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AUDIT 1 Flashcards

1
Q

What standards provide the most authoritative guidance for NON-ISSUERS? Who issues these standards?

A

Statements on Auditing Standards (SASs), issued by AICPA Auditing Standards Board

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2
Q

What standards provide the most authoritative guidance for ISSUERS? Who issues these standards?

A

Auditing Standards (ASs), issued by the PCAOB

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3
Q

State the primary purpose of an audit.

A

To provide FS users with an opinion on whether the FS are fairly presented, in all material respects, in accordance w/ the applicable reporting framework.

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4
Q

What are the 5 general GAAS requirements related to the conduct of an audit?

A

Professional Skepticism, Ethical Requirements, Professional Judgement, Sufficient and Appropriate Audit Evidence, and Compliance w/ GAAS

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5
Q

Identify 3 inherent limitations of an audit.

A

Nature of Financial Reporting, Nature of Auditing Procedures, Timeliness of Financial Reporting and the balance b/w benefit and cost

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6
Q

When should an audit opinion be modified?

A
  1. FS as a whole are materially misstated 2. Auditor is unable to gather evidence
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7
Q

List in order the primary sections of an unmodified audit opinion of a non-issuer

A

Title, Addressee, Introduction (We have audited the FS of…), Management’s Responsibility (Responsible for the prep and fair presentation of the FS), Auditor’s Responsibility (Our responsibilty is to express an opnion on these FS based on our audit), Opinion (In our opinion, the FS referred to above fairly present in all material respects), Report on Other Legal or Regulatory Req.

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8
Q

What is in the Introductory Paragraph of an unmodified opinion of a non-issuer?

A
  1. The entity whose FS have been audited 2. Statement that the FS were audited 3. The title of each FS audited 4. The dates or periods covered by each FS
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9
Q

What is in the Management’s Resp. paragraph of the unmodified audit opinion of a non-issuer?

A
  1. An explanation that management is resp. for the prep and fair representation of the FS 2. A statement that this resp. includes the design, implementation, and maintenance of IC
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10
Q

What is included in the Auditor’s Resp. paragraph of the unmodified opinion of a non-issuer?

A
  1. It is the auditor’s responsibilty to express an opinion
  2. Audit was conducted in accordance with AS generally accepted in the US.
  3. Standards that require auditor to plan and perform
  4. A description of the audit
  5. Statement whether the auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the auditor’s opinion.
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11
Q

What is included in the OPINION of the unmodified opinion of a non-issuer?

A
  1. A statement that the FS present fairly, in all material respects, the financial position of the entity as of the BS date and the results of operations and its cash flows for the period then ended, in accordance w/ the applicable framework.
  2. Identification of the applicable FS framework and its origin.
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12
Q

Where in the std. unmodified opinion does the auditor refer to the applicable framework/GAAS?

A
  1. Framework-Management’s responsibility and opinion paragraph
  2. GAAS: Auditor’s Responsibility
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13
Q

List in order the primary sections of an unqualified audit opinion of an ISSUER?

A
  1. Title
  2. Addressee
  3. Opinion Section
  4. Basis for Opinion Section
  5. Signature, Tenure, location
  6. Report Date
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14
Q

What is included in the opinion section of an unqualified opinion of a non-issuer?

A
  1. The name of the company who is being audited
  2. Statement identifying what exactly was audited
  3. Dates or periods
  4. A statement indicating that the FS were audited
  5. An opinion
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15
Q

What should be included in the first paragraph under the Basis for Opinion section?

A
  1. A statement that the FS are the responsibility of managment
  2. Auditor’s resp. to express an opinion
  3. Statement that the auditor is a public accounting firm registered with the PCAOB and is required to be independent in accordance w/ SEC and PCAOB
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16
Q

What should be included in the second paragraph under the Basis for Opinion Section in an unqualified opinion of an issuer?

A
  1. A statement that the audit was conducted in accordance with the standards of the PCAOB
  2. PCAOB requires auditor to plan and perform
  3. What the audit included
  4. A statement that the auditor believes that the audit evidence provides a reasonable basis for the opinion.
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17
Q

Where in the standard unqualified opinion of an issuer do they refer to the framework/PCAOB?

A
  1. Framework: Opinion

2. PCAOB: Second paragraph under Basis for Opinion

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18
Q

Sufficient and appropriate audit evidence is completed when…

A

Evidence shows that:

  1. Audit documentation has been reviewed
  2. FS have been prepared
  3. Management has taken responsibility for the FS
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19
Q

Definition of a CAM?

A

A matter that was communicated or required to be communicated to the audit committee and that:

  1. Relates to accounts or disclosures that are material to the FS
  2. Involved especially challenging, subjective, or complex auditor judgements

(Audit reports for issuers must include any CAMS or state that there were none)

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20
Q

In determining CAMS, what factors should an auditor consider?

A
  1. Assessment of the risks of MM
  2. Areas of significant judgement or estimation by mangement
  3. Nature and timing of unusual transactions
  4. Degree of subjectivity in applying audit procedures
  5. Extent of specialized skill or knowledge regarding a matter
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21
Q

How many CAMS will an auditor normally identify in issuers?

A

At least ONE

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22
Q

For each CAM identified, what should the audit report of an issuer include?

A
  1. Identification of CAM
  2. Description of the Principal Considerations that led the auditor to believe it was a CAM
  3. Description of how the CAM was addressed in the audit
  4. Reference to the relevant FS accounts or Disclosures
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23
Q

What if there are no CAMS?

A

“We determined that there are no critical audit matters”.

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24
Q

When would an auditor use professional judgement to determine whether to issue a qualified opinion or an adverse opinion?

A

Materially pervasive or not

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25
Q

Describe the circumstances in which a material misstatement of the FS may arise?

A

May arise in relation to:

  1. The appropriateness of Accounting Principles
  2. The application of accounting principles
  3. The appropriateness of FS presentation
  4. The appropriateness or adequeacy of disclosures in the FS
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26
Q

If an opinion is qualified due to material misstatement of FS of an issuer auditor report. where does the paragraph explaining the qualification appear?

A

Paragraph should be placed immediately following the opinion paragraph. There is no heading for this. The paragraph should include:

  1. All of the substantive reasons that lead the auditor to conclude that there has been a departure.
  2. Disclosure of the principle effects of the subject matters.
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27
Q

Compared to a standard unqualified opinion for an issuer, determine the paragraphs that are modified in an audit report when the following opinions are issued due to FS issues:

  1. Qualified
  2. Adverse
A

Qualified: Except for
Adverse: Do not present fairly

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28
Q

Is the auditor required to report on a CAM when issuing an adverse opinion?

A

No, they are not when an adverse opinion is expressed.

29
Q

When would an auditor use professional judgement to determine whether to issue a qualified or disclaimer of opinion?

A

All relates to pervasiveness of audit evidence

30
Q

Identify some examples of scope limitations.

A

Restrictions related to:
Time constraints, inability to observe inventory, inability to confirm receivables, inability to obtain audited FS of a consolidate investee, restrictions on the use of auditing procedures, inadequacy of accounting records, refusal of the client’s attorney to respond to inquiry, refusal of management to provide a rep letter

31
Q

What situations may result in a disclaimer of opinion?

A
  1. Pervasive inability to obtain sufficient appropriate audit evidence
  2. Lack of independence (ALWAYS results in a disclaimer)
  3. Going concern uncertainty (note: If adequate disclosure of going concern exists, the auditor may choose between an unqualified opinion with an explanatory paragraph or a disclaimer of opinion)
32
Q

If an opinion is modified on a non-issuer audit report, where does the paragraph explaining the modification appear?

A

Would appear prior to the opinion paragraph..Should use appropriate headings such as “Basis for Qualified Opinion”

33
Q

How do uncertainties affect the auditor’s report?

A

Result in a change of opinion depending on their severity

34
Q

Is an auditor required to report on CAMs when there is a disclaimer of opinion?

A

No

35
Q

What is the purpose of an emphasis of matter paragraph? NON-ISSUER

A

To reference a matter that is appropriately presented in the FS, but is of such importance that it is fundamental to the user’s understanding of the FS.

36
Q

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

A
  1. Placing the paragraph immediately after the opinion paragraph
  2. Using the heading “Emphasis of Matter”
  3. Describing the matter being emphasized and the location of relevant disclosures in the FS
  4. Indicating that the auditor’s opinion is not modified with respect to the matter emphasized
37
Q

Under what circumstances would an emphasis of matter paragraph be required in an auditor’s report? NON-ISSUER

A
  1. The auditor determines there is a substantial doubt regarding the entity’s ability to continue as a going concern for a reasonable time period
  2. There is a need to describe a justified change in accounting principle that has a material affect of the FS
  3. Facts are subsequently discovered that lead to a change in the auditor’s opinion
  4. The FS are prepared in accordance with a special framework
38
Q

What are the reporting requirements for the other-matter paragraph of a non-issuer?

A

Placing the paragraph immediately after the opinion paragraph and after any emphasis of matter parapgrahh

  1. Use the appropriate heading
  2. Describing the matter being emphasized and the location of the relevant disclosures, if applicable, in the FS
39
Q

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

A
  1. The auditor includes an alert in the report that restricts its use
  2. Facts are subsequently discovered that lead to a change in auditor’s opinion (emphasis of matter may also be appropriate)
  3. Prior period FS were audited by a predecessor auditor and that report is not re-issused
  4. Current period FS are audited and presented in comparative form with compiled or reviewed FS from the prior period.
  5. Prior to the audit report date, the auditor identifies a material inconsistency in other information included in a document with audited FS that require revision and management refuses to make the revision
  6. The auditor chooses to report on supplementary information in the same report
  7. Special purpose FS are prepared in accordance with a contractual/regulatory basis (which implores a restriction)\
  8. The auditor’s report on the FS includes a compliance report
40
Q

Under what circumstances would an explanatory paragraph WITH an appropriate heading by required in an auditor’s report (ISSUER)?

A
  1. There is substantial doubt about the going concern
  2. There has been a material change between periods in accounting principles or methods in application
  3. There has been a change in a reporting entity, unless its from a transaction or event.
  4. There has been a change in an investee year-end that has a material affect on the company’s FS.
  5. A material misstatement in a previously issued FS has been corrected.
  6. Other information in a document containing audited FS is materially inconsistent with informatiion appearing in the FS.
  7. Selected financial data required by the SEC Regulation S-K has been ommitted or has not been reviewed.
  8. Supplementary information required by an applicable reporting framework has been ommitted, or departs materially from guidlines.
41
Q

Under what circumstances would an explanatory paragraph WITHOUT an appropriate heading by required in an auditor’s report (ISSUER)?

A
  1. The prior year auditor is not presented
    The prior year opinion is updated
  2. Management is required to report on the company’s internal controls control but the auditor has not been engaged to do so.
42
Q

What are the reporting requirements of an explanatory paragraph for an issuer?

A
  1. Appropriate title
  2. Describe the matter being emphasized and the location of the relevant disclosures about the matter in the FS
  3. The explanatory paragraph will generally follow the opinion paragraph when added to an unqualififed report.
43
Q

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

A

Non-Issuer: OTHER MATTER
Issuer: EXPLANATORY

It is….

  1. A statement that the auditor’s written communication is intended solely for the information and use of the specified parties.
  2. Identification of the specified parties for whom it is intended for
  3. A statement that the auditor’s written communication is not intended to be and should not be used by anyone but the specified parties stated.
44
Q

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

  1. Accrued or disclosed?
  2. Disclosed only?
A
  1. Probably and can estimate the loss amount: Accrue and disclose
  2. Probably but can’y estimate: Disclose
  3. Reasonably possible, either or: Disclose
  4. Remote: Generally Ignore it
45
Q

If, during the current examination of comparative FS, the auditor discovers evidence that affects the prior statements and the opinion that was expressed, what action should be taken? (Only DORCS change their mind)

A

First off, the auditor should update the current year’s report. It should be disclosed in either an emphasis or matter/other matter or an explanatory paragraph for issuers. The 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 occurred
  5. Statements that the “opinion….is different”
46
Q

The predecessor auditors should take what steps before reissuing an audit report on prior period FS?

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 sucessor auditor
  4. Obtain a letter of representation from management at or near the date of reissuance
  5. If unrevised, use the original report date. If revised, dual date the report.
47
Q

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

A
  1. A statement that those FS were audited by the old auditor.
  2. The type of opinion that was expressed by the old auditor. If it was modified, give the reasons as to why.
  3. The nature of any additional paragraphs in the prior report.
  4. The date of the old report.
48
Q

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

A

An other-mater paragraph or explanatory paragraph that includes:

  1. Description of the service performed in the prior period (Review or compilation)
  2. The date of the prior period report
  3. A description of any material modifications in the report
  4. A statement that that service was less in scope than an audit and does not provide a basis for expressing an opinion on the FS

If the prior pd statments were not audited, reviewed, or compiled, an other matter paragraph should state that they auditor assumes no responsibilty for these FS.

49
Q

Define a 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.

50
Q

Identify the 2 requirements that are necessary to reference a component auditor in the auditor’s report.

A

A reference to the component auditor in the auditor’s report can be made if the following requirements 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 in use.
51
Q

What are the responsibilites of a group engagement partner(team) when it assumes responsibility for the work of a component auditor?

A

No reference to the component auditor is made in the auditor’s report.

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.

When a component is deemed significant because of sig. risks of material misstatement to the group FS, the group engagement team or component auditor should perform additional audit procedures.

Components that are not considered significant only require that analytical procedures by performed by the group engagement team.

52
Q

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

A

Obtain an understanding of:

  1. Purpose for preparing the single FS or specific element
  2. Intended users
  3. Steps taken by management to ensure that the applicable financial reporting framework is acceptable under the circumstances
53
Q

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

A
  1. If the item is based on SE, the auditor should perform procedures necessary to express an opinion about financial position.
  2. If the item is based on NI, the auditor should perform procedures necessary to express an opinion about financial position and results of operations.
  3. If an adverse opinion or disclaimer was issued, the auditor may not report on items that constitute a major portion of the FS. (The auditor may report on non-major items, but such reports should not accompany the report on the FS).
54
Q

Define the two types of subsequent events.

A

A recognized subsequent event relates to a condition that existed on or before the balance sheet date. Recognized require FS adjustment.

A nonrecognized event after the BS date. Generally do not require FS adjustment but may require footnote disclosure.

55
Q

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

A

P: Review Post balance sheet transactions
R: Obtain a Representation letter from management describing events that occurred
I: Inquire with management or those charged with governance whether these events impact FS
M: Review Minutes of board and committee meetings
E: Examine current interim FS and compare to FS under audit.

56
Q

After the date of the auditor’s report, what actions should an auditor take regarding subsequent events?

A

Note: Auditor has no active responsibility to make inquiries or perform auditing procedures after the report date.

An exception to this rule is when an auditor’s report is included in an exempt offering document (and the auditor is involved in the offering) or registration statement. In such a case, the auditor should extend subsequent event procedures.

57
Q

When and why is dual dating used?

A

It is used when subsequent events requiring FS adjustment or disclosure come to the auditor’s attention after the original date of the audit report. Dual dating extends the auditor’s responsibility only for the particular event. The original date of the report is retained for the rest of the FS.

58
Q

After issuance of the report, what actions should an auditor take upon discovering information that materially affects the report?

A
  1. DETERMINE whether there are persons relying or likely relying on the FS.
  2. ADVISE the client immed. disclose new information to persons relying or likely relying on FS. This disclosure may take the form of revised FS, disclosures and revisions to any imminent FS, or notification that the FS/report should not be relied on.
  3. ADVISE the client to discuss the new disclosures or revisions with the SEC, stock exchanges, and appropriate regulatory agencies.
  4. ENSURE that the appropriate steps have been taken by the client.
59
Q

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

A

The auditor should real the other information to determine that it is consistent with the audited FS 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.

60
Q

What are the 2 objectives of engagements to report on supplementary information?

A
  1. To evaluate the presentation of the supplementary information in relation to the FS as a whole.
  2. To report on whether the supplementary information is fairly stated, in all material respects, in relation to the FS as a whole.
61
Q

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

A

Applied limited procedures include:

  1. Inquiry regarding how the information was prepared, including changes in assumptions.
  2. Determing whether information is consistent
  3. Obtaining written management representation letters regarding the required supplemental information.
  4. The auditor may (but is not required to) issue an opinion on the information.
62
Q

Examples of special purpose frameworks

A
  1. Cash basis
  2. Tax basis
  3. Regulatory basis
  4. Contractual basis
  5. Any other basis of accounting that uses a definite set of logical, reasonable criteria that is applied to all material items appearing in the FS.
63
Q

What is included in the auditor’s report when FS are prepared on the cash or tax basis?

A

An emphasis of matter pgh. alerting readers that the prep. in accordance with a special purpose framework should be included.

64
Q

What is incuded in the report is its for regulatory (not for general use) or contractual basis?

A
  1. Description of the purpose for which the special framework is being used
  2. Emphasis of matter alerting that it is being used
  3. Other matter resricting the use of the auditors report
65
Q

What is included in the report for regulatory (for general use)

A

Should include the description of purpose for which the special purpose statements are prepared.

66
Q

What should be included in an emphasis-of-matter paragraph included in a special purpose framework (other than regulatory basis for general use)?

A
  1. Indicates that the FS are prepared in accordance with special framework
  2. Refers to the note to the FS that describes that framework
  3. States that the special purpose framework is a basis of accounting other than GAAP.
67
Q

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

A
  1. Description of the engagement, entity, and transaction.
  2. Reference to AICPA standards.
  3. Description of the appropriate application of the requirements of the applicable framework
  4. Preparers are responsible for proper accounting.
  5. Differences in facts, circumstances, or assumptions may change the report.
  6. Restricted-use paragraph
68
Q

When accepting an engagement to audit FS prepared in accordance with a framework accepted in another county the auditor should obtain an understanding of:

A
  1. The purpose for which the FS are prepared
  2. Is it a fair presentation?
  3. Intended users
  4. Steps taken by management to ensure that the framework is appropriate under the circumstances
  5. The legal responsibilities involved(if using the form and content of another country’s audit report)
69
Q

Reporting requirements outside of the US

Also intended for in the US?

A

Distributed outside the US only: Report form of the other country or the report sent out in the ISAs ORRR Us dtyle report modified to refer to the framework accepted in another country.

WIthin the US: Add an emphasis of matter paragraohs that:

  1. Identifies the framework
  2. Refers to the note in the FS describing the framewrok
  3. Indiciates that the framework differs from GAAP in the US!

audit (6 decks)

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