AUD 1 - Audit Reports Flashcards by Hannah Lin

What is the purpose of an audit?

To provide f/s users with an opinion on whether the f/s are presented fairly in all material respects in accordance with the applicable financial reporting framework

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The audit function adds _______ to the financial statements.

Credibility

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What is management responsible for?

Financial statements AND

Internal controls

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What is the auditor’s ultimate responsibility?

Attest function

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What is defined as a high, but not absolute level of assurance?

Reasonable assurance

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What at the inherent limitations of an audit?

1) Nature of financial reporting involves lots of judgement
2) Nature of audit procedures may not catch fraud or errors
3) Timeliness of financial reporting and the balance between the cost and benefit

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What does GAAS stand for?

Generally Accepted Auditing Standards

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What does GAGAS stand for?

Generally Accepted Government Auditing Standards

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What does PCAOB stand for?

Public Company Accounting Oversight Board

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Issuers consist of what type of companies?

Primarily public companies

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If you are an issuer, do you have to comply with the PCAOB?

YES

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Public accounting firms must register with whom in order to audit a public company?

PCAOB

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What are the overall objectives of the auditor?

To obtain reasonable assurance

To report on the f/s

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

1) Professional skepticism
2) Independence in fact and appearance
3) Professional judgement
4) Sufficient appropriate audit evidence and audit risk
5) Compliance with GAAS

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What are the three conditions of the fraud triangle?

POR
Pressure
Opportunity
Rationalization

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An auditor should be independent in both _____ and _______.

Fact AND

Appearance

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True or false.

The auditor should exercise professional judgment in planning and performing an audit.

True

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Albert violated GAAP but it was essential in order to fairly present. Is this acceptable?

YES

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Does weak internal control equal an adverse opinion?

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A clean opinion = ?

Unmodified audit opinon

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In an unmodified audit opinion, what paragraph follows the addressee?

Introductory paragraph

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In an unmodified audit opinion, what paragraph follows the intro paragraph?

Management’s responsibility for the financial statements

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What is management responsible for?

MR DIM
Management responsible for
Preparation and fair presentation of financial statements
Design, implementation, maintenance of IC

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What is the auditor responsible for?

REPPORTS CRAME

Responsibility 
Express an opinion 
Plan
Performing procedures
Obtain audit evidence
Risks of material misstatement of the f/s
Test internal controls
Statements

Control
Reasonableness
Accounting estimates
Management
Evaluating overall presentation of f/s

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For the audits of issuers, the PCAOB AS No. 1 requires the auditor's report to include a reference to the standards of the PCAOB (US). What does this reference explicitly say?

"We conducted our audits in accordance w/ the standards of the PCAOB (US)."

Which paragraph of the auditor's report would you find GAAS?

Auditor's responsibility paragraph

Which paragraphs of the auditor's report would you find GAAP?

Management responsibility paragraph | Opinion paragraph

What is the big difference between the auditor's report under US GAAS and the ISAs? Namely, what is the big requirement in the ISAs and not in US GAAS?

ISAs: "prep and fair presentation of the f/s" OR "prep of the f/s that give a true and fair view" US GAAS: does not include any references to "true and fair view"

References to the component auditor should not be made unless what two requirements are met?

1) Component auditor has performed an audit in accordance w/ the relevant requirements of GAAS, or when required, the PCAOB 2) The component auditor's report is not restricted use

When the group engagement partner decides to assume responsibility for the work of the component auditor, should any reference to the component auditor be made?

A component that is significant due to individual financial significance should be audited by whom?

Group engagement team OR | Component auditor

The group engagement team should perform what type of procedures for components that are not significant components?

Analytical procedures

Management believes and the auditor is satisfied that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss, but discloses the situation in the notes to the financial statements. If management does not make an accrual in the financial statements, what type of opinion should the auditor express?

Unmodified opinion

What type of opinion should be used for a material but not pervasive GAAP problem?

Qualified opinion

What type of opinion should be used for a material and pervasive GAAP problem?

Adverse opinion

What type of opinion should be used for a material and pervasive GAAS problem?

Disclaimer of opinion

What type of opinion should be used for a material but not pervasive GAAS issue?

Qualified opinion

A significant going concern uncertainty would result in what type of opinion?

Disclaimer of opinion

The auditor should examine the evidence obtained from what procedures in evaluating going concern?

ADMITS ``` Analytical procedures Debt compliance Minutes Inquiry of client's legal counsel Third parties Subsequent events review ```

Based on the going concern procedures performed, the auditor may identify what conditions and events that may be indicative of substantial doubt of going concern?

FINE Financial difficulties Internal matters Negative trends External matters

Is the auditor precluded from choosing to disclaim an opinion due to going concern uncertainty?

NO EXPLANATION: The decision b/w an unmodified opinion with an emphasis of matter paragraph and a disclaimer of opinion is based on the auditor's judgment.

If, in the auditor's judgment, the entity's going concern disclosures are inadequate, a departure from GAAP exists. This may result in what type of opinion?

Qualified OR | Adverse

Unless the auditor's report explicitly states otherwise, the auditor's report implies that the f/s are _______ between periods.

Comparable

Do accounting estimates or corrections of errors affect the consistency standard?

NO EXPLANATION: They do not affect the auditor's report (no emphasis of matter paragraph needed).

When the f/s contain a departure from US GAAP because, due to unusual circumstances, the statements would be otherwise misleading, the auditor should express what type of opinion?

Unmodified

The client would not let you look at a very material account. They wouldn't let you audit it. Can you issue an adverse opinion?

NO EXPLANATION: This is a GAAS limitation (qualified or disclaimer) not a GAAP limitation.

What does ISAs require the auditor to do when the auditor is unable to obtain sufficient appropriate audit evidence due to a management-imposed scope limitation and the auditor concludes that the possible effects of any undetected misstatements could be both material and pervasive?

Withdraw from the audit EXPLANATION: US GAAS requires that the auditor "consider" withdrawal from the engagement under these circumstances.

What changes in the intro paragraph for a disclaimer of opinion?

"We were engaged to audit..."

If there is a material misstatement related to the uncertainty, what type of opinion would you issue?

Qualified or adverse EXPLANATION: This is a GAAP problem.

If there is insufficient evidence related to uncertainty, what type of opinion would you issue?

Qualified or disclaimer EXPLANATION: This is a GAAS problem.

An auditor concludes that a client's illegal act, which has a material effect on the f/s, has not been properly accounted for or disclosed. Depending on the pervasiveness of the effect on the f/s, the auditor should express what type of opinion?

Qualified or adverse opinion EXPLANATION: This is a GAAP problem.

If an updated opinion differs from the previous opinion, the auditor should disclose the reasons in an emphasis-of-matter or other-matter paragraph that discloses what 5 things?

DORCS ``` Date of the auditor's previous report Opinion type previously issued Reason for the prior opinion Changes that have occurred Statement that the "opinion...is different" ```

Would a disclaimer of opinion be appropriate in the following circumstance? Management does not provide reasonable justification for a change in accounting principle.

NO EXPLANATION: This is a GAAP problem.

True or false. When reporting on comparative f/s, an auditor ordinarily should change the previously issued opinion on the prior year's f/s if the prior year's f/s are restated to conform with GAAP.

True

Comparative f/s include the prior year's statements that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was unmodified, what should the successor do?

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

A trade receivable existing at the date of the f/s that is deemed uncollectible b/c of bankruptcy of the customer requires what according to GAAP rules?

Adjustment to the f/s

What is the GAAP rule for a recognized (Type I) event?

Requires a f/s adjustment

What is the GAAP rule for a nonrecognized (Type II) event?

May require footnote disclosure

Type I or Type II event. A condition that existed on or before the balance sheet date.

Type I event

Type I or Type II event. A condition that existed after the balance sheet date.

Type II event

During the subsequent period, the auditor should obtain an understanding of the procedures management has established to identify subsequent events and should perform what five procedures?

PRIME ``` Post balance sheet transactions Rep letter should be obtained from mgt Inquiry Minutes Examine latest available interim f/s ```

What is the following an example of? "January 21, 20X2, except as to Note 2, which is as of February 3, 20X2."

Dual dating

If a client refuses to follow procedures upon subsequent discovery of facts after the report release date, what additional steps can the auditor take to prevent further reliance?

"DAR" them to fix it Disassociate Alert agencies Relying parties

When the auditor concludes that there is a material misstatement of fact that management refuses to correct, what should the auditor do?

Auditor should notify those charged with governance

The auditor should obtain written ________ representations regarding the required supplementary information.

management

Events or transactions that occur after the balance sheet date but before the f/s are issued are known as what?

Subsequent events

True or false. The phrase "US generally accepted accounting principles" is an accounting term that encompasses the conventions, rules, and procedures necessary to define US accepted accounting practice at a particular time.

True

The adoption of sound accounting policies is an implicit part of _________ responsibilities, not the auditor's responsibilities.

management's

An auditor's responsibility is to express an opinion on f/s based on an _____.

audit

Define reasonable assurance.

A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement

What is a requirement for audit evidence?

The auditor must obtain sufficient appropriate audit evidence to afford a reasonable basis for the opinion

For an entity's f/s to be presented fairly in accordance with an applicable financial reporting framework, the framework selected should be what?

Include an adequate description of the framework in the f/s

Does the ASB establish a financial reporting framework?

Is there a requirement that an entity's f/s be prepared in accordance w/ prevalent industry practices?

When a disclaimer of opinion is issued due to a lack of sufficient audit evidence, the lack of evidence should be disclosed where?

Disclosed in auditor's responsibility paragraph and discussed in an additional paragraph before the opinion paragraph ("Basis for Disclaimer of Opinion")

Would an auditor express an unmodified opinion in the following situation? Quarterly financial data required by the SEC has been omitted

Yes EXPLANATION: Omission of selected quarterly data required by SEC regulations is disclosed in an emphasis-of-matter paragraph added to an otherwise unmodified opinion.

Would an auditor express an unmodified opinion in the following circumstance? The auditor is unable to obtain audited f/s of a consolidated investee

No EXPLANATION: The inability to obtain audited f/s of a consolidated investee represents a scope limitations which may result in either a qualified opinion or a disclaimer of opinion.

March, CPA, is engaged by Monday Corp., a client, to audit the f/s of Wall Corp., a company that is not March's client. Monday expects to present Wall's f/s with March's auditor's report to 1st Federal Bank to obtain financing in Monday's attempt to purchase Wall. In these circumstances, who should March's auditor's report be addressed to?

Monday Corp, the client that engaged March EXPLANATION: The auditors should address their report to the entity that engaged them. In this case, Monday Corp. engaged the auditors to perform an acquisition audit and the report should be addressed to Monday.

When an auditor concludes there is substantial doubt about a continuing audit client's ability to continue as a going concern for a reasonable period of time, what is the auditor's responsibility?

Consider the adequacy of disclosure about the client's possible inability to continue as a going concern AND Include an emphasis-of-matter paragraph in the audit report

When there has been a change in accounting principles, but the effect of the change on the comparability of the f/s is not material, what should the auditor do?

Not refer to consistency in the auditor's report EXPLANATION: If an accounting change has no material effect on the comparability of the f/s, the auditor does not need to recognize the change in the current year's audit report.

If a publicly held company issues f/s that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express what sort of opinion?

Qualified opinion EXPLANATION: If a company issues f/s that purport to present financial position and results of operations but omits the related statement of cash flows, the auditor will normally conclude that the omission requires qualification of the opinion.

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's disclosures concerning this matter are adequate, the audit report may include what type of opinion?

Unmodified with emphasis of matter paragraph OR Disclaimer of opinion EXPLANATION: Generally, an unmodified opinion is issued but the auditor is not prohibited from choosing to issue a disclaimer.

An audit report for an issuer should include references to ________ standards and GAAP.

PCAOB

True or false. A division of responsibility affects the Auditor's Responsibility Paragraph and the Opinion Paragraph, but does not require inclusion of a Basis for Opinion Paragraph. If the other auditor's opinion is qualified, but the subject of the qualification is not material in relation to the overall consolidated statements, Logan need not make reference to the qualification in their report.

True

A client acquired 25% of its o/s capital stock after year-end but prior to the date of the auditor's report. What should the auditor do?

Advise management to disclose the acquisition in the notes to the f/s

A client acquired 25% of its o/s capital stock after year-end but prior to the date of the auditor's report. What should the auditor do?

Advise management to disclose the acquisition in the notes to the f/s

A client acquired 25% of its o/s capital stock after year-end but prior to the date of the auditor's report. What should the auditor do?

Advise management to disclose the acquisition in the notes to the f/s

A client acquired 25% of its o/s capital stock after year-end but prior to the date of the auditor's report. What should the auditor do?

Advise management to disclose the acquisition in the notes to the f/s

How might the following affect the audit opinion? The co. changed its method of accounting for LT construction contracts, but mgt was justified in making the change. The new method is acceptable under GAAP, and the change was accounted for prospectively.

Qualified or adverse EXPLANATION: Retrospectively account for the change, not prospectively.

A client acquired 25% of its o/s capital stock after year-end but prior to the date of the auditor's report. What should the auditor do?

Advise management to disclose the acquisition in the notes to the f/s

Qualified or adverse EXPLANATION: Retrospectively account for the change, not prospectively.

A client acquired 25% of its o/s capital stock after year-end but prior to the date of the auditor's report. What should the auditor do?

Advise management to disclose the acquisition in the notes to the f/s

Qualified or adverse EXPLANATION: Retrospectively account for the change, not prospectively.

How might the following affect the audit opinion? A predecessor auditor's unmodified opinion for a PY report on comparative F/S is not presented.