Audit Report Flashcards
Going Concern
Once determining there is substantial doubt about an entity’s ability to continue as a going concern, the auditor’s next steps are to ensure the financial statements are adequately disclosed on the matter and add an emphasis-of-matter paragraph to an otherwise unmodified report.
GAAP Departures
Management’s refusal to change unreasonable lives being used for depreciable assets and changing an accounting principle without justification represent GAAP departures that will result in a qualified or adverse opinion, depending on the materiality of the effects.
Evidence that the chief executive officer has committed a material fraud may indicate a material misstatement of the financial statements, requiring a qualified or adverse opinion.
The omission of a statement of cash flows is a departure from GAAP and would require the issuance of a qualified opinion.
A change in accounting principles
Whenever there is a change in accounting principles, including a change in the method of accounting for inventories, a change from an unacceptable principle to an acceptable one, or a change that management cannot reasonably justify, the auditor’s report will include some reference to consistency.
The audit report is normally addressed to?
Although an audit report is most frequently addressed to those charged with governance of the audited entity, the report is normally addressed to those for WHOM the report is PREPARED. When retained to audit an entity that is NOT the client, the report would be addressed to the CLIENT rather than governance of the audited entity.
When a predecessor auditor has expressed an opinion?
When a predecessor auditor has expressed an opinion on financial statements of a prior period that are being presented in COMPARATIVE form WITHOUT the predecessor’s report, an OTHER-MATTER paragraph should be ADDED to the current period’s report and should include information regarding the previous period’s report. It SHOULD indicate that ANOTHER AUDITOR audited the prior period’s financial statements. It should also indicate the DATE of the predecessor’s REPORT, the NATURE of any EXPLANATORY PARAGRAPHS added to the report, the type of OPINION issued, and the REASONS for issuance of anything other than a standard UNMODIFIED opinion. The name of the predecessor auditor would not be included.
A significant scope limitation?
A significant scope limitation precludes the auditor from issuing an unmodified opinion. Depending on materiality, the auditor will either issue a DISCLAIMER of opinion or a QUALIFIED opinion. An unjustified accounting change is a departure from GAAP, which will require either an ADVERSE opinion, or a QUALIFIED opinion, depending on materiality. In either case, if a qualified opinion is expressed, the opinion paragraph will indicate that the financial statements are fairly presented “EXCEPT FOR” the items referenced in the BASIS for QUALIFIED OPINION paragraph.
When a predecessor auditor reissues?
When a predecessor auditor reissues his or her report on a prior period, there are NO modifications to that report UNLESS circumstances arise SUBSEQUENT to the DATE of the REPORT that affect the previous year. In order to determine if such subsequent events have occurred, the PREDECESSOR auditor would receive a LETTER of REPRESENTATION from the successor auditor stating that the successor auditor is NOT AWARE of any current year information that would affect the prior year report.
When a departure from a promulgated accounting principle is justified?
When a departure from a promulgated accounting principle is JUSTIFIED because following the principle WOULD result in MISLEADING financial statements, the financial statements would be considered FAIRLY STATED and the auditor would issue an UNMODIFIED opinion. The auditor will, however, draw attention to the departure by including an EMPHASIS-OF-MATER PARAGRAPH. Neither the auditor’s responsibilities nor management’s responsibilities are affected and neither paragraph would be modified.
An other-matter paragraph is used?
An other-matter paragraph is used to provide information that is NOT REQUIRED to be reported or disclosed in the financial statements that will ENHANCE users’ UNDERSTANDING of the audit or the audit report, not to draw attention to an item that is properly accounted for and disclosed.
Financial statements are properly restated in the current year and presented in comparative form with the current year’s financial statements?
The inclusion of a significant disclosure the omission of which had been the basis of a qualification, is considered a CORRECTION of an ERROR. If the corrected financial statements are presented in comparative form, the auditor would EXPRESS an UNMODIFIED opinion and include an OTHER-MATTERS paragraph that would provide the DATE of the previous report, the TYPE of OPINION expressed, the REASONS for the different opinion, and that the opinion on the revised financial statements is DIFFERENT from the previous one. The original report would not be presented and a qualified opinion would no longer be expressed since there is no longer a departure requiring one.
An auditor issues a report that refers to consistency?
I. Management’s lack of reasonable justification for a change in accounting principle.
II. A change from an accounting principle that is not generally accepted to one that is generally accepted.
A change in ACCOUNTING PRINCIPLE, whether justified or not, and a change from an unacceptable principle to an acceptable one, which is accounted for as a CORRECTION of an ERROR, are both changes in accounting principles or the manner in which they are applied and both affect consistency.
The CPA suggests appropriate revisions to the financial statements, but management refuses to accept the CPA’s suggestions?
Although the auditor is issuing a DISCLAIMER of opinion, when the auditor is aware of a DEPARTURE from GAAP, it should be appropriately disclosed in an OTHER MATTER PARAGRAPH in the auditor’s report.
When there is substantial doubt about an entity’s ability to continue as a going concern?
When there is substantial doubt about an entity’s ability to continue as a going concern the auditor will issue an UNMODIFIED opinion as long as the financial statements present fairly GAAP. In addition, the auditor will ADD an EXPLANATORY PARAGRAPH to emphasize the substantial doubt and direct the users to the appropriate footnote. Reporting on one financial statement does NOT REQUIRE an additional explanatory paragraph. UNREASONABLE ESTIMATES is a DEPARTURE from GAAP and would result in a QUALIFIED or ADVERSE opinion. Not being able to test certain transactions is a SCOPE LIMITATION resulting in a QUALIFIED or DISCLAIMER of opinion.
Dual dating an audit report?
When dual dating an audit report such as “March 12, 20X2; except for the event described in note J dated March 18, 20X2.”, the auditor is indicating that he or she is TAKING RESPONSIBILITY for ALL SUBSEQUENT EVENTS occurring before March 12, the LAST DAY of FIELDWORK, and is only taking RESPONSIBILITY for ONE additional EVENT occurring on March 18.
An emphasis-of-a-matter paragraph?
An emphasis-of-a-matter paragraph directs the user to a footnote in the financial statements.