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CPA AUDIT > AUD CH 6 - Audit Report > Flashcards

AUD CH 6 - Audit Report Flashcards

1
Q

Why is it unacceptable to address the audit report to Management?

A

Management is the party the auditor is reporting ON

(Management is not the party who the auditor is reporting TO)

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2
Q

What is the ﾓcleanﾔ report for non-issuers?

A

Unmodified Report (AICPA & ISA)

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3
Q

What is the ﾓcleanﾔ report for Issuers?

A

Unqualified (PCAOB)

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4
Q

What is required for all sections in an unmodified report?

A

Heading for each section

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5
Q

List the sections of an unmodified report

A

* Title: ﾓIndependent Auditor’s Reportﾔ

  1. Introductory (or Report on the F/S)
  2. Management’s Responsibility for the F/S
  3. Auditor’s Responsibility
  4. Opinion
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6
Q

Unmodified report ﾖ Describe Section 1

A

Title: Introductory or ﾓReport on the F/Sﾔ

  1. Entity whose F/S are being audited
  2. F/S ﾓAuditedﾔ
  3. Title of each statement (& related notes)
  4. Date or Period covered by each F/S
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7
Q

Unmodified report ﾖ Describe Section 2

A

Title: ﾓManagement’s Responsibility for the F/Sﾔ

  1. Prep & Fair Presentation of the F/S
  2. DIM of I/C relevant to reliable financial reporting
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8
Q

Unmodified report ﾖ Describe Section 3

A

Title: ﾓAuditor’s Responsibilityﾔ

  1. to Express an opinion on the F/S
  2. accordance with GAAS in the USA
  3. plan/perform the audit to obtain reasonable assurance that F/S are free of material misstatement
  4. Describes an Audit
    - procedures for audit evidence
    - auditor’s judgement, assess RMM (fraud or error)
    - I/C is considered (no opinion)
    - evaluating appropriateness, reasonableness, overall pres.
  5. ﾓwe believeﾔ S.A. Audit evidence
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9
Q

Which section(s) is the Audit described in the standard unmodified report?

A

Under the Auditor’s Responsibility Section

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10
Q

Which section(s) is the AFRF (GAAP) mentioned in the standard unmodified report?

A

2 Times Total:

  • Management’s Responsibility

&

  • Opinion
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11
Q

What determines the form and content of the F/S?

A

the AFRF (system of accounting used to prepare the F/S)

  • Gen Purpose or Special Purpose Frameworks
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12
Q

Which report is consistency & adequacy of disclosures explicitly mention?

A

Modified Report: they require comment only when there are new principles or inadequate disclosure

*implicit in the standard unmodified report (ﾓno news is good newsﾔ)

*explicit in the modified report

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13
Q

Which section(s) are the individual financial statements mentioned in the unmodified report?

A

Explicitly mentioned in the Intro Section BY NAME

*opinion: financial position, results of operations (I/S & S/E), cash flows

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14
Q

Who signs an unmodified audit report?

A

In-Charge Auditor (with city & state of practice)

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15
Q

When should the auditor’s report be dated?

A

ON or AFTER the date on which S.A. Audit evidence to support the opinion has been obtained

(report date could be close to the report release date)

*** NOT THE DATE ON WHICH THE REPORT IS SIGNED

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16
Q

When sufficient appropriate audit evidence obtained?

A

Evidence that:

  1. the audit documentation has been reviewed

&

  1. F/S (+ disclosures & notes) have ben prepared

&

  1. Management has asserted responsibility for the F/S
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17
Q

What is the last day on which any evidence about the client is obtained?

A

The date the audit report is signed

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18
Q

When is audit report dual dated?

A

auditor discovers information after the date that sufficient appropriate audit evidence but prior to signing the report

*refers ﾓExcept for note Xﾔ… NO CHANGE TO BODY of Audit Report

*dual date must always be LATER than the basic (original) date

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19
Q

What does a dual date represent?

A

an extension of the auditor’s responsibility on a single note to the F/S

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20
Q

List the sections of an unqualified report

A

* title: ﾓReport of Independent Registered Public Accounting Firmﾔ

  1. Introductory: ﾓauditedﾔ, F/S, dates, period, mgmt responsibility, auditor responsibility
  2. Scope: PCAOB audit (NOT GAAS), audit procedures, reasonable assurance, ﾓwe believeﾔ
  3. Opinion: fin position, results of ops, c/f, GAAP

***4. Ref. To Report on I/C (explanatory) ﾖ ICFR, COSO, report date & opinion

(***only required when the audit reports are separate)

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21
Q

Which adjustments are required to an unmodified report under PCAOB? Which type of reports does they apply to?

A

PCAOB: Applies to all audit reports of issuers & reviews of INTERIM financial information

  1. Title: ﾓReport of Independent Registered Public Accounting Firmﾔ
  2. Scope Paragraph: refer to ﾓstds of PCAOB USﾔ (not GAAS)
  3. Below the auditor-in-charge signature must be listed CITY & STATE of the office where the auditor is based (city&country for non-US auditors)
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22
Q

Which section(s) is GAAP & GAAS mentioned in an unqualified report?

A

GAAP: Opinion section (section 3)

GAAS: not mentioned at all (PCAOB instead)

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23
Q

What are the major differences between the audit report under GAAS & ISA?

A
  1. ISA: expanded descriptions of management’s the auditor’s responsibilities
  2. ISA: addressed as required by the engagement circumstances
  3. ISA: name the location in the country or jurisdiction where the auditor practices
  4. ISA: If audit is conducted in accordance with ISA & another set of standards, may refer to both sets ONLY IF:
    - there is no conflict between them that would impact the report &

& - Audit report includes ALL elements required by ISA (full accordance)

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24
Q

Does an immaterial disagreement, scope limit, emphasis, or uncertainty have an effect on the opinion?

A

No… An Unmodified opinion will be issued

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25
Q

Pervasive

A

in the auditor’s judgement, ﾓvery materialﾔ

  • the effects are NOT confined to a specific element, account, or item of the F/S
  • Could represent a substantial portion of the F/S or disclosures that are fundamental to users’ understanding of the F/S
  • relates to the ﾓscopeﾔ of the effect on the F/S (ﾓmaterial but not pervasiveﾔ vs ﾓmaterial & pervasiveﾔ)
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26
Q

What are the types of a modified opinion?

A
  • Qualified: ﾓExcept forﾔ
  • Adverse: ﾓdo not present fairlyﾔ
  • Disclaimer: ﾓwe do not express an opinionﾔ

** all must include ﾓBasis Forﾔ paragraph with heading before modified opinion

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27
Q

What are the types of a unmodified opinion?

A
  • Unmodified - clean opinion
  • Unmodified with emphasis/other matter paragraph
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28
Q

When is a ﾓbasis forﾔ section required? Where is its place in a non-issuer audit report?

A

*ONLY for MODIFIED audit reports & is placed before the modified opinion paragraph

  • any MATERIAL misstatements regarding Disagreements or Scope Limits

(** not uncertainty/emphasis unless EXTREME going concern)

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29
Q

If a misstatement is considered material & NOT pervasive, how would it affect the unmodified audit report?

A

MODIFIED with a Qualified ﾓexcept forﾔ opinion & ﾓBasis forﾔ paragraph (before)

  • only affects Disagreements & Scope limits
  • Disagreements: misstatements are material but not pervasive
  • Scope Limit: **unable to obtain S.A. Audit evidence** & Material, but not pervasive
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30
Q

If a disagreement is material and pervasive, how does it affect the unmodified report?

A

MODIFIED with an Adverse opinion & ﾓBasis for Adverseﾔ paragraph (before)

  • ﾓmisstatements are both material & pervasiveﾔ
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31
Q

If a scope limitation is material & pervasive, how does it affect the unmodified report?

A
  1. MODIFIED with a Disclaimer of opinion & ﾓBasis for Disclaimerﾔ paragraph (before)
    - ﾓunable to obtain S.A. Audit evidenceﾔ
    - ﾓmisstatements are both material & pervasiveﾔ

OR

  1. Withdraw from the engagement (ONLY if scope limitation is imposed by the client)
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32
Q

How does the pervasiveness ﾓscopeﾔ affect an opinion in regards to a disagreement with management?

A
  • Material but NOT Pervasive: Qualified “except for” opinion
  • Material & Pervasive: Adverse Opinion
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33
Q

When is an adverse opinion warranted?

A

when a disagreement is MATERIAL & PERVASIVE

** disagreement: Non-GAAP, Inconsistency (improperly handled), or Inadequate disclosures

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34
Q

When is a disclaimer of opinion warranted?

A

when a scope limit is MATERIAL & PERVASIVE

OR

EXTREME going concern doubt

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35
Q

How does the pervasiveness ﾓscopeﾔ affect an opinion in regards to a scope limit?

A
  • Material but NOT Pervasive: Qualified “except for” opinion
  • Material & Pervasive: Disclaimer of Opinion

***if it does not affect ending balance of a B/S account, Unmodified on Fin Position & Disclaim an opinion on results of operations

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36
Q

What is purpose of an emphasis of matter paragraph?

A

when the client PROPERLY ACCOUNTED for & DISCLOSED an item of importance (complies with GAAP), but the auditor feels that they are fundamental to the users understanding of the F/S (users may overlook)

ﾖ sometimes optional & mandatory

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37
Q

Circumstances in which an emphasis of matter paragraph is OPTIONAL

A
  • significant related party transactions
  • material uncertainty (contingent liab.)
  • important subsequent events
  • lack of consistency in applying accounting principles
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38
Q

Emphasis of Matter Section

A

Immediately AFTER the opinion section (before other-matter paragraph, if any)

  • Appropriate heading
  • Clear reference to the matter & where the matter is addressed in the F/S (ﾓNote Xﾔ)
  • INDICATE the opinion is NOT modified with respect to the matter
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39
Q

What circumstances do NOT modify an opinion?

A
  • Everything that is Immaterial (immaterial = clean)
  • Emphasis of Matters
  • Other Matter
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40
Q

When is an emphasis of matter paragraph MANDATORY?

A
  1. opinion on revised F/S differs from previously expressed opinion (other matter paragraph may be used instead)
  2. ﾓSUBSTANTIAL doubtﾔ about client to continue as a ﾓgoing concernﾔ (include wording)
  3. a JUSTIFIED change in accounting principles affecting consistency
    - change in reporting entity (not owner)
    - change in accounting principle by an investee under equity method
    - adjustments to correct a misstatement in previously issued F/S
    - GAAP departure that is more appropriate than GAAP (usually from new transaction type or legislation)
  4. F/S prepared in accordance with a SPECIAL PURPOSE FRAMEWORK (other than GAAP)
  5. F/S prepared in accordance with a regulatory basis that are intended for GENERAL USE (not limited)
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41
Q

What is purpose of an other-matter paragraph?

A

to communicate matters that are appropriately report or disclosed in the F/S but (in the auditor’s judgement) ENHANCES a user’s ability to understand the audit, auditor’s responsibilities, or the auditor’s report

***include heading

***after opinion & emphasis of matter paragraphs (AFTER AFTER)

***optional & mandatory

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42
Q

When is an other matter paragraph mandatory?

A
  1. opinion on revised F/S differs from previously expressed opinion (EoM paragraph may be used instead)
  2. The report of another auditor who reported on the prior period F/S is NOT presented with comparative F/S
  3. When prior periods presented in comparative F/S were review or compiled
  4. When PP presented Comparative F/S have NOT been audited, reviewed, or compiled
  5. When other information accompanying audited F/S contains MATERIAL inconsistency, which management refused to revise (unless auditor withholds report or withdraws from engagement)
  6. When the entity presents supp. Information with the F/S (unless auditor issues separate report on the SI)
  7. When the F/S are accompanied by RSI (req. supp. Info)
  8. F/S are prepared in accordance with a SPECIAL PURPOSE FRAMEWORK (other than GAAP) that are LIMITED USE (not general)
  9. If reporting on auditing compliance & F/S in a combined report
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43
Q

What is the treatment for reporting on compliance* when included in the auditor’s report on F/S?

(*reporting on compliance with contractual agreements or regulatory requirements)

A

Other Matter Paragraph & ***ﾔRestricted Useﾔ alert

  • reference to the specific covenants/paragraphs of the contractual agreements or regulatory requirements to the extent that they relate to accounting matters
  • Negative assurance OR identify the instances of noncompliance
  • indicate the communication is being provided in connection with F/S audit
  • audit not directed primarily toward compliance (add’l procedures may mean add’l matters)
  • description & source of significant interpretations made by mgmt
  • ***restricted use.. ﾓintended solelyﾔ
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44
Q

ﾓRestricted Use Relating to the Other Matterﾔ statement if performed in accordance with Government Auditing Standards

A
  • “purpose of this communication is related to compliance” described in the other matter paragraph
  • solely to describe the scope of our testing
  • This communication is an Integral part of a GAS audit in considering compliance
  • This communication is not suitable for any other purpose
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45
Q

What is the authoritative source of GAAP For Non Issuers

A

FASB Accounting Standards Codification (ASC)

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46
Q

What is the authoritative source of GAAP for Issuers

A

SEC requirements & FASB ASC

47
Q

What is the first step when auditor discovers the F/S are not prepared in conformity with GAAP?

A
  1. Suggest to management that the statements be correct
  2. If management refuses, issue a qualified opinion (ﾓexcept forﾔ) or adverse opinion, based on pervasiveness & materiality
48
Q

Accordance with Framework for reporting (& Disagreements with)

Implicit or Explicit (in Audit Report)?

A

Explicitly stated in the opinion paragraph (GAAP)

  • If Justified Departure, include EoM paragraph (with explanation & reason for being more appropriate than GAAP)
  • If unjustified departure, qualified (ﾓexcept forﾔ) opinion or adverse opinion, based on pervasiveness & materiality (auditor’s judgement)…. with ﾓbasis for qualified opinion paragraphﾔ (BEFORE)
49
Q

Consistency (& Disagreements with)

Implicit or Explicit (in Audit Report)?

A

Implicit (assume consistency unless reported in the Auditor’s report)

50
Q

Consistency Evaluation

A

Auditor is REQUIRED to evaluate the consistency* of F/S for the periods presented & communicate in the auditor’s report when the comparability of F/S from one period to the next is affected (implicit)

*Consistency: assume continued use of same standards

51
Q

What may cause inconsistency?

A
  • Change in Accounting Principle (4 conditions)
  • Adjustment to Correct a Material Misstatement in previously issued statements
52
Q

What should an auditor determine when there is a change in accounting principle (inconsistency)?

A
  1. All conditions must be met to issue an unmodified opinion with EoM paragraph (which is included in future reports until new principle applies to ALL PERIODS presented)**except if considered retroactive restatement

A - If new principle is in accordance with the AFRF

P - if the change is proper (conforms to requirements)

D - If Disclosures are appropriate & adequate

J - if there is justification that the change is preferable

  1. If not all met, evaluate if the change is a AFRF-departure (which requires a qualified or adverse opinion)
53
Q

What are ﾓaccounting changesﾔ that would result in an unmodified opinion & emphasis of matter paragraph?

A
  • change from one acceptable principle to another PREFERABLE acceptable principle
  • change in accounting estimate that is inseparable from a change in accounting principle (change in depreciation method or useful life)
  • Change in reporting entity (including or excluding entities from consolidated F/S) which does not include a change in ownership
  • Significant change in accounting principle by an investee under equity method
  • Adjustment to correct a material misstatement in previously issued F/S
  • Change in classification of an item (resulting from an change in acctg principle or error correction)
54
Q

According to AS6 (PCAOB), what is a change from an unacceptable accounting principle to an acceptable one?

A

Correction of a misstatement in a previously issued F/S

** NOT a change in accounting principle

55
Q

When will an inconsistency NOT require identification on the auditor’s report?

A

If it does not have a MATERIAL impact on the comparability of the current & preceding years (immaterial)

56
Q

Connection between Inconsistency & GAAP-departure

A

Not equivalents as long as:

  1. The auditor CONCURS with the change (preferable)
  2. Properly accounted & disclosed

* unmodified opinion with EoM

  • if do not satisfy above, qualified or adverse opinion (pervasiveness) with ﾓbasis forﾔ paragraph (before)
57
Q

What is important in the EoM paragraph regarding a justified change in principle (consistency)?

A
  • Reference to the client’s footnote that discusses the change
  • ** auditor does NOT explicitly state they concur with the change (implicit an through unmodified opinion)
  • indicate opinion is not modified (implicit)
58
Q

According to AS6 (PCAOB), what should the Auditor do if a material misstatement in a previously issued F/S is corrected?

A

An explanatory paragraph should be added to the auditor’s report describing the situation?

59
Q

What are examples of inconsistency that would be considered a GAAP Departure?

A
  • Change to an unacceptable principle
  • Change that is not properly accounted for or disclosed
  • change made without sufficient justification (unjustified)
60
Q

What is required for a change that was treated as a retroactive restatement?

A

Explanatory paragraph in year of occurrence but not for subsequent years (other changes that affect periods presented in F/S should carry the explanatory paragraph until all years apply)

61
Q

How would a first year audit treat consistency?

A
  • verify with predecessor, F/S, & predecessor audit reports
  • if successor auditor concurs with consistency, NO REFERENCE (implicit)
62
Q

When are disclosures mentioned in the audit report?

A

Introductory paragraph (implies among the F/S being audited)

*** unless disclosures are considered incorrect, incomplete, or unsatisfactory

63
Q

Disclosures (& Omissions/Inadequacy)

Implicit or Explicit (in Audit Report)?

A

Implicit: Disclosures are considered correct/adequate unless auditor indicates otherwise

** if adequate, disclosures are only mentioned in the introductory paragraph

64
Q

What should an Auditor respond to the failure to include a statement of cash flows in a set of F/S?

A
  • REQUIRED by GAAP to be included when a company is presenting results of operation (i.e. I/S)
  • treat it like an inadequate disclosure (not a scope limit)
  • QUALIFIED opinion issued with Basis For qualification paragraph (precludes standard report & unmodified opinion)
  • Delete references in the Intro & Opinion paragraphs
  • Opinion Paragraph ﾓIn our opinion, except that omission of Cash Flows results in an incomplete presentationﾔ
65
Q

What is a failure to include a statement of cash flows considered when a company presents its results of operation?

A

an Inadequate Disclosure, which warrants a qualified opinion with basis for paragraph

  • delete references in intro & opinion
  • include ﾓexcept thatﾔ statement in the opinion paragraph
66
Q

How does an Auditor report on comprehensive income?

A

1 of 2 ways ﾖ ONLY affects the intro paragraph (NO change to Opinion)

  1. Separate mention - ﾓstatement of comprehensive incomeﾔ
  2. Combined - ﾓstatement of income & comprehensive incomeﾔ
67
Q

If a client includes the name of a CPA firm in F/S report were NOT audited/reviewed/compiled by the CPA, what should be done?

A
  1. Remove the name from the report

Or

  1. Mark each page of the F/S ﾓUnaudited. No opinion expressed on themﾔ
68
Q

What is required by a CPA in order to attach any report to Financial Statements?

A

at least the level of work equivalent to a compilation

69
Q

Group Engagement Partner

A

accounting firm that has examine the company having the largest impact on the overall report (i.e. PARENT COMPANY AUDITOR)

70
Q

Component Auditor

A

auditor of one or more of the subsidiary corporations

71
Q

When must a group engagement partner consider component auditors?

A

When the related subsidiary has a material impact on the consolidated statements of the parent corporation

  • Subsidiary accounted for under use of the equity method
  • Consolidated F/S report (indicate in Intro & Opinion)
72
Q

What will a group engagement partner consider when evaluating component auditors?

A
  • CA’s Understanding & willingness to comply with ethical requirements (includes independence)
  • CA’s Competence
  • Extent of being involved in the CA’s work
  • Ability to obtain necessary consolidating information from the component auditor
  • Whether the CA operates in an environment with appropriate oversight

*** if Group Engagement Partner has any reservations about these, should not use CA’s work in forming an opinion & no reference

73
Q

What should a Group Engagement Partner do when they have reservations about the Component Auditor?

A
  • obtain S.A. audit evidence about the subsidiary (component) without using any of the CA’s work
  • No Reference to the component auditor in the Audit Report
74
Q

A reference to a component auditor in the audit report indicates

A

Division of responsibility

75
Q

When a Group Engagement Partner decides to reference the Component Auditor, what should be indicated in the Audit Report?

A
  • Clearly indicate ﾓWe did NOT auditﾔ & statements were audited by ﾓother auditorsﾔ**

*name of CA if CA gives express permission & CA’s report presented with the group F/S

  • Magnitude of the portion of F/S audited by the CA
  • Percentages of consolidated total or as Dollar Amounts of the largest individual numbers on the B/S & I/S (i.e. Total Assets, Total Revenues)
76
Q

When should a reference not be made in regards to a component auditor?

A
  • Component F/S were prepared according to same AFRF (GAAP) as the Group F/S
  • CA has complied with GAAS
  • CA’s report is NOT RESTRICTED (Gen Use)
  • group auditor decides to assume responsibility for the work of a component auditor
77
Q

Guidelines on Group Financial Audits is a result of ___________

A

Clarity Project

78
Q

Relationship between component auditor’s report & group auditor’s report

A
  • Group Engagement Auditor should consider whether modifications to the CA’s report may warrant modifications to the GA’s report
  • If the Group Auditor is given permission to use the CA’s name when referencing the CA in the audit report, the CA’s report presented with the group F/S
79
Q

If a group auditor decides to assume responsibility for the work a component auditor, how does it affect the Auditor’s report?

A

It does not affect the Auditor’s report

  • NO REFERENCE made
80
Q

Which sections of a Group Financial Audit report are affected if there is a division of responsibility/shared responsibility?

A

Intro:

  • ﾓconsolidated financial statementsﾔ

**Auditor’s Responsibility:

  • ﾓwe did not auditﾔ, ﾓother auditorsﾔ, percentages/dollar amounts

Opinion:

  • ﾓIn our opinion, based on our audit & the report of other auditors, the consolidated F/Sﾔ
81
Q

What is the AICIPA limit for concerns about client’s status to REQUIRE an EoM paragraph?

A

One year after the B/S date (maximum)

82
Q

What is indicated by the denial or losses of licenses of patents?

A

Substantial Doubt as to the going concern of the client (EoM Paragraph)

83
Q

What are the primary issues related to when considering doubt of going concern?

A

Cash Flow Issues… client is most likely unable to pay debts as they come due

84
Q

What are certain audit procedures likely to ID conditions & events that could lead to substantial doubt of to the client’s going concern?

A
  • Inspection of debt agreements & third party commitments of financial support
  • Inspection of minutes of BoD
  • Inquiries of client’s legal counsel (attorney)
  • Analytical Procedures
85
Q

What is indicated by defaults or restructurings of debts?

A

Substantial Doubt as to the going concern of the client (EoM Paragraph)

86
Q

What should an Auditor consider when they have concluded that substantial doubt of going concern exists?

A
  1. Consider If the client has proper disclosure of it
  2. If so, UNMODIFIED opinion with EoM paragraph (includes ﾓsubstantial doubtﾔ & ﾓgoing concernﾔ)
  3. If not, QUALIFIED opinion with Basis For Qualification paragraph (considered an inadequate disclosure ﾖ GAAP Departure)
  4. Auditor is REQUIRED to communicate going concern issues to Governance
87
Q

When is a an auditor required to add an EoM paragraph regarding an uncertainty (or contingent liability)?

A

Auditor is NOT REQUIRED to do so, it is optional for the Auditor to include an EoM paragraph

  • Basis For Paragraph is required when not properly disclosed, accrued OR there is a scope limitation
88
Q

When is a Basis for Paragraph warranted for an uncertainty (or scope limitation)?

A
  • GAAP departure: basis for qualification or adverse

Or

  • Scope Limitation: Basis for qualification or adverse
89
Q

What warrants a qualified opinion or disclaimer of opinion?

A

Scope limitation (aka GAAS departure)

  • audit evidence is insufficient or inappropriate, therefore unable to draw a conclusion on certain accounts/disclosure or the as a whole (based on materiality & pervasiveness)
90
Q

Connection between ﾓrequirementsﾔ & audit procedures

A

Scope Limitations & Alternative procedures

  • If an Unconditional Requirement (ﾓmust doﾔ, ﾓrequireﾔ) is unable to be performed, then there are NO ACCEPTABLE ALTERNATIVE PROCEDURES (therefore, Scope Limitation ﾖ Scope restriction)
  • If a presumptively mandatory require (ﾓshouldﾔ) is unable to be performed, document how alternative procedures were able to accomplish the objectives
91
Q

Scope Limitations may result from

A
  • Circumstances beyond the control of the Auditor & Client
  • Circumstances related to the nature or timing of the auditor’s procedures
  • Management imposed limitations
92
Q

If an alternative procedure is possible, what effect does it have on the Audit Report?

A
  • NO EFFECT on the audit report
  • Auditor’s must document how alt. Procedures were able to accomplish the objective

*** unconditional requirements have NO ACCEPTABLE ALTERNATIVE PROCEDURES

93
Q

When is a unmodified opinion on the financial position & a disclaimer on the results of operations and cash flows permitted?

A

if the item does not affect the ending balance of a B/S account

Fin Position: Unmodified

Results of ops & CF’s: Disclaimer

94
Q

How is the auditor’s report affected if the auditor is unable to attend the year-end inventory count for valid reasons & is unable to satisfactorily obtain evidence using alternative procedures?

A
  • considered a scope limitation due to circumstances (not management)
  • Qualified opinion ﾓexcept for the possible effects of matter described in the basis forﾔ

**** does NOT refer to the omitted procedures themselves

  • Basis for qualified opinion paragraph: explain the reasons for the qualified opinion
95
Q

Limited Reporting Engagement

A

client asks auditor to report on only one F/S and not the others (not considered a piecemeal)

  • acceptable by GAAS & not considered a scope limitation as long there are no client-imposed scope limitations (auditor is permitted access to examine any evidence, including the other financial statements not being audited)
96
Q

Examples of Client Imposed Scope Limitations

A
  • Inadequate records (includes statement omission)
  • Client refuses permission to contact attorney (no letter of inquiry)
  • Management will not sign Management Representation letter
97
Q

What effect can inadequate accounting records have an audit?

A
  • Auditor may choose to disclaim an opinion or withdraw from the engagement
98
Q

Which statements are required to give an opinion on the results of operations?

A

Income Statement, Statement of Cash Flows (if one is missing, it is considered a scope limitation)

99
Q

When would a omission of the statement of cash flows not preclude an unmodified opinion?

A

Limited Reporting Engagement on the financial position of an entity (opinion on B/S only)

100
Q

What effect does a limited reporting engagement have on the standard unmodified report?

A

Intro: only ID F/S that is being audited

All of report: financial statement in singular form (statements to ﾓstatementﾔ) when referring to the F/S being audited

101
Q

What warrants an adverse opinion (ﾓbecause ofﾔ)?

A

GAAP Departure that is material & pervasive (auditor’s judgement)

  • auditor disagrees with application of accounting principles
  • Inadequate disclosure

Or

  • unreasonable accounting estimate
102
Q

When does the auditor ALWAYS have the option of withdrawing from the engagement?

A

Anytime the auditor feels the statements are

  • False
  • Fraudulent
  • Deceptive

Or

  • Misleading
103
Q

What does a disclaimer of opinion result from?

A
  • Very Material & Pervasive Scope Limitaion

Or

  • Ver Material & Pervasive Uncertainty
104
Q

Which section(s) of the audit report are affected by a disclaimer of opinion?

A
  • Intro: “We were engaged to audit”
  • Auditor’s Responsibility: ﾓbecause of matter described in basis forﾔ & ﾓwe were not able to obtain SA audit evidenceﾔ

**** OMIT: 2nd & 3rd paragraphs (2/3) in Auditor’s Responsibility, Definition of Audit, & ﾓwe believeﾔ ****

  • ADD Basis For Disclaimer of Opinion: reasons, ﾓunable to satisfy ourselvesﾔ
  • Disclaimer of Opinion: ﾓBecause of the significanceﾔ, ﾓnot able to obtain SA audit evidenceﾔ, ﾓwe do not express an opinionﾔ

*** MGMT Responsibility is NOT affected

105
Q

If unable to verify beginning inventory & able to verify ending inventory, what opinion would be issued?

A

2 Opinions

  • Financial Position: Unmodified (B/S)
  • Other Statements that cover the entire year: Disclaimer
106
Q

Piecemeal Opinion

A

PROHIBITED (violation)

  • to express an opinion on an individual account when issuing an adverse opinion or disclaimer of opinion on the statement
107
Q

Disclaimer of Opinion on a Financial Statement applies to

A

All of the individual accounts on that whole statement

108
Q

What effect does the auditor’s acknowledged lack of independence have on the auditor’s report?

A

1 Paragraph ONLY with Disclaimer of opinion (ﾓwe do not express an opinionﾔ)… omit all other paragraphs.

*** DO NOT give reasons for lack of independence

109
Q

Comparative financial statements

A

Multi-year financial information & statements

110
Q

Regarding comparative F/S, what is the effect on the audit report if all periods presented were audited by the same auditor (all unmodified opinion)?

A

It is the Comparative Standard Unmodified Report: One Audit Report for all periods (report is simply updated)

Identical to the Standard Unmodified with minor changes

  • Intro & Opinion are modified to to include ﾓconsolidated F/Sﾔ, subsidiaries, related consolidated statements, & periods presented
111
Q

Comparative F/S: Same Auditor (Change of Opinion)

What is the effect on the Audit Report?

A

One Audit Report

Intro: Include periods presented

**Opinion: reflects current year opinion (with appropriate report modifications ﾅ i.e. basis for)

**Other Matter Paragraph: refers to earlier report (date, opinion expressed, reason for change, & fact that the current opinion differs)

112
Q

What should a successor auditor do when a predecessor auditor is involved while reporting on comparative F/S?

A

Two Ways to handle this

  1. PA Reissue: Predecessor’s report can be issued & included along with the Successor’s report
    - PA must read/compare F/S & obtain a rep letter for SA & Client
    - if restate, reissue with dual date (after a 3 way meeting with client to apply procedures)
    - if no adjustment/revision, reissue with original report date

Or

  1. PA does not reissue: (PA MUST NOT BE NAMED… ﾓother auditorﾔ)
    - Other Matter Paragraph (PA previous report date, opinion, & reasons for any qualification of the opinion)
    - OR include PA’s explanatory paragraph (PA’s basis for)

** if PA issued a different opinion on AMENDED F/S, other matter paragraph should indicate

113
Q

What happens in comparative report when the PA has ceased operations?

A

Must state that the predecessor has ﾓceased operationsﾔ in Other-Matter Paragraph

114
Q

What is required when different levels of service are provided for different periods while issuing a report on comparative F/S?

A

If the report on the prior period’s F/S is NOT reissued, the current year report will include an OTHER MATTER paragraph indicating:

  • the service performed
  • date of the report on that service
  • a description of conclusion provided (opinion, negative assurance, or no opinion)

*reports only apply to equivalent of at least a compilation (no opinion)

CPA AUDIT (16 decks)

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