Audit Reports Flashcards
Most authoritative guidance for the auditor of a nonissuer
General Guidance provided by a Statement on Auditing Standards
An auditor of a nonissuer must conduct the audit in accordance with….
ASB Standards.
Not required to do it for PCAOB Standards
Examples of Professional Skepticism
- Obtaining corroboration of management’s explanations through consultation with a specialist
- Using 3rd party confirmations to provide support for management’s representations
- Designing additional auditing procedures to obtain more reliable evidence in support of a particular financial statement assertion.
- Not inquiring PRIOR YEAR personnel about management’s honesty and integrity. Prior year is not relevant to current year audit for Fraud assessment.
Unmodified Opinion if:
- Justified departure from GAAP (otherwise misleading)
Words that auditors have a responsibility to consider:
“may”, “might”, and “could”
PCAOB was established by:
SOX 2002
Qualified opinion due to lack of sufficient audit evidence
The lack of evidence should be disclosed in the Auditor’s Responsibility paragraph and discussed in an explanatory paragraph before the opinion paragraph (Basis for Qualified opinion)
Audit documentation for substantial doubt
- The effect of the auditor’s conclusion on the auditor’s report
- The conclusions that gave rise to the substantial doubt
- The auditor’s conclusion about whether substantial doubt remains or is alleviated.
- No requirement for management’s opinion about the substantial doubt
To help against negative trends and financial difficulties (substantial doubt):
- Postpone expenditures (R&D)
- Increase ownership equity
- Negotiate reductions in required dividends being paid on preferred stock
- Lease rather than purchase (delay expenditures)
Reference US in both:
Accounting Principles and Accounting Standards
Qualified or Adverse opinion
- Inadequate disclosure of the substantial doubt about an entity’s ability to continue as a going concern is a departure from GAAP
- Material Weakness in Internal Control
- Unjustified accounting change
- Fail to disclose information that is required by GAAP (Depending on the pervasiveness)
- Inadequate disclosures (Illegal Acts)
Qualified or Disclaimer opinion
Scope Limitations:
- Unable to determine the amounts associated with an employee fraud scheme.
- Refusal by the client to permit the auditor to confirm accounts receivable
- Refusal of management to sign a management rep letter (Disclaimer - Likely)
- Unable to obtain audited financial statements of a consolidated investee
A change in accounting principle
The use of emphasis-of-matter paragraph following the opinion paragraph in an unmodified report as long as the change was accounted for properly
Financial Difficulties
Usual trade credit from suppliers are denied
Lack of payment of preferred, cumulative dividends
What words to include in emphasis-of-matter paragraph for entities with substantial doubt?
“Going Concern”
“Substantial Doubt”
Group Engagement partner references component auditor’s work when:
The group engagement partner is unable to review the component auditor’s audit documentation
Unable to form an opinion on client’s opening inventory balances
Issue a unmodified report for Balance Sheet only.
Issue a disclaimer opinion on Statement of Income (Income Statement), Retained earnings, and Cash Flows.
Statement is a basic element of the auditor’s report under US auditing standards
“An audit includes evaluating significant estimates made by management”
Implicitly stated in Audit reports
Consistency
No explicit reference to “test basis”
Disclaimer Opinion
Auditor lacks independence (Qualified is not an option)
Qualified Opinion
- Restrictions on the scope of the audit
- Lack of sufficient appropriate audit evidence
- Company issues financial statements that purport to present financial position and results of operations but omits the related statement of cash flows (Inadequate disclosure)
- Reference to specialists if findings result in change to auditor’s report
- Departure from GAAP (If material, Adverse opinion)
Unmodified opinion with NO emphasis-of-matter paragraph
Material loss that is sufficiently supported and disclosed
-Uncertainty that is properly disclosed (Lawsuits) (probable but not estimable)
Unmodified opinion WITH emphasis-of-matter paragraph
- Existence of significant transactions with related parties
- A change in accounting principle
- Omission of supplemental information required by GAAP (Quarterly data required by SEC)
- Substantial doubt but disclosed
Qualified opinion due to inadequate disclosure phrase to use:
“Except for the omissions of the information described in the Basis for Qualified Opinion paragraph”
Substantial doubt was removed in the current period:
No repeat of prior year’s emphasis-of-matter paragraph and no description of the reasons or plans for recovery need to be included
Addressee of auditor’s report
The entity that engaged the auditor
No reference of component auditor in Group auditor’s report, which means:
The group auditor assumes responsibility for the work of the component auditor and should determine the type of work to be performed on the financial information of the component.
When an auditor is associated with the Financial Statement of a public entity but has not audited or reviewed such statements (Only required to read the FS for obvious material misstatements)
Disclaimer opinion
Confirming with 3rd parties the details of arrangement to provide or maintain financial support
Audit procedure to identify doubts about an entity’s ability to continue as a going concern
Accounting change with NO material effect on the comparability of the financial statements
Auditor doesn’t not need to recognize the change in the current year’s audit report, therefore, doesn’t not need to refer to the consistency in the report
Reference to GAAS
Auditor’s responsibility paragraph
Reference to GAAP
Opinion Paragraph
Disclaimer
Auditor’s responsibility paragraph and Opinion Paragraph are not omitted but there is no opinion
Wording of Qualified Opinion due to Scope Limitation
The possible effects on the financial statements
What paragraphs need to be modified for a Qualified opinion?
Opinion Paragraph “except for…”
Basis for Opinion Paragraph
Change of accounting that has a material effect
In emphasis-of-matter paragraph, refer to the financial statement notes.
Large Client Imposed Restriction (35% of Assets can’t be audited b/c they are unavailable)
Disclaimer opinion
Going Concern w/ adequate disclosures, the audit report can be:
1) Unmodified opinion with emphasis-of-matter paragraph
2) Disclaimer opinion
Substantial doubt about client’s ability to continue as a going concern
Opinion paragraph with emphasis-of-matter paragraph with the use of words “Going concern” and “substantial doubt”
Issue an “except for” qualified opinion for:
Scope limitation
Unjustified accounting change
Emphasis-of-matter paragraph, before or after opinion?
After
“Obtaining evidence that is sufficient and appropriate”, Explicit or Implicit?
Explicit
Basis for Qualified opinion
Precede the opinion paragraph
How would you identify events and conditions that indicate substantial doubt in an entity?
Inquiring of the entity’s legal counsel about litigation, claims, and assessments
Read Board meeting minutes
Indicative of substantial doubt about a company
Negative trends - Recurring working capital shortages
Immaterial adjustment but client refuses to make the adjustment
FS are free from material misstatements and no disclosures in the notes are required since it’s immaterial
Under International Standards on Auditing, the going concern period is:
At least one year from the date of the financial statements being audited
Client has capitalizable leases but refuses to capitalize them in the financial statements. Is this immaterial or material? What opinion.
Material; Adverse opinion
The company issues financial statements that purport to present financial position and results of operations, but refuses to include the related statement of cash flows. What opinion?
Qualified or Adverse
The auditor is unable to determine the extent of or the amounts associated with a pervasive employee fraud scheme. What opinion?
Disclaimer
If the financial statements of a prior period have been audited by a predecessor auditor who report is not presented, the successor auditor should indicate:
In an Other-Matter paragraph of the report:
1) That the FS of prior period were audited by another auditor (Name of Predecessor if part of successor firm)
2) Date of the previous report
3) The type of report issued by the predecessor auditor
4) If the report was other than an unmodified report, the substantive reasons therefor.
For reissuing prior year auditor’s report, Predecessor auditor should obtain letters of representation from the:
1) Successor auditor
2) Former client’s management
If reissuing audit report with no changes or additional work, the date of the report should be:
The original report date of the reissued report
If the predecessor’s report was unmodified, the successor should:
Indicate in an other-matter paragraph that the predecessor auditor expressed an unmodified opinion on the prior year’s financial statements
If scope limitation of assets and liabilities could materially affect current operating results, the auditor would:
Be unable to express an opinion on the current year’s results of OPERATIONS and CASH FLOWS.
Dual Dating
Used when there is a subsequent event occurring after the original date of the auditor’s report, and the auditor wishes to extend responsibility only for the ONE event. (Date would be extended if auditor wants to take responsibility of all subsequent events)
Used if the event were disclosed in the notes of the financial statements.
Not True for Comparative financial statements:
Using Dual Dates
Subsequent event: A contingency is resolved that had been disclosed in the audited financial statements. Auditor’s action?
Auditor has no obligation to investigate
Subsequent event like to investigate?
Example: New information discovered concerning undisclosed related party transactions of the prior year/audited year.
In obtaining evidence about subsequent events, the auditor should:
Examine the latest available interim financial information, and compare them with the financial statements under audit
In the event of omiteed audit procedures, the auditor should first attempt:
Perform alternative procedures in order to ascertain whether the opinion can be relied upon
Conditions that did not exist at year end but arose after year end are Type 2 (nonrecognized) subsequent event that must be:
Disclosed to keep the financial statements from being misleading
Type 1 (recognized) subsequent events require:
Adjustments to the financial statements
Type 2 (nonrecognized) subsequent event must:
Be disclosed to keep the financial statements from being misleading
The report on the application of the requirements of an applicable financial reporting framework should include a statement that:
Should any facts or circumstances differ from those presented may change the report
There is no requirement that the auditor’s report on supplementary information required by GAAP be restricted. True or False?
True
The auditor would not perform a review or express negative assurance on supplementary information required by GAAP.
True or False?
True
Supplementary information outside of the Basic Financial Statements:
Express an opinion on the information, if he or she has been engaged to examine such information
Report on whether the information is fairly stated in relation to the financial statements taken as a whole, if appropriate procedures have been applied
Disclaim an opinion on the information
If management (of a governmental body) declines to present information required by the GASB, the auditor should issue:
An unmodified opinion with an other-matter paragraph
When reporting on the application of the requirements of an applicable financial reporting framework to a specific transaction, the CPA should include in his report a statement that:
The preparers of the financial statements, who should consult with their continuing accountants, bear the ultimate responsibility for proper accounting treatment
When the audit engagement includes reporting on selected financial data, the report prepared by the auditor should be:
Limited to the data that was obtained from the financial statements
Describe GAAS
Measures the quality of the auditor’s performance
Negative Cash flows
Event that an auditor to have substantial doubt about an entity’s ability to continue as a going concern
What is permitted in US auditing standards but not permitted under International auditing standards?
Division of responsibility
Not a phrase in the opinion paragraph of a qualified opinion
When read in conjunction with Note X
With the foregoing explanation
Inadequate Disclosure
GAAP departure = Qualified or Adverse opinion
Division of Responsibility modifies:
The Auditor’s Responsibility Paragraph & the Opinion Paragraph
If the other auditor’s opinion is qualified, but the subject of the qualification is not material in relation to the overall consolidated statements, Logan need no make reference to the qualification in their report.
Division of responsibility
Qualified and Adverse opinion also modifies:
The Auditor’s responsibility paragraph
Subsequent procedures that should be performed:
- Review of post balance transactions
- Review of management’s rep letter
- Make inquiries of management regarding any unusual adjustments that may have been made after year end
- Review of the minutes of a stockholders meeting that took place on Jan Year 2
- Examine the latest interim financial statements
Results in either a qualified or adverse opinion?
Inadequate disclosure of the substantial doubt about an entity’s ability to continue as going concern (departure from GAAP)
