AUD 1 - Audit Reports Flashcards
Nonissuer
For both unmodified and qualified opinions for nonissuers - what does the 1) introductory, 2) management responsibility, and 3) auditor’s responsibility specifically state?
What happens after these 3?
Introductory
- Identify entity who’s FS are being audited
- FS have been audited and WHICH FS were audited
- Dates covered by each
Management Responsibility
- Management is responsible for the preparation and fair presentation of FS in accordance with applicable financial reporting framework
- Including the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of FS that are free from material misstatment, whether due to fraud or error
Auditor Responsibility
- Responsibility to express an opinion on FS based on audit
- Audit was conducted in accordance w/ auditing standards generally accepted in the US
- Standards require auditor plan and perform the audit to obtain reasonable assurance that FS are free from material misstatement
- Description of the audit:
- An audit involves performing procedures to obtain audit evidence about amounts and disclosures
- Procedures selected depend on auditors judgment
- Considers internal control relevant to the entity’s preparation and fair presentation to design audit procedures
Opinion
- FS are presented fairly
After unmodified (unqualified), what are the 3 other types of modified opinions?
Qualified - Except for the effects that the qualification relates to, the FS present fairly, in all material respects (material but not pervasive)
Adverse - FS DO NOT present fairly the financial position. Issue with GAAP - FS issue (numbers off)
Disclaimer - Auditor does not express an opinion on FS. Audit issue = GAAS issue = management didn’t let us do our job
What is the difference between unmodified and unqualified opinion?
How is each broken-down?
Unmodified = Nonissuer = Private company = GAAS Unqualified = Issuer = Public company = PCAOB
Unmodified
- Introduction
- Management’s responsibility
- Auditors responsibility
- Opinion
Unqualified
- Opinion
- Basis of Opinion
Auditors signature and date at the end of both!
Issuers
For Unqualified opinions for Issuers, what are the elements of the audit reports under PCAOB standards?
(Detailed Breakdown/summary)
Opinion
- Name of company, identify each FS audited, date and statement indicating that they were audited
- An opinion that FS present fairly and that its in conformity with GAAP
Basis for Opinion
- FS are responsibility of management
- Auditors responsibility to express opinion and conducted in accordance with PCAOB
- PCAOB require plan and perform audit to obtain reasonable assurance that FS are free from material misstatement, whether from error or fraud.
- “such procedures including examining , on a test basis, evidence” about amounts and disclosures.
- AND evaluating accounting principles and estimates used
What are EXAMPLES of Qualified and Adverse Opinions?
Qualified = Material but not pervasive Adverse = Both material and pervasive
- GAAP inconsistency change (unjustified) = auditor disagrees
- Departure from GAAP (unjustified)
- Unreasonable accounting esti
- Inadequate disclosure
Nonissuer
How does an Audit Report change when expressing a qualified or adverse opinion?
1) Auditors responsibility paragraph is modified
“Auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the QUALIFIED audit opinion”
2) Add a “Basis for qualified opinion” BEFORE opinion paragraph (or adverse)
- Description and quantification that states effects of any misstatement relating to specific amounts
- Explanation on how disclosures are misstated
3) Qualified Opinion Paragraph
- “Except for the effects of the matters described in the basis of qualified opinion paragraph, the financial statements are presented fairly.”
OR
3) If Adverse Opinion Paragraph
“Because of the significance of the matters described in the basis for adverse opinion paragraph, the FS do not present fairly in the accordance with the applicable financial reporting framework”
Issuer
How does an Audit Report change when expressing a qualified or adverse
1) Opinion Paragraph
- Qualified = Second sentence is modified to include “except for” and a reference to the paragraph that discloses all
- Adverse = because of the effects of the matters discussed - the financial statements DO NOT PRESENT FAIRLY
2) Add an Additional paragraph BELOW but BEFORE Basis of Opinion Section
- All the substantive reasons that lead the auditor to conclude the departure from GAAP
- Disclosure of principle effects
Opinion Section REMAINS THE SAME
What is qualified/disclaimer opinion?
What are scope limitations and examples?
Unable to obtain sufficient evidence to base an opinion and possible effects of any undetected misstatements could be material but not pervasive (Disclaimer = material AND pervasive)
Scope limitations
- When auditor is unable to complete audit fully, the scope has been limited.
- GAAS Issue
Examples:
- Time constraint
- Insufficient evidence
- Not independent (disclaimer)
- Inability to observe inventory
- Refusal of management to acknowledge fair presentation
Nonissuer
How does an Audit Report change when expressing a qualified or disclaimer opinion?
1) Auditors Paragraph modified
- “Auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the QUALIFIED audit opinion” (or adverse)
2) Add “Basis for Qualified Opinion Paragraph” BEFORE qualified opinion paragraph (or Adverse)
- Describe the reasons for the inability to obtain sufficient audit evidence
3) Qualified Opinion Paragraph
- “Except for the possible effects of the matters described in the basis for qualified opinion paragraph, the financial statements are presented fairly”
OR
3) If Disclaimer of Opinion Paragraph
- “Because of the significance of the matters described in the basis for disclaimer of opinion paragraph, the auditor has not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion”
- “Accordingly, the auditor DOES NOT EXPRESS AN OPINION on the financial statements
Issuer
How does an Audit Report change when expressing a qualified or disclaimer opinion?
1) Opinion
- Qualified = Second sentence is modified to include “except for” and a reference to the paragraph that discloses all
- Disclaimer = because of the effects of the matters discussed - the financial statements DO NOT PRESENT FAIRLY
2) Add Additional Paragraph BEFORE the basis of opinion
- All of the substantive reasons of a departure from GAAP
- Disclosure of the principal effects
3) Basis of Opinion REMAINS THE SAME just write “except for” to start.
OR
3) Disclaimer = Eliminate any reference to the auditors responsibility. No GAAS.
BIG DIFFERENCE = 3) doesn’t exist with adverse. This only applies to disclaimer.
Emphasis-of-Matter Paragraph
What entities uses, location, what is it about?
When are they required to be used?
When can it be necessary as well but not required?
Emphasis-of-Matter = Nonissuers
About:
- Used ONLY with unmodified opinion
- Used to highlight matters that are fundamental to a users understanding of financial statements
Location:
- Placed the emphasis-of-matter paragraph immediately after the opinion
- Describe what is being emphasized
Required when:
- Going Concern
- Change in Accounting principle that has material effect on FS
- Change in Audit opinion (from a previous year)
- Special Purpose framework
(GAASP to help)
Necessary when:
- Uncertainty with litigation or regulatory action
- Major catastrophe (hurricane)
- Unusually important subsequent events
- Significant related party transactions
Other-Matter Paragraph
What entities uses, location, what is it about?
When are they required to be used?
Other-Matter = Nonissuers
About:
- Refers to matters OTHER than those presented/disclosed in FS that is relevant to a users understanding of audit, audit responsibilities, and audit report
Location:
- Immediately AFTER opinion and emphasis-of-matters
- Describe what is being emphasized
Required when:
- Alert of restricted use in audit report
- Subsequently discovered facts leading to CHANGE in audit opinion (same as emphasis of matters - choose)
- Predecessor auditor won’t reissue audit report
- Current FS audited in comparative form with compiled/reviewed FS
- MGMT refuses to revise a material inconsistency that requires revision
- Auditor reports SUPPLEMENTARY information in the auditors report, rather than separate report
- FS are prepared using special purpose framework (basis of accounting OTHER than GAAP)
- Report on compliance is included in auditors report
Explanatory Paragraph
What entities uses, location, what is it about?
When are they required to be used?
Explanatory = Issuers
About:
- Important in Unqualified opinion that needs to be stated
Location:
- Immediately AFTER opinion in unqualified report
- Describe what is being emphasized
Required:
- Going concern
- Change in accounting principle/application (material)
- Change in reporting entity
- Change in investee has material effect on FS
- Material misstatement from previous FS has been corrected
What is an example of updating (Changing) Prior Opinions?
Where should the auditor disclose the reason?
And what should be stated in the disclosure?
Ex: previous report was qualified due to a departure from financial reporting framework would no longer be appropriate in the event of the restatement of the prior years reports.
Location:
- Emphasis-of-matters (nonissuer)
- Other-matter (nonissuer)
- Explanatory paragraph (issuer)
Should disclose the following:
- 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”
Only “DORCS” change their minds
Predecessor Auditor
When reissuing a predecessor auditors report (as long as its still appropriate) - the predecessor auditor should…
1) Read the statements for the current period
2) Compare the statements audited with the current period statements
3) Obtain a letter of representation from the successor auditor (states whether successor auditor revealed any matters that might have material effect)
4) Inquire of and obtain a letter of representation from management (states whether MGMT previous representations need to be modified)
5) Date the report
