, such as legal proceedings, new legislation, loss of a principal customer, natural disasters

Question 18

What is the going concern period?

Answer 18

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

Question 19

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

Answer 19

“Substantial doubt” and “Going concern”

Question 20

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

Answer 20

When audit evidence indicates that there is material misstatement of the F/S; A qualified opinion is issued when the auditor concludes that misstatements, individually or in the aggregate, are material but not pervasive to the F/S; An adverse opinion is issued when the auditor concludes that misstatements, individually or in the aggregate, are both material and pervasive to the F/S.

Question 21

Described the circumstances in which a material misstatement of the F/S may arise.

Answer 21

• The appropriateness of accounting policies
• The application of accounting policies
• The appropriateness of the F/S presentation
• The appropriateness or adequacy of disclosures in the F/S

Question 22

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

Answer 22

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 evidence on which to base an opinion and the auditor determines that the possible effects could be both material and pervasive.

Question 23

ID some causes of scope limitations

Answer 23

• Circumstances
• Management
• Inability to observer inventory
• Inability to confirm receivables
• Refusal of the client’s attorney to respond to inquiry
• Refusal of mgt to provide a rep letter

Question 24

The auditor’s report should not be dated earlier than the date on which the auditor has obtained sufficient appropriate evidence. This should include evidence that what 3 things have occurred?

Answer 24

1. audit documentation has been reviewed;
2. F/S have been prepared; and
3. MGT has taken responsibility for the F/S

Question 25

If, during the current examination of comparative F/S, the auditor discovers evidence that affects the prior statements and the opinion that was expressed, what action should be taken?

Answer 25

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:
(D) Date of the auditor’s previous report
(O) Opinion type previously issued
(R) Reason for prior opinion
(C) Changes that have occurred
(S) Statement “opinion… is different.”

Question 26

The predecessor auditor should take what steps before reissuing an audit report on prior period F/S?

Answer 26

• Read the statements for the current period
• Compare the previous audited statements w/ the current period statements
• Obtain a letter of representation from the successor auditor
• Obtain a letter of representation from MGT at or near the date of reissuance
• If unrevised, use the original report date; if revised, dual date the report

Question 27

Define the 2 types of subsequent events.

Answer 27

A recognized subsequent event relates to a condition that existed on or before the balance sheet date. Recognized subsequents require F/S adjustment.

A nonrecognized subsequent event occurs after the balance sheet date. Nonrecognized subsequent events generally do not require F/S adjustment, but may require footnote disclosure.

Question 28

What procedures should the auditor perform during the subsequent period?

Answer 28

(P) review Post b/s transactions
(R) obtain a Representation letter from MGT describing events that occurred during the subsequent period requiring adjustment to the F/S
(I) Inquire w/ MGT of those charged w/ governance whether subsequent events occurred that could impact F/S
(M) review Minutes of board and committee meetings
(E) Examine current interim F/S and compare to F/S under audit

Question 29

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

Answer 29

None. Although 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 30

When and why is dual dating used?

Answer 30

Dual dating is used when subsequent events requiring F/S 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 only for the particular subsequent event. The original date of the report is retained for the rest of the F/S.

Question 31

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

Answer 31

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 32

What is the auditor’s responsibility with respect to info. accompanying the basic F/S in a client-prepared document?

Answer 32

The auditor should read the other info. to determine that it is consistent w/ the audited F/S and that there are no material inconsistencies or material misstatements of fact.

That auditor may (but is not required to) report on the other info.

Question 33

What are the 2 objectives of engagements to report on supplementary info?

Answer 33

1. To evaluate the presentation of the supplementary info. in relation to the F/S as a whole.
2. To report on whether the supplementary info. is fairly stated, in all material respects, in relation to the F/S as a whole.

Question 34

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

Answer 34

• The purpose for which the F/S are prepared
• Whether the financial reporting framework is a fair presentation framework
• The intended users of the F/S
• The steps taken by MGT to ensure that the applicable financial reporting framework is acceptable under the circumstances