Audit Reports

Question 1

Adverse Opinion

Answer 1

“The financial statements do not present fairly the financial position, results of operations, or cash flows in conformity with generally accepted accounting principles.”

• Such an opinion is appropriate when financial statements are considered to be misleading.
• professional standards state that such an opinion is expressed when the financial statements taken as a whole are not presented fairly in conformity with generally accepted accounting principles.

Question 2

Auditor Required Communication

Answer 2

An auditor’s required communication with those charged with governance of an audit client may occur before or after issuance of the auditor’s report

This communication should include discussion of any significant disagreements with management concerning the financial statements.

Question 3

Auditors Responsibility Paragraph

Answer 3

Auditors Responsibility Paragraph of the audit report that includes a statement that the auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the audit opinion.

Question 4

Change in Accounting Principles

Answer 4

When management does not provide reasonable justification of a change in accounting principles either a qualified or an adverse opinion is appropriate, not a disclaimer.

Question 5

Comfort Letter

Answer 5

• A letter written by the auditor to an underwriter of securities, which expresses an opinion about whether the audited financial statements and schedules in the registration statement comply as to form with applicable accounting requirements of the SEC Act of 1933 and related rules and regulations adopted by the SEC.
• Procedures performed are specified by the underwriter.
• Letters for underwriters typically provide negative assurance on unaudited interim financial information

Question 6

Consistency - Auditor s Opinon Paragraph

Answer 6

The following require recognition in the auditors opinion paragraph due to consistency :

• Changes in reporting entities
• Changes in accounting principles
• Correction of errors
• Changes in principles inseparable from changes in estimates

Changing from consolidating a subsidiary to carrying on the equity basis is a change in reporting entity.

Question 7

Consistency - Auditor’s Opinon Paragraph

Answer 7

When the auditor has obtained assurance as to the consistency of application of accounting principles between the current and preceding year, no mention of consistency is included in the audit report.

Question 8

Emphasis-of-Matter Paragraph as to Consistency

Answer 8

Emphasis-of-matter paragraph as to consistency is only necessary when a change in principles has occurred.

Changing from consolidating a subsidiary to carrying on the equity basis is a change in reporting entity.

All listed affect consistency and should be referred to in the auditor’s opinion.

• Changes in reporting entities,
• Changes in accounting principles
• Correction of errors
• Changes in principles inseparable from changes in estimates

Question 9

Disclosure of Basis Adverse Opinion

Answer 9

Professional standards require that a basis for adverse opinion disclosing the substantive reasons for expressing an adverse opinion precede the opinion paragraph of the auditor’s report.

Question 10

Doubts as to Going Concern

Answer 10

When, after considering management’s plans, the auditor concludes there is substantial doubt, he or she should consider the possible effects on the financial statements, and the adequacy of the related disclosure. In addition, an emphasis-of-matter paragraph should be added to the audit report.

Question 11

Material GAAP Violation

Answer 11

Material disclosures required by GAAP, if omitted, cause the financial statements to be in violation of GAAP.

When the financial statements are materially affected by a departure from GAAP, the auditor should express a qualified or an adverse opinion.

Question 12

Group Auditor Report

Answer 12

In making reference to another auditor in their examination report the other auditor may be named

• only if permission has been granted and
• the report of the other auditor is presented along with the principal auditor’s report.

Question 13

Omission of a Statement of Cash Flows

Answer 13

The omission of a statement of cash flows is a departure from GAAP and an “except-for” qualified report with a basis for modification paragraph is appropriate.

Question 14

Omission of Statement of Cash Flows

Answer 14

The omission of a statement of cash flows when an entity issues financial statements that present financial position and result of operations results in a qualified audit opinion with basis for qualified opinion paragraph.

Question 15

Opening (Introductory) Paragraph

Answer 15

The opening (introductory) paragraph of the auditor’s standard report states that the auditor has audited the financial statements and then lists them.

Question 16

Prospective financial statements:

Answer 16

Prospective financial statements are either financial forecasts or financial projections. Prospective financial statements may cover a period that has partially expired. Statements for periods that have completely expired are not prospective financial statements. Professional standards require that all significant assumptions used to prepare the financial statements be presented.

Question 17

Report Presented on Comparative Statements

Answer 17

When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible to update his report on the financial statements of the one or more prior periods presented regardless of the opinion previously issued.

Question 18

Restated Financial Statements

Answer 18

Previously expressed qualified opinion due to departure from GAAP - Whne F/S are restated to conform to GAAP the auditor should indicate that the statements have been restated and should express an unmodified opinion with respect to the restated financial statements.

An other-matter paragraph to the report should disclose

• (1) the date of the auditor’s previous report
• (2) the type of opinion previously expressed
• (3) the circumstances or events that caused the auditor to express a different opinion
• (4) that the updated opinion differs from the previous opinion.

Question 19

Restated Financial Statements

Answer 19

When an auditor has previously expressed a qualified or an adverse opinion on financial statements of a prior period and those financial statements have been restated, the auditor’s updated report is changed.

Question 20

Review of Interim Financial Information

Answer 20

A review of interim financial information consists primarily of inquiries and analytical procedures concerning significant accounting matters relating to the financial data being reported.

Question 21

Scope Limitations

Answer 21

When restrictions that so significantly limit the scope of the audit are imposed by the client, the auditor generally will be required to disclaim an opinion on the financial statements.

Question 22

SEC Registration Statement

Answer 22

When an independent audit report is incorporated by reference in a SEC registration statement, a prospectus that includes a statement about the independent accountant’s involvement should state ( as indicated in AU-C 920) that the independent accountant is an expert in auditing and accounting.

Question 23

Four Trust Services Principle criteria

Answer 23

• policies
• communications
• procedures
• monitoring

Question 24

Scope Limitations

Answer 24

scope limitations lead to either a qualified opinion or a disclaimer of opinion.

Question 25

Required Communications

Answer 25

The auditor should communicate with those charged with governance (the audit committee):

• the auditor’s responsibilities under generally accepted auditing standards,
• an overview of the planned scope and timing of the audit, and
• significant findings from the audit.

The significant findings from the audit that should be communicated include:

• the auditor’s view about qualitative aspects of the entity’s significant accounting practices,
• significant difficulties encountered during the audit,
• uncorrected misstatements (that are not trivial),
• disagreements with management,
• other findings or issues that the auditor believes to be significant or relevant to the audit committee’s oversight of the financial reporting process,
• material, corrected misstatements that were brought to the attention of management as a result of audit procedures,
• representations the auditor is requesting from management,
• management’s consultations with other accountants about accounting and auditing matters
• significant issues arising from the audit that were discussed with management.