Audit 1 Flashcards updated
Purpose of an Audit
The purpose of the audit is to provide FS users with an OPINION on whether the FS are PRESENTED FAIRLY in ALL MATERIAL RESPECTS, in accordance with GAAP
Reasonable Assurance
NOT ABSOLUTE Assurance. Auditor must obtain sufficient appropriate audit evidence to form a reasonable assurance of an opinon on the FS.
What is the most authoritative guidance for the audit of a nonissuer?
General guidance (not specific guidance) provided by a Statement on Auditing Standards is the most authoritative of level of auditing guidance for audits of nonissuers. Auditors are required to comply with SASs, and should be prepared to justify any departures therefrom.
Describe Quality Control Standards
A quality control system consists of policies and procedures designed, implemented, and maintained to ensure that the firm complies with professional standards and appropriate legal and regulatory requirements, and that any reports issued are appropriate in the circumstances.
Conditions for Fraud
Pressure, Opportunity, Rationalization
Presumptively Mandatory Requirements
Presumptively mandatory indicates that the requirement must be followed in all cases where the requirement is relevant, except in rare circumstances in which auditors and audit organizations determine it is necessary to depart from the presumptively mandatory requirement. If, in rare circumstances, auditors judge it necessary to depart from a relevant presumptively mandatory requirement, they must provide a special explanation, which includes their justification for the departure and how the alternative procedures performed in the circumstances were sufficient to achieve the intent of that requirement. Generally accepted government auditing standards uses the term should to describe presumptively mandatory items.
What does Fairly Presented Mean?
FS adequately disclose - Policies are Constistently applied - Accounting Estimates are Reasonable - FS are Relevant, Reliable, Comparable, Understandable - Effects of material transactions and events are reasonable - Terminology is appropriate - Notes represent the underlying transactions
MR DIM
Managements Responsbility: Design, Implement, and Maintain internal controls
Auditors REPPORTS CRAME
Auditors RESPONSIBILITY: EXPRESS an opinion - PLAN the audit - PERFORM procedures - OBTAIN evidence - assess RISK of Material Misstatement - TEST internal controls - Prentation of the financial STATEMENTS - not necessarily opinion on internal CONTROL - REASONABLENESS of significant ESTIMATES made by MANAGEMENT and EVALUATING overall FS.
What is found in Auditors Opinion Paragraph?
FS present fairly in accordance with the applicable financial reporting framework
What is the defined date of auditors report?
Report should be dated no earlier than the date on which auditor obtained sufficient appropriate audit evidence on which to base an opinion. (final date of auditor responsibility)
When the examiners require candidates to respond to questions concerning unmodified opinion remember�
GAAS = SCOPE = Auditors Responsibility Paragraph GAAP = Opinion Paragraph
ISAs Requirements Not in US GAAS
ISA = FS gives a TRUE and FAIR VIEW GAAS = FS Present Fairly
Reference to the component auditor should NOT be made unless�
- Component Auditor has performed an audit in accordance with GAAS/PCAOB 2. Component Auditors report is not restricted use.
What if Component Auditor used a different financial framework?
Do not use unless: Framework is similar OR Group Engagement team can obtain appropriate evidence to make adjustments.
How to make reference to a Component Auditor in Report
Clearly state: audit was by component auditor, the magnitude of the portion audited, that auditor takes responsibility for evaluating appropriateness of adjustments.
ISAs on Component Auditor
ISAs do not permit making reference to component auditor.
What if Component Auditor issues a modified opinion?
Auditor should include emphasis of matter, other-matter, or modify the group opinion depending on the materiality of the component.
No reference to the Component Auditor Means�
Auditor IS assuming responsibility
When the auditor IS asumming responsibility for the work of another auditor�
No reference should be made to the component auditor.
When a component has significance to the group FS�
Group engagement team should audit.
What if component has a significant RMM?
Group or component auditor should audit financial information, account balances, and transactions or disclosures that raise the RMM
What should a group team do with a component that is not significant?
Perfrom analytical procedures.
When should an audit opinion be modified?
FS are materially misstated - OR - Auditor was unable to obtain sufficient appropriate evidence.
What is an adverse opinion?
GAAP problem that is very material. (Accounting policy, presentation, disclosures, estimates)
What is a Disclaimer of Opinion?
GAAS problem that is Pervasive/Significant. (Insufficent evidence, Significant going concern, lack of independence).
When is the emphasis of matters paragraph used?
When referring to a matter that is appropriately presented in FS and is of such importance that it should be emphasized to help the user understand the FS. (After Opinion P. Before Other Matters P)
When is an emphasis of matter paragraph required?
Going Concern - Consistency related to justified change in accounting principle - Change in audit opinion - Special Purpose framework used.
When is an emphasis of matter paragraph necessary (professional juddgement)?
Uncertainty related to litigation, major catastrophe, significant related party transactions, important subsequent events.
When in an Other Matters Paragraph used?
Refers to matters other than those presented or disclosed in FS. (After opinion. After Emphasis of Matters)
When is an Other Matters Paragraph Required?
To Restrict the use of the audit report, Change an opinion, Prior period was audited by predecessor (and report not reissued), When Comparative FS were compiled or reviewed or not audited, Material inconsistency in other information, When Auditor is reporting on Supplementary info
When may an Other Matters Paragraph be necessary (professional judgement)?
If auditor cannot withdraw though unable to obtain sufficient evidence, when laws permit auditor to provide further explanation of duties, or when auditor is reporting on more than one financial framework.
What procedures does an auditor use to determine whether there is going concern problem?
ADMITS = Analytical Procedures - Debt Compliance - Minutes - Inquiry - Third Party Confirmations - Subsequent Events Review
ISA requirements for Going Concern are�
Auditor should consider going concern assumption throughout the engagement.
What Conditions and Events may be indicative of Substantial Doubt?
FINE = Financial Difficulties - Internal Matters - Negative Trends - External Matters
What mitigating factors could help companies with going concern issues?
Borrow Money/Restructure Debt - Sell Assets - Delay/Reduce Expenditures - Increase Ownership Equity
What specific language does the Emphasis of Matter Paragraph need to contain regarding Going Concern?
Substantial Doubt and Going Concern (Significant Doubt - if ISA)
ISA and Management Responsibilities with Going Concern
ISAs require written representation on its plans for future action. Auditor must evalute managements assessment.
Who must an auditor discuss Going Concern with?
Those charged with corporate governance
What if the entitys going concerns are inadequate?
A departure from GAAp exists = Qualified or Adverse Opinion. Emphasis of matter paragraph from prior years need not be repeated.
Going concern with adequate disclosure
Unmodified opinion with Emphasis of Matter Paragraph
Going concern with inadequate disclosure
GAAP issue = Modified or Adverse
Going Concern with Significant Uncertainty
GAAS Issue = Dislaimer
Consistency Implies that�
FS from year to year are comparable between periods
When evaluating the acceptability of an accounting change, the auditor should consider�
- Newly Adopted principle is correct 2. Method of Accounting change is acceptable 3. Disclosures are appropriate 4. Change is justified (AND include in emphasis of matter paragraph)
What is an area that is tricky relative to consistency?
Changes in accounting Estimates, Immaterial items, Corrections of Errors are not consistency issues needing reporting with emphasis of matter. (However, changes in depreciation method would be disclosed).
What circumstances necessitate emphasis of matter paragraphs regarding consistency?
Changes in prior periods that are still being presented in FS, Retroactive restatement, Change in Depreciation, Cash to Accrual, Consolidation changes, Investments using the Equity Method.
Where does an auditor restrict the use of the audit?
In the Other-Matter Paragraph
When should an auditor alert people in the Other-Matter Paragraph that the audit is restricted use?
- Limited Users have adequate understanding of the criteria. 2. Disclosure criteria only available to specified parties. 3. By-Product Reports
ISAs and Management Imposed Scope Limitations
ISAs = management imposed scope limitations = Withdraw GAAS = Consider Withdraw
Only DORCS Change their Minds (updated opinions)
DATE of Auditors Previous Report OPINION type Previously Issued REASONS for Prior Opinion CHANGES that have occurred STATEMENT that opinion is different
What Procedures should a Predecessor Auditor follow when asked to Reissue?
Read the statements - Compare the statements with current period - Obtain a letter of representation from the successor auditor - Get a Management Rep Letter - Date the report (possibly dual date)
What if Successor Auditor decides not to reissue Prior?
Express an Opinion on Current Year Only & Indicate in Other-Matters Paragraph. Predecessor should NOT be named unless firms merged.
What if the prior period was not audited?
Indicate in Other-Matter paragraph whether review, compilation was done. Statement that it was less in scope than an audit. And/or auditor assumes no responsibility.
What if predecessor and successor have different opinions?
Disclaim an opinon on the year in question. BUT no Other Matters Paragraph.
Recognized (Type1) Events
Conditions that existed on or before the B/S Date (Trade Receivable is now uncollectible)
Nonrecognized( Type II Events)
Conditions after the B/S date that MAY require a foot note or pro forma FS
Subsequent Period
The period between the FS Date and the Date of Audit Report. Auditor has an active responsibiltity to investigate
PRIME Test for Subsequent Events
PRIME: Post Balance Sheet Transactions, Representation Letter, Inquiry of Management, Minutes of BOD, Examine Latest available interim FS
Responsibilities AFTER Original Date of Report
Auditor has no active responsibility. BUT If they become aware they should determine if adjustments or disclosures required.
Dual Dating
If adjustments are necessary, auditor may dual date to extend responsibility for the one item.
Subsequent Discovery of facts after release date
Auditor takes Action: 1. Assess whether the information necessitates a change to opinion. 2. Is anyoune Relying on the Reports 3. Revised FS - New Audit Report 4. Advise Client to Make Disclosures 5. Notice Given that FS cannot be relied upon.
Clients Refusal to Disclose Subsequent Events
DAR - Disassociate, Alert Agencies, Relying Parties
If Auditor Discovers that they Omitted Procedures
First, determine if other audit procedures were adequate. Second, perform the procedures (better late than never)
Examples of Nonrecognized Events
Purchase of business, sale of a debenture bond, Subsidiary Sale
Examples of Inquiry for Subsequent Events
New Borrowing, Sale or acquistions, Increase in Capital, Developments on Contingencies, Unusual Accounting Adjustments, Legal Claims
Define Supplementary Information
Information presented outside of FS that may be contained in the Audited FS
Objectives when Reporting on Supplementary Information
Auditor has two objectives: evaluate the presentation of the information in relation to the FS & report whether it is fairly stated. (There can be no adverse or disclaimer opinion on the FS)
Audit Procedures for Supplementary Information
Inquire of Management, Obtain a Rep Letter, Compare to FS, Evaluate Appropriateness and Completeness, Form and Content Apppropriate
Reporting Supplementary Information
Present in Other-Matter Paragraph or in Separate Report (and reference the auditors report)
Required Supplementary Information (Opinion NOT Required)
Report Deficiencies and Omissions
Application of Requirements of an applicable FR Framework
Reporting Accountant should: report on the application of the requirements of an applicable reporting framework to a proposed future transaction as long as facts and circumstances are of the transaction are disclosed.
Reporting Accountant
Prepares a written report on the application of an applicable reporting framework to a specific transaction or the type of report that may be rendered on a specific entitys financials.
Reporting Accountant may NOT:
May NOT report on the application of accounting principles to a hypothetical transactions AND need not be independent.
Reporting Accountants Written Report
The reporting Accountants written report should include an identification of the specific entity involved; a brief description of the nature of the engagement; a statement that the engagement was performed in accordance with AICPA standards; a description of the specific transaction(s); a statement of the relevant facts, circumstances, assumptions and source of the information; a statement describing the appropriate application of the requirements of the applicable financial reporting framework to the specific transaction or type of report; a statement that the preparers of the financial statements are responsible for proper accounting treatment; a statement that any difference in facts, circumstances or assumptions presented may change the report; a separate paragraph restricting its use to specified parties; and a statement indicating that the reporting accountant is not independent (if appropriate).
Reporting on Financials with a Framework from another Country
In an audit of financials with a framework generally accepted in another country, the auditor should obtain an understanding of the applicable legal responsibilities involved if the auditor plans to use the form and content of the Auditors report of another country. The auditor should also obtain an understanding of the purpose for which the financial statements are prepared; whether the financial reporting framework is a fair presentation framework; the intended users of the financial statements; and the steps taken by management to determine whether the applicable financial reporting framework is acceptable in the circumstances.
Reporting and Continuing Accountant Protocols
�When issuing a report on the application of the requirements of an applicable financial reporting framework to a specific transaction, the reporting CPA should consult with the continuing CPA to obtain information relevant to the transaction. If the reporting accountant decides it is unnecessary to consult with the continuing accountant, then he or she must document the reasons for not consulting.
