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Auditing > AUD 1 > Flashcards

AUD 1 Flashcards

1
Q

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

A

Nonissuers: Statements on Auditing Standards(SASs), issued by the AICPA Auditing Standards Board

Issuers: Auditing Standards (ASs), issued by the Public Company Accounting Oversight Board (PCAOB)

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2
Q

State the primary purpose of an audit

A

To provide FS users with an option on whether the FS are fairly presented, in all material respects, in accordance with the applicable financial reporting framework

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3
Q

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

A 
S Professional Skepticism
E Ethical Requirements
J Professional Judgment
E Sufficient & Appropriate Audit Evidence
C Compliance with GAAS
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4
Q

Identify three inherent limitations of an audit

A
  • The nature of financial reporting
  • The nature of audit procedures
  • Timeliness of financial reporting & the balance between benefit and cost
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5
Q

When should an auditor’s opinion be modified?

A

Modification to the auditor’s report necessary when:

  • Auditor determines that the FS as a whole are materially misstated (GAAP issue)
  • Auditor is unable to obtain sufficient appropriate audit evidence to conclude that the FS as a whole are free from material misstatement (GAAS issue)
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6
Q

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

A

Title: Independent Auditor’s Report
Address: Based on the circumstances of the engagement
Introduction: We have audited the accompanying FS
Management’s Responsibility: Management is responsible for preparation & fair presentation of FS
Auditor’s Responsibility: Our responsibility is to express an opinion on these FS based on our audit
Opinion: In our opinion, the FS referred to above present fairly, in all material respects, the financial position
Report on Other Legal & Regulatory Requirements: If applicable

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7
Q

What should be included in the introductory paragraph of the unmodified audit opinion (nonissuer)?

A

The introductory paragraph should include:

  • The entity whose FS have been audited
  • A statement that the FS were audited
  • Title of each FS audited
  • Dates or periods covered by each FS
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8
Q

What should be included in the Management’s Responsibility paragraph of the unmodified audit opinion (nonissuer)?

A
  • MR-Responsible for preparation & fair presentation of FS
  • DIM-Responsibilities include Design, Implementation, & Maintenance of internal control
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9
Q

What should be included in the auditor’s responsibility paragraph of the unmodified audit opinion (nonissuer)?

A
  • RE-aR to Express an opinion on FS based on audit
  • Audit conducted in accordance with auditing standards generally accepted in the US
  • PPO-auditor Plan & Perform procedures to Obtain audit evidence
  • R-assessment of Risks of MM
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10
Q

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

A
  1. The FS present fairly, in all material respects, the financial position of the entity as of the BS date & results of the operations & its cash flows for the period then ended, in accordance with the applicable financial framework
  2. Identification of the applicable financial reporting framework & its origin
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11
Q

Where is the standard unmodified option (nonissuer) does the auditor refer to (1) the applicable financial reporting framework (GAAP or IFRS) & (2) generally accepted auditing standards?

A
  1. The applicable financial reporting framework is referred to in the management’s responsibility ¶ &; opinion ¶
  2. GAAS is referred to in the auditor’s responsibility paragraph
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12
Q

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

A 
Title
Addressee
Option section
Basis for Opinion section
Signature, tenure, location
Report date
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13
Q

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

A

Section title “Opinion of the FS” following elements:

  • FS were audited
  • Opinion that the FS present fairly
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14
Q

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

A

Basis for Opinion-first paragraph

  • FS responsibility of company’s management
  • Auditors responsibility to express opinion on the FS
  • Auditor is a public accounting firm registered with PCAOB, and independent
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15
Q

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

A

Basis for Opinion-second paragraph

  • AA-Audit conducted in Accordance with PCAOB
  • PP-audit was Planned and Performed to obtain assurance
  • MM-fs free from Material Mistatements
  • EE-audit included Examining Evidence on a test basis
  • AA-Assessing the Accounting principals
  • MM-estimates Made by Management
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16
Q

Where in the standard unqualified (issuer) does the auditor refer to (1) the applicable financial reporting framework (GAAP) & (2) the standards of PCAOB?

A
  1. The applicable financial reporting framework is referred to in the opinion paragraph.
  2. Standards of the PCAOB are referred to in the second paragraph under the Basis for Opinion section
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17
Q

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

A

Evidence that:

  1. Audit documentation has been reviewed
  2. FS have been prepared
  3. Management has taken responsibility for the FS
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18
Q

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

A

When audit evidence indicates that there is MM of the FS
Qualified Opinion issued when auditor concludes that misstatement, are material but not pervasive to FS
Adverse Opinion issued when auditor conclues that misstatements, are both material & pervasive to FS

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19
Q

Describe the circumstances in which a MM of the FS may arise

A

Misstatements may arise in relation to:

  • Appropriateness and application of accounting policies
  • Appropriateness of FS presentation
  • Appropriateness or adequacy of disclosures in FS
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20
Q

If an opinion is qualified due to MM of FS on an issuer audit report, where does the paragraph explaining the qualification appear?

A

Middle paragraph before opinion paragraph:

  • All of the substantive reasons that lead the auditor to conclude that there has been a departure from GAAP
  • Disclosure of the principal effect on FS
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21
Q

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

  • Qualified
  • Adverse
A

Qualified: Opinion section “except for”
Adverse: Opinion section “Do not present fairly”

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22
Q

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

A

Limitation on the scope of the audit
Qualified Opinion-Auditor unable to obtain sufficient evidence on which to base the opinion, effect could be material but not pervasive
Disclaimer of Opinion-Auditor unable to obtain sufficient evidence on which to base the opinion, effects could be both material & pervasive

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23
Q

Identify some examples of scope limitations

A

Restrictions on auditor’s ability to perform procedures:

  • Time constraints
  • Inability to observe inventory
  • Inability to confirm receivables
  • Inability to obtain audited FS of 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
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24
Q

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

A
  • Pervasive inability to obtain sufficient appropriate evidence
  • Lack of independence(always result in disclaimer)
  • Going concern uncertainty (note: if adequate disclosure of going concern exists, choose btwn unqualified opinion with explanitory Par. or a disclaimer of opinion.
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25
Q

If an opinion is modified on a nonissuer audit report, where does the paragraph explaining the modification appear?

A

Paragraph explaining the modification would appear prior to the opinion paragraph

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26
Q

Compared to a standard unmodified opinion for a nonissuer, determine the paragraphs that are modified in an audit report when the following opinions are issued

  • Qualified
  • Adverse
  • Disclaimer
A

Qualified- Opinion “Except for”
Adverse- Opinion “ Do not present fairly”
Disclaimer- Intro “Engage to audit,” Auditor responsibility “Not able to obtain,” Opinion- disclaimer

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27
Q

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 audit issues (Scope limitation)

  • Qualified
  • Disclaimer
A

Qualified- Opinion “Except for”

Disclaimer- Opinion “Engaged to audit and disclaimer, Basis for Opinion section “Omit certain sentences”

28
Q

How do uncertainties affect the auditor’s report?

A
  • No MM & management’s analysis of uncertainty is supported & properly reported or disclosed-Unmodified Opinion
  • Unable to obtain sufficient evidence involving uncertainty (scope limit)- Qualified or Disclaimer
  • FS are MM due to departure from GAAP related to uncertainty- Qualified or adverse
29
Q

What is the purpose of an emphasis-of-matter paragraph (nonissuer)?

A

The purpose of an emphasis-of-matter ¶ is to reference a matter that is appropriately presented in the FS, but is of such importance that it is fundamental to the user’s understanding of the FS

30
Q

What are the reporting requirements for an emphasis-of-matter paragraph (nonissuer)?

A

Reporting requirements for Emphasis-of-matter:

  • Place immediately after opinion paragraph
  • Use heading “emphasis-of-matter”
  • Describe matter and location of disclosure in FS
  • Indicate auditor’s opinion is not modified with respect to matter emphasized
31
Q

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

A

Emphasis-of-matter used when:

  • G-entity’s ability to continue as Going convern
  • A-describe a justified change in Accounting principal
  • A-facts discovered lead to change in Auditor’s opinion
  • SP-fs prepared in accordance with applicable Special Purpose framework
32
Q

What are the reporting requirements for an other-matter paragraph (nonissuer)?

A

Requirements of other-matter paragraph:

  • Place immediately after opinion and EoM paragraph
  • Use heading “other-matter”
  • Describe matter and location of disclosure, if applicable in the FS
33
Q

Under what circumstances would an auditor use an other-matter paragraph in an auditor’s report(nonissuer)?
Part 1

A

Part 1-Other-matter paragraph used when:

  • Auditor includes an alert that restricts its use
  • Facts discovered lead to a change in auditor’s opinion
  • Prior period FS predecessor’s audit report isn’t reissued
  • Current period FS audited & presented in comparative form with complied or reviewed FS for prior period
34
Q

Under what circumstances would an auditor use an other-matter paragraph in an auditor’s report(nonissuer)?
Part 2

A

Part 2-Other-matter paragraph used when:

  • Prior to audit report date, auditor identifies material inconsistency in FS that require revision and management refuses to make revision
  • Auditor chooses to report on supplement info in FS
  • Special purpose FS presented in accordance with contractual/regular basis of accounting
  • Auditor’s report on FS includsd compliance report
35
Q

Under what circumstances would an explanatory ¶ with an appropriate heading be required in an auditor’s report (issuer)? Part 1

A

Part 1-Explanatory ¶ used when:

  • Substantial doubt entity’s ability cont. as going concern
  • Material change btwn periods in acc. principal/method
  • Change in reporting entity, unless change from transaction/event
  • Change in an investee year-end that has a material effect on company’s FS
36
Q

Under what circumstances would an explanatory ¶ with an appropriate heading be required in an auditor’s report (issuer)? Part 2

A

Part 2-Explanatory ¶ w/ appropriate heading used when:

  • MM in previously issued FS has been corrected
  • Other info in document containing audited FS is materially inconsistent with info appearing in FS
  • Selected financial data required by SEC Reg S-K has been omitted or not been reviewed
  • Supplement info required by an applicable reporting framework has been omitted or departs materially
37
Q

Under what circumstances would an explanatory ¶ without a heading be required in an auditor’s report (issuer)?

A

Explanatory ¶ w/o heading used when:

  • PY auditor report is not presented
  • PY opinion is updated
  • Management required to report on comp. internal controls over financial reporting but such report is not required to be audited, & auditor hasn’t been engaged to perform an audit of management’s assessment of the effectiveness of comp. internal control over financial reporting.
38
Q

What are the reporting requirements for an explanatory paragraph (issuer)?

A

Requirements of explanatory paragraph:

  • Generally should include appropriate title
  • ¶ describe matter being emphasized and location of disclosure in FS
  • Generally follow the opinion ¶ when added to an unqualified report
39
Q

How is an alert that restricts the use of the auditor’s written communication reflected in the auditor’s report, & what item should be included in the alert?

A

Other-matter(nonissuer) or explanatory(issuer) used to restrict the use of the auditor’s report required by GAAS
Alert that restricts use of auditor’s written communication
*Statement that auditor’s written comm. intended solely for info and use of specified parties
*Identification of specified parties whom use is intended
*Statement isn’t intended to be used by anyone other than the specified parties

40
Q

According to US GAAP, when are contingencies(such as pending litigation) required to be:

  • Accrued & disclosed
  • Disclosed only
A
  • Probably & can estimate-accrue & disclose, can’t estimate disclose only
  • Reasonably possible & can/can’t estimate-disclose only
  • Remote-Generally ignore
41
Q

If during the current examination of comparative FS, the auditor discovers evidence that affects the prior statements & the opinion that was expressed, what action should be taken?
Only DORCS change their mind!

A

Auditors should update the opinion in CY report if the opinion differs from their previous opinion in an explanatory paragraph:
Date of the auditor’s previous report
Opinion type previously issued
Reason for prior opinion
Changes that have occurred
Statement that the “opinion….is different”

42
Q

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

A
  • Read statements for current period
  • Compare previous audited stmt w/ current period stmt
  • Obtain letter of representation from successor auditor
  • Obtain letter of rep from management at or near date of reissuance
  • If unrevised, use the original report date; if revised, dual date the report
43
Q

What stmt. should be included in the auditor’s report in an other-matter(nonissuer) or explanatory paragraph(issuer) when comparative FS are presented & prior auditor’s report is not reissued?

A

Other matter/explanatory paragraph should include:

  1. Stmt that FS of PP were audited by predecessor auditor
  2. Type of opinion expressed by predecessor auditor
  3. Nature of any emphasis-of-matter, other-matter, or explanatory paragraph included in predecessor’s report
  4. Date of predecessor auditor’s report
44
Q

What is the effect on the audit report when the current period FS are audited & presented in comparative format with PP FS that were not audited?

A

If PP FS were reviewed an other-matter, explanatory ¶ includes:

  • Description of service performed in the PP
  • Date of PP report
  • Description of material modifications in the report
  • Stmt that service was less in scope than an audit & doesn’t provide basis for expressing opinion of FS

If PP FS were not audited, reviewed or compiled, the other-matter ¶ should indicate this and state auditor assumes no responsibility for FS

45
Q

Define a component auditor

A

Component auditor-auditor who performs work on financial info of a component that will be used as audit evidence for the group audit.

46
Q

Identify the 2 requirements that are necessary to reference a component auditor in the auditor’s report.

A
  • The component auditor has performed an audit in accordance with GAAS, or when required PCAOB
  • Component auditor’s report is not restricted use
47
Q

What are the responsibilities of a group engagement partner(team) when it assumes responsibility for the work of a component auditor?

A

No reference to component auditor is made
If component significant, should be audited
When significant bc of MM, should perform additional audit procedures, to potential risk
Components not significant only require analytical procedures

48
Q

What type of information should an auditor gather prior to auditing a single FS or a specific element of FS?

A
  • Purpose for preparing
  • Intended users
  • Steps taken by management to ensure that the applicable financial reporting framework is acceptable under the circumstances>
49
Q

What are some of the limitations surrounding an auditor’s report on a single FS, or specified element, account or item of a FS?

A
  • If based on stk equity, auditor should perform procedures necessary to express an opinion about financial position
  • If based on NI, auditor should perform perform procedures to express opinion about finacial position & results of operations
  • If adverse/disclaimer opinion, auditor may not report on items that constitute a major portion of the FS
50
Q

Define the two types of subsequent events.

A

Recognized subsequent event-relates to condition exists on or before the BS date. Requires FS adj.
Nonrecognized subsequent event-occurs after BS date. Doesn’t require FS adjustment, but may require footnote

51
Q

What procedures should the auditor perform during the subsequent period?
PRIME

A

P-review Post BS transactions
R-obtain a Representation letter from management
I-Inquire with management whether could impact FS
M-review Minutes of board meetings
E-Examine current interim FS & compare to FS under audit

52
Q

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

A

None. Thought the auditor is responsible for investigating subsequent events until the date of the auditor’s report

53
Q

When and why is dual dating used?

A

DD used when subsequent events requiring FS adj. come to auditors attention after original date of auditor report.
DD extends auditor’s responsibility only for particular subsequent event, not the rest of the FS

54
Q

After issuance of the report, what actions should an auditor take upon discovering information that materially affects the report?

A

Determine whether there are persons relying on FS
Advise client to revise, disclosure, or notify about FS
Advise client to discuss new disclosure with SEC
Ensure appropriate steps taken by the client

55
Q

What is the auditor’s responsibility with respect to information that is presented in a document containing the audited FS?

A

Auditor should read the other info to determine that it is consistent with the audited FS & that there are no material inconsistencies or MM of fact.
The auditor may report on the other information.

56
Q

What are the two objectives of engagements to report on supplementary information?

A
  1. To evaluate the presentation of supplementary info in relation to FS as a whole
  2. To report on whether the supplementary info is fairly stated, in all material respects, in relation to FS as whole
57
Q

What procedures would an auditor perform related to supplementary info that accompanies the FS & is required by a designated accounting standards setter, such as the FASB?

A

Apply limited procedures:

  • Inquiry how info was prepared, including changes from PY & significant assumptions used
  • Determine if supp info is consistent w/ management’s responses, audited FS & other knowledge
  • Obtain written management representations regarding the required supp info
  • The auditor may issue an opinion of the info
58
Q

Give examples of special purpose frameworks?

A
  • Cash basis
  • Tax basis
  • Regulatory basis
  • Contractual basis
  • Any other basis of accounting
59
Q

Which of the following elements should be included in the auditor’s report when FS are prepared on the cash/tax basis?

  • Description of purpose
  • Emphasis-of-matter paragraph
  • Other-matter paragraph
A

An emphasis-of-matter paragraph alerting readers about the preparation in accordance with a special purpose framework should be included in the auditor’s report for FS prepared on the cash/tax basis.

60
Q

Which of the following elements should be included in the auditor’s report when FS are prepared on the regulatory basis (not for general use) & contractual basis?

  • Description of purpose
  • Emphasis-of-matter paragraph
  • Other-matter paragraph
A

All:

  • Description of purpose for which special purpose FS are prepared
  • Emphasis-of-matter paragraph alerting readers about preparation in accordance w/ special purpose framework
  • Other-matter paragraph restricting the use of the auditor’s report
61
Q

Which of the following elements should be included in the auditor’s report when FS are prepared on the regulatory basis (for general use)

  • Description of purpose
  • Emphasis-of-matter paragraph
  • Other-matter paragraph
A

An auditor’s report for FS prepared on the regulatory basis for general use should include the description of purpose for which special purpose FS are prepared.

62
Q

What should be included in an emphasis-of-matter paragraph included in a special purpose framework (other than regulatory basis FS intended for general use)

A

Include an emphasis-of-matter paragraph, which:

  1. Indicates that FS are prepared in accordance w/ applicable special purpose framework.
  2. Refers to the note to FS the describes that framework
  3. States that special purpose framework is a basis of accounting other than GAAP.
63
Q

List several features of a report on the application of the requirements of an applicable financial reporting framework.

A
  • Description of engagement
  • Reference to AICPA standards
  • Description of applicable reporting framework to specific transaction or type of report
  • Preparers are responsible for proper accounting
  • Differences in facts, circumstances, or assumptions
  • Restricted-use paragraph
64
Q

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

A
  • Purpose for which the FS are prepared
  • Whether the financial reporting framework is a fair presentation framework
  • The intended users of the FS
  • The steps taken by management to ensure that applicable financial reporting framework is accepted
  • Legal responsibilities involved (if using the form & content of another country’s audit reprot)
65
Q

What are the reporting options for FS prepared in accordance w/ a financial reporting framework generally accepted in another country when the FS will be distributed outside of the US only? What if the FS are also intended for use w/in the US.

A

Distributed outside the US only:
*Report form of the other country or sent out in the ISAs
*US-style report modified refer to framework generally accpeted in another country
Distributed w/in the US:
US report with emphasis-of-matter paragraph:
*Identifies the financial reporting framework
*Refer to note in FS describing the framework
*Indicates that framework differs from accounting principals generally accepted in USA

Auditing (1 decks)

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