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Becker- Audit > Audit 1 > Flashcards

Audit 1 Flashcards

1
Q

Primary purpose of an audit

A

Provide financial statement users with an opinion on whether the financial statements are fairly presented, in all material respects, in accordance with the applicable financial reporting framework

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2
Q

What are the five general requirements related to the conduct of an audit?

A 
SEJEC
S - Professional Skepticism 
E- Ethical Requirements 
J- Professional Judgement 
E - Sufficient and appropriate audit evidence
C- Compliance with GAAS
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3
Q

What are three inherent limitations of an audit?

A

1) The nature of financial reporting
2) The nature of audit procedures
3) Timeliness of financial reporting and the balance between benefit and cost

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4
Q

what is the purpose of an emphasis of matter paragraph

A

reference a matter that is presented in the financial statements but is of such importance that it is fundamenta to the user’s understanding of the financials

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5
Q

What type of issuer includes an emphasis of matter paragraph

A

non-issuers

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6
Q

What are the reporting requirements for an emphasis of matter paragraph?

A

1) placing the paragraph immediately after the opinion paragraph
2) using the heading “emphasis of matter” or anotther appropriate heading
3) describing the matter being emphasized and the location of relevant disclosure financial statements
4) indicating that the auditor’s opinion is not modified with respect to the matter

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7
Q

Under what circumstances would an emphasis of matter be required in a report

A

GAASP
G - going concern
A - need to describe a justified change in ACCOUNTING principle that has effect on the entity’s financial statements
A- facts are subsequently discovered that lead to change in the auditor’s opinion
P- financial statements prepared in accordance with applicable SPECIAL PURPOSE framework, other than regulatory basis financial statements intended for general use

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8
Q

What are reporting requirements for an other-matter paragraph

A

1) placing the paragraph immediately after the opinion paragraph and after any emphasis of matter paragraph
2) using the heading “other-matter” or another appropriate heading
3) describing the matter being emphasized and the location of relevant disclosures applicable, in the financial statements

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9
Q

What type of issuer can include an other-matter paragraph

A

non-issuer

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10
Q

Under what circumstances would an auditor use an other-matter paragraph in an auditor’s report?

A

1) Auditor includes an alert in the audit report that restricts its use
2) Facts are subsequently discovered that lead to change in auditor’s opinion
3) prior to period financial statement were audited by a predecessor auditor and the predecessor audit report is not reissued
4) current period FS are audited and presented in comparative with compiled or reviewed financial statements for the prior period
5) prior to the audit report date, the auditor identifies a material inconsistency in information included in a document with audited financial statements that require revision and management refuses to make the revision
6) the auditor chooses to report on supplementary information presented with financial statements in the auditor’s report, rather than in a separate reprot
7) special purpose financial statements are prepared in accordance with a contractual / regulatory basis of accounting (requiring a restriction on the use of auditor’s report)
8) the auditor’s report on the financial statements includes a compliance report

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11
Q

Under what circumstances would an explanatory paragraph with an appropriate heading be required in an auditor’s report? (WITH A HEADER)

A

1) There is substantial doubt about the entity’s ability to continue as a going concern
2) there has been amaterial change between periods in accounting principles or in the methods of the application
3) There has been a change in a reporting entity, unless the change is the reproting entity results from a transaction of events
4) There has been a change in an investee year-end that has a material effect on the company’s financial statements
5) A material misstatement in previously issued financial statements has been corrected
6) Other information in a document containing audited FS has been corrected
7) Other information in a document containing audited financial statements is materially inconsistent with information appearing in the FS
8) selected financial data required by SEC regulation S-K has been omitted or has not been reviewed
9) Supplementary information required by an applicable reporting framework has be omitted, or departs materially from guidelines

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12
Q

What type of issuer can include an explanatory paragraph

A

issuer

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13
Q

When should an explanatory paragraph without a heading be required in an auditor’s report?

A

1) the prior year auditor report is not presented
2) The prior year opinion is updated
3) management is required to report on the company’s internal controls over financial reporting but such report is not required to be audited, and the auditor has not been engaged to perform an audit of management’s assessment of the effectiveness of the company’s internal control over financial reporting

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14
Q

What are the reporting requirements for an explanatory paragraph?

A

1) should include an appropriate title
2) describe the matter being emphasized and the location of relevant disclosures about the matter in the financial statements
3) generally follow the opinion paragraph when added to an unqualified report

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15
Q

How is an alert that restricts the use of the auditor’s written communication reflected in the auditor’s report, and what items should be included in the report

A

An other-matter or explanatory paragraph is used to restrict the use of the auditor’s report when required by GAAS or when the auditor deems it necessary
The alert that restricts the use of the auditor’s written communication includes
- a statement that the auditors written communication is intended solely for the information and use of the specific parties
- Identification of the specified parties for whom use is intended and
- a statement that the auditor’s written communication is not intended to be and should not be used by anyone other than the specified parties

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16
Q

According to US GAAP when are contingencies (such as pending litigation) required to be

1) Accrued and disclosed
2) disclosed only

A 
Can estimate loss amount 
1) probably- accrue and disclose 
2) Reasonably possible - disclose 
Cannot estimate loss amount 
1) Probably  - disclose 
2) Reasonably possible - disclose

Remote -ignore

17
Q

If during the current examination of comparative financial statements, the auditor discovers evidence that effects the prior statements and the opinion that was expressed, what action should be taken?

A

only DORCS change their mind

The auditor should update the opinion in the current year’s report. If the opinion differs from previous opinion, the reason should be disclosed in a separate emphasis of matter of other other matter paragraph following the opinion paragraph (nonissuers) or explanatory paragraph (issuers)

The explanatory paragraph should disclose:

1) Date of the auditor’s previous report
2) Opinion type previously issued
3) Reason for prior opinion
4) Changes that have occured
5) Statement that the “opinion…is different”

18
Q

The predecessor auditor should take what steps before reissuing an audit report on prior period financial statements

A

1) read the statements for the current period
2) Compare the previous audited statements with the current period statements
3) obtain a letter of representation from the successor auditor
4) obtain a letter of rep from management at or near the date of reissuance
5) if revised, use the original report date; if revised, dual date the report

19
Q

What statements should be included in the auditor’s report in an other-matter-paragraph (non-issuer) or explanatory paragraph (issuer) when comparative financial statements are presented and the prior auditor’s report is not reissued?

A

The other-matter paragraph (non-issuer) or explanatory paragraph (issuer) should include the following:

1) A statement that the financial statements of the prior period were audited by the predecessor auditor
2) The type of opinion expressed by the predecessor auditor. If the opinion was modified, include the reason for the modification, include the reason for the modification
3) the nature of any emphasis-of matter, othermatter, or explanatory paragraph included in the predecessor report
4) The date of the predecessor auditor’s report

20
Q

What is the effect on the audit report when the current period financial statements are audited and presented in comparative format with prior period financial statements that were not audited?

A

If the prior period financial statements were reviewed or compiled, an other-mater paragraph (non-issuer) or explanatory paragraph (issuer) is added that includes

  • a description of the service performed in the prior period
  • the date of the prior period report
  • a description of any material modifications in the report
  • a statement that the service was less in scope than an audit and does not provide a basis for expressing an opinion on the financial statements

If the prior period financial statements were not audited, reviewed, or complied, the other-matter paragraph should indicate this and state that the auditor assumes no responsibility for the financial statements

21
Q

Component auditor

A

An auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit. The component auditor may be part of the group engagement partner’s firm, a network firm, or another firm

22
Q

Two requirements that are necessary to reference a component auditor in the auditor’s report

A

You may reference the auditor in the auditor’s report if the following are met

1) the component auditor has performed an audit in accordance with GAAS, or when required, the PCAOB
2) The component auditor’s report is not restricted use

23
Q

What are the responsibilities of a group engagement partner when it assumes responsibility for the work of a component auditor?

A

1) No reference to the component auditor is made in the auditor’s report
2) If the component is a significant component due to its individual financial significance, it should be audited by the group engagement team or the component auditor
3) When a component is deemed significant because of significant risks of material misstatement to the group financial statements, the group engagement team or component auditor should perform additional audit procedures pertaining to the potential risks identified
4) Components that are not considered significant only require that analytical procedures be performed by the group engagement team

24
Q

What type of information should an auditor gather prior to auditing a single financial statement or a specific element of a financial statement?

A

The auditor should obtain an understanding of:

1) purpose for preparing the single financial statement
2) intended use
3) steps taken by management to ensure that the applicable financial reporting framework is acceptable under the circumstances

25
Q

What are some of the limitations surrounding an auditor’s report on a single financial statement, or a specified element, account, or item of a financial statement?

A
  • if the item is based on equity, the auditor should perform procedures necessary to express an opinion about the financial position
  • If the item is based on NI, the auditor should perform procedures necessary to express an opinion about the financial position and results of operations
    3- if an adverse opinion on disclaimer of opinion was issued, the auditor may not report on items that constitute major portion of the financials statements. (the auditor may report on non major items, but such reports should not accompany the report on the financial Statements
26
Q

What audit procedures should the auditor perform during the subsequent period?

A

between the date of the financial statements and the date of the auditor’s report:
P - review POST balance sheet transactions
R- Obtain a representation letter from management describing the events that occurred during the subsequent period requiring adjustment
I- INQUIRE with management or those charged with governance whether subsequent events occured that could impact financial statements
M- Review MINUTES of board and committee meetings
E- Examine current interim financial statements and compare financial statements under audit

27
Q

After the date of the audit report, what actions should the auditor take regarding subsequent events

A

None

Only exception is when the auditor is included in an exempt offering document or registration statement

28
Q

What is the auditor’s responsibility with respect to information that is presented in a document containing the audited financial statements?

A

The auditor should read the other information to determine that it is consistent with the audited financial statements and that there are no material inconsistencies or material misstatements of fact

The auditor may but is not required to report on the other information

29
Q

What are two objectives to report on supplementary information

A

1) evaluate the presentation of the supplementary information in relation to the financial statements as a whole
2) To report on whether the supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole

30
Q

What procedures would an auditor perform related to supplementary information that accompanies the financial statements and is required by a designated accounting standards setter, such as the FASB?

A

Apply limited procedures which include

1) inquiry regarding how supplementary information was prepared, including changes from period years and significant assumptions used.
2) Determining whether the supplementary information is consistent with managements responses, audited financial statements and other knowledge
3) obtaining written management representations regarding the required supplementary information
4) The auditor may (but is not required to) issue an opinion on the information

31
Q

What should be included in the auditor’s report when financial statements are prepared on the cash or tax basis?

A

An emphasis of matter paragraph alerting readers about the preparation in accordance with a special purpose framework should be included in the auditor’s report for financial statements prepared on the cash or tax basis

32
Q

What should be included in the auditor’s report when FS are prepared on the regulatory basis and contractual basis (not for general use)

A

1) Description of purpose for which special purpose financial statements are prepared
2) Emphasis of matter paragraph alerting readers about the preparation in accordance with a special purpose framework
3) Other-matter paragraph restricting the use of the auditor’s report

33
Q

What should be included in the auditor’s report when FS are prepared on the regulatory basis? (for general use)

A

description of purpose for which the SPF are prepared

34
Q

What should be included in an emphasis of matter paragraph included in a SPF (other than regulatory basis FS intended for general use)

A

1) Indicates that the financial statements are prepared in accordance with the applicable special purpose framework
2) Refers to the note to the financial statements that describes that framework
3) States that the special purpose framework is a basis of accounting other than GAAP

35
Q

List several features of a report on the application of the requirements of an applicable financial reporting framework?

A
  • Description of engagement, entity, transaction
  • Reference to AICPA standards
  • Description of the appropriate application of the requirements of the applicable financial reporting framework to the specific transaction or type of report
  • prepares are responsible for proper accounting
  • differences in facts, circumstances, or assumptions may change the report
  • Restricted-use paragraph
36
Q

When accepting an engagement to audit financial statements prepare in accordance with a financial framework generally accepted in another country, the auditor should obtain an understanding of

A
  • the purpose for which the FS are prepared
  • Whether the financial reporting framework is a fair presentation framework
  • The intended users of the FS
  • The steps taken by management to ensure that the applicable financial reporting framework is acceptable under the circumstances
  • The legal responsibilities involved (if using the form and content of another country’s audit report)
37
Q

What are the reporting options for financial statements prepared in accordance with a financial reporting framework generally accepted in another country when the FS will be distributed outside the US only?
What if the FS are also intended for use within the US?

A

Distributed outside the US only:

  • Report form of the other country or the report sent out in the ISA if applicable
  • US style report modified to refer to the financial reporting framework generally accepted in another country

Distributed within the US
Standard US Report with an emphasis of matter paragraph that:
1) Identified the financial reporting framework
2) Refers to the note in the financial statements describing the framework
3) Indicated the framework differs from accounting principles generally accepted in US

Becker- Audit (9 decks)

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