AT - AUDITOR'S REPORT ON FINANCIAL STATEMENTS Flashcards
What is the objective of an audit of financial statements?
It is to enable the auditor to express an opinion about whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
What is an unmodified opinion?
An unmodified opinion is the most common type of opinion. It is issued when the auditor CONCLUDES THAT THE FS ARE PRESENTED FAIRLY BASED ON AUDIT EVIDENCE OBTAINED.
What are the basic elements of an unmodified report? What are each of the elements’ purpose?
- Title - indicated that it is the report of the INDEPENDENT AUDITOR to distinguish it from others
- Addressee (shareholder/BOD/3rd parties/Public) - addressed to those for whom the report is prepared.
- Introductory Paragraph - must indicate
a. Name of the entity
b. State that the FS has been audited
c. Identify the title of each of the FS - Management’s Responsibility for FS - must include the heading “MANAGEMENT’S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS” and describe management’s responsibility for:
a. fair presentation of FS
b. Design and implementation and maintenance of
internal controls - Auditor’s Responsibility - must include the heading “Auditor’s Responsibility” and:
a. State the responsibility of the auditor of expression
of an opinion
b. State that the audit was conducted in accordance
with the PSAs
c. Give a general description of the audit - Auditor’s Opinion - Must include the heading “Opinion”
- Other Reporting Responsibilities
- Auditor’s Signature - report should be signed in the name of the audit firm and/or personal name of the auditor. If the FS is to be submitted to regulators, SEC requires that it be in the PERSONAL NAME of the partner.
- Date of the report - audit report SHOULD NOT BE DATE EARLIER THAN THE DATE OF THE APPROVAL OF THE FS.
- Auditor’s Address
When is an opinion modified?
An unmodified opinion is issued when:
- The audit was conducted in accordance with the PSA
- FS has been prepared in accordance with the applicable financial reporting framework
Failure to meet any of the above will cause the auditor to modify his opinion on the FS.
What is a scope limitation?
Scope limitation arises when the auditor is UNABLE TO PERFORM NECESSARY AUDIT PROCEDURES or when the auditor is UNABLE TO OBTAIN SAE ABOUT AN ASSERTION, both of which could be imposed by client or circumstances.
- Circumstances beyond entity’s control
- Circumstances relating to the nature/timing of the auditor’s work
- Limitations imposed by management
What happens when management imposes a scope limitation?
- Auditor should first ask management to remove the scope limitation
- If refused, auditor should communicate the refusal to TCWG and determine whether it is possible to perform alternative procedures to obtain SAE
- Failure to obtain SAE will cause the auditor to either:
a. Express a qualified opinion if the effect is material
but not pervasive
b. If effect is both material and pervasive, either
RESIGN from the engagement or DISCLAIM THE
OPINION.
The practicality between resignation and disclaiming the opinion depends on the stage of completion of the engagement.
Discuss the basis of modification paragraph.
When the auditor modifies his opinion on the FS, the auditor should include a SEPARATE PARAGRAPH IN THE AUDITOR’S REPORT that provides a DESCRIPTION OF THE MATTER GIVING RISE TO THE MODIFICATION. This paragraph must be PLACED IMMEDIATELY BEFORE THE OPINION PARAGRAPH with an appropriate heading such as “BASIS FOR QUALIFIED OPINION.”
If the modification is due to material misstatement auditor should include in the basis for modification paragraph:
a. DESCRIPTION OF THE NATURE OF THE MISSTATEMENTS
b. QUANTIFICATION OF THE FINANCIAL EFFECTS OF THE MISSTATEMENT, if practicable.
If the modification is due to scope limitation, auditor should include in the basis for modification paragraph THE REASONS THEREOF.
What is a piecemeal opinion?
Piecemeal opinion is an unmodified opinion expressed on one or more components of the FS while expressing an adverse or disclaimer of opinion on the FS as a whole. PSA 705 DOES NOT ALLOW THIS REPORTING PRACTICE.
What is an emphasis of matter paragraph?
An EoM is included in the report to DRAW THE READER’S ATTENTION TO A MATTER PRESENTED OR DISCLOSED IN THE FS, that in the auditor’s judgment, IS OF SIGNIFICANT IMPORTANCE that is fundamental to the reader’s understanding of the FS.
What are the instances wherein an EoM paragraph may be necessary?
- An Uncertainty
- Material going concern uncertainty
- Early application of new accounting standard in advance of its effective date
- Major catastrophe that has significant effect on entity’s financial position
- Subsequent discovery of facts affecting the previously issued opinion
- FS prepared using special purpose framework.
What is an uncertainty?
An uncertainty is a matter whose outcome depends on future actions or events not under the control of the entity that may affect the FS.
What is an other matter paragraph?
Other matter paragraphs are added when the auditor considers it necessary to COMMUNICATE A MATTER OTHER THAN THOSE PRESENTED OR DISCLOSED IN THE FS.
Differentiate other matter paragraph and emphasis of matter paragraph.
EoM - Already disclosed in the FS, auditor only emphasizes.
Other matter - not disclosed in the FS, but auditor wants to bring to reader’s attention.
When is an other matter paragraph required?
- Reporting on comparative information
- Material inconsistency between FS and other information
- FS prepared using more than one financial framework
- Limiting the use of the auditor’s report
- Subsequent discovery of facts
What are the two financial reporting frameworks for comparative information?
- Comparative FS / Horizontal analysis - amounts and other disclosures for the preceding period are included for comparison with the FS of the current period but DO NOT FORM PART OF THE CURRENT PERIOD FS.
- Corresponding Figures - amounts and other disclosures for the preceding period are included for comparison with the FS AS PART OF THE CURRENT PERIOD FS.
