AUD- Audit Reports

Question 2

What are the requirements for an audit report?

Answer 2

Must conform to GAAP

Consistency with prior period reporting is implied (must state if inconsistent)

Adequacy of disclosure is implied (must state if disclosures are lacking)

Opinion is provided - provides assurance

Must be signed by the auditor- and dated.

Question 3

How should an audit report be adjusted if reporting is not consistent with the prior period?

Answer 3

If inconsistent- an Unqualified Opinion is OK

Explanatory paragraph after Opinion is added

Otherwise - Qualified Opinion issued

Question 4

When is consistency not violated with respect to changes in reporting between years?

Answer 4

Accounting Errors

Reclassifications

Prospective treatment of a new principle

Accounting Estimate Change

Question 5

What assurance is provided in an audit opinion?

Answer 5

The opinion states that the financial statements are fairly presented in all material respects

The opinion states if the financials are in conformity with GAAP.

Question 6

What are the sections of the audit report?

Answer 6

Title - States that the auditor is independent

Address - whomever hired the auditor

Introduction Paragraph

Scope Paragraph

Opinion Paragraph

Signed and Dated by Author

Question 7

Which statements are included in the Scope Paragraph of the audit report?

Answer 7

GAAS was followed (IF SEC company, use the standard of the PCAOB)
Reasonable assurance about material misstatements was obtained.
Financial statements and disclosures are supported by evidence.
Management estimates evaluated
Accounting principles evaluated
Financial Statement presentation evaluated
Reasonable basis exists for an opinion

If any scope limitations exist, the auditor tries to work around them and still issue an unqualified opinion if possible.

Question 8

For an unqualified opinion to be issued- what must be the case with all periods presented?

Answer 8

A prior year’s Financial Statement used for comparative purposes must also meet criteria for an Unqualified Opinion

If an exception arises- the Explanatory and Opinion paragraphs will address the issue

If a prior year’s issue has been corrected- issue an Unqualified opinion and ignore the past issue

Question 9

What is included in an unqualified opinion paragraph with an emphasis?

Answer 9

Includes:

Immaterial GAAP issues
Going Concern worries
Auditor shares responsibility
Emphasizing a particular aspect of Financial Statements
Unqualified Opinion/Assurances not affected

Explanatory paragraph added after opinion

Question 10

What is the effect of a qualified opinion?

Answer 10

A qualified opinion creates reduced assurances.

It results from scope limitations or major inconsistencies.

It includes material problems with GAAP- disclosures- or segment reporting.

If there is an issue that causes a Qualified Opinion- the explanatory paragraph goes after the Scope and before the Opinion paragraphs and the Opinion paragraph refers to the issue as well.

Question 11

How is the audit report changed if there is Scope Limitation?

Answer 11

Qualified opinion is issued.

Scope paragraph modified

Explanatory paragraph between Scope and Opinion paragraphs

Opinion paragraph points out scope limitation

Question 12

How is the audit report modified for major inconsistencies found during the audit?

Answer 12

Qualified opinion is issued.

Scope paragraph remains unchanged

Explanatory paragraph between Scope and Opinion paragraphs

Opinion paragraph points out inconsistency

Question 13

How does a Disclaimer of Opinion affect the audit report?

Answer 13

States that an opinion cannot be issued.

Creates negative assurances

Includes severe Scope limitation

Question 14

What would cause an Adverse Opinion?

Answer 14

Very material GAAP and Disclosure issues would cause an Adverse Opinion.

If there is an issue that causes an Adverse Opinion- the explanatory paragraph goes after
the Scope and Before the Opinion paragraphs and the Opinion paragraph refers to the issue as well

Question 15

How is division of auditor responsibility disclosed?

Answer 15

Disclosed in Introductory Paragraph.

Doesn’t name the other auditor without permission.

Referenced in Opinion paragraph and division of responsibility indicated

If other auditor is not referenced- then you take responsibility for their conclusions- so consideration of independence- experience- credentials- etc required

Question 16

What standards govern SSARS engagements?

Answer 16

Compilations are governed by SSARS (Statements on Standards for Accounting and Review Services)

Question 17

Which clients can have compilation engagements?

Answer 17

Non-SEC (non-public) registrants only.

Question 18

What is a compilation?

Answer 18

Accountant puts together financial statements with information PROVIDED BY MANAGEMENT.

No opinion is expressed- and no assurances are given.

Independence is not required.

Question 19

What disclosures are required for Compilation engagements?

Answer 19

Disclosures not necessary – must state that they are not included

Question 20

What standards govern Review engagements?

Answer 20

SSARS (Statements on Standards for Accounting and Review Services)

Question 21

What type of assurance is given in a Review engagement?

Answer 21

Reviews give limited assurance.

Question 22

What procedures are required for Review engagements?

Answer 22

Analytical procedures are required for reviews.

Compare results to documented predictions.

Question 23

What is a Review engagement?

Answer 23

Financial statements are presented with no opinion expressed- and limited assurances are given.

Independence is required for a review engagement.

Question 24

What is a Forecast?

Answer 24

A prospective financial statement that uses normal circumstances.

General and limited use allowed.

Question 25

What is a Projection?

Answer 25

A prospective financial statement using hypothetical situations.

Only limited use by the client is allowed.

Question 26

What are the requirements for Agreed Upon Procedures?

Answer 26

Independence is required

Only limited use by the client is allowed.

Question 27

What disclosures are required for remote likelihood of losses?

Answer 27

No disclosure required.

Question 28

What disclosure is required for a probable loss contingency?

Answer 28

Accrue if estimable.

Explanatory paragraph if not estimable.

Question 29

What disclosure is made if a loss contingency is reasonably possible?

Answer 29

Auditor assesses need for explanatory paragraph based on loss likelihood.

Question 30

How is a gain contingency reported?

Answer 30

Gain contingencies are not reported.

Question 31

How does an immaterial GAAP issue affect the audit opinion?

Answer 31

It doesn’t. Opinion is unqualifed.

Question 32

How does a material GAAP issue affect the audit opinion?

Answer 32

Qualified Opinion is issued.

Similar to Scope Limitation.

Explanatory paragraph after Scope Paragraph.

Opinion refers to GAAP issue.

Question 33

How does a very material GAAP issue affect the audit report?

Answer 33

Adverse opinion is issued.

Same paragraph structure as a Qualified opinion.

Question 34

How does a Going Concern issue affect the audit report?

Answer 34

Unqualified opinion with an Emphasis is OK

Explanatory paragraph is added after Opinion paragraph.

Question 35

What is a Yellow Book audit?

Answer 35

An audit performed under governmental auditing standards (GAS).

Question 36

How do GAS standards compare to GAAS?

Answer 36

GAS is more strict that GAAS.

Question 37

What is required under the Single Audit Act?

Answer 37

A report on internal control is required.

GAAS and GAS don’t require the I/C report.