AUD 1 - Audit Reports

Question 1

What are the steps in the Audit Process ?

Answer 1

1. Engagement Acceptance
2. Assess Risk and plan response
3. Perform audit procedures and obtain evidence
4. form conclusions
5. Reporting

Question 2

What are the three levels of the GAAS Hierarchy?

Answer 2

1. SAS for Non Issuers and PCAOB AS for issuers - this is the most authoritative
2. Interpretative Guidelines - not considered to be auditing standards. Examples are AICPA Audit and Accounting Guidance
3. Other Auditing Publications - no authoritative status but may be helpful to the auditor

Question 3

Relating to management’s responsibilities, the preparation and fair presentation of the financial statements require?

Answer 3

1. identification of applicable financial reporting framework
2. preparation and fair presentation of the financial statements in accordance with the framework
3. inclusion of an adequate description of the framework in the financial statements

Question 4

Does a weak internal control mean you should issue an adverse opinion?

Answer 4

no, it doesnt, it doesnt mean their financial are wrong, it just means the auditor will have to do a lot more work.

Question 5

The auditor is unable to obtain absolute assurance that the financial statements are free from material misstatement due to the following:

Answer 5

1. The nature of financial reporting - some FS items are subject to the inherent level of variability bc they involve judgment by management (ie accounting estimates)
2. The nature of audit procedures - there are practical and legal limits on an auditor’s ability to obtain audit evidence (ie mgmt/employee may not provide complete information)
3. Timeliness of Financial Reporting and the Balance between Cost and Benefit

Question 6

what is an integrated audit?

Answer 6

two opinions are rendered. one on the fairness of the financial statements and one opinion on the operating effectiveness of internal controls over financial reporting

Question 7

When disclaiming an opinion bc of insufficient audit evidence for a non-issuer where should the auditor refer to the situation?

Answer 7

the lack of evidence should be disclaimed in the basis of opinion paragraph section

Question 8

what are the special purpose frameworks?

Answer 8

(1) the cash basis,
(2) the tax basis,
(3) a regulatory basis,
(4) a contractual basis and
(5) a definite set of logical and reasonable criteria applied to all natural items in the statements.

Question 9

A nonissuer changed from the straight-line method to the declining-balance method of depreciation for all newly acquired assets. This change has no material effect on the current year’s financial statements but is reasonably certain to have a material effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n)

Answer 9

Unmodified opinion.

If a change in accounting principle has no material effect on the current financial statements but is expected to have a material effect in future years, the change should be disclosed by the client if required by the applicable financial reporting framework. But it need not be recognized in the report.

Question 10

What should the engagement letter contain?

Answer 10

1. the objective and scope of the audit
2. the responsibilities of both the auditor and management
3. an explanation of the inherent limitations of the audit and internal control
4. the financial reporting framework the audit is being performed under
5. an explanation of the form and content of the audit report
6. other relevant such as fees and billing

Question 11

Comparative financial statements include the prior-year statements that were audited by a predecessor auditor whose report is not presented. If the predecessor’s report was unmodified, the successor should

Answer 11

Indicate in an other-matter paragraph that the predecessor auditor expressed an unmodified opinion on the prior-year financial statements.

Question 12

What is GAAS?

Answer 12

Generally Accepted Auditing Standards - they are used to measure the quality of the auditors performance, and guide the auditor in the performance of a properly planned and executed audit

Question 13

Does the auditor’s report references the United States as the country of origin for:

1. accounting principles used to prepare the FS, OR
2. auditing standards the auditor followed in performing the audit

Answer 13

need to reference US for both in the auditors report

Question 14

Relating to an audit report for a NON issuer, the following phrases would be related to what type of opinions:

“do not present fairly..”

“except for…”

Answer 14

“do not present fairly..” - adverse opinion

“expect for…” - qualified opinion

Question 15

When an auditor qualifies his opinion bc of a scope limititation, the wording in the opinion paragraph should state that the qualification relates to:

the possible effects on the FS and the scope limitation?

Answer 15

the possible effect on the FS only

Question 16

What type of audit report is required when the entity has fully disclosed that there is substantial doubt about the entity’s ability to continue as a going concern?

Answer 16

an unqualified opinion with an explanatory paragraph as long as there is no significant audit findings

Question 17

Does an audit report include an emphasis of matter or other matter paragraph for a justified lack of consistency caused by a material change in GAAP between periods?

Answer 17

emphasis of matter paragraph

**no paragraph is required if change is IMMATERIAL

Question 18

When the group engagement partner decides to make reference to a component auditors audit under US GAAS, where should this be stated in the audit report?

Answer 18

in the opinion section

Question 19

If the financial statements of a prior period have been audited by a predecessor auditor who report is not presented, what should be the updated format of the auditors report?

Answer 19

1. FS of prior year were audited by another CPA
2. date of the previous report
3. type of report issued by the predecessor auditor and if the report was modified, reasons for the modification
4. the nature of any emphasis of matter, other matter, or explanatory paragraph in the previous report

**the previous CPA may be named only if the previous CPA’s practice was acquired or merged with the successor auditor

Question 20

When the financial statements of a prior period have been compiled or reviewed by a predecessor whose report is not presented, the auditor should include an other-matter paragraph in the current-period report. This paragraph should state..

Answer 20

(1) the service performed in the prior period, (2) the date of the report on that service, (3) material modifications noted in that report, and (4) that the service (a) was smaller in scope than an audit and (b) did not provide a basis for an opinion.

Question 21

The following are examples of circumstances in which the auditor may need to include an emphasis-of-matter paragraph:

Answer 21

(1) an uncertainty relating to the future outcome of unusually important litigation or regulatory action;
(2) a major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position;
(3) significant transactions with related parties; and
(4) unusually important subsequent events.

Question 22

Do you need a rep letter for a compilation?

Answer 22

no, not for a compilation engagement

Question 23

What is an attest engagement?

Answer 23

When a CPA in the practice of public accounting performs an attest engagement, the engagement is subject to the attestation standards. An attest engagement is one in which a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter, that is the responsibility of another party.

Question 24

For which of the SSARS services will the practitioner issue a report?

Preparation, compilations, and review?

Answer 24

for only compilations and reviews…no report is issued for preparations.

Question 25

Eagle Company’s financial statements contain a departure from generally accepted accounting principles because, due to unusual circumstances, the statements would otherwise be misleading. The auditor should express an opinion that is

Answer 25

Unmodified and describe the departure in an other-matter paragraph.

The auditor must describe:

(1) the departure,
(2) the approximate effects of the departure (if practicable), and
(3) the reasons compliance would result in misleading financial statements.

Question 26

What is GAAS?

Answer 26

measures of quality of the auditor’s performance and guide the auditor in the performance of a properly planned and executed audit

Question 27

Which paragraphs of a nonissuer’s report on the financial statements under the US Auditing Standard’s should refer to GAAP?

Answer 27

Opinion and mgmt responsibility paragraph

Question 28

What type of opinion is issued when the mgmt omits quarterly financial data required by the SEC?

Answer 28

an unmodified opinion with an other matter paragraph

Question 29

If an accounting change has no material effect on the financial statements in the current year but the change will have an impact in future years, how should this be accounted for in the auditors report?

Answer 29

should not be mentioned in the auditors report (aka no modification) but it should be disclosed in the notes to the FS

Question 30

WHen a group engagement partner decides to make reference to a component auditor’s audit under GAAP, the group engagement partner’s report should state “We did not audit the financial statements of X company..” in which paragaph?

Answer 30

the opinion paragraph