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AUD > Audit Reports > Flashcards

Audit Reports Flashcards

1
Q

What are the requirements for an audit report?

A

Must conform to GAAP

Consistency with prior period reporting is implied (must state if inconsistent)

Adequacy of disclosure is implied (must state if disclosures are lacking)

Opinion is provided - provides assurance

Must be signed by the auditor- and dated.

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2
Q

How should an audit report be adjusted if reporting is not consistent with the prior period?

A

If inconsistent- an Unqualified Opinion is OK

Explanatory paragraph after Opinion is added

Otherwise- Qualified Opinion issued

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3
Q

When is consistency not violated with respect to changes in reporting between years?

A

Accounting Errors

Reclassifications

Prospective treatment of a new principle

Accounting Estimate Change

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4
Q

What assurance is provided in an audit opinion?

A

The opinion states that the financial statements are fairly presented in all material respects

The opinion states if the financials are in conformity with GAAP.

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5
Q

What are the sections of the audit report?

A

Title - States that the auditor is independent

Address - whomever hired the auditor

Introduction Paragraph

Scope Paragraph

Opinion Paragraph

Signed and Dated by Author

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6
Q

Which statements are included in the Scope Paragraph of the audit report?

A

GAAS was followed (IF SEC company- uses the standard of the PCAOB)
Reasonable assurance about material misstatements was obtained.
Financial statements and disclosures are supported by evidence.
Management estimates evaluated
Accounting principles evaluated
Financial Statement presentation evaluated
Reasonable basis exists for an opinion

If any scope limitations exist- the auditor tries to work around them and still issue an unqualified opinion if possible.

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7
Q

For an unqualified opinion to be issued- what must be the case with all periods presented?

A

A prior year’s Financial Statement used for comparative purposes must also meet criteria for an Unqualified Opinion

If an exception arises- the Explanatory and Opinion paragraphs will address the issue

If a prior year’s issue has been corrected- issue an Unqualified opinion and ignore the past issue

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8
Q

What is included in an unqualified opinion paragraph with an emphasis?

A

Includes:

Immaterial GAAP issues
Going Concern worries
Auditor shares responsibility
Emphasizing a particular aspect of Financial Statements
Unqualified Opinion/Assurances not affected

Explanatory paragraph added after opinion

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9
Q

What is the effect of a qualified opinion?

A

A qualified opinion creates reduced assurances.

It results from scope limitations or major inconsistencies.

It includes material problems with GAAP- disclosures- or segment reporting.

If there is an issue that causes a Qualified Opinion- the explanatory paragraph goes after the Scope and before the Opinion paragraphs and the Opinion paragraph refers to the issue as well.

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10
Q

How is the audit report changed if there is Scope Limitation?

A

Qualified opinion is issued.

Scope paragraph modified

Explanatory paragraph between Scope and Opinion paragraphs

Opinion paragraph points out scope limitation

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11
Q

How is the audit report modified for major inconsistencies found during the audit?

A

Qualified opinion is issued.

Scope paragraph remains unchanged

Explanatory paragraph between Scope and Opinion paragraphs

Opinion paragraph points out inconsistency

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12
Q

How does a Disclaimer of Opinion affect the audit report?

A

States that an opinion cannot be issued.

Includes severe Scope limitation

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13
Q

What would cause an Adverse Opinion?

A

Very material GAAP and Disclosure issues would cause an Adverse Opinion.

If there is an issue that causes an Adverse Opinion- the explanatory paragraph goes after
the Scope and Before the Opinion paragraphs and the Opinion paragraph refers to the issue as well

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14
Q

How is division of auditor responsibility disclosed?

A

Disclosed in Introductory Paragraph.

Doesn’t name the other auditor without permission.

Referenced in Opinion paragraph and division of responsibility indicated

If other auditor is not referenced- then you take responsibility for their conclusions- so consideration of independence- experience- credentials- etc required

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15
Q

What standards govern SSARS engagements?

A

Compilations are governed by SSARS (Statements on Standards for Accounting and Review Services)

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16
Q

Which clients can have compilation engagements?

A

Non-SEC (non-public) registrants only.

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17
Q

What is a compilation?

A

Accountant puts together financial statements with information PROVIDED BY MANAGEMENT.

No opinion is expressed- and no assurances are given.

Independence is not required.

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18
Q

What disclosures are required for Compilation engagements?

A

Disclosures not necessary – must state that they are not included

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19
Q

What standards govern Review engagements?

A

SSARS (Statements on Standards for Accounting and Review Services)

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20
Q

What type of assurance is given in a Review engagement?

A

Reviews give limited assurance.

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21
Q

What procedures are required for Review engagements?

A

Analytical procedures are required for reviews.

Compare results to documented predictions.

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22
Q

What is a Review engagement?

A

Financial statements are presented with no opinion expressed- and limited assurances are given.

Independence is required for a review engagement.

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23
Q

What is a Forecast?

A

A prospective financial statement that uses normal circumstances.

General and limited use allowed.

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24
Q

What is a Projection?

A

A prospective financial statement using hypothetical situations.

Only limited use by the client is allowed.

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25
Q

What are the requirements for Agreed Upon Procedures?

A

Independence is required

Only limited use by the client is allowed.

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26
Q

What disclosures are required for remote likelihood of losses?

A

No disclosure required.

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27
Q

What disclosure is required for a probable loss contingency?

A

Accrue if estimable.

Explanatory paragraph if not estimable.

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28
Q

What disclosure is made if a loss contingency is reasonably possible?

A

Auditor assesses need for explanatory paragraph based on loss likelihood.

29
Q

How is a gain contingency reported?

A

Gain contingencies are not reported.

30
Q

How does an immaterial GAAP issue affect the audit opinion?

A

It doesn’t. Opinion is Unqualifed.

31
Q

How does a material GAAP issue affect the audit opinion?

A

Qualified Opinion is issued.

Similar to Scope Limitation.

Explanatory paragraph after Scope Paragraph.

Opinion refers to GAAP issue.

32
Q

How does a very material GAAP issue affect the audit report?

A

Adverse opinion is issued.

Same paragraph structure as a Qualified opinion.

33
Q

How does a Going Concern issue affect the audit report?

A

Unqualified opinion with an Emphasis is OK

Explanatory paragraph is added after Opinion paragraph.

34
Q

What is a Yellow Book audit?

A

An audit performed under governmental auditing standards (GAS).

35
Q

How do GAS standards compare to GAAS?

A

GAS is more strict that GAAS.

36
Q

What is required under the Single Audit Act?

A

A report on internal control is required.

GAAS and GAS don’t require the I/C report.

37
Q

Materiality of problem- immaterial

A
  1. GAAP - unqualified

2. GAAS - unqualified

38
Q

Materiality of problem- material

A
  1. GAAP - qualified (modify opinion paragraph)

2. GAAS - qualified (modify scope and opinion paragraphs)

39
Q

Materiality of problem- highly material

A
  1. GAAP - adverse

2. GAAS - disclaimer of opinion

40
Q

Qualified opinion “except for” GAAP

A
  1. Non GAAP change
  2. Inadequate disclosure
  3. Unadjusted departure from GAAP
  4. Unreasonable accounting estimate
41
Q

Qualified opinion “except for” GAAS

A
  1. Uncertainty

2. Scope limitation

42
Q

Adverse opinion GAAP

A
  1. Non GAAP change
  2. Inadequate disclosure
  3. Unadjusted departure from GAAP
  4. Unreasonable accounting estimate
43
Q

Adverse opinion GAAS

A
  1. Uncertainty
  2. Scope limitation
  3. Lack of independence
  4. Unaudited
44
Q

Withdraw from the engagement

A

False, fraudulent, deceptive, or misleading

45
Q

Uncertainty - GAAP and evidence

A
  1. Auditor agrees with management - unqualified
  2. Auditor unable to obtain evidence - Qualified GAAS or Disclaimer
  3. Auditor disagrees with management - Qualified GAAP or Adverse
46
Q

Modified unqualified opinion

A
  1. Modified wording - division of responsibility
  2. Explanatory paragraph
    a. necessary and justified departure from GAAP
    b. Going concern
    c. To emphasize a matter
    d. A justified lack of consistency
    e. Required SEC reg S-K is omitted
    f. Suppl. info required by GAAP is omitted
    g. Other info in a doc is not consistent with other info in FS
47
Q

Explanatory paragraph

A
  1. Unqualified opinion - the expl. paragraph AFTER the opinion paragraph
  2. Qualified, adverse, and disclaimer of opinion - the expl. paragraph BEFORE the opinion paragraph
  3. Exception - the expl. paragraph may be BEFORE or AFTER the opinion paragraph when:
    - justified GAAP departure
    - emphasis of a matter
48
Q

Reliance on work of other auditors

A
  1. Responsibilities:
    a. The other auditor is responsible for his own work
    b. The principal auditor must always be satisfied regarding the reputation and independence of the other auditor
  2. Division of responsibility:
    a. When auditor decides to mention the work done by another auditor, the division is mentioned in 3 paragraphs (introduction, scope, opinion)
    b. The work is expressed in %, total assets, revenue in the introductory paragraph
  3. Assumption of responsibilities - no reference to other CPA
    - review the audit program,
    - discuss the audit procedure,
49
Q

Necessary/ justified departure from GAAP

A
  • they are OK and the auditor agrees with them because if otherwise the FS will be misleading,
  • include explanatory paragraph
50
Q

Auditor’s consideration of Going concern

A
  • reasonable period of time.

- if may not make it, the explanatory paragraph after the opinion paragraph

51
Q

Procedures to determine if there is info about going concern

A
  1. Analytical procedures
  2. Debt compliance
  3. Minutes
  4. Inquiry of client’s legal counsel
  5. Third parties
  6. Subsequent events review
52
Q

Conditions and events - going concern

A
  1. Financial difficulties
  2. Internal matters
  3. Negative trends
  4. External matters
53
Q

Mitigating factors - going concern

A
  1. Plan to borrow money or restructure debt
  2. Plans to sell assets
  3. Plans to delay or reduce expenditures
  4. Plans to increase ownership equity
54
Q

Going concern

A 
Modified unqualified (the explanatory par.  or disclaimer of opinion
Use words: "substantial doubt" and "going concern"
55
Q

International Auditing Standards

A

Use words: “significant doubt” NOT “Substantial doubt”

56
Q

Going concern - opinion

A
  1. Adequate GAAP disclosure - Modified unqualified opinion or disclaimer
  2. Inadequate GAAP disclosure - Qualified (GAAP) or adverse
57
Q

Emphasis of a matter - Unqualified opinion

A
  1. A related party transactions
  2. A significant subsequent event
  3. The entity is a component of a larger business enterprise
  4. Accounting matters that affect comparability
  5. Material uncertainties disclosed in the footnotes
58
Q

Emphasis of a matter - Unqualified opinion

A
  1. A related party transactions
  2. A significant subsequent event
  3. The entity is a component of a larger business enterprise
  4. Accounting matters that affect comparability
  5. Material uncertainties disclosed in the footnotes
59
Q

Going concern

A 
Modified unqualified (the explanatory par.  or disclaimer of opinion
Use words: "substantial doubt" and "going concern"
60
Q

International Auditing Standards

A

Use words: “significant doubt” NOT “Substantial doubt”

61
Q

Going concern - opinion

A
  1. Adequate GAAP disclosure - Modified unqualified opinion or disclaimer
  2. Inadequate GAAP disclosure - Qualified (GAAP) or adverse
62
Q

Emphasis of a matter - Unqualified opinion

A
  1. A related party transactions
  2. A significant subsequent event
  3. The entity is a component of a larger business enterprise
  4. Accounting matters that affect comparability
  5. Material uncertainties disclosed in the footnotes
63
Q

Emphasis of a matter - the explanatory paragraph

A
  • before or after the opinion paragraph

- do not use “with the foregoing explanation”

64
Q

Subsequent events

A
  1. Recognized Type I Events - conditions existing ON or BEFORE the balance sheet date - an adjustment to FS
  2. Nonrecognized Type II events - conditions existing AFTER the balance sheet - footnote disclosure
65
Q

Auditor’s responsibility for subsequent events

A

Subsequent event - time between date of FS and date of audit report - actively make sure nothing changed

  1. Post balance sheet transactions
  2. Representation letter should be obtained
  3. Inquiry
  4. Minutes
  5. Examine latest interim FS
66
Q

Auditor’s responsibility AFTER the original date of the auditor’s report

A

no active responsibility to make inquiries after the original date of the report

67
Q

Report

A

a. If adjustments or disclosures are made after the original date of the auditor’s report, the auditor may dual date the report to extend responsibility only for the particular subsequent event.
b. Later date may be use for the report, but this extends auditor’s responsibility
c. If adjustments are made to the FS without any footnote disclosure, the original date of the report should be used

68
Q

Subsequent discovery of facts existing at the date of the auditor’s report

A
  1. Auditor’s action - advise client to disclose info to people relying on FS by revising FS, disclosures, notification that FS cant be relying on.
  2. Client refuses:
    - the auditor should notify BOD
    - notify the client that the report can’t be associated with FS
    - notify regulatory agencies
    - notify people relying on FS that cant be trusted
69
Q

Omitted audit procedures discovered after submission of the audit report

A
  1. Auditor makes sure that other audit procedures compensate for it
  2. If omitted procedures impair the auditor’s ability to supported the previously issued opinion, needs apply omitted procedures asap

AUD (12 decks)

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