A1 - Reports on Audited F/S

Question 1

In order to form the opinion, the auditor should evaluate whether, based on the applicable financial reporting framework:

Answer 1

1. the F/S adequately disclose the significant accounting policies selected and applied, including a description of the applicable financial reporting framework;
2. the accounting policies selected and applied are consistent with the applicable financial reporting framework and are appropriate;
3. the accounting estimates made by management are reasonable;
4. the information presented in the F/S is relevant, reliable, comparable, and understandable;
5. the F/S provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the information conveyed in the F/S;
6. the terminology used in the F/S, including the title of each financial statement, is appropriate;
7. the overall structure and content of the F/S is fairly presented; and
8. the F/S, including the related notes, represent the underlying transactions and events in a manner that achieves fair presentation.
   * A1-12*

Question 2

Unmodified audit opinion:

GAAS ———- > ____ paragraph(s)

GAAP ———- > ____ paragraph(s)

Answer 2

GAAS: Auditor’s Responsibility Paragraph

GAAP: (U.S. or other applicable financial reporting framework): Management’s Responsibility Paragraph and Opinion Paragraph.

A1-16

Question 3

The group engagement partner is the ____.

Answer 3

the partner or other person in the firm is responsible for the group audit engagement and for the auditor’s report on the group F/S.

A1-17

Question 4

Reference to the component auditor should not be made unless the following requirements are met:

1. _____
2. _____

Answer 4

1. The component auditor has performed an audit in accordance with the relevant requirements of GAAS, or when required, the PCAOB
2. The component auditor’s report is not restricted use.

A1-18

Question 5

An emphasis of matter paragraph is **required **in the following circumstances:

Answer 5

1. Going concern
2. To describe a justified change in accounting principle that has a material effect on the entity’s F/S.
3. Subsequently discovered facts lead to a change in audit opinion (the auditor may use an emphasis of matter paragraph or other matter paragraph, as appropriate)
4. The F/S are prepared in accordance with an applicable special purpose framework (other than regulatory basis F/S intended for general use).

A1-23

Question 6

Going concern US vs ISA:

Answer 6

US: The auditor is responsible for evaluating audit evidence to determine whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the F/S being audited.

ISA: require the auditor consider the same period that was used by management in making its assessment of the entity’s ability to continue as a going concern. This period must be at least, but not limited to, 12 months from the BS date. The auditor is also required to inquire of management regarding conditions or events beyond the period of assessment that may cast significant doubt about the entity’s ability to continue as a going concern.

A1-25

Question 7

The auditor examines evidence obtained during the audit to determine whether there is information that is contrary to the basic principle of going concern. The auditor should examine the evidence obtained from the following procedures:

Answer 7

ADMITS

Analytical procedures

Debt compliance- The auditor should review the terms of debt and loan agreements

Minutes-The auditor should review minutes from stockholder and board of director meetings

Inquiry of client’s legal counsel

Third parties-The auditor should confirm the details of financial support arrangements

Subsequent events review

A1-26

Question 8

Based on the procedures performed, the auditor identifies conditions and events that may be indicative of substantial doubt:

Answer 8

FINE

Financial difficulties - loan defaults, dividend arrearages, denial of usual trade credit, debt restructuring, noncompliance with capital requirements, new financing sources or methods, disposal of substantial assets

Internal matters - work stoppages, labor difficulties, substantial dependence on a particular project, uneconomic long-term commitments, significant revision of operations

Negative trends - recurrent losses, working capital deficiencies, negative cash flows, adverse financial ratios

External matters-legal proceedings, new legislation, loss of a key franchise, license, or patent, loss of a principal customer or supplier, natural disasters.

A1-26

Question 9

When the auditor believes there is substantial doubt about the ability of the entity to continue as a going concern for a reasonable period of time, the following items should be included in the audit documentation:

Answer 9

a. The conditions or events that gave rise to the substantial doubt;
b. Any mitigating factors that the auditor considers significant;
c. Audit work performed to evaluate management’s plans;
d. The auditor’s conclusion about whether substantial doubt remains or is alleviated; and
e. The effect of the auditor’s conclusion on the evaluation of the financial statements and related disclosures, and on the resulting auditor’s report.
* A1-28*

Question 10

Effects of going concern issues on the auditor’s report:

Adequate disclosure:

Inadequate disclosure:

Significant going concern uncertainty:

Answer 10

Adequate disclosure: Unmodified w/ emphasis of matter paragraph

Inadequate disclosure: Qualified or adverse (GAAP)

Significant going concern uncertainty: Disclaimer (GAAS)

A1-29

Question 11

GAAP Problem VS GAAS Problem:

Answer 11

GAAP

• Unreasonable accounting estimate
• GAAP consistency change (unadjusted) = Auditor disagrees
• Inadequate disclosure
• F/S are materially misstated
• Departing/violation of GAAP (unjustified)

GAAS

• Insufficient evidence
• independence
• scope limitation
• Significant going concern uncertainty
• Lack of independence

A1-31

Question 12

Practicable means

Answer 12

Practicable means 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.*
• A1-33*

Question 13

When the auditor is not independent but is required by law or regulation to report on the F/S, the auditor should______.

Answer 13

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

A1-41

Question 14

The group engagement team must understand the following for each component auditor:

Answer 14

1. Whether the component auditor is independent and will comply with all relevant ethical requirements
2. The professional competence of the component auditor
3. The extent to which the group engagement team will be involved in the work of the component auditor
4. Whether the group engagement team will be able to get information needed for the consolidation process from the component auditor
5. Whether the component auditor operates in a regulatory environment that actively oversees auditors
   * A-18*

Question 15

Component Auditor:

Answer 15

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. A component auditor may be part of the group engagement partner’s firm, a network firm, or another firm.

A1-17

Question 16

Group Engagement Team:

Answer 16

The group engagement team includes the group engagement partner, other partners, and staff who establish the overall audit strategy, communicate with component auditors, perform work on the consolidation process, and evaluate the conclusions drawn from the audit evidence as the basis for forming an opinion on the group financial statements.

A1-17

Question 17

Making a reference in the auditor’s report

The auditor’s report on the group F/S should clearly indicate:

Answer 17

1. that the component was not audited by the auditor of the group, statements but was audited but the component auditor;
2. the magnitude of the portion of the F/S audited by the component auditor;
3. when the component’s F/S are prepared using a different financial reporting framework from the group F/S;
   
   1. the financial reporting framework used by the component; and
   2. that the auditor of the group f/s is taking responsibility for evaluating the appropriateness of the adjustments to convert the component’s F/S to the group financial reporting framework
4. When the component auditor’s report on the component’s F/S does not state that the audit was performed in accordance with GAAS or PCAOB standards and the group engagement partner has determined that the component auditor performed additional procedures to meet the relevant requirements of GAAS:
   
   1. The set of auditing standards used by the component auditor; and
   2. That additional audit procedures were performed by the component audit to meet the relevant requirements of GAAS.

A1-19

Question 18

Use of a Different Financial Reporting Framework

If the component’s financial statements are prepared using a different financial reporting framework from the group financial statements, reference to the component auditor should not be made in the auditor’s report on the group F/S unless:

Answer 18

1. the measurement, recognition, presentation, and disclosure criteria used by, the component under the component’s financial reporting framework are similar to the criteria under the financial reporting framework used by the group.
2. the group engagement team has obtained sufficient appropriate audit evidence to evaluate the appropriateness of the adjustments needed to convert the component’s financial statements to the financial reporting framework used by the group (without needing to assume responsibility for the work of the component auditor).

A1-18

Question 19

When assessing mangement’s plans for dealing with adverse effects of future conditions and events, mitigating factors would include:

Answer 19

1. The postponement of expenditures (including R&D)
2. Plans to dispose of assets
3. Plans to borrow money or restructrure debt
4. Plans to increase ownership equity (sell stock).
   * A1-Q11*

Question 20

Omission of selected quartely data required by SEC regulations is dlsclosed in ___ paragraph added to an otherwise ___ opinion.

Answer 20

emphasis of matter ; unmodified

A1-Q21