Audit Report Flashcards

1
Q

Going Concern

A

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.

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2
Q

GAAP Departures

A

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.

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3
Q

A change in accounting principles

A

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.

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4
Q

The audit report is normally addressed to?

A

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.

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5
Q

When a predecessor auditor has expressed an opinion?

A

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.

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6
Q

A significant scope limitation?

A

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.

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7
Q

When a predecessor auditor reissues?

A

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.

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8
Q

When a departure from a promulgated accounting principle is justified?

A

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.

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9
Q

An other-matter paragraph is used?

A

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.

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10
Q

Financial statements are properly restated in the current year and presented in comparative form with the current year’s financial statements?

A

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.

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11
Q

An auditor issues a report that refers to consistency?

A

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.

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12
Q

The CPA suggests appropriate revisions to the financial statements, but management refuses to accept the CPA’s suggestions?

A

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.

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13
Q

When there is substantial doubt about an entity’s ability to continue as a going concern?

A

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.

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14
Q

Dual dating an audit report?

A

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.

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15
Q

An emphasis-of-a-matter paragraph?

A

An emphasis-of-a-matter paragraph directs the user to a footnote in the financial statements.

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16
Q

Inadequate disclosure is?

A

Inadequate disclosure is a violation of GAAP which, depending on materiality, would require the issuance of an ADVERSE opinion or a QUALIFIED opinion. An adverse opinion would indicate that the financial statements are NOT fairly presented. A qualified opinion would indicate that the financial statements are fairly presented except for the information omitted.

17
Q

Management’s inability to provide a justification for a change in accounting principles?

A

Management’s inability to provide a justification for a change in accounting principles indicates a departure from GAAP, which would require a qualified opinion, not a disclaimer.

18
Q

An adverse opinion?

A

When a departure from the applicable financial reporting framework is SIGNIFICANT enough to affect the financial statements taken as a whole, the auditor would conclude that the financial statements are NOT FAIRLY PRESENTED presented and would issue an ADVERSE opinion.

19
Q

Shared Responsibility?

A

When an auditor is auditing Group financial statements (division of responsibility) and the Group auditor decides to SHARE RESPONSIBILITY with the component auditor, then the DOLLAR AMOUNT or PERCENT audited by the other auditor is included in the AUDITOR’S RESPONSIBILITY PARAGRAPH. The OPINION PARAGRAPH would also be adjusted to include the words, “based on our audit and the report of the other auditors”.

20
Q

GAAP prescribes principles as to?

A

GAAP prescribes principles as to WHEN items should be RECOGNIZED and how they should be MEASURED. To be in conformity with GAAP, an entity MUST account for events and transactions that will provide outcomes that are reasonably CLOSE to, or within an ACCEPTABLE RANGE of, what is prescribed. It is appropriate for an entity to change accounting principles from the prior year or apply principles that are different from the industry as long as the financial statements are not misleading.

21
Q

The Adverse Opinion?

A

In an ADVERSE OPINION, the opinion paragraph indicates that the financial statements are NOT FAIRLY presented and refers to the preceding paragraph, the BASIS for ADVERSE OPINION. The preceding paragraph, not the opinion paragraph, provides the SUBSTANTIVE REASONS for the adverse opinion and a brief description of the principle effects of the departure.

22
Q

When unaudited financial statements are presented in comparative form with audited financial statements?

A

When unaudited financial statements are presented in comparative form with audited financial statements in a document filed with the SEC, such statements should be MARKED as UNAUDITED but are NOT referred to in the auditor’s report and DO NOT have to be withheld by management as long as they are clearly marked as UNAUDITED. The financial statements that have NOT been audited should be clearly marked as such and either the report on the PRIOR PERIOD should be REISSUED or an OTHER-MATTER paragraph should be added to the audit report describing the RESPONSIBILITY ASSUMED for the unaudited financial statements.

23
Q

A change in an accounting principle?

A

A change in an accounting principle is a change in a METHOD USED, such as using a different DEPRECIATION METHOD or SWITCHING from LIFO to FIFO. Accounting changes require FULL DISCLOSURE in the FOOTNOTES of the financial statements to describe the JUSTIFICATION and financial EFFECTS of the CHANGE. The auditor will, ADD an EMPHASIS of MATTER paragraph FOLLOWING the opinion paragraph. If the change had NOT been PROPERLY accounted for or disclosed, the auditor would MODIFY the report, affecting the opinion paragraph, and would add a paragraph with the BASIS for the QUALIFICATION BEFORE the opinion paragraph.

24
Q

The inability of an auditor to form an opinion on beginning inventory?

A

The inability of an auditor to form an opinion on beginning inventory does NOT affect the ability to form one on ending inventory, ENABLING the auditor to EXPRESS an opinion on the ending BALANCE SHEET. Since beginning inventory is a component of COST of SALES, the auditor would not be able to form an opinion on the income statement or the statement of shareholders’ equity, which adjusts equity for net income. The change in inventory is taken into account in calculating cash flows from operating activities and the inability to form an opinion on beginning inventory would prevent forming one on cash flows.

25
Q

A group auditor will make reference to the work performed by a component auditor?

A

A group auditor will make reference to the work performed by a component auditor in the audit report BY discussing the division of responsibility when the group auditor is NOT WILLING to take responsibility for the work of the component auditor. This would be the case when the principal auditor is UNABLE to REVIEW the other auditor’s working papers (II). If the principal auditor is able to review the other auditor’s working papers and is willing to take responsibility for the other auditor’s work, NO reference would be made in the report.

26
Q

Inadequate disclosure of an entity’s inability to continue as a going concern is?

A

Inadequate DISCLOSURE of an entity’s INABILITY to CONTINUE as a going concern is a GAAP DEPARTURE that requires the auditor to issue either a QUALIFIED or ADVERSE opinion.

27
Q

The basic unmodified audit report for a nonissuer?

A

The basic unmodified audit report for a nonissuer consists of 4 paragraphs. The INTRODUCTORY or REPORT on the FINANCIAL STATEMENTS paragraph, MANAGEMENT’S RESPONSIBILITY paragraph, AUDITOR’S RESPONSIBILITY paragraph and the OPINION paragraph. Reference to the auditing standards used (GAAS, AFRF) is made in the AUDITOR’S RESPONSIBILITY paragraph and reference to ACCORDANCE WITH the principles is made in the OPINION paragraph.

28
Q

Condensed financial statement?

A

Condensed financial statements DO NOT conform to GAAP, but also ARE NOT prepared in accordance with an OCBOA. The condensed financial statements are a SUPPLEMENTARY FILING and would NOT be compared to themselves for determining if they are fairly stated. Since they are derived from the audited financial statements, the auditor would indicate that they are FAIRLY STATED in RELATION to THOSE financial statements.

29
Q

The following paragraphs are found in both the standard report expressing an unmodified opinion for the audit of a non-issuer and in the standard report expressing an unqualified opinion for an audit of a public company?

A

A standard report expressing an unmodified opinion for a NON-ISSURE will include an INTRODUCTORY paragraph, a paragraph indicating MANAGEMENT’S RESPONSIBILITY, one indicating the AUDITOR’S RESPONSIBILITY, and an OPINION paragraph. A standard report expressing an unmodified opinion for an ISSUER will include an INTRODUCTORY paragraph, a SCOPE paragraph, and an OPINION paragraph. The only paragraphs they have in common are the INTRODUCTORY and OPINION paragraphs.