AUD Flashcards
1
Q
Assembly and Retention Guidelines
A
Assembled within 45 days (nonissuer) or 60 days (Issuer)
Retention = 5 years (nonissuer) and 7 years (issuer)
2
Q
Audit documentation
A
- Permanent and current files
- supports auditor’s opinion/report
- Aids in training and the conduct/supervision
- Record of accumulated evidence
- Accounting records reconcile w/ FS
- Experienced auditor w/o connection can understand work performed
3
Q
Engagement Letter
A
- Objective of the audit
- Management responsibilities
- Auditor’s responsibilities
- Inherent limitations
- Identification of framework
- Expected form and content of reports
- Reassessed before each engagement
4
Q
Client Confidentiality
A
May breach if:
- Quality review program
- Subpoena process
- Investigation conducted by AICPA, state CPA society, or under state statute
5
Q
Management Responsibilities
A
- Preparation and fair presentation of FS
- Design, implementation, and maintenance of IC
- Provide auditor with: access to all info relevant and requested; unrestricted access to persons necessary to obtain audit evidence
6
Q
Those charged with Governance
A
Bear responsibility to oversee the obligations and strategic direction of an entity
- include BoD and audit committee
- Usually NOT mgt
7
Q
Audit Committee
A
- Establish control environment
- Selecting and appointing auditor
- review of quality of auditor’s work
- Review of scope of audit
- Responding to auditor recommendations
- Helping resolve disagreements
- Bridge between auditor and BoD
8
Q
Required Communications to Governance
A
-Auditor’s responsibility (expressing an opinion)
-Planned scope and timing of the audit
-Significant Audit Findings (includes uncorrected, nontrivial MS
>when governance not involved in managing entity, auditor should communicate: material, corrected MS; mgt representations; mgts consultation w/ other accountants; significant issues that arose and were discussed w/ mgt
-For issuers, additionally communicate: all critical accounting policies; material alternative GAAP accounting treatments, and other material communication
9
Q
Communications related to IC w/ FS Audit only
A
*Not required to search for deficiencies that are less severe than a material weakness, or to express an opinion on IC
>But: Sign. def. and MW must be communicated, in writing to mgt and governance w/in 60 days of report release date
>Uncorrected, previously communicated SD and MW
>To mgt all other deficiencies
>May not report absence of SD, but may report absence of MW
10
Q
Independence Rule
A
- Required for audits and attest services
- Not required for compilations, consulting services, or tax work
- Impaired if: direct financial interest or material indirect financial interest; unpaid audit fees in excess of one year; CPA has mgt position with client, spouse part of accounting or financial reporting; CPA makes hiring decisions for client; litigation cannot impair if immaterial unrelated to audit
11
Q
Integrity and Objectivity Rule
A
-Free of conflicts of interest, unless disclosed and approved by client
12
Q
General Standards Rule
A
- Professional competence
- Due professional care (exercise the same skill a reasonably prudent accountant would; critically review work of others)
- Sufficient relevant data
13
Q
Compliance with Standards Rule and Accounting Principles Rule
A
- Must comply with applicable standards
- CPA cannot state F/S comply with GAAP if departures exist that would have material effect
- Unusual departures may exist, but must be described and explained (Justifications include: new legislation and evolution of a new form of business transaction)
14
Q
Contingent Fees Rule
A
- Not permitted for audits, reviews, and most tax work
- Permitted for compilations lacking independence
- Permitted when CPA represents a client in an examination of a tax return by the IRS
15
Q
Acts Discreditable Rule
A
- Retaining client records after client has demanded their return
- Discrimination
- Failure to follow standards
- Negligence in false or misleading journal entries
- Failure to timely file tax returns or remit payroll taxes
- Soliciting or disclosing CPA exam questions and answers
- Making false, misleading, or deceptive claims about the members abilities to provide professional services
- Disclosure of confidential information
16
Q
Adverse Interest Threat
A
Members interests are opposed to the interests of the client or employing organization
17
Q
Advocacy Threat
A
-Promoting the interests of the client or employing org to the point that objectivity or independence is compromised
18
Q
Familiarity Threat
A
Long or close relationship w/ client or employing org, member becomes too sympathetic
19
Q
Management Participation Threat
A
Member takes role of client mgt or otherwise assume mgt responsibilities
20
Q
Self-interest Threat
A
Member could benefit financially or otherwise from an interest in, or relationship with, a client or employing org, or persons associated w/ the client
21
Q
Self-review Threat
A
Member will not appropriately evaluate the results of a previous judgement made, or service performed or supervised
22
Q
Undue Influence Threat
A
Member will subordinate their judgement to an individual associated with a client or employing ord or any relevant third party due to that individual’s reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over th member
23
Q
SOX
A
- Record retention= 7 years
- Concurring or second partner must also review audit report
- Many other services prohibited, except for tax services preapproved by audit committee
- Auditor must be preapproved by audit committee and must report: critical accounting policies and practices used; alternative accounting treatments preferred by auditor; material written communications between mgt and auditor
- Partner must rotate off every 5 years and take 5 years off
- Audit firm cannot have employed issuer’s mgt for a one-year period proceeding audit
24
Q
PCAOB
A
-Same as SOX plus,
>No contingent fees or commissions
>No tax services related to aggressive tax transactions
>No tax services to mgt
>Firm must describe in writing to audit committee all relationships that play a factor with independence, annually
25
SEC
-Same as SOX plus:
>No loans to or from audit client
>Client may not invest in accounting firm or engage accounting firm for investment services
>No contingent fees or commissions
>Requires ALL partners to rotate, leads have 5 year cool off, while others have 2 years
>Partners can only be compensated for selling audit, review or attest services
26
US DOL
-Independence required
>Impaired if: direct or material indirect interest; connection to plan; maintains financial records of plan
>Not impaired if: Employee disassociates from the plan until no longer relevant to time period audited, actuary associated with the accountant or the accountant's firm rendered services to plan
27
GAGAS Conceptual Framework for Independence
-Threats and safeguards approach
>Adds: Bias threat and structural threat
- Must determine whether providing a non-audit service would impair independence
-Consider if mgt has ability to effectively oversee the non-audit service to be performed
28
Independence Considerations When Stock Received from Inheritance
They disposed of the financial interest as soon as practicable but no later than 30 days after they had knowledge of and obtained the right to dispose of the financial interest.
AND
(2) During the period that they did not have the right to dispose of the financial interest, they did not participate on the attest engagement team, and the direct financial interest is not material to them
29
Quality Control Standards (HELP ME)
- Human Resources
- Engagement/Client Acceptance and Continuance: minimization of association w/ client lacking integrity; expects to complete with reasonable competence, and complies with legal and ethical requirements
- Leadership Responsibilities: Culture that emphasizes quality
- Engagement Performance: Firm consistently adheres to high level of performance, engagements properly supervised, confidentiality, safe custoday, integrity, accessibility, retrievability, and retention maintained.
- Monitoring: Reasonable assurance that QC is relevant, adequate, operating effectively, and complied with in practice
- Ethical Requirements: Maintain independence in fact and appearance
* Deficiencies or Noncompliance with a firm's QC standards DO NOT necessarily imply that a specific engagement was not performed in accordance with appropriate standards
30
Audit Plan
-Outlines NET of the procedures to be performed including risk assessment procedures, further audit procedures, and other audit procedures over management assertions
31
Business and Industry Knowledge
- Not required prior to accepting engagement, but understanding must be obtained once accepted
- Industry knowledge: guides, trade publications, govt publications
- Business knowledge: Tours, financial history, understanding accounting system, asking questions
32
Inherent Limitations of IC
- Human error
- Collusion, deliberate circumvention, fraud
- Mgt Override
33
Five Components of IC (CRIME)
- Control Environment (Tone at the top)
- Risk Assessment (Mgts identification)
- Info and Communication (identity, capture, and exchange info)
- Monitoring (Assess the quality, like IA)
- Existing Control Activities (Established to ensure that mgt objectives are carried out) > PAID TIPS
34
(Existing) Control Activities (PAID TIPS)
Prenumbering of docs
Authorization of transactions
Independent checks to maintain asset accountability
Documentation
Timely and appropriate performance reviews
Information processing controls
Physical controls for safeguarding assets
Segregation of duties (ARC)
35
ARC
Authority
Recording
Custody
36
Audit Requirements in Understanding IC
Obtain understanding if design of controls
Determine whether IC have been implemented
NOT required to evaluate effectiveness of controls
37
Service Organizations
-Type 1 report helps in understanding of design of controls
>Should contain a disclaimer over operating effectiveness of controls
-Type 2 report helps in understanding of design and effectiveness
>May reduce control risk
-Report should be restricted use
38
Effect of Information Technology on the Audit
-COPAL: Control group, Operators, Programmers, Analyst, Librarian
-Auditing around the computer = manual
-Auditing through the computer = CAAT
>Transaction Tagging (Follow through system)
>Embedded audit modules (Application collects data for the auditor, but auditor must be involved in design)
>Test Deck/Test Data (Uses application program to process test data, results of which are already known; client system; offline; invalid #, excess pay rate, excess hours)
>Integrated Test Facility (Test data commingled with live data; client's system; auditor's data; online; CPA controls)
>Parallel Simulation (Auditor reprocesses client's live data and compares to actual results; auditor's system; client's data)
>Generalized Audit Software Packages or GASP (Allow auditor to perform tests of controls and substantive tests directly in client's system; great when little knowledge of client's hardware or software is known)
39
Effect of Information Technology on IC
- Automated controls: high volume of recurring transactions; control acts can be adequately designed and automated
- IT Risks (GIGO)>Overreliance, loss of data, unauthorized changes, failure to make changes/updates
- IT benefits > Accurate and consistent processing, timeliness, analysis, and performance monitoring
40
Effect of Information Technology on Audit Testing
- Substantive tests alone may not suffice.
- Tests of controls should be performed
- Should obtain an understanding throughout the period (Continous testing)
41
Categories of Fraud
- Fraudulent Financial Reporting (Lying): Intentional MS or omissions of amounts/disclosures in the FS
- Misappropriate of Assets = Stealing
- Corruption = Cheating
42
Presumed Fraud Risk
- Improper revenue recognition
| - Mgt override of controls
43
Fraud Risk Factors
-Incentives/Pressures > Reason to commit
-Opportunity> Ineffective controls or override of controls
-Rationalization/Attitude > Justification of behavior
>Ethics
-Just because all three are missing does not mean fraud cannot occur
-Just because all 3 are present does not mean fraud has occurred
44
Communication of Fraud
- Anything resulting in a material misstatement and/or due to a significant deficiency, report directly to mgt and governance
- If it involves senior mgt, report only to governance
- Otherwise, report to at least one level above where fraud was committed
- To third parties: no duty to disclose unless, SEC in order to comply with legal, successor auditor, response to a subpoena, or a funding agency
45
Audit Risk Model
-Risk auditor gives unmodified opinion on fraud/error FS
-ARM=RMM(CRxIR)xDR
If RMM (High)=DR(Low), NET(High)
If RMM (Lows)=DR (High), NET (Low)
46
NET
```
Nature = control or substantive testing (purpose and type)
Extent = Lot or little (Quantity)
Timing = Interim or year-end
```
47
Risk Assessment and FS Material Misstatement
1. Can be discussed together
2. Key audit team members MUST be involved
3. Done in planning stage
48
Inherent Risk
May increase when a transaction is more likely to be recorded incorrectly, ie legislation changing accounting for leases
49
Judgemental Misstatement
Relates to differences arising from the judgements of mgt concerning accounting estimates that the auditor considers unreasonable or the selection or application of accounting policies that the auditor considers inappropriate
50
Risk Assessment Procedures
MUST:
>Obtain understanding of entity and environment
>Assess RMM (Both IR and CR)
-Inquiry, analytical procedures, audit data analytics, observation and inspection, audit team discussion
>Respond to RMM = test of controls and substantive procedures (DR), NET
>Evaluate audit evidence
51
Obtaining an Understanding of Entity
-Industry, regulatory, and other external factors
-Nature of entity
-Entities objectives, strategies, and business risks
-Entities financial performance
-Entities IC
>Evaluate design and implementation, not required to evaluate effectiveness
-Under PCAOB, must obtain understanding of company's selection and application of accounting principles
52
Management Assertions (COVERU)
```
-About transactions and events, account balances, presentation, and disclosure
Completeness
CutOff
Valuation, allocation, and accuracy
Existence and occurrence
Rights and obligations
Understnadability and classification
```
53
Completeness
All account balances, transactions, and disclosures that should have been recorded have been recorded and included in the FS
54
Existence/Occurrence
Account balances exist and transactions that have been recorded and disclosed have occurred and pertain to the entity.
55
Cutoff
Transactions have been recorded in the proper accounting period
56
Valuation, Allocation, and Accuracy
Account balances, transactions, and disclosures are recorded fairly and at the appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded
57
Rights and Obligations
The entity holds or controls the rights to assets, and liabilities are the obligations of the entity
58
Understandability and Classification
Transactions have been recorded in the proper accounts. Financial information is appropriately presented and described and disclosures are clearly expressed
59
Tracing & Vouching
Events>Documents>Sub>GL>TB>FS
- Vouch = Support, Occurrence, Existence (Rev & Assets)
- Trace = Completeness, Coverage (Exps and Liabs)
60
Documenting Risk Assessment
- Key elements of understanding of entity
- Identified risks and related controls
- Risk assessment procedures performed
- Auditor's risk assessment and basis for assessment
61
Level of Response to Assessed Risk
- Overall: Communicate increased need for professional skepticism; staff with more experienced or specialized skills; increase level of supervision; incorporate a greater level of unpredictability; changes in NET of tests
- Assertion Level Response: Clear linkage of risk at the relevant assertion level nd the NET of further audit procedures
- Response to significant risks: if relying on operating effectiveness of IC intended to mitigate SR, tests of controls MUST be performed in the current period
62
Audit Approaches
Substantive approach = no test of controls
Combined = NET of sub testing affected by the operating effectiveness of controls
>No controls=Max risk= Do not test controls***
>Weak controls=High risk= Do not test controls***
>Some controls=Moderate risk = Test
>Strong Controls= Low risk = Test
***Exception: If significant electronic processing is used, controls should be tested
63
Materiality
Amount of error or omission that would affect the judgement of a reasonable person.
- Based on the SMALLEST level of MS that could be material to any ONE of the FS
- Both qualitative and quantitative factors should be considered
64
Tolerable MS
Application of PM to a particular sampling procedure
65
Materiality for Classes of Transactions, Account Balances, or Disclosures
Separate materiality should be set when MS of an amount less than materiality for the FS as a whole could influence the economic decisions of users
66
Use of Internal Auditor's
* Independent auditors cannot SHARE responsibility for audit decisions, assessments, or for issuing the report
- Critical factors: Competence, objectivity, and application of a systematic and disciplined approach
67
Use of a Specialist
* Understand the specialist's field of expertise, competence, capabilities, and objectivity to determine the possibility of using the specialist's work.
- If auditor adds explanatory language or departs from an unqualified opinion, the auditor may reference the specialist in the report AND should indicate that the reference does NOT share responsibility
- For an ISSUER, may reference specialist on CAMs but must obtain specialist permission
* **Auditor CANNOT share responsibility with a third party
- Client does not have to approve use of specialist
68
Related Party Transactions
Audit procedures:
>Company's procedures to identify; inquiry; filings with the SEC; review of material transactions for related party evidence
-Worried about capturing and proper disclosure
**Guarantees, nonrecurring transactions
69
Noncompliance w/ Laws and Regulations
- Auditor is responsible for obtaining reasonable assurance, auditor is NOT responsible for preventing noncompliance
- If auditor suspects noncompliance may exist, discuss with mgt at least one level above
- If material and not adequately reflected = GAAP issue = qualified or adverse
- If insufficient evidence = GAAS issue = qualified or disclaimer
- If client refuses = Consider withdrawing
70
Fair Value Measurements
- Mgt responsible for making FV measurements and disclosures in accordance with GAAP
- Auditor must rest such measurements and disclosures to provide reasonable assurance that they are in conformity with GAAP
71
Accounting Estimates
- Auditor must verify that: appropriate practices used to develop estimates, reasonable, presented in conformity with GAAP, properly disclosed
- May examine BOD and shareholder minutes to look for areas of uncertainty
72
Audit Evidence
-Sufficient = professional judgment
-Appropriate
>Reliability = AEIO
>Relavance = Related to assertion being tested
73
Reliability of evidence (AEIOU)
```
Auditor's direct personal knowledge and observation
External evidence
Internal Evidence
Oral Evidence
U know this!
```
74
Analytical Procedures
***Assess Reasonableness
-Required to be performed during planning the overall review at the end of the audit
-Procedures performed during the overall review stage may be similar to procedures performed during the risk assessment in the planning stage
-As a sub procedure, evidence is only circumstantial and will require corroboration
-During the final review, determines overall reasonableness of account balances
-Best to understand reasons for changes in ratios
>Liquidity ratios= ST ability to pay maturing obligations
>Activity ratios= How effectively an enterprise is using its assets
>Profitability ratios= Success or failure of an enterprise for a given period of time
>LT debt-paying ability ratios= Security for LT creditors/investors
75
Sampling methods
Statistical = quantitative test
Nonstatistical = qualitative test
BOTH require professional judgment
Under statistical sampling, the sample size is only area w/o judgment
76
Attribute Sampling
-For IC testing, estimates a rate of occurrence for a given attribute
-Methods include: discovery; stop and go; or acceptance
*Factors affecting sample size
>Risk of assessing control risk too low=INVERSE
>Tolerable dev rate=INVERSE
>Expected dev rate=DIRECT
77
Variable Sampling
-Estimate a numerical value; typically for substantive testing
-Methods=Mean per unit, ratio, difference, and PPS
*Factors affecting sample size:
>Expected MS=DIRECT
>Population variability(std dev)=DIRECT
>Assessed level of risk=DIRECT
>Tolerable MS=INVERSE
>Acceptable level of risk=INVERSE
-Sample error+recorded balance=point estimate
-Accept book value if falls within an acceptable range (point estimate +/- allowance for sampling risk
78
Selection of a Sample
- Random=Best
- Systematic: Every nth item
- Stratification: Divide population into subpops based on strata; reduces the effect of variance in the total pop
- Block/cluster=Not desirable
- PPS
79
Upper Rate of Deviation
=Sample deviation rate + Allowance for sampling risk
| -Must be equal to or less than TM
80
Mean-per-Unit
=(Total audit value/# items sample size) * # items in pop = point estimate
81
Ratio Estimation
=(Sample audit value/sample book value) * Total book value = Point Estimate
82
Difference Estimation
=((Sample BV-Sample audit value)/sample size) * pop size = Projected error
>Total BV-projected error=point estimate
>Likely MS=projected MS
83
Probability-Proportional-to-Size Sampling (PPS)
Advantage: Smaller sample than other methods
>Automatically stratifies pop
Disadvantage: Zero, negative, and understated balances generally require special design considerations
*Sample interval=TM/reliability factor
*Sample size=Pop/sample interval
reliability factor corresponds to risk of incorrect acceptance
=((recorded amount-audit amount)/recorded amount)*sample interval = projected error
>projected error+allowance=PM
>If recorded amount exceeds sample interval, no tainting, take difference between recorded amount and audit amount
84
Dual Purpose Samples
- Good idea when you believe the control is operating effectively
- Perform tests of controls and substantive testing together
- Evaluate results separately
85
Test of Controls
- Reperformance, inspection, observation, and inquiry
- Inquiry alone is NOT sufficient
- Consider whether controls were applied at relevant times, how the controls were applied, the consistency of application, by whom or by what means controls are applied
86
Substantive Auditing Procedures (FIVE CARROT CARS)
Footing, cross-footing, and recalculation
Inquiry
Vouching
Examination and Inspection
```
Confirmation
Analytical Procedures
Reperformance
Reconciliation
Observation
Tracing
```
Cutoff Review
Auditing related accounts simultaneously
Representation Letter
Subsequent Events Review
*If done at interim, must extend work to year-end and RMM must be low
87
Confirmations
Required unless: immaterial, ineffective, or iR and CR are very low and evidence provided by other procedures sufficiently reduces audit risk
>MUST document basis for omission of confirms
-Negative confirms may be used when IR and CR are low, large number of small balances, AND no reason to expect recipients to ignore the confirmations
88
Confirmation Nonresponses
1. Send follow up confirmations
2. Perform alternative procedures, such as examining applicable sales order, shipping docs, and subsequent cash receipts
89
Fraudulent Cash Schemes
Kiting: Check drawn on one bank is deposited in another bank and no record is made of the first disbursement
>Bank transfer schedule needed
Lapping: Today's cash receipts are used to cover for yesterday's theft
>Lockbox best safeguard
>Deposit slip test: trace deposit items from the deposit slip to the posting in the customer account, will see a consistent delay
90
Attorney Letter
*Corroborate mgt
-Inquire about specific litigation(if identified), including the timing and degree of probability of unfavorable outcome
-Response is sent directly to auditor
-No response or refusal to cooperate is considered a scope limitation
>Qualified or disclaimer
91
Going Concern
(ADMITS)
(FINE)
-If substantial doubt exists, an EOM or explanatory para including words "substantial doubt" and "going concern", DO NOT include "for one year"
-FASB= FS issuance + 1 year
-GASB=FS date+1 year
Audit Approach (ADMITS): Analytical procedures; compliance with Debt/loan agreements; review Minutes; Inquire of client's legal counsel; confirm financial support arrangements w/ Third parties; review Subsequent events
Conditions (FINE): Financial difficulties; Internal matters; Negative financial trends; External matters
Mitigating factors: Mgt has ability and intent
-Once going concern no longer present, no longer need paragraph
92
Internal control deficiencies
- Control deficiency: Exists when design or operation fail to prevent, or detect and correct MS on timely basis
- Sign Def: Less severe than material weakness, yet important enough to merit attention by those charged with governance
- Material weakness: Reasonable possibility(or probable) that a MM of the entities F/S will not be prevented, or detected and corrected
- Note: issuers do not include "correct" in wordings
- Indicators of MW: any level of fraud by senior mgt; restatement of previously issued FS; MM that would not have been detected by IC; ineffective oversight by governance
93
Written Representations
* Should be dated the same as auditor's report
- Done to ensure mgt accepts responsibility and document client's representations and responses
* Should address all periods covered by report
- Mandatory, if omitted= scope limitation
94
Subsequent Events
-Recognized=exist at FS date, should adjust FS
-Nonrecognized= require disclosure in notes
Auditor responsibility (PRIME):
>Responsbile from balance sheet date to date of auditor's report
>Prime:review post balance sheet transactions; obtain rep letter; inquiry; read minutes; examine latest interim statements
After date of report, auditor has no active responsibility, but cannot ignore information that comes to their attention
>If issue deals with their work, then they are responsible even after issuance
Dual date: Extend the report for that particular subsequent event
95
Subsequently Discovered Facts
-Advise client to immediately disclose the information and its impact on FS
-If client refuses, auditor should notify BoD and client that report cannot be associated with FS
>Notify regulatory agencies and any persons relying on FS and report
96
Unmodified (Unqualified) Opinion
- Present fairly in all material respects
- In conformity with the applicable financial reporting framework
- May include EoM, OM, explanatory, and CAMs
97
GAAP Issues(Quualified/Adverse)
*Conclude on MS individually OR in the aggregate
Nonissuers modify:
1. Auditor's responsibility
2. Include Basis for modification preceding opinion
3. Opinion paragraph (qualified=except for) (Adverse=FS do not present fairly)
Issuers:
>Include additional paragraph immediately following the opinion paragraph and modify opinion paragraph
98
GAAS Issues (Qualified/Disclaimer)
*POSSIBLE EFFECTS of any undetected misstatements COULD be both material (and pervasive)
Nonissuers modify:
1. Auditor's responsibility
2. Include basis for modification preceding opinion
3. Opinion modification (Qualified=except for) (Disclaimer= We DO NOT provide an opinion)
4. Modification of intro (Disclaimer only)
Issuer
Issuers:
>Add a paragraph immediately following the opinion and modify the opinion
>Under a disclaimer, CAMs are not required to be reported
99
```
Unmodified Opinion (Nonissuer) Report
(MR DIM REPPORTS CRAME)
```
**Title: Independent Auditor's Report
Management's
Responsibility
Design
Implementation
Maintenance
```
Responsibility (Auditor's)
Express (opinion)
Plan
Perform
Obtain (reasonable assurance)
Risks
Test (IC)
Statements
```
```
Control (effectiveness)
Reasonableness of
Accounting (significant estimates)
Management
Evaluating (overall presentation of FS)
```
100
Audits if Group F/S
- Clearly indicate that the component was audited by the component auditor and should include the magnitude of the portion of the FS audited by them
- Include the name of the component auditor only if granted permission by them and their report is included in group FS
- If no reference is made, auditor assumes responsibility for component auditors work
- Should be satisfied with independence and competence
- Report is not restricted
101
Emphasis-of-Matter Paragraph
- Refers to a matter that is appropriately presented or disclosed in FS, but auditor believes its fundamental to the users understanding
- Immediately after opinion
- includes EoM heading
- Describe the matter AND location of relevant disclosure
- State report is not modified
102
Lack of Consistency
- When material change in GAAP has occurred between periods AND change is justified, describe and reference in EoM
- If unjustified, modified opinion
103
Other-Matter Paragraph
- Other than those presented or disclosed in the FS that are relevant to the user's understanding of the audit, auditor's responsibilities, or auditor's report
- immediately after opinion and EoM
- Use Other Matter heading
- Describe matter and location of relevant disclosures (if applicable)
- Often used to restrict an auditor's written communication
104
Explanatory Paragraphs
- Combination of EoM and OM
- Immediately after opinion
- Describe the matter
105
Critical Audit Matters (CAM)
-Must either include statement regarding CAMS or state that no CAMs were determined
-Was communicated or required to be communicated to the audit committee AND relates to accounts and disclosures that are material AND involved especially challenging, subjective, or complex auditor judgment
-Must report (IPAD):
>Identification of CAM
>Principle considerations
>how the cam was Addressed
>reference to relevant FS accounts or Disclosures
106
Change in Opinion (DORCS) & Comparative F/S
-Must disclose the reasons for change in an EoM, OM, or explanatory paragraph
-Disclose:
>Date of the previous auditor's report
>Opinion type previously issued
>Reason for the prior opinion
>Changes that have occurred
>Statement that "Opinion...is different"
-When issuing a report with different opinions, modify auditor's responsibility, add basis, and specific year in opinion
107
Filing of Form AP (ISSUERS only)
- Required by PCAOB
- Must be filed by the 35th day after the audit report is first filed in a document with the SEC or within 10 days if the audit report is included in a registration statement
108
Integrated Audit Reports
-Required for issuers, but SASs allow nonissuers to decide if they wish to have their IC examined
-Dodd-Frank Act removed nonissuers, only requiring it for large accelerated and accelerated (>75M?) filers
-Must obtain sufficient appropriate audit evidence to support opinion on IC and assessment of CR for FS purposes
>Top-down approach: evaluate overall risk; consider controls at entity level; focus tests of controls on areas with reasonable possibility of MM
109
Communications with Management and Those Charged with Governance
* Not required to search for control deficiencies or SDs in a FS audit only, but those identified should be communicated
- Control deficiencies, SDs, and MWs should be communicated to mgt in writing
- SDs and MWs should be communicated to audit committee
- For issuers, MWs should be communicated to parties before issuance of audit report on IC
- For nonissuers, communication of SDs and MWs should be made by the report release date and communication of control deficiencies should be made within 60 days of report release date
110
Opinion on IC
-May be separate or combined
-If separate, each report should have a pointer paragraph towards the other
-SHOULD include section on definitions and inherent limitations of IC over financial reporting
>Before opinion for nonissuer
>Before CAMs for issuer
111
Modified Audit Opinions due to IC
Scope limitation = Disclaim or withdraw
-Material weakness = Adverse opinion
>Define MW; statement that a MW was identified; identification of the MW described to mgts own assessment on IC
-An absence of a control deficiencies or SD, should not be reported on
112
SSAE Report Types
- Agreed-upon procedures=examination or AUP
- Prospective FS=Examination or AUP
- Pro forma FS=Examination or review
- Compliance=Examination or AUP
- MD&A=Examination or Review
- Service orgs=Examination
113
Agreed-Upon Procedures Engagements (I AM SURE)
-Independence
- Agreement of parties (Procedures, criteria, and materiality limits)
- Measurability and consistency
- Sufficiency of procedures
- Use of report is restricted
- Responsibility for subject matter is either client or client provided evidence of third party responsibility
- Engagements to perform AUP on prospective FS, must include summary of significant assumptions
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Prospective FS
-Financial forecast: Based on expected conditions and expected courses of action
>May be general use or restricted
-Financial projection: Based on hypothetical (What if) assumptions
>MUST be restricted
-May be compiled, examined or AUP
-Both should include warning that auditor holds no responsibility to update to that anything will actually happen
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Statements on Standards for Attestation Engagements (SSAE)
Examination = reasonable assurance with positive opinion
Review = limited assurance with conclusion (NO opinion)
Agreed-upon procedures = NO assurance, listing of findings
****DOES NOT include historical FS (Generally fall under SASs or SSARS review)
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Statements on Standards for Accounting and Review Services (SSARS)
All engagements require a written understanding with mgt and those charged with governance, regarding the services to be performed
-Includes: review, compilations, and preparations
-Communication with predecessor auditor is not required
-Subsequent events not required under compilation or preparation
-No understanding of IC required (no test work)
-One or more FS allowed to be prepared/compiled
>May be allowed under review as long as scope of procedures is not restricted
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Review Engagements (SSARS), (U LIAR CPA)
- LIMITED assurance provided (negative assurance)
* Independence is required, each page should be marked "See accountant's review report", only inquiry and analytical procedures are performed
- Other procedures: understanding of client's business; principles used in the industry; read FS; obtain reports from other accountants; OBTAIN REP LETTER; Issue a report
- GAAP departures should be presented in final paragraph or accountant may withdraw depending on pervasiveness
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Compilation Engagements
- No assurance provided
- Independence not required, but must disclose if not independent, reasoning not required
* Translation of mgt language into applicable F/S standards
- Procedures: Obtain knowledge of client's business; industry accounting principles, READ FS and ensure are free of obvious clerical errors and obvious mistakes related to GAAP; issue a report
- May omit disclosures, as long as not intended to mislead and clearly indicated in the fourth paragraph of compilation report
- GAAP departures should be presented in final paragraph or accountant may withdraw depending on pervasiveness
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Preparation Engagement
* Does NOT provide assurance
- No independence required
- Preparation of FS in accordance with applicable framework
- May omit disclosures as long as not made to deceive
- Procedures: Obtain knowledge of client's business, practices, and principles; PREPARE FS; on each page of FS, state: No assurance is provided"; neither accountant or firm name required in report
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Change in Engagement (Audit -> Review/compilation)
- Inquire about the reasons for the change
- Consider the estimated additional cost/effort
* IF change is justified, then accountant must comply with applicable standards
121
Review of Interim FS (U LIAR CPA)
*Stating whether auditor is aware of any needed material modifications to interim FS for GAAP conformity
-Procedures:
Understanding of client
Learn entity and its environment, INCLUDING IC
Inquiries
Analytical procedures
Review-other procedures
Client rep letter
Professional judgment
Accountant should communicate results
***Additionally, under SAS/PCAOB reviews: analytical procedures should be applied to disaggregated data (ie previous qtrs); obtain evidence that interim data reconciles to accounting records; mgt written reps related to IC and fraud
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Letters to Underwriters
- Done before registration of client's securities
- CPA is required to review interim financial information
- RESTRICTION of report
- Negative assurance on most financial information
* MAY provide positive assurance regarding independence and compliance of FS with securities act IF FS audited, otherwise negative
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Note
If question does not state type of company outright, assume nonissuer
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Comparative Reporting
- Compilation -> Review: Prior year report should be updated and issued as the last paragraph of the current period report
- Review->compilation:
1. Issue a compilation report and add a paragraph to report describing responsibility for the prior period statements
2. Issue two separate reports
3. Issue a combined report presenting both full reports
- Anything->Preparation: No requirement to reference prior period
125
Interim Review Report relating to going concerns
- IF disclosure is inadequate, modify report for departure from GAAP
- Issuer: as long as disclosure is adequate, no need for an explanatory paragraph
- Nonissuer: Add EoM if mgt has included a statement that substantial doubt exists in its FS, OR if
1. going concern EoM in prior year audit report
2. Conditions for going concern still exist at interim, AND
3. Mgt plans do not alleviate the substantial doubt
126
Other Information in Documents Containing Audited FS
* Auditor must read the information and should try to resolve any material inconsistencies or material misstatements of fact directly with the client
- The auditor may issue a disclaimer of opinion, or may be engaged to express an opinion on such information
127
Reporting in Supplementary Information in Relation to the FS as a Whole
If engaged to report on SI:
>Evaluate the presentation of the SI in relation to FS as a whole; AND
>report whether the SI is fairly stated, in all material respects, to FS as a whole
-Auditor may report on SI in a separate report or in an OM/explanatory paragraph
-Required SI:
>Perform limited procedures
>Auditor's report should include OM para
>Opinion is permitted, but not required
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Reports on Application of the Requirements of an Applicable Financial Reporting Framework
-Accountant MAY report on the application of the requirements of an applicable financial reporting framework to a specific transaction or the type of report that may be rendered on a specific entity's FS
>REPORT SHOULD BE RESTRICTED IN USE
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Reporting on FS Prepared in Accordance with FRF Generally Accepted in Another Country
* NOT IFRS
- Distribution Outside the US only= Use other country's report, the report set out in the ISAs, or a US form report. Permits limited distribution within US
- Distribution within the US=An EoM that identifies the FRF, refers to the note in the FS that describes the framework and indicates that the framework differed from accounting principles generally accepted in the US
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GAGAS
- Ethical principles: Serving the public interest; integrity; objectivity; proper use of government information, resources, and positions; and professional behavior
- General Standards: independence of mind and appearance; professional judgment; competence; quality control and assurance
- Consider deficiencies early so that corrective action can be taken sooner, no need to wait until end of audit
- Report directly to outside parties when mgt fails to satisfy legal or regulatory requirements or when mgt fails to take time and appropriate steps to respond to likely fraud, noncompliance, or abuse
- Report on compliance issues with material effect on FS
* No consulting engagements for audit firms
* Requires mandatory peer review every 3 eyars
131
Reporting on Noncompliance (GAGAS)
Material instances should be reported in a separate communication to the entity AND should be noted in auditor's report
- Material= failure to follow requirements OR violation of rules
- REPORTING illegal acts is REQUIRED
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Single Audit Act
- Required when entity receives and spends total federal awards equal to or in excess of 750k
- Allows for either a single audit that covers the entire program OR program-specific audits associated with an individual award
* Materiality determinations: Considered SEPERATELY in relation to each major program
- Major= all that expend over 750k or more AND smaller programs deemed high risk
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Comparison of Government Reports
GAAS:
1. Opinion on all F/S
GAGAS (Yellow Book):
1. Compliance (report, no opinion)
2. IC over financial reporting (report, no opinion)
Single Audit Act (2 CFR 200)
1. Compliance (Opinion)
2. IC over compliance applicable to each major program (Report-no opinion)
3. Schedule of findings and questioned costs
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Unqualified Opinion (ISSUER) Report
Order: Title, addressee, OPINION, basis for opinion, CAM
*Title= Report of Independent Registered Public Accounting Firm
Basis (RAP MEE, RAP MEE):
Responsibility of mgt & Responsibility of auditor
Auditor is public firm & Audit in accordance w/ PCAOB
Plan & Perform audit to gain reasonable assurance
free of Material Misstatement
Examining Evidence
Evaluating Estimates
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Report on Special Purpose Frameworks
-Use nonGAAP titles
-EoM stating that SPF used and reference footnote
-OM that restricts the use of report IF contractual or regulatory
-If prepared with regulatory basis FOR general use
=2 opinions: 1) fairly presented, in all material respects, in accordance w/ GAAP & 2) prepared in accordance w/ SPF
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Single FS and Specified Elements, Accounts, or Items
-May be performed as separate engagement or in conjunction w/ audit of complete set
-Should perform procedures on all interrelated items (i.e. A/R and Sales)
>Specfic element of equity=procedures necessary to express an opinion on B/S
>Element of net income= Procedures necessary for B/S and I/S
-If auditor issues a modified opinion on complete set of FS, auditor should express adverse opinion on specific element when element is MM OR express an adverse opinion on specific element if due to scope limitation
-When auditor expresses an adverse or disclaimer on complete set of FS, an unmodified opinion on a specific element in the same report would contradict the other opinion and would express a PIECEMEAL opinion.
>Auditor should only express an unmodified on element when the opinion on the element is NOT published with and does not accompany the auditors report on complete set, AND
>element does not constitute a major portion of the entity's complete set of FS OR element is NOT based on Stockholders equity or net income
**A single F/S is considered to be a major portion
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Compliance with Contractual or Regulatory Requirements Related to Audited FS
* Negative Assurance on compliance in the form of a statement that **nothing came to auditor's attention**
- Report should be in writing and may either be a separate report or provided in one or more paragraphs in the auditor's report on FS
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Auditor's Communication with those Charged with Governance
(SPAM, PODIUM, MARS)
- Selection of, changes in, & appropriateness of sign accounting policies
- Processes used by mgt in formulating sign accounting estimates
- Adequacy of F/S disclosures
- Mgt judgements that are significant
- Planned scope and timing
- Other issues judged sign. by auditor
- Difficulties encountered in performances
- Impairment of independence
- Uncorrected, material MS & possible effects on opinion
- Mgt disagreements
* If those charged w/ governance are not involved in managing entity, tell them to go to:
- Material, corrected MS
- Accountants that mgt consulted with
- Representations of mgt required by the auditor
- Sign issues or findings arising from the audit that was discussed w/ mgt
