Audit Reports - Pre Clarity

Question 1

What are the requirements for an Audit Report?

Answer 1

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.

Question 2

How should an Audit Report be adjusted if reporting is not consistent with the prior period?

Answer 2

If inconsistent- an Unqualified Opinion is OK Explanatory paragraph after Opinion is added Otherwise - Qualified Opinion issued

Question 3

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

Answer 3

Accounting Errors Reclassifications Prospective treatment of a new principle Accounting Estimate Change

Question 4

What assurance is provided in an audit opinion?

Answer 4

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.

Question 5

What are the sections of the Audit Report?

Answer 5

Title - States that the auditor is independent Address - whomever hired the auditor Introduction Paragraph Scope Paragraph Opinion Paragraph Signed and Dated by Author

Question 6

Which statements are included in the Scope Paragraph of the Audit Report?

Answer 6

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.

Question 7

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

Answer 7

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

Question 8

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

Answer 8

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

Question 9

What is the effect of a qualified opinion?

Answer 9

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.

Question 10

How is the Audit Report changed if there is Scope Limitation?

Answer 10

Qualified opinion is issued. Scope paragraph modified Explanatory paragraph between Scope and Opinion paragraphs Opinion paragraph points out scope limitation

Question 11

How is the Audit Report modified for major inconsistencies found during the audit?

Answer 11

Qualified opinion is issued. Scope paragraph remains unchanged Explanatory paragraph between Scope and Opinion paragraphs Opinion paragraph points out inconsistency

Question 12

How does a Disclaimer of Opinion affect the Audit Report?

Answer 12

States that an opinion cannot be issued. Includes severe Scope limitation

Question 13

What would cause an Adverse Opinion?

Answer 13

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

Question 14

How is division of auditor responsibility disclosed?

Answer 14

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

Question 15

What standards govern SSARS engagements?

Answer 15

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

Question 16

Which clients can have compilation engagements?

Answer 16

Non-SEC (non-public) registrants only.

Question 17

What is a compilation?

Answer 17

Accountant puts together financial statements with information PROVIDED BY MANAGEMENT. No opinion is expressed- and no assurances are given. Independence is not required.

Question 18

What disclosures are required for Compilation engagements?

Answer 18

Disclosures not necessary must state that they are not included

Question 19

What standards govern Review engagements?

Answer 19

SSARS (Statements on Standards for Accounting and Review Services)

Question 20

What type of assurance is given in a Review engagement?

Answer 20

Reviews give limited assurance.

Question 21

What procedures are required for Review engagements?

Answer 21

Analytical procedures are required for reviews. Compare results to documented predictions.

Question 22

What is a Review engagement?

Answer 22

Financial statements are presented with no opinion expressed- and limited assurances are given. Independence is required for a review engagement.

Question 23

What is a Forecast?

Answer 23

A prospective financial statement that uses normal circumstances. General and limited use allowed.

Question 24

What is a Projection?

Answer 24

A prospective financial statement using hypothetical situations. Only limited use by the client is allowed.

Question 25

What are the requirements for Agreed Upon Procedures?

Answer 25

Independence is required Only limited use by the client is allowed.

Question 26

What disclosures are required for remote likelihood of losses?

Answer 26

No disclosure required.

Question 27

What disclosure is required for a probable loss contingency?

Answer 27

Accrue if estimable. Explanatory paragraph if not estimable.

Question 28

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

Answer 28

Auditor assesses need for explanatory paragraph based on loss likelihood.

Question 29

How is a gain contingency reported?

Answer 29

Gain contingencies are not reported.

Question 30

How does an immaterial GAAP issue affect the audit opinion?

Answer 30

It doesn’t. Opinion is Unqualifed.

Question 31

How does a material GAAP issue affect the audit opinion?

Answer 31

Qualified Opinion is issued. Similar to Scope Limitation. Explanatory paragraph after Scope Paragraph. Opinion refers to GAAP issue.

Question 32

How does a very material GAAP issue affect the Audit Report?

Answer 32

Adverse opinion is issued. Same paragraph structure as a Qualified opinion.

Question 33

How does a Going Concern issue affect the Audit Report?

Answer 33

Unqualified opinion with an Emphasis is OK Explanatory paragraph is added after Opinion paragraph.

Question 34

What is a Yellow Book audit?

Answer 34

An audit performed under governmental auditing standards (GAS).

Question 35

How do GAS standards compare to GAAS?

Answer 35

GAS is more strict that GAAS.

Question 36

What is required under the Single Audit Act?

Answer 36

A report on internal control is required. GAAS and GAS don’t require the I/C report.