Audit 1: Audit Reports Flashcards
Reasonable Assurance is..
High but not absolute level of assurance
NOT ABSOLUTE B/C:
-mgmt judgment
-fraud may be concealed
In order to obtain reasonable assurance an Auditor must…
1-Plan and supervise assistants
2-Determine and apply appropriate levels of materiality
3-Identify and Assess risk of material misstatement, whether fraud or error
4-Obtain sufficient appropriate evidence
Nature of Financial Reporting
Is subject to judgement
Public Company Accounting Oversight Board does what?
Part of SOX
Required in preperation and issuance of audit reports for issuers
Public Accounting firms must register with them in order to audit public companies
Statements on Standards for Attestation Engagements are
SSAEs
issued by AICPA
they are the standards set for Attestations
Generally Accepted Auditing Standards are issued by who
AICPA
Statements on Standards for Accounting Review Services are issued by…
SSARS
AICPA
*The GAAS Hierarchy of Auditing Guidance
1-AICPA Statements on Auditing Standards (SAS)
and
PCAOB Auditing Standards
2-Interpretative Publications (listed on another card)
3- Other Auditing Publications
Interpretative Publications include…
Auditing Interps of GAAS
Exhibits to GAAS
Audit Guidance in AICPA Audit and Acct Guides
AICPA Audit Statements of Position (SOP)
Other Audit Publications Include
Journal of Accountancy
Other Professional Guides
AICPA CPA Letter
textbooks etc
*Overall Objectives of Audit
1-Obtain Reasonable Assurance
2-Report on financial statements
Conditions that Indicate Potential Fraud
Pressure
Opportunity
Rationalization
When does an auditor not need to be independent
1-When GAAS provides otherwise
or
2-Required by law or regulation to perform audit
Professional Judgement is needed to determine
Materiality Audit Risk Nature, Extent and Timing of Audit Procedures When Enough Sufficient Evidence Obtained Evaluating Mgmt in applying frameworks Drawing a Conclusion
Does GAAS override laws or regulations that govern financial statements?
No
Can conduct audit with both GAAS and other standards
Unmodified Audit Opinion is
The cleanest opinion given
FS are presented fairly in all material respect in accordance with GAAP (or applicable fin rep. framework)
*Layout of Unmodified Opinion
Title
Addressee
Intro Paragraph Mgmt Responsibility Para. Auditor's Responsibility Para. Auditor's Opinion Other Reporting Responsibilities
Signature of Auditor
Address of Auditor
Date
*Intro Paragraphs need
Identify Entity
State Fin Stmts have been Audited
Identify Title of Each Fin Stmt
State Dates or Period covered by each Fin Stmt
*Manager Paragraph needs
Mgmt is responsible for prep and fair presentation of fin stmts
and
responsible for Design Implemmentation maintnance of Internal Controls
*1st Part of Auditors Paragraph aka?
Needs what?
Scope Paragraph
Responsibility to Express Opinion
Conducted with audit standards generally accepted in America
And that requires auditor to obtain reasonable assurance that fin stmts are free from material misstatement
*2nd Auditors Paragraph needs
Audit involves performing procedures to obtain audit evidence
Procedures depend on auditors judgement
Considers how the entity’s Internal Controls affect the prep of fin stmts
Evaluates acct polices and estimates Mgmt uses
Auditor’s Unmodified Opinion States
Fin Stmts Present Fairly
with dates and times for Fin Stmts
in accordance with “reporting framework” (ie GAAP)
Date of Auditor’s Report should be
No Earlier than the date on which Sufficient Appropriate Audit Evidence Obtained
Date shows Final Responsibility of Auditor
Audit of Issuers Requires what to be named
That GAAS and additionally PCAOB standards were used
GAAS in what paragraph?
GAAP in what paragraph?
GAAS= Auditors Responsibility Scope Paragraph
“Auditor responsibility is to conduct the audit according to GAAS”
GAAP=Opinion Paragraph
“Auditor should express his opinion based on if entity has compiled w/GAAP or NOT
Applicable frameworks could include
GAAP or IFRS
ISAs are
International Standards of Auditing
Requirements refered to in ISA not in GAAS audit reports
“true and fair view” of fin stmts
Significant accounting polices
Ethical requierments
Requirements referred to in GAAS not in ISAs Reports
A1-17
Audit documentation has been reviewed
No separate mgmt stmt
What should Group Auditor do if serious concerns about component auditor work?
Should not use work
GAAS for non-issuers are issued by
AICPA’s Auditing Standards Board ASB
What needs to happen in order to make reference to component auditors work?
1- Performed by GAAS Standards
or PCAOB when needed
2-their report is not restricted use
If component audit says anything less than unmodified what to do?
Need to determine the effect on all of the audit
When group assumes responsibility do you mention the component?
Why or Why not?
No, Because mentioning component when you take responsibility makes it seem like you are not taking that much responsibility
What should be done for component that is likely to be significant?
Insignificant?
Significant needs to be audited
Insignificant- Analytical Procedures need to be performed
Types of Opinions
Unmodified
GAAP
1-Qualified Except for
2-Adverse
GAAS
1-Qualified Except for
2-Disclaimer
Withdraw
When to issue Adverse opinion
When Very Material GAAP Issue
When to issue Disclaimer Opinion
When Very Material GAAS issues
Insufficient Evidence
Going Concern Problem
Lack of Independence
Emphasis of Matter Paragraphs are used when…
When matter appropriately disclosed but matter is fundamental to understand fin stmts
Does not affect auditor’s opinion
Emphasis of Matter paragraph goes where..
Right after Opinion paragraph
Need title
When must Emphasis of Matter paras be used…
Going Concern
Show justified change in accounting principle
Change of audit opinion
When Prepared with Special Purpose Framework
Emphasis may be used when…
Uncertainty about litigation
Major catastrophe
Related party transactions
Unusal important subsequent events
Other Matter Paragraph used when…
Refer to matters not presented or disclosed
Where does Other Matter Paragraph go..
After Opinion and Emphasis paras
When to use Other Matter
Restricted use of audit report
Change in Opinion
Predecessor Auditor stmts used but report not issued
When issued with unaudited prior period stmts
Procedures auditor uses for Going Concern
Analytical Debt Compliance Board Minutes Inquire of Legal Counsel Third Party Confirmation of $ Support Subsequent Events
Conditions and Events that could show substantial doubt of Going Concern
Financial Difficulties
Internal matters
Negative Trends
External Matters
Mitigating factors when there is substantial doubt of Going Concern
Plans to
Borrow $ or redo debt
Sell Assets
Delay Expenses
Increase through equity
When Going Concern Doubt what kind of paragraph and what does it need to say
Emphasis of Matter
Needs “substantial doubt” to continue as “going concern”
ISA requires what for Going Concern issue
Mgmt’s plan for going forward
Paragraph that restricts use of report is what sort of paragraph?
Other Matters Paragraph
Difference between Qualified and Adverse Opinion is…
Adverse is PERVASIVE
Qualified are material
What and where do changes need to be made for modified opinion?
Change Audit Responsibility Para to say modified
Add Basis for Modification Para before Opinion
Change language in Opinion
What words need to be in
Qualified Opinion Para
Adverse Opinion Para
Qualified=
“Except for”
presented “fairly”
Adverse=
“because of”
“not presented fairly”
Difference in Qualified and Disclaimer Opinion
Qualified
Unable to obtain sufficient audit evidence on which to base opinion an COULD be material misstatements but not PERVASIVE
Disclaimer= COULD be PERVASIVE material misstatements
Scope Limitations Occur because
Circumstances- wernt there at beg of year for inventory
Mgmt limits you
ISA versus GAAP difference on insufficient audit evidence?
ISA requires you to withdraw
GAAP wants you to consider it
What to do when you issue Modified report on GAAS limitation?
Need to modify intro to say “ENGAGED” to audit financial stmts
Audit Responsibility Para changes to having enough info for qualified opinion
Or
Disclaimer “Because of”
“Not able to obtain sufficient appropriate evidence”
(more)
What do you need to add for Modified GAAS Opinion after Auditor’s Responsibility Paragraph?
Basis for Modification Para
What words do a Qualified Opinion need?
Disclaimer?
Qualified
=”Except For”
“Presented Fairly”
Disclaimer
=”because of”
“does not express an opinion”
What needs to be done if Prior Period Opinion Changed?
Other Matter Paragraph
Date of previous report Opinion previously issued Reason for Prior Opinion Changes Say "Opinion..is different"
DORCS
If Prior Period stmts released what does Prior Auditor need to do?
Read current fin stmts
Compare old and new stmts
Get Representation letter from new auditor
Get Rep letter from mgmt
Date it
How to Date re-release of Prior Audit
If Unrevised use original date
If Revised Dual Date
If Prior Period Audit not reissued what does Current Auditor need to do?
Report on current fin stmts only and
use Other Matter paragraph
1-Prior audit done by different guy
2-Type of opinion and why
3-Nature of Emphasis and Other Matter Paras
4-Date
When Subsequent Events occur what needs to happen
Event on or Before Date= Adjust Financials
Event after Balance Sheet Date= maybe footnote
What items should auditor review during subsequent period?
Post B/S transactions, see about proper cutoff Rep letter from Mgmt about sub events Inquire about Mgmt if any changes Minutes of Board Meeting to be read Examine Interim Fin Stmts
If auditor determines that subsequent event requires a change to Fin Stmts, and Mgmt doesnt do it.
What opinion should be given?
Qualified or Adverse
How to date report with subsequent date?
Use dual dating
Main Report Date
and
Except for Date of Subsequent Event
What to do if after audit report issued material items discovered?
Advise client to release revised Fin Stmts or Disclosures
or
If results cannot be determined DO NOT RELY on Report
Talk to SEC etc
If client refuses to make changes to newly discovered material misstatements
What does auditor do?
Disassociate from your report
Alert Agencies, SEC etc
Alert Third Parties
What to do if you discovered omitted procedures after audit?
Determine whether other procedures were adequate
If more procedures needed than complete them
If discover material misstatement use Subsequent procedures to make changes
What should auditor do if Mgmt refuses to correct a material misstatement of fact?
Tell those in charge of Goverance
How can an auditor report on supplementary information?
Either
Other Matter Paragraph
or
Separate Report
When entity’s ability to continue to be a going concern is inadequately disclosed what kind of opinion is it?
Inadequate Disclosure is a GAAP issue
So Qualified or Adverse Opinion is Issued
Issue what kind of opinion for a change in accounting principle?
Trick Question
Need Emphasis of Matter Paragraph
If Auditor lacks independence what kind of opinion to issue?
Disclaim, cannot audit fin stmts that you are not independent of
When you have significant transactions with related parties what kind of Opinion to issue?
Can do Unmodified but need an Emphasis of Matter Paragraph
An unjustified Accounting Change would get what Opinion?
Qualified or Adverse
If company’s Going Concern issue for prior year has gone away what needs to happen?
The Emphasis of Matter paragraph needs to go away
Who is Audit Report Addressed to…
Whoever Engaged the Audit
When CPA is associated with fin stmts but has not reviewed them, what sort of opinion is needed?
Disclaimer
When auditor cant get sufficient evidence of beginning inventory what opinion to issue?
B/S and Income Stmt
B/S=Unmodified (ending date is B/S Date)
Income Stmt= Disclaim (cant get COGS)
An Omission of Cash Flows would get what sort of Opinion?
Qualified
If Substantial Doubt of Going Concern what would be issued?
An Emphasis of Matter Paragraph
When there is a change in accounting principle that materially affects comparability of fin stmts
What to do?
Issue with Emphasis of Matter Paragraph
What are the two options to Issue for Going Concern problem?
A1-27
Unmodified with Emphasis of Matter
or
Disclaimer
Failure to disclose is what sort of problem?
What sort of Opinions
GAAP
Qualified or Adverse
Going Concern Period for
GAAS
ISA
GAAS=cannot exceed 1 year
ISA=at least 1 year
Basis of Modification Paragraphs Go where
Before Opinion Paragraph
When to change a previously issued opinion on comparative Fin Stmts?
When they are restated to follow GAAP
When should successor auditor mention by name the prior auditor?
Only when the prior auditor merged or acquired by successor
What to do with prior year restatement that has brought it back into compliance with GAAP?
Issue Unmodified report
What should Auditor do FIRST if he finds out something would have affected report occurred before Year-End?
Deterimine if anyone would find that information important
then
Have Mgmt reissue Fin Stmts
What best describes GAAS?
Measures of the quality of the auditors performance
What should auditor do FIRST if he finds out that some items were not audited that should have?
Assess the importance of the procedure
This is different than information didnt know
When there is a significant change in accounting policy what to put in report?
Refer to lack of consistency in Emphasis of Matter Paragraph
If accounting change has no material effect this year but will in later years what to put in opinion?
Disclose in fin stmts but dont refer to in report
How does Intro paragraph change for disclaimer opinion?
Goes from Phrase “We have audited”
to
“We were engaged to audit”
How does Auditor’s Responsibility paragraph change for disclaimer opinion?
Omits sentence that takes responsibility
How does Auditor’s Responsibility paragraph change for a qualified opinion?
A phrase is used immediately to point to the opinion paragraph to let user know of qualified opinion
Does an introductory paragraph need to be modified for unmodified opinion with another CPA that you are going to share responsibility with?
No
If a legal uncertainty is properly disclosed what sort of opinion and what needs to change on report.
Unmodified
and nothing needs to change
