AUD 1

Question 1

Which standards provide the most authoritative U.S. auditing guidance for non-issuers and issuers, and who issues those standards?

Answer 1

Non-issuers: Statements on Auditing Standards (SAS), issued by the AICPA Auditing Standards Board
Issuers: auditing standards (AS), issued by the Public Company Accounting Oversight Board (PCAOB)

Question 2

State the primary purpose of an audit

Answer 2

To provide financial statement users with an opinion on whether the financial statements are fairly presented, in all material respects, in accordance with the applicable financial reporting framework.

Question 3

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

Answer 3

S - Professional Skepticism
E - Ethical Requirements
J - Professional Judgement
E - Sufficient and Appropriate Audit Evidence
C - Compliance with GAAS

Question 4

Identify three inherent limitations of an audit

Answer 4

• The nature of financial reporting
• The nature of audit procedures
• Timeliness of financial and the balance between benefit and cost.

Question 5

When should an auditor’s opinion be modified?

Answer 5

A modification to the auditor’s report is necessary when:
- the auditor determines that the financial statements as a whole are materially misstated (GAAP issue) or
-The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement (GAAP issue)

Question 6

List in order the primary sections of an unmodified audit opinion (nonissuer)

Answer 6

-Title
-Addresse
-Auditor’s Opinion
-Basis for opinion
-Responsibilities of management for the financial statements
-Auditor’s responsibilities for the audit of the financial statements
-Signature of the auditor, auditors address, and date of the auditor’s report
When applicable, the auditor’s report may include additional sections depending on the circumstances of the audit. Examples include Going concern, key audit matters, other information, and other reporting responsibilities

Question 7

What should be included in the opinion paragraph of the unmodified audit opinion (non-issuer)?

Answer 7

• The entity under audit
  -The title of each financial statement and reference to the notes
  -The dates or periods covered by the financial statements.
  -A statement that the financial statements have been audited
  -A statement that the financial statements present fairly, in all material respects in accordance with the applicable financial framework.
• The applicable financial reporting framework and its origin

Question 8

What should be included in the management’s responsibility paragraph of the unmodified audit opinion (non-issuer)?

Answer 8

• 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 control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
• When required, the evaluation of where there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

Question 9

Where in the standard unmodified (non-issuer) does the auditor refer to (1) the applicable financial reporting framework (i.e. GAAP or IFRS) and (2) generally accepted auditing standards?

Answer 9

1. The applicable financial reporting framework is referred to in the management’s responsibility and opinion sections.
2. GAAS is referred to in the basis of opinion and auditor’s responsibility sections.

Question 10

What is the definition of a key audit matter (KAM)?

Answer 10

Key audit matters are those matters that were of most significance in the audit of financial statements of the current period and are selected from the matters communicated to those charged with governance.
Key audit matters related to the audits of non-issuers only and entities have the opinion of whether or not to engage the auditor to communicate such matters int he auditor’s report.

Question 11

When an auditor is engaged to communicate key audit matters in the auditor’s report, what information should be included?

Answer 11

When the auditor is engaged to communicate key audit matters, the auditor’s report should include a separate section with the heading ‘Key Audit Matters’ and the following information should be included:
- A description of each matter
- A description of why it was of most significance to the audit
- How the matter was addressed in the audit of the financial statements

Question 12

In what circumstances would an auditor be prohibited from communicating key audit matters in the auditor’s report?

Answer 12

An auditor is prohibited from communicating key audit matters in the auditor’s report when the auditor expresses an adverse or disclaims an opinion on the financial statements, unless such reporting is required by law or regulation.

Question 13

Can an auditor that has been engaged to communicate key audit matters in the auditor’s report conclude that there are no key audit matters to communicate?

Answer 13

Yes, an auditor may determine, based on the facts and circumstances of the audit, that there are no key audit matters to communicate. In this circumstance, a statement to this effect should be added to the key audit matters section of the auditors report.

Question 14

List in order the primary sections of an unqualified audit opinion (issuer)

Answer 14

• Title
• Addresse
• Opinion Section
• Basis for opinion section
• Critical audit matters
• Signature, tenure, location
• Report date

Question 15

What should be included in the opinion section of the unqualified audit opinion (issuer)?

Answer 15

The first section of the auditor’s report must include the section heading ‘ Opinion on the financial statements, and the following elements:
- The name of the company whose financial statements have been audited
- A statement of identifying each financial statement and any related schedule that has been audited
- Dates or period covered by each financial statements and related schedule
- A statement indicating that the financial statements were audited
- An opinion that the financial statements presented fairly, in all material respects, the financial position of the company as the balance sheet date and the results of its operations and its cash flows for the period then ended in conformity with applicable financial reporting framework (e.g. GAAP)

Question 16

What should be included in the first paragraph under the Basis for opinion section in the unqualified audit opinion (issuer)?

Answer 16

The second section of the auditor’s report must include the section heading ‘Basis for opinion, and the following elements:
- A statement that the financial statements are the responsibility of the company’s management
- A statement that the auditors is a public accounting firm registered with the PCAOB (United States) and is required to be independent with respect to the company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB.

Question 17

What should be included in the second paragraph under the Basis for Opinion section in the unqualified audit opinion (issuer)?

Answer 17

The second paragraph under the Basis or Opinion section contains the following:
- A statement that the audit was conducted in accordance with the standards of the PCAOB
- A statement that PCAOB standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material mistatement, whether due to error or fraud
- A statement that the audit included:
- performing procedures to assess the risks of material misstatement
- examining, on a test basis, evidence regarding the amounts and disclosures
- evaluating the accounting principles used and significance estimated made by management and
- evaluating the overall presentation of the financial statements and
- A statement that the auditr believes that the audit provides a reasonable basis for the auditor’s opinion

Question 18

Where in the standard unqualified opinion (issuer) does the auditor refer to (1) the applicable financial reporting framework (i.e GAAP) and (2) the standards of the Public Company Accounting Oversight Board (PCAOB)?

Answer 18

1. The applicable financial reporting framework is referred to in the opinion paragraph
2. The standards of the PCSOB are referred to in the second paragraph under the Basis for opinion section.

Question 19

The auditors report should not be dated earlier than the dat eon which the auditor has obtained sufficient appropriate audit evidence. This should include evidence that what three things have occurred?

Answer 19

Evidence that:
1. audit documentation has been reviewed
2. financial statements have been prepared and
3. management has taken responsibility for the financial statements

Question 20

In most audit of issuers, how many critical audit matters (CAMs) will an auditor normally identify?

Answer 20

It is expected that, in most audits, the auditor would identify at least one CAM.

Question 21

What is the definition of a critical audit matter (CAM)?

Answer 21

A critical audit matter is defined as a matter that was communicated or required to be communicated to the audit committee and that:
1. relates to accounts or disclosures that are material to the financial statements and
2. involved especially challenging, subjective, or complex auditor judgement
Note: Audit reports for issuers must include any CAMs or state that the auditor determined there were no CAMs.

Question 22

In determining critical audit matters (CAMs), what factors should the auditor consider?

Answer 22

The auditor should consider the auditor’s assessment of the risks of material misstatement, areas of significant judgement or estimation by management, nature and timing of unusual transactions, the degree of subjectivity in applying audit procedures, and the extent of specialized skill or knowledge regarding a matter.

Question 23

For each CAM identified, what should the audit report of an issuer include?

Answer 23

For each CAM identified, the audit report should include:
- Identification of the CAM
- description of the Principal considerations that led the author to determine the matter was a CAM
- description of how the CAM was addressed in the audit and
- reference to the relevant financial statements accounts or disclosures

Question 24

What should the auditor of an issuer do if the auditor determines there are no CAMs?

Answer 24

When the auditor determines that there are no CAMs, the audit report should state: We determined that there are no critical audit matters.

Question 25

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

Answer 25

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

Question 26

Describe the circumstances in which a material misstatements of the financial statements may arise.

Answer 26

Misstatements may arise in relation to:
- The appropriateness of accounting policies
- The application of accounting policies
- The appropriateness of financial statements presentation
The appropriateness or adequacy of disclosures in the financial statements

Question 27

If an opinion is qualified due to material misstatement of financial statements on an issuer audit report, where does the paragraph explaining the qualification appear?

Answer 27

A paragraph should be placed immediately following the opinion paragraph. There is no heading for this paragraph. The paragraph should include:
- All of the substantive reasons that lead the auditor to conclude that here has been a departure from generally accepted accounting principles.
- Disclosure of the principal effects of the subject matter of the qualification on financial position, results of operations, and cash flows, if practicable.
- If the effects are not reasonably determinable, the report should so state.
- If such disclosures are made in a note to the financial statements, the explanatory paragraph(s) may be shortened by referring to it.

Question 28

Compared to a standard unqualified opinion for an issuer, determine the paragraphs that are modified in an audit report when the following opinions are issued due to financial statement issues (misstatement):
- Qualified
- Adverse

Answer 28

Qualified - opinion section: except for additional paragraph: yes Basis for opinion section: standard
Adverse - opinion section - do not present fairly additional paragraph - yes basis for opinion section - standard
Note: The section headings (opinion on the finanical statements and basis for opinion are the same as the standard unqualified report when a qualified or adverse opinion is issued.

Question 29

Is an auditor required to report on critical audit matters (CAMs) when issuing an adverse opinion?

Answer 29

No, the auditor is not required to report CAMs when an adverse opinion is expressed.

Question 30

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

Answer 30

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

Question 31

Identify some examples of scope limitations.

Answer 31

Restrictions on the auditor’s ability to perform auditing procedures may be caused by:
- Time constraints
- Inability to observe inventory
- Inability to confirm receivables
- Inability to obtain audited financial statements of a consolidated investee
- Restrictions on the use of auditing procedures
- Inadequacy of accounting records
- Refusal of the client’s attorney to respond to inquiry
- Refusal of management to provide a representation letter

Question 32

What situations may result in a disclaimer of opinion in an audit report?

Answer 32

• Pervasive inability to obtain sufficient appropriate audit evidence
• Lack of independence (always results in disclaimer)
• Going concern uncertainty ( Note: If adequate disclosure of going concern exists, the auditor may choose between either an unqualified opinion with a separate report section (non-issuer) or explanatory paragraph (issuer), or a disclaimer of opinion.

Question 33

If an opinion is modified, on a non-issuer audit report where does the explanation of the modification appear?

Answer 33

The paragraph explaining the modification would appear after the opinion pragraph. The basis for modification paragraph should use the appropriate heading. Appropriate heading includes:
- Basis for qualified opinion
- Basis for adverse opinion
- Basis for disclaimer of opinion