Audit 1 - Audit Reports Flashcards
What is the purpose of an Audit?
To provide F/S users with an opinion on whether the F/S are presented fairly, in all material respects, in accordance with the applicable financial reporting framework
What is an applicable financial reporting framework?
The financial reporting framework that is acceptable in view of the nature of the entity and the objective of the F/S, or that required by law or regulation
What is a General Purpose Framework?
Those designed to meet the needs of a wide range of users (US GAAP and IFRS)
Who are financial statements prepared by?
Management
What is Management generally responsible for?
(1) Preparation and fair presentation of the F/S. (2) The Design, Implementation, and Maintenance of I/C. (3) Providing the Auditor with access to info and persons within the entity needed to complete the audit.
What are the Auditor’s generally responsible for?
(1) Expressing an opinion on the F/S based on the audit. (2) Having appropriate competence and capabilities to perform the audit. (3) Complying with relevant ethical requirements, (4) Maintaining professional skepticism. (5) Exercising professional judgment throughout the planning and performance of the audit.
What kind of assurance does an auditor obtain during an audit?
Reasonable assurance. NEVER absolute
What kind of evidence must an auditor obtain?
Sufficient Appropriate audit evidence
Why can an auditor not obtain absolute assurance?
Inherent limitations of an Audit
What are the inherent limitations of an audit?
The nature of financial reporting, and of audit procedures, and the timelineess of financial reporting and the balance between cost and benefit
What is GAAS?
Generally Accepted Auditing Standards
Who governs the audit standards of nonissuers?
A branch of the AICPA - Accounting Standards Board (ASB)
What does the ASB issue?
Statements on Auditing Standards (SAS)
What is GAGAS
Generally Accepting Government Auditing Standards
What does the PCAOB do?
Establishes auditing and related professional practice standards to be used in the preparation and issuance of the audit reports for issuers
What must public accounting firms do before audting a public company?
Register with the PCAOB
AICPA Code of Professional Conduct applies to what?
All services performed in the practice of public accounting.
Who issues the Statements on Quality Control Standards (SQCS)?
The ASB
When do SASs and PCAOB standards apply?
Generally, only when auditing services are rendered, but also when reviews of interim financial information and letters for underwriters are being rendered.
What are the overall objectives of an auditor when conducting an audit?
(1) Obtain reasonable assurance about whether the F/S as a whole are free from material misstatement, (2) Report on the F/S and communicate findings as required by GAAS
What are the general requirements relating to an audit?
(1) Professional skepticism, (2) Ethical Requirements, (3) Professional Judgment, (4) Sufficient Appropriate Audit Evidence and Audit Risk, (5) Compliance with GAAS
Auditor must be independent of an entity, unless what?
(1) GAAS provides otherwise, or (2) the auditor is required by law or regulation to accept the engagement
When should the auditor use professional judgment?
When making decision about (1) materiality, (2) audit risk, (3) the nature, intent and timing of audit procedures, (4) Evaluating whether sufficient, appropriate evidence has been obtaine, (5) evaluating management’s judgments in applying the applicable financial reporting framework, and (6) drawing conclusions based on the audit evidence obtained
What does weak internal control mean?
You cannot rely on their records to create accurate information. Does not require an adverse opinion
Forming an opinion: Adequate Disclosure
Auditor should evaluate whether the F/S adequately disclose the significant accounting policies selected and applied
Forming an opinion: Consistency
Auditor should evaluate whether the accounting policies selected and applied are consisten with the appliable financial reporting framework and are appropriate
Forming an opinion: Reasonability
Auditor should evaluate whether the accounting estimates made by management are reasonable
Forming an opinion: Relevant/Reliable/Comparable/Understandable
Auditor should evaluate whether the information presented in the F/S is relevant, reliable, comparable, and understandable
Forming an opinion: Effect of Material Transactions
Auditor should evaluate whether the F/S provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the information conveyed in the F/S
Forming an opinion: Appropriate Terminology
Auditor should evaluate whether the terminology used in the F/S, including titles, is appropriate
Forming an opinion: Fair Presentation
Auditor should evaluate whether the overall structure and content of the financial statements is fairly presented
Forming an opinion: Underlying Transactions
Auditor should evaluate whether the F/S, including related notes, represent the underlying transactions and events in a manner that achieves fair presentation
When is an unmodified opinion expressed?
When the auditor concludes that the F/S are presented fairly, in all material respects, in accordance with the applicable financial reporting framework
What are the headings in the Audit Report for an Unmodified Opinion?
(TIM-AA) Title; Introduction; Management Responsibility; Auditor Responsibility; Audit Opinion
In an Unmodified Opinion with Emphasis-of-Matter / Other-Matter sections, what is the order of the headings?
(TIM-AA EMO) Title; Introduction; Management Responsibility; Auditor Responsibility; Audit Opinion; Emphasis-of-Matter; Other-Matter
Who is an audit report typically addressed to?
The engager of the audit. GR: NOT management
What does the introductory paragraph include?
(1) Identification of the entity whose F/S have been audited, (2) state that they have been audited, (3) identify the title of each F/S that has been audited, and (4) specify the date(s) or period(s) covered by each F/S
REPPORTS CRAME is the Auditors responsibility paragraph of the report
Responsibility, Express, Plan, Performing, Obtain, Risks, Test (I/C), Statements, Control, Reasonableness, Accounting, Management, Evaluating
What explicit statements must be included an Unmodified Auditors Opinion?
Statement that F/S present fairly, in all material respects, the financial position of the entity as of the B/S date and the results of operations and its cash flows for the period then ended, in accordance with the applicable financial reporting framework
Signature of the auditor
Can be manual or printed
Date of the audit report
Should be no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base an opinion. This shows the final date of the auditor’s responsibility. (For comparative F/S the auditor should use the report date of the most recent audit)
What is a Component Auditor?
An auditor who performs work on the F/S of a component (i.e. subsidiary) that will be used as audit evidence for the group audit
What is a Group Engagement Partner?
The partner or other person in the firm who is responsible for the group audit engagement and for the auditor’s report on the group F/S
What must the group engagement team understand about each component auditor?
(1) Whether he/she is independent, (2) professional competence of the component auditor, (3) the extent to which the group engagement team will be involved in the work of the component auditor, (4) whether the team is able to get info needed for the consolidation process, and (5) whether the component auditor operates in a regulatory environment that actively oversees auditors
Reference to the component auditor should not be made UNLESS
(1) Component Auditor has performed an audit in accordance with the relevant requirements of GAAS or PCAOB (when required), (2) The component auditor’s report is not restricted use
When group and component used a different financial reporting framework
Reference should not be made unless they’re similar to that of the group and the group has obtained sufficient appropriate audit evidence to evaluate the appropriateness of the adjustments needed to convert the component’s F/S to that of the group.
When referenced, the Auditors report should…
(1) Clearly indicate that the component was not audited by the auditor of the group, (2) the magnitude of the portion of the F/S audited by the component auditor, (3) auditor takes responsibility for component’s work, and (4) state the set of auditing standards used by component auditor if not GAAS
How does a modified opinion or the inclusion of an emphasis-of-matter/other matter paragraph by the component auditor affect the group audit report?
The group auditor should determine the effect on the auditor’s report on the group F/S. When appropriate, the group auditor should modify the opinion on the group F/S or include an emphasis-of-matter or other-matter paragraph in the report.
What are the requirements for referencing a Component Auditor in the Audit Report?
Component Financial Statements must be prepared using same Financial Reporting Framework as the Group Financial Statements; Component Auditor must have performed audit in accordance with GAAS or PCAOB Standards.
What must the Group Engagement Partner do if they assume responsibility for the Component Auditor’s work?
No reference to component auditor is made. Perform additional audit procedures; Be involved in Component Auditors work; Perform Risk Assessment procedures; Assess Risk of Material Misstatement
What would cause a Qualified “except for “ GAAP opinion?
Accounting policy (not following); Presentation (improper); Disclosures (lack of); Estimates (bad)
What would cause a Qualified “except for” GAAS opinion?
Insufficient evidence (material scope limitation)
What would cause an Adverse opinion?
Very material/pervasive departure from GAAP - Accounting policy (not following); Presentation (improper); Disclosures (lack of); Estimates (bad)
What would cause a Disclaimer of opinion?
Very material/pervasive scope limitation; significant going concern uncertainty, lack of independence
What would cause an Auditor to withdraw from an audit engagement?
Finding information that is false, fraudulent, deceptive, or misleading
What is an emphasis-of-matter paragraph used for?
Communicating addiitonal information, that is appropriately presented or disclosed in the F/S and is of such importance that it is fundamental to the users understanding, without modifying the opinion (included in report after the opinion). Should note location of disclosure in F/S
When should and auditor modify his/her opinion?
When the auditor concludes the F/S as a whole are materially misstated or is unable to obtain sufficient appropriate audit evidence to conclude that the F/S as a whole are free from material misstatement
What are the types of modified opinions?
Qualified “except for” (GAAP/GAAS), Adverse (GAAP), Disclaimer (GAAS)
When is an emphasis-of-matter paragraph required?
“Substantial doubt of going concern”, to describe a justified change in accounting principle, when changing prior opinion, when F/S are prepared in accordance with an appliable special purpose framework
When might the use of an emphasis-of-matter paragraph be necessary?
Uncertainty of litigation outcome, major catastrophe having significant effect on entity’s financial position, significant related party transactions, unusually important subsequent events
What is an other-matter paragraph used for?
To refer to matters other than those presented or disclosed in the F/S that are relevant to the user’s understanding of the audit/auditors responsibilities/auditors report
When is use of an other-matter paragraph required?
Anytime use is restricted, change in audit opinion, when prior period F/S were audited by predecessor auditor and the report is not reissued, current period F/S are audited and presented in comparative form with compiled or reviewed F/S for the prior period (or not), material inconsistency, when reporting on supplumentary information, to refer to required supplementary information, and when a report on compliance is included in report
How does the auditor find evidence to the contrary of going concern?
ADMITS; Analytical procedures, Debt compliance, Minutes, Inquire of client’s legal counsel, Third parties, Subsequent events review
What conditions and events might be indicative to substantial doubt of going concern?
FINE; Financial difficulties (loan defaults/debt restructuring/disposal of substantial assets), Internal matters (work stoppages/labor difficulties), Negative trends (recurrent losses/working capital deficiencies/adverse financial ratios), External matters (legal proceedings/loss of a principal customer or supplier)
What are some mitigating factors of going concern doubt?
(1) Plans to borrow money or restructure debt, (2) Plans to sell assets, (3) Plans to delay or reduce expenditures, (4) Plans to increase ownership equity
Going Concern: Emphasis-of-matter v. Disclaimer of opinion
GR is to include emphasis-of-matter paragraph, the auditor is not precluded from issuing a disclaimer of opinion (prof. judgment used)
What is the effect of an acceptable change in accounting principle on the auditor’s report?
(1) if effect of change is immaterial - no revision is necessary, (2) EOM¶ should be included in the period of change and all subsequent periods until principle is applied in all periods presented, (3) If the change is accounted for by retroactive restatement, the EOM¶ is only needed in the period of change
What effect do a qualified or adverse opinion have on the auditor’s report?
The AR ¶ should be amended to stated that the auditor believes the audit evidence obtained is significant and appropriate to provide a basis for the auditor’s modified opinion, and the report will include a Basis for Modification¶
Where is the Basis for Modification paragraph placed?
Immediately before the opinion ¶ and denote the type of opinion in title
What does the Basis for Modification paragraph include?
Description and quantification of the financial effects of any misstatement, an explanation of how disclosures are misstated, and a description of the nature of omitted information
If fraud is suspected, what does the auditor do?
WITHDRAW!
What are the causes of scope limitations?
Circumstances (timing), and Management (report limitation if mgmt will not remove lim.;disclaim opinion)
What modifications to the Auditor’s report does a disclaim of opinion require?
Introductory (was engaged), Auditor’s Responsibility, Basis for Modification, Opinion
What modifications to the Auditor’s report does a qualified opinion require?
Auditor’s Responsibility, Basis for Modification, Opinion
No audit work equals
NO AUDIT OPINION!
What is the format of an updated opinion?
DORCS; Date of the auditors previous report, Opinion type previously reported, Reason for the prior opinion, Changes that have occurred, Statement that the “opinion… is different”
What should an updated opinion include?
DORCS in an Emphasis-of-matter paragraph
What should the Prior CPA do if the report of the predecessor auditor is presented?
Read the statements for the current period, compare the audited statements with the current statements, obtain a letter of representation from the successor auditor, inquire of and obtain a letter of representation from management, date as appropriate (unrevised=original date, revised=dual date)
What should the Current CPA do is the report of the predecessor auditor is NOT presented?
Only express opinion on current period F/S and indicate in an other-matter paragraph: that the prior period F/S were audited by a predecessor (not named), type of opinion expressed by the predecessor, the nature of any emphasis-of-matter/other-matter paragraph included in predecessor’s report, date of the predecessor’s report
What should the auditor do when the current F/S are audited and presented in comparative form with prior period F/S that were reviewed/compiled?
Include an other-matter paragraph that includes the service performed in the prior period, the date of the prior report, description of any material modifications described in the report, and a statement that the service was less in scope than an audit and does not provide the basis for expressing an opinion
What should the auditor do if the current F/S are audited and presented in comparative form with prior period F/S that were not audited/reviewed/compiled?
Clearly mark the F/S to say they were unaudited, include an other-matter paragraph to indicate that the auditor did not audit, review or compile the prior period F/S and that the auditor assumes NO responsibility for them
What is a Type I Recognized event?
Conditions existing ON for BEFORE the balance sheet date. Usually requires an adjustment to the F/S (trade receivable deemed uncollectible because of bankruptcy of the customer)
What is a Type II Nonrecognized event?
Conditions existing AFTER the balance sheet date. Require no adjustment to F/S, but may require significant additional disclosure if not doing so would cause the F/S to be misleading. Could require only a note to the F/S, or could require complete supplemental disclosure (pro forma F/S)
What is the subsequent period?
The period between the date of the F/S and the date of the Auditor’s Report
What is the auditor’s responsibility in the subsequent period?
The auditor has ACTIVE responsibility to investigate certain subsequent events
What procedures should be performed during the subsequent period?
PRIME; Post balance sheet transactions, Representation letter, Inquiry, Minutes, Examining the latest available interim F/S
What is the auditor’s responsibility after the original date of the report?
The auditor has NO active responsibility to make and inquiries or to perform further auditing procedures to discover subsequent events. However, if auditor becomes aware of any information relating to subsequent events before the report release date, he/she should use professional judgment on whether to adjust F/S or related disclosures
What if the auditor believes the F/S need to be revised to reflect a subsequent event and management does not make the revision?
The auditor should express a qualified or adverse opinion
What action must the auditor take upon discovering information that materially affects the report and reliance on report after the report release date
Advise the client to issue revised F/S, advise the client to make the necessary disclosures and revisions, provide notification that the F/S cannot be relied on if effect cannot be determined on a timely basis
If client refused to follow procedures regarding the subsequent discovery of facts after the report release date..
Auditor must DAR them to fix it; Disassociate, Alert agencies, and notify Relying parties
What action must the auditor take upon discovering omitted audit procedures after submission of the audit report?
Determine whether the other audit procedures were adequate to compensate; if omitted procedures impair the auditor’s ability to support the opinion and there are people relying on the report then the auditor should promptly undertake to apply the omitted procedures; If facts emerge that would have affected the auditors report, the auditor should proceed as described under subsequent discovery of facts.
What is the auditors responsibility regarding other documents (annual reports, etc.)?
Generally, an auditor is not responsible for determining whether other information in documents containing the audited F/S and the auditors report is properly stated. However, the auditor should READ the other info
What if a material inconsistency is discovered in the documents containing the audited F/S and the audited F/S need revision?
Auditor should modify the audit opinion if management refuses to make revision on the audited F/S
What if a material inconsistency is discovered in the documents containing the audited F/S and the other documents need revision?
Include an other-matter paragraph describing material inconsistency; withhold use of report; OR withdraw if false/fraudulent/deceptive/misleading
What is supplementary information?
Information presented outside the basic financial statements
What is the auditor’s responsibility when engaged to report on supplementary information?
Two objectives: evaluate presentation and report on whether fairly stated
Supplementary Information: Managements Responsibility
The auditor must obtain an agreement of management that it acknowledges and understands its responsibility
Supplementary Information: Audit Procedures
Inquiry of management, determine whether form and content complies with applicable criteria, obtain understanding of the methods used to prepare the info, compare and reconcile the info to the audited F/S, inquire regarding significant assumptions, evaluate appropriateness and completeness of the info, obtain written representations from mgmt
How should the report on supplementary info be presented?
As an other-matter paragraph OR separate report
Effect of modified opinions on audited F/S on opinions on supplementary information..
Qualified on F/A - should express qualified on SIAdverse/Disclaimer on F/S - prohibited from expressing opinion on SI
Are reports on the application of a financial reporting framework intended for general use?
No, report must include a separate paragraph restricting its use to specified parties
Must an accountant be independent to report on the application of a financial reporting framework?
No, report must include a statement regarding the lack of independence
