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CPA AUDIT > AUD 6 - Audit Reports > Flashcards

AUD 6 - Audit Reports Flashcards

1
Q

Audit Report

A

A document issued by an auditor as a result of an audit, expressing an opinion regarding the fairness of the financial statements taken as a whole.

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2
Q

What are the 5 basic types of Opinions?

(Non-Issuer - AICPA, ASB, CS)

A

The 5 Basic types of opinions for Non-Issuers are:

  1. Unmodified Opinion - which is a Standard “clean” report
  2. Unmodified Opinion w/: (2)
    • an Emphasis of Matter paragraph or
    • an Other Matter paragraph
  3. Qualified Opinion - “Except for”
  4. Adverse Opinion - “Do not present fairly”
  5. Disclaimer of Opinion - “We do not express an opinion”

NOTE: Qualifed, Adverse, & Disclamer are referred to as Modified Opinions.

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3
Q

What are the 5 basic types of Opinions?

(Issuer - PCAOB)

A

The 5 Basic types of opinions for Non-Issuers are:

  1. Unqualified Opinion - which is a Standard “clean” report
  2. Unqualified Opinion w/: (2)
    • an Emphasis of Matter paragraph or
    • an Other Matter paragraph
  3. Qualified Opinion - “Except for”
  4. Adverse Opinion - “Do not present fairly”
  5. Disclaimer of Opinion - “We do not express an opinion”

NOTE: Qualifed, Adverse, & Disclamer are referred to as Modified Opinions.

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4
Q

What are the 5 basic parts of an Unmodified Opinion Audit Report for a Non-Issuer (AICPA/ASB)?

(TIM-AA)

TESTED

A
  • Title - Must include “Independent”
  • Addresse as (TO:) - Board & Shareholders ONLY!
    • Never addressed to Management
  • Intro (“The Report on the Financial Statements”)
    • Identify the entity whose FS were audited
    • State that FS have been audited
    • Identify title of each statement audited (BS, I/S, Cash Flow)
    • Specify the date or period covered
  • Management’s Responsibility
    • Preparation & fair presentation in accordance w/ AFRF
    • Responsibility for the DIM of Internal Ctrl
  • Auditor’s Responsibility
    • To express an opinion on the FS
    • Audit conducted in accordance w/ GAAS
    • Defines what an Audit is, & its procedures
  • Auditor’s Opinion
    • ​Whether or not the FS are presented fairly, in all material respects, in accordance w/ AFRF (GAAP)
  • Auditor’s Signature
  • Auditor’s City & State
  • Date of Auditor’s Report - Date SAAE was obtained
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5
Q

Introductory Paragraph (4)

(“Report on the Financial Statements”)

A

The opening paragraph of an audit report , often called the introductory paragraph or “The Report on the Financial Statements”, includes four components:

  1. Identify the entity whose FS have been audited.
  2. Properly state that the FS have been audited.
  3. Identify the title of each statement that the financial statement comprise.
  4. Specify the date or period covered by each FS.
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6
Q

Management Repsonsibility Paragraph (2)

A

The second paragraph, with the subheading Management’s Responsibility for the Financial Statements, describes mgmt’s responsibility for:

  1. Preparation & fair presentation of the FS in accordance with the AFRF.
  2. Responsibility for the DIM of Internal Control
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7
Q

Auditor’s Responsibility (3)

A

The third paragraph of an unmodified audit report. The section of the auditor’s report that identifies the auditor’s responsibilites are typically in three paragraphs:

  1. The first indicates the auditor’s responsibility to express an opinion, that the audit was conducted in accordance with GAAS, & that GAAS requires the auditor to plan & perform the audit to obtain reasonable assurance as to the fairness of the FS.
  2. The second indicates that the auditor applies procedures to obtain audit evidence, applying judgement taking into account the auditor’s assessment of RMM & Internal Controls relevent to the financial reporting.
  3. The third indicates the auditor’s belief that the audit evidence obtained supports the auditor’s opinion.
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8
Q

Opinion Paragraph

A

The fourth paragraph & final paragraph, of an unmodified audit report stating the auditor’s opinion as to whether or not the financial statements are fairly presented in accordance with the applicable financial framework.

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9
Q

What are the 4 basic parts of an Unqualified Audit Report for an Issuer (PCAOB)?

(TISO)

A
  • Title
    • Must state “Report of Independent Registered Public Accounting Firm”
  • To: (Addressee)
  • Introductory
    • Identity the Entity, State that the FS have been audited, Title of each Stmt, Date/Period covered
    • Mgmt Responsibility
    • Auditor’s Responsibility
  • Scope
    • ​​Audit is conducted in accordance with the standards of the PCAOB
    • Definition of an Audit & its procedures
  • Opinion
    • Whether or not the FS are presented fairly, in all material respects, in accordance w/ GAAP
  • Signature
  • City & State or Country
  • Date
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10
Q

Unmodified Opinion

A

An audit report (called “Standard” or “Clean” audit report) with an opinion paragraph that indicates that the FS are fairly presented in accordance with the AFRF.

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11
Q

Modified Opinion (3)

A

A modified opinion may be broken up into three different opinions.

  1. A qualified opinion,
  2. An adverse opinion
  3. A disclaimer of an opinion,

NOTE:Each type of a modified opinion requires a paragraph before the Auditor’s Opinion paragraph indicating the “Basis For” the qualification, the adverse opinion, or the disclaimer of opinion.

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12
Q

Qualified Opinion (2)

A

A modification to the auditor’s report included when the auditor is satisfied that the FS are not materially misstated as a whole (not pervasive) but either, upon obtaining SAAE, the auditor concludes that the FS include a material misstatemet (Disagreement); or the auditor is unable to obtain SAAE regarding a matter that is material to the FS (Scope Limitation).

Note: A qualified opinion is issued due to either a NON-Pervasive Disagreement or a Scope Limit. A “Basis For” paragraph before the auditor’s opinion is required.

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13
Q

Adverse Opinion

A

An audit report stating that the FS are NOT presented fairly when issued, based on obtaining SAAE. The auditor concludes that the FS contain material misstatement (due to a Disagreement) that are pervasive to the FS taken as a whole.

NOTE: Results from a departure from GAAP that is both material & pervasive which may be in the form of:

  • Incorrect application of accounting principles based on the auditor’s judgement
  • Inadequate Disclosures
  • Unreasonable accounting estimates
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14
Q

Disclaimer of Opinion

A

An audit report stating that an opinion CANNOT be expressed when the auditor is unable to obtain SAAE to draw a conclusion as to whether or not the FS are fairly presented in accordance with the AFRF (due to a Scope Limitation).

NOTE: A disclaimer may cover only some of financial statements. For example, unable to obtain evidence regarding beginning inventory, but verify ending inventory may result in an unmodified opinion which will include a disclaimer.

A disclaimer of opinion is appropriate when the auditor is unable to obtain sufficient appropriate audit evidence to be able to form an opinion on the financial statements. This would be the case if the auditor was unable to obtain audited financial statements for a material consolidated subsidiary; the auditor was unable to obtain satisfaction as to the quantity or value of inventory, if material; or if management imposed a scope limitation, such as not allowing the auditor to review canceled checks. Management’s inability to provide a justification for a change in accounting principles indicates a departure from GAAP, which would require a qualified opinion, not a disclaimer.

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15
Q

What are three general determinants for an Audit Reports?

TESTED

(Disagreements3, Scope Limit2, Uncertainty3)

A

1.) Disagreements

  • Not AFRF or GAAP
  • Inconsistency (Accounting Policies)
  • Inadequate Disclosures
    • No Cash Flow Report = Qualified Opinion

Two Possible Opinions depending on Materiality:

  • NOT Pervasive = Qualified Opinion
    • “Basis for Qualified Opinion” is added BEFORE the Auditor’s Opinion
  • Pervasive (Very) = Adverse Opinion
    • “Basis for Adverse” is added BEFORE the Auditor’s Opinion

2.) Scope Limitations

  • Restrictions on ability to obtain SAAE
  • Due to Circumstances or Client Imposed

Two Possible Opinions depending on Materiality:

  • NOT Pervasive = Qualified Opinion
    • “Basis for Qualified Opinion” is added BEFORE the Auditor’s Opinion
  • Pervasive (Very) = Disclaimer Opinion
    • “Basis for Disclaimer” is added BEFORE the Auditor’s Opinion

3.) Uncertainty (Add Emphasis of Matter / Other Matter)

  • Contingent Liability
  • Going Concern Doubt
  • Audit CY - Reivew PY (Different Opinions)
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16
Q

Audit Report - Determinant

Disagreement (3)

A

Disagreements

  1. Not AFRF or GAAP (explicit)
  2. Inconsistency (Accounting Policies) (implicit)
  3. Inadequate Disclosures (implicit)
    • NOTE: No Cash Flow Report = Qualified Opinion

Two Possible Opinions depending on Materiality:

  • NOT Pervasive = Qualified Opinion
    • “Basis for Qualified Opinion” is added BEFORE the Auditor’s Opinion
  • Pervasive (Very) = Adverse Opinion
    • “Basis for Adverse” is added BEFORE the Auditor’s Opinion
17
Q

Audit Report - Determinant

Scope Limitation

A

Scope Limitations - Restrictions on ability to obtain “sufficient appropriate audit evidence” (SAAE). Due to certain Circumstances or can be Client Imposed.

  • Circumstances (generally results in Qualified Opinion)
    • Cannot confirm Accounting Records
    • Auditor did not observe Ending Inventory
    • Circumstances beyond the control of the entity
  • Client Imposed (may be Disclaimer or Withdraw)
    • Client’s records are inadequate
    • Client refuses permission to contact Attorney
    • Mgmt will not sign Mgmt Representation Letter

Two Possible Opinions depending on Materiality:

  • NOT Pervasive = Qualified Opinion
    • “Basis for Qualified Opinion” is added BEFORE the Auditor’s Opinion
  • Pervasive (Very) = Disclaimer Opinion
    • “Basis for Disclaimer” is added BEFORE the Auditor’s Opinion
18
Q

Audit Report - Determinant

Uncertainty (3)

A

3.) Uncertainty (Add Emphasis of Matter / Other Matter)

  • Contingent Liability (Optional emphasis-of-matter)
  • Going Concern Doubt (Required emphasis-of-matter)
  • Audit CY - Reivew PY (Different Opinions)
19
Q

Emphasis of Matter

A

Emphasis of matter is a type of paragraph in, or section of, an auditors’ report on financial statements. Such a paragraph is added to indicate a significant uncertainty or other matter, which is disclosed appropriately in the notes forming part of the financial statements, but which the auditor considers is significant or important enough to warrant a mention in their report.

20
Q

What are four cirumstances that may lead the auditor to add an OPTIONAL Emphasis of Matter Paragraph?

(SLIC)

A

Circumstances that may lead the auditor to add an optional emphasis of matter paragraph follwing the opinion includes:

  1. Significant related party transactions
  2. Lack of consistency in application of Accounting Principles
  3. Important subsequent events (fire/loss of inv)
  4. Contingent liabilities (pending lawsuits)
21
Q

What are five cirumstances in which the inclusion of an Emphasis of Matter Paragraph is MANDATORY?

A

Circumstances in which the inclusion of an emphasis of matter paragraph is mandatory:

  1. Auditor’s opinion on revised FS differs from the opinion previously expressed.
  2. Substantial doubt as to the ability of the client to continue as a going concern requiring phrases such as “substantial doubt” & “going concern”.
  3. A justified change in accounting principles affecting consistency.
  4. FS prepared in accordance with a special purpose framework other than GAAP.
  5. FS prepared in accordance with a regulatory basis that are intended for general use.
22
Q

Emphasis of Matter paragraph includes? (3)

A

When the auditor decides to include an emphasis of matter paragraph, the paragraph should include:

  1. Have an appropriate heading such as ‘Emphasis of Matter’
  2. Include a clear reference to the matter being emphasized & where the matter is addressed in the financial statements.
  3. Indicate that the auditor’s opinion is NOT modified with respect to the matter.
23
Q

Other Matter

A

An auditor will use an other-matter paragraph to communicate matters that are appropriately reported or disclosed in the FS but, in the auditor’s judgement, enhances a user’s ability to understand the audit, the auditor’s responsibilities, or the auditor’s report.

24
Q

What are seven circumstances where an Other Matter paragraph is required?

TESTED

A

Circumstances which requires an Other Matter Paragraph may include the following:

  1. Auditor’s opinion on revised FS differs from the opinion previously expressed. (emphasis-of-matter may be used)
  2. The report of another auditor who reported on prior period FS is not presented w/ comparative FS.
  3. When prior periods presented in comparative FS were reviewed or compiled, or when they have not been audited, reviewed or compiled.
  4. When other information accompanying audited financial statements contains a material inconsistency, which mangement refuses to revise, unless the auditor decides to withold the report or withdraw.
  5. When the entity presents supplementary info with the FS.
  6. When the FS are accompanied by required supplementary information (RSI).
  7. FS prepared in accordance with a special purpose framework other than GAAP.
25
Q

Framework for Reporting - Explicit

(Disagreement)

A
  • In a standard report, the opinion paragraph explicitly states that the FS are in conformity w/ AFRF (GAAP).
  • When the client’s mgmt is NOT preparing the FS in conformity w/ the AFRF, two types of opinions may be given.
    1. Qualified Opinion (“except for”)
    2. Adverse Opinion
26
Q

Consistency - Implicit

(Disagreement)

A

An auditor is req’d to evaluate the consistency of FS for the periods presented & communicated in the auditor’s report when the comparability of FS from one period to the next is affected (Implicit). The inconsistency may be due to:

  1. A change in Accounting Principle
  2. An adjustment to correct a material misstatement in previously issued FS

NOTE: Generally requires an emphasis-of-matter paragraph if there is any justitified change in consistency (the two above). Results in either a qualified or adverse opinion if there is a circumstance that will cause an inconsistency to be a GAAP departure.

27
Q

Ommitted Disclosures (Inadequate Disclosures) - Implicit

(Disagreement)

TESTED

A

In an unmodified opinion, the auditor implicitly indicates that disclosures are adequate by not indicating otherwise in the report. If the req’d disclosures ARE inadequate, this would result in either a qualified or an adverse opinion.

NOTE: NO Cash Flow statements results in an Inadequate Disclosure, NOT a scope limitation. Reason is that BS & IS may provide information to create a cash flow statement.

28
Q

What is the result of an Audit report if there is No Cash Flows? (3)

A

NO Cash Flow statements results in an Inadequate Disclosure, NOT a scope limitation. Reason is that BS & IS may provide information to create a cash flow statement.

No Cash Flows = Inadequate Disclosure = Qualified Opinion

  • Omit “Cash Flows” in Intro Paragraph
  • “Basis for qualification” paragraph is added before the opinion paragrph explaining that the company declined to present the Cash Flow statement as required by GAAP
  • Opinion paragraph mentions, “except that omission of Cash Flows results in an incomple presentation, which results in a qualified opinion.
29
Q

Group Financial Audits

To reference or not?

A

Engagements in which one firm, the group auditor, issues a report of the FS of an entity taken as a whole, when components of the entity have been audited by others, referred to as component auditors.

NOTE: To reference or not?

  • The group auditor may decided to assume responsibility for the work of a component auditor means the report will make no reference to the component auditor.
  • If the group auditor decides to take NO responsiblity for the component auditor’s work, the report should indicate clearly that the component auditor’s work was not audited.
30
Q

When should the Component Auditor be referenced in the Audit report?

A

NO reference should be made if:

  • Component FS were prepared according to the same framework as the Group FS.
  • Component auditor has compiled with GAAS.
  • Component auditor’s report is not restricted.

Reference should be made if:

  • Report should indicate clearly that the component was not audited by the group engagement auditor.
31
Q

Elements taken into consideration when the Group Engagement Partner evaluates the Component’s auditors work.

A
  • Component auditor’s understanding & willingness to comply with ethical requirements, independence.
  • Componenet auditor’s competence.
  • The extent to which the group engagemnent team will be involved in the work of the component auditor.
  • Wheather the group engagement team will be able to obtain necessary consilidating info from the component auditor.
  • Whether the component auditor operates in an environment with appropriate oversight.
32
Q

Uncertainty - Explicit

What are the two common types?

A
  1. Contingent Liability - a loss that may occur in the future when competent evidential matter becomes available, as a result of an existing condition
    • Unmodified with OPTIONAL emphasis-of-matter paragraph after the opinion.
  2. Going Concern Doubt - there is substantial doubt about the company’s ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the FS being audited.
    1. Unmodified with REQUIRED emphasis-of-matter paragraph after the opinion
    2. Disclamer of Opinion if considered extreme.
33
Q

Scope Limitation

Circumstances(3) vs. Client Imposed(3)

A

Scope Limitation - Inablility to obtain SAAE which can result in a Qualified or Disclaimer opinion depending on materiality/pervasiveness. May occur due to:

  • Circumstances (results in Qualified or Disclaimer)
    • Cannot confirm Accounting Records
    • Auditor did not observe Ending Inventory
    • Circumstances beyond the control of the entity
  • Client Imposed (may be Disclaimer or Withdraw)
    • Client’s records are inadequate
    • Client refuses permission to contact Attorney
    • Mgmt will not sign Mgmt Representation Letter
34
Q

Limited Reporting Engagements

A

An engagement where a client asks auditor to report on only one financial statements & not the others. Opinion on the Balance Sheet only, allowed to do!

35
Q

Piecemeal Opinion

A

An opinion on a “piece” of the statement (Ex: Cash or A/R), but a disclaimer or adverse on the entire statement, NOT allowed!

36
Q

Comparative Financial Statements

(Prior period also audited by current auditor)

A
  • Prior period also audited by us (current auditor)
  • Report covers both years if continuing auditor:
    • If opinion on earlier year changed, ADD Other-Matter paragraph.
    • May issue report with different opinions on x1 vs x2.

Correct! When reviewed or compiled financial statements are presented in comparative form with audited financial information in the subsequent year, the unaudited financial statements should be clearly marked as such and either the report on the prior period should be reissued or an other-matter paragraph should be added to the audit report stating the service performed in the prior period, the report’s date, a description of any material modifications noted in the report, and a statement that the service was less in scope than an audit and does not provide the basis for the expression of an opinion on the financial statements.

37
Q

Comparative Financial Statements

(Prior period NOT audited by current auditor)

What are the two scenarios?

TESTED

A

Prior period NOT audited by us (current auditor).

1.) The predecessor’s report can be reissued & included along with the successor’s audit report.

  • If Predecessor Auditor reissues report,
    • Read F/S
    • Obtain representation letter from successor auditor & client
    • If no adjustments to P/Y FS, use original report date
    • If restate P/Y FS, dual-date report

2.) Successor can make reference to the predecessor’s earlier report in an “Other-matter Paragraph” if predecessor Does NOT agree to reissue report.

  • Results in an additon of an “Other-matter paragraph” which includes the following:
    • Prior period audited by other auditors
    • Date of predecessor’s report
    • Type of opinion
    • If modified opinion, state the reasons why
38
Q

Summary of NON-Standard Reports

Material Departure

Justified Departure

Inconsistent

Inadequate Disclosure

No Statement of Cash Flows

Group Financial Audit

A

Material Departure:

  • Intro - Standard
  • Mgmt Responsibility - Standard
  • Auditor Responsibility - Adeq basis for qualified or adverse
  • Opinion - Standard (Qualified or Adverse)
  • Addt’l Paragraph - “Basis for qualification or adverse” before

Justified Departure:

  • Intro - Standard
  • Mgmt Responsibility - Standard
  • Auditor Responsibility - Standard
  • Opinion - Standard (Unmodified)
  • Addt’l Paragraph - Emphasis-of-matter (after)

Inconsistency (Properly rep & justifiable):

  • Intro - Standard
  • Mgmt Responsibility - Standard
  • Auditor Responsibility - Standard
  • Opinion - Standard (Unmodified)
  • Addt’l Paragraph - Emphasis-of-matter (after)

Inconsistency (Not properly rep or Not justifiable):

  • Intro - Standard
  • Mgmt Responsibility - Standard
  • Auditor Responsibility - Standard
  • Opinion - Qualified or Adverse
  • Addt’l Paragraph - “Basis for qualification or adverse” before

Inadequate Disclosures:

  • Intro - Standard
  • Mgmt Responsibility - Standard
  • Auditor Responsibility - Standard
  • Opinion - Qualified or Adverse
  • Addt’l Paragraph - “Basis for qualification or adverse” before

No Statement of Cash Flow:

  • Intro - Delete reference
  • Mgmt Responsibility - Standard
  • Auditor Responsibility - Standard
  • Opinion - Qualified
  • Addt’l Paragraph - “Basis for qualification or adverse” before

Group Financial Audit:

  • Intro - Standard
  • Mgmt Responsibility - Standard
  • Auditor Responsibility - Refer to % or $ audited by other
  • Opinion - Unmodified w/ reference to report of other
  • Addt’l Paragraph - NOT required
39
Q

Summary of NON-Standard Reports

Contingent Liability

Going Concern Doubts

Scope Limitation - Material & NOT Pervasive

Scope Limitation - Material & Pervasive

Scope Limitation - Imposed by Mgmt

A

Contingent Liability:

  • Intro - Standard
  • Mgmt Responsibility - Standard
  • Auditor Responsibility - Standard
  • Opinion - Standard
  • Addt’l Paragraph - Emphasis-of-matter (after)

Going Concern Doubt:

  • Intro - Standard
  • Mgmt Responsibility - Standard
  • Auditor Responsibility - Standard
  • Opinion - Standard
  • Addt’l Paragraph - Emphasis-of-matter (after)

Scope of Limiation (Material & NOT Pervasive:

  • Intro - Standard
  • Mgmt Responsibility - Standard
  • Auditor Responsibility - Standard
  • Opinion - Qualified
  • Addt’l Paragraph - “Basis for Qualification” (before)

Scope of Limitation (Material & Pervasive):

  • Intro - Standard
  • Mgmt Responsibility - Standard
  • Auditor Responsibility - Inability to obtain evidence
  • Opinion - Disclaimer
  • Addt’l Paragraph - “Basis for Disclaimer” (before)

Scope of Limitation (Imposed by Mgmt):

  • Intro - Withraw or state engagement to audit
  • Mgmt Responsibility - Standard
  • Auditor Responsibility - Inability to obtain evidence
  • Opinion - Disclaimer
  • Addt’l Paragraph - “Basis for Disclaimer” (before)

CPA AUDIT (9 decks)

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