AUD 1 - Forming an Audit Opinion

Question 1

What are the two criteria that must be taken into account to form an audit opinion?

Answer 1

1) Whether sufficient appropriate audit evidence was obtained (required by GAAS)

AND

2) Whether the financial statements are prepared, in all material respects in accordance with the applicable financial reporting framework (e.g. GAAP)
- The auditor should evaluate whether, based on the financial reporting framework (e.g. GAAP):

a) financial statements ADEQUATELY DISCLOSE significant accounting policies
b) accounting policies selected and applied are CONSISTENT with the applicable reporting framework
c) accounting estimates made by management are REASONABLE
d) information in financial statement is relevant, comparable, and understandable
e) terminology used in financial statement is appropriate
f) financial statements are fairly presented
g) financial statements represent the underlying transactions that achieves fair presentation

Question 2

Is departure from GAAP permissible? What type of opinion is a departure from GAAP?

Answer 2

• Departure from GAAP is permissible if financial statements would be otherwise misleading
• Departure from GAAP if financial statements are misleading is called an UNMODIFIED / UNQUALIFIED OPINION (no problems)

Question 3

What guidelines do auditors refer to on how to perform audit (e.g. inventory count should be observed by the auditor)?

Answer 3

generally acceptable auditing standards (GAAS)

Question 4

What guidelines do auditors refer to on how to evaluate whether transactions are recorded and reported fairly in the financial statements (e.g. land should not be depreciated)?

Answer 4

applicable financial reporting framework (e.g. U.S. GAAP)

Question 5

Define an umodified (unqualified) opinion? What type of issuer used the term unmodified? What type of issuer uses the term unqualified?

Answer 5

No materiality issue - An unmodified (unqualified) opinion states that the financial statements present fairly, in all material respects the financial position with the applicable financial reporting framework.

Unmodified - term used by nonissuers (private company)

Unqualified - term used by issuers (public company)

Question 6

What are additional communications called that are added to the audit report without modifying the auditor’s opinion?

Answer 6

• Use emphasis-of-matter and other-matter for NONISSUERS (private company)
• Use explanatory paragraph for ISSUERS (public company)

Question 7

Define why an auditor’s opinion would be a modified opinion?

Answer 7

1) The auditor concludes that the financial statements as a whole are materially misstated

OR

2) The auditor is unable to obtain sufficient appropriate audit evidence to make an opinion

Question 8

What are the three types of modified opinions?

Answer 8

1) Qualified opinion
2) Adverse opinion
3) Disclaimer opinion