Audit Report 3 Flashcards
Review of interim Financial Statement - AU-C 930
- Objective : provide accounting with a basis for communication whether he/she is aware of an material modifications that should be made to the interim financial information for it to confirm with applicable financial reporting framework e.g. GAAP
- Required for Issuer; non issuer can choose
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Procedures
- Inquiries of management about the method of preparing information and
- AP
- Auditor is required to have an understanding of IC
- Report includes limited (negative) assurance
- obtain a written representation from management
- Independent
- Compare information for consistency with (1) Management’s responses to the inquiries (2) The basic financial statements (3) Other knowledge obtained during the audit
- When dealing with the annual financial statements, omission, misstatement, or auditor inability to review the quarterly information all lead to inclusion of an emphasis-of-matter paragraph in the annual audit report. Be aware that the information is to be reviewed, not audited. Therefore, its misstatement will not lead to a qualified or an adverse opinion.
Letter Underwriters /Comfort letters - AUC_C 920
- AU920 Accountants provides Letter Underwriters (comfort letters) in connections with the registration of Securities with SEC
- Date same date or just before registration statement becomes effective
- Accountant’s involvement limited to negative insurance
- Letter may include: independence of accounts, unaudited financial statement, condensed interim information, pro forma financial statement, and financial forecast
- Address to the underwriter and signed by independent auditor
- When a public company wishes to issue new securities to the public, the underwriters of the securities will generally ask the company’s auditor to provide “comfort” on the financial and accounting data in the prospectus that is not covered by an accountant’s report of some form (e.g., an audit report on the financial statements).
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In comfort letters, the CPAs will provide
- positive assurance that they are independent and that their audit followed SEC standards.
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negative assurance (or a summary of findings on various types of accounting) related matters such as the following:
- unaudited summary and summarized interim information,
- pro forma financial information,
- change subsequent to the balance sheet date, and
- on various tables of data.
Attestation Engagement (ERA’s)
- AT101 Attestation Engagement: apply to engagement in which the CPAs are engaged to issue or do issue an examination, a review, or agreed upon procedures report on the subject matter or an assertion about subject matter, that is the responsibility of another party
- Attestation engagement – suitable and available to the user
- engagement and representation letter required
- Auditor must be independent for attestation engagement
- Unmodified attestion report may ordinarily refer to that assertion or to the subject matter to which the assertions relates - BUT when deviation from the criteria being reported upon exist → the CPA should report directly upon subject matter and NOT assertion
Attestation Engagement & Type of assurrance
- Examination – level of service comparable to Audit; positive assurance
- Review – limited (negative) assurrance; inquiries and AP
- Agreed-upon procedure – AT 201 - agreement upon the nature of procedure – restricted use - provides a summary of procedures performed and findings NOT limited inssurance. do NOT require a written assertion
What are the requirements for Agreed Upon Procedures?
- Independence is required
- Only limited use by the client is allowed
- Report the accountant’s findings
- A written assertion is not always required for an agreed-upon procedures engagement
What is a Forecast?
- AT 301 - A prospective financial statement -
- Forcast based on what is expected to occcur under normal circumstances
- General and limited use allowed
- Independence is NOT required
- include a statement that prospective result may not be achieved
- Examination: adverse opinion is appropriate when significant assumption are not disclosed
- Know that a compilation report provides no assurance (again, this is also the case with financial statement compilations); an examination report provides positive assurance with respect to the reasonableness of assumptions; and an agreed-upon procedures report provides a summary of findings.
- NO review
What is a Projection?
- AT- 301 - Projection A prospective financial statement using hypothetical situations - What if ?
- Only limited use meant for responsible party (management) and 1/3 whith whom the responsible party is negotiating directly
- Include a statement that prospective result may not be achieved
- NO review
Governement reporting accordance with GAAS Audit (Generally Accepted Auditing Standards)
- Opinion on Financial Statement
- NO compliance report is issued
- NO IC report unless significant deficiencies have been identified
What is a Yellow Book audit?
An audit performed under governmental auditing standards (GAS)
Compliance Auditing of Federal Financial Assistance Programs. A major factor causing the demand for compliance auditing is the need for accountability over the financial assistance provided by the federal government. Guidance is provided by Government Auditing Standards (GAS), also referred to as the “Yellow Book,” published by the Comptroller General of the United States (the top executive within the General Accounting Office). GAS presents what it refers to as “generally accepted government auditing standards”; the importance of GAS on the CPA exam is emphasized by its inclusion in Information for CPA Candidates as a publication that should be studied.
How do GAS standards (Yellow book) compare to GAAS?
- AU-C 806
- GAS is more strict that GAAS
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Required
- Opinion on FS (report on FS)
- Written report on IC
- Report on compliance with law & regulation (direct and material effect) - include all material instances of noncompliance, and all instances or indications of illegal acts which could result in criminal prosecution
- Documentation of supervisory review before report is issued
- This requirement may be met by issuing (1) one combined report, (2) two reports (internal and compliance combined) or (3) three separate reports .
What is required under the Single Audit Act?
- More extensive than GAAS and GAS
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Required AU-C 806
- Opinion on FS
- Written report on IC
- Report on compliance with law & regulation
- Report on Scope of audit testing on IC - GAAS and GAS don’t require it
- Report on schedule of expenditures of federal awards
Assertion and Criteria in Attestation engagement
- An assertion is a declaration about whether the subject matter is presented in accordance with certain criteria.
- A CPA should evaluate the criteria being followed. The criteria used in an attestation engagement should be suitable and available to the users.
- Suitable criteria should have an appropriate combination of the following characteristics: objective, measurable, complete, and relevant.
- In addition to meeting the requirement that they be suitable, the criteria should also be available to users. This requirement of availability actually has two parts in that not only should the criteria be available, they should be understandable to users. (1) publicly, (2) included with the subject matter or in the assertion, (3) included in the CPA’s report, (4) well understood by most users (e.g., the distance between A and B is twenty feet) or (5) available only to specified parties.
- While an attestation engagement will always have subject matter, it sometimes will not have a written assertion
Several multiple-choice questions have required knowledge of the “circumstance for which it is not appropriate to refer a reader of an auditor’s report to a financial statement note for details.”
The proper answer is generally a scope limitation since details of audit scope are not presented in the financial statement notes.
Service Organization Control (SOC) Reports
SOC Reports. Service organizations provide processing services to customers who decide to outsource their processing of particular data. Examples of service organizations include data centers, flexible spending account servicers, and medical claims processers.
The AICPA has established three types of examination services that result in the following three types of CPA reports on service organization controls (SOC):
- SOC 1: Restricted use reports on controls at a service organization relevant to a user entity’s internal control over financial reporting.
- SOC 2: Restricted use reports on controls at a service organization related to security, availability, processing integrity, confidentiality, and/or privacy.
- SOC 3: General use SysTrust reports related to security, availability, processing integrity, confidentiality, and/or privacy.
Summary Financial Statements AU-C Section 810
Occasionally, a client-prepared document will include summary financial statements (condensed financial statements) developed from audited financial statements.
These statements typically include considerably less detail than the audited financial statements.
The CPAs who issued the report on the audited financial statements may be asked to report on the summary statements.
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Unless they have issued an adverse opinion or a disclaimer of opinion on the audited financial statements, the CPAs may accept an engagement related to the summary financial statements.
- In these circumstances the CPAs determine whether the criteria applied by management in the preparation of the summary financial statements is acceptable and whether those criteria have been properly applied.
While the audited financial statements need not accompany the summary financial statements, those statements should be readily available to any user who wishes to obtain them (e.g., available on the company’s website).
When the CPAs have concluded that the summary financial information is properly presented, they issue an opinion stating that the summary financial statements are consistent, in all material respects, with the financial statements from which they have been derived, in accordance with the applied criteria.
