Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

AUD > Audit Reports - Pre-Clarity > Flashcards

Audit Reports - Pre-Clarity 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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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 Auditor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How does a Disclaimer of Opinion affect the Audit Report?

A

States that an opinion cannot be issued.

Includes severe Scope limitation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What standards govern SSARS engagements?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Which clients can have compilation engagements?

A

Non-SEC (non-public) registrants only.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What disclosures are required for Compilation engagements?

A

Disclosures not necessary must state that they are not included

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What standards govern Review engagements?

A

SSARS (Statements on Standards for Accounting and Review Services)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What type of assurance is given in a Review engagement?

A

Reviews give limited assurance.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What procedures are required for Review engagements?

A

Analytical procedures are required for reviews.

Compare results to documented predictions.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is a Forecast?

A

A prospective financial statement that uses normal circumstances.

General and limited use allowed.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is a Projection?

A

A prospective financial statement using hypothetical situations.

Only limited use by the client is allowed.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What are the requirements for Agreed Upon Procedures?

A

Independence is required

Only limited use by the client is allowed.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What disclosures are required for remote likelihood of losses?

A

No disclosure required.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What disclosure is required for a probable loss contingency?

A

Accrue if estimable.

Explanatory paragraph if not estimable.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

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

A

Auditor assesses need for explanatory paragraph based on loss likelihood.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

How is a gain contingency reported?

A

Gain contingencies are not reported.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

How does an immaterial GAAP issue affect the audit opinion?

A

It doesn’t. Opinion is Unqualifed.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

What is a Yellow Book audit?

A

An audit performed under governmental auditing standards (GAS).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

How do GAS standards compare to GAAS?

A

GAS is more strict that GAAS.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

In regards to an emphasis-of-matter situation properly accounted for as a change in accounting principle, what is difference between International Auditing Standards and GAAP?

A

International Auditing Standards allow, but DO NOT require an emphasis-of-matter situation relating to a properly accounted for change in accounting principles

US standards REQUIRE that a change in accounting principle that’s properly accounted for and disclosed in a footnote still has to be disclosed in an emphasis-of-matter paragraph

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

When is an emphasis-of-matter paragraph required for a change in accounting principle?

A

An emphasis-of-matter paragraph on an audit report is required for a change in accounting principle in the following situations:

  1. GAAP to GAAP
  2. Non-GAAP to GAAP
  3. GAAP to non-GAAP
  4. For NEWLY acquired assets in an EXISTING class of assets (whether it relates to items 1- 3 above)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

When is an emphasis-of-matter paragraph required for a change in accounting estimate?

A

An emphasis-of-matter paragraph on an audit report is required for a change in accounting estimate in the following situation:

  1. Inseparable estimate and principle change
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

When is an emphasis-of-matter paragraph required for a change in entity?

A

An emphasis-of-matter paragraph on an audit report is required for a change in entity in the following situation:

  1. Changes NOT involving a transaction
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

When is an emphasis-of-matter paragraph required for a correction of error?

A

An emphasis-of-matter paragraph on an audit report is required for a correction of an error in the following situations:

  1. Error in principle
  2. Error not involving application of a principle
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

When is an emphasis-of-matter paragraph NOT required for a change in accounting principle?

A

An emphasis-of-matter paragraph on an audit report is NOT required for a change in accounting principle in the following situation:

  1. For NEWLY acquired assets within a NEW asset class that relate to either of the following:

a. GAAP to GAAP
b. Non-GAAP to GAAP
c. GAAP to non-GAAP

For newly acquired assets in a new asset class, there is no inconsistency and no real change; thus no emphasis-of-matter paragraph would be required. The auditor would issue an unmodified opinion

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

When is an emphasis-of-matter paragraph NOT required for a change in accounting estimate?

A

An emphasis-of-matter paragraph on an audit report is NOT required for a change in accounting estimate in the following situation:

  1. Judgmental adjustments
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

When is an emphasis-of-matter paragraph NOT required for a change in entity?

A

An emphasis-of-matter paragraph on an audit report is NOT required for a change in entity in the following situation:

  1. Changes involving a transaction
45
Q

Does a change in statement format require an emphasis-of-matter paragraph to be included in an audit report?

A

A change in statement format in relation to classifications and reclassifications DO NOT require an emphasis-of-matter paragraph to be included in an audit report

An example of this would be classifying or reclassifying something on the statement in terms of format in the current year to look like something in the prior year

46
Q

What opinion would an auditor render on financial statements if there is a GAAP departure and it’s at least material?

A

An auditor would render a Qualified or Adverse opinion on financial statements where there is a GAAP departure and it’s at least material

The opinion would be based on the auditors’ judgment and would be based on the pervasiveness of the departure

47
Q

What opinion would an auditor render on financial statements if a scope limitation exist and it’s at least material?

A

An auditor would render a Qualified or Disclaimer opinion on financial statements when there is a scope limitation and it’s at least material

The opinion would be based on the auditors’ judgment and would be based on the pervasiveness of the departure

48
Q

In regards to Unmodified Opinions with Other-Matter paragraphs, how are they different from emphasis-of-matter paragraphs?

A

Unmodified Opinions with Other-Matter paragraphs differ from emphasis-of-matter paragraphs in that they refer to a matter NOT in the audited financial statements

49
Q

In what situations would an auditor need to include an other-matter paragraph in an audit opinion?

A

An auditor would need to include an other-matter paragraph in audit opinion in the following situations:

  1. Prior period financial statements not audited by CPA - that is they are reviewed, compiled or there is no CPA

In this situation, an other-matter paragraph is added indicating the nature of CPA association with the prior period financial statements (or indicating that there is no association) - this is for a non-issuer

  1. Opinion on prior period statements different from opinion previously issued

An example, say a company didn’t capitalize a lease in the prior year, so you issued a qualified/modified opinion. Say for the current year, they fixed the PY issue. For the current year, an unqualified/unmodified opinion will be rendered on the PY and CY financial statements since they are comparative.

  1. Prior period financial statements audited by a predecessor auditor
50
Q

What does a predecessor auditor situation entail?

A

A predecessor auditor situation involves, for example, two years of financial statements with a different CPA firm each year

51
Q

What does a group audit situation entail?

A

A group audit situation involves, for example, one year financial statements with two CPA firms involved with that one audit

52
Q

What is Required Supplementary Information?

What is an auditors responsibility for dealing with RSI?

A

Required Supplementary Information is information that is required be included with the basis financial statements by the following accounting standard setting organizations:

  1. FASB
  2. GASB
  3. FASAB (Federal Accounting Standards Advisory Board)

Auditor is required to do the following with RSI:

  1. Inquire of management about methods of preparing information
  2. Compare information for consistency with management response to inquires, basic financial statements, and other knowledge obtained during audit
  3. Obtain written representations from management regarding the RSI
53
Q

In regards to RSI, if an auditor DOES NOT identify likely misstatements from review of the RSI, how should it be reported on an audit opinion?

A

The PCAOB standards DO NOT include any disclosure in this situation for public company audit

The Auditing Standards Board (for non-public companies) requires that an other-matter paragraph be included in the audit report

54
Q

Question:

In May 2023, an auditor reissues the auditor’s report on the 2022 financial statements at a continuing client’s request. The 2022 financial statements are not restated and the auditor does not revise the wording of the report.

What should the auditor do in this situation?

A

The auditor should use the original report date on the reissued report

Note: If the auditor changes the date on the reissued report, then the auditor is saying that they are taking full responsibility for everything through the new date. In this case, they would just use the original issue date

55
Q

When would an auditor dual date an audit report?

A

An auditor would date an audit report when the work is completed. However, if something significant occurs between the completion date and when the financial statements are issued; the auditor would have two dates in this situation, which would be a dual-dated report

In this case, one date covers everything, except for the issue or item cited (which is usually described in a FN) and the second date would cover the item cited or issue only

56
Q

Question:

A financial statement audit report issued for the audit of an issuer (public) company concludes that the financial statements follow…

A

…Generally accepted accounting principles

This is explicitly stated in the opinion paragraph. A publicly traded company in the US issues their financial statements in US GAAP

Note: You don’t say the financial statements follow audit standards (PCAOB)

57
Q

Does an auditor have to include an emphasis-of-matter paragraph in an audit report if the CPA concludes there is substantial doubt about an entity ability to continue as a going concern if it’s adequately disclosed?

A

YES!

The auditor would still have to include an emphasis-of-matter paragraph even if the going concern issue is adequately disclosed

In addition, the emphasis-of-matter paragraph must specially use the following words:

  1. Going concern
  2. Substantial doubt

In this case, the auditor would render an unmodified opinion with an emphasis-of-matter paragraph

58
Q

If there are conditions that cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern and these conditions are INADEQUATELY disclosed, which opinion could an auditor render?

A

In the case where an auditor believes there is substantial doubt about an entity’s ability to continue as a going concern and it is IMPROPERLY disclosed; this is considered to be a GAAP departure

The auditor can express a Qualified or Adverse opinion

59
Q

Question:

An auditor who qualifies an opinion because of an insufficiency of audit evidence should describe the limitations in and basis for modification paragraph

The auditor should also refer to the limitation in the

A

In addition to describing the scope limitation and basis of modification paragraph, the auditor should also include the limitation in the following:

  1. Auditor’s responsibility section - if there is a scope limitation, you’ve got to mention this in the auditors responsibility section because your basically going to be saying that you did an audit and how it was done; except for, what is cited in the Basis for Qualified Opinion paragraph
  2. Opinion paragraph - you have to say “except for the possible effects…” and refer the issue to the Basis for Qualified Opinion paragraph, which precedes the opinion paragraph

Note: Scope limitation would NOT be included in the Notes to the financial statements because those are managements’

60
Q

Question:

What situation would an auditor ordinarily issue an unmodified audit opinion WITHOUT an emphasis-of-matter paragraph?

A

An auditor would issue this type of report when the auditor decides to make reference to the report of an auditor who audited a component of group financial statements

This would be a shared responsibility (between group and component auditors) report and would NOT require an emphasis-of-matter paragraph

Note: Modification of report to set forth a division or responsibility for the audit would be required. However, the audit report would be unmodified WITHOUT an emphasis-of-matter paragraph

61
Q

Question:

An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements.

If the auditor concludes that the financial statements DO NOT require revision, but the client refuses to revise or eliminate the material inconsistency, the auditor may…

A

The auditor may revise the auditor’s report to include a separate other-matter paragraph describing the material inconsistency

62
Q

Assume that a group auditor completed its audit procedures on March 28, 2023 and planned to submit its auditor’s report to the client on April 4, 2023

What date should be on the audit report?

A

The date on the audit report should be the date that the auditor completed the audit including proper review of workpapers.

The actual release date can be a little bit later (but shouldn’t be too much later)

In this case, the date on the audit report should be March 28, 2023

63
Q

Assume a group and component auditor decided to shared responsibility in auditing a parent and subsidiary company and the group auditor decides NOT to assume responsibility for the work of the component auditor

In this situation, who should sign the audit report?

A

The group auditor should be the ONLY CPA firm that signs the audit report

The component auditor DOES NOT sign the audit report, even though the group auditor is not assuming responsibility for the work performed by the component auditor

64
Q

How does an audit report on financial statements prepared using a special purpose financial reporting framework differs from the standard audit report?

A

An audit report on financial statements prepared using a special purpose financial reporting framework is different in the following ways:

  1. The report must include an emphasis-of-matter paragraph alerting users that the financial statements are prepared in accordance with the special purpose financial reporting framework and refer the F/S note that describe the framework
  2. The paragraph should also state that the special purpose framework is a basis of accounting other than GAAP
  3. The paragraph should describe basis being used or refer to the footnote in the financials

Note: The essence of the report is the expression of an opinion as to whether the financial statements fairly present what they purport to present according to the special purpose framework being used (NOT GAAP)

65
Q

What is a comfort letter?

What type of assurance will a CPA provide for these?

A

When a company wishes to issue new securities to the public, the underwriters of the securities will generally ask the company’s auditors to provide “comfort” on the financial and accounting data in the prospectus that is not covered by an accountant’s report of some form

CPAs provide positive assurance that they are independent and that their audit followed SEC standards

CPAs provide an opinion as to whether the audited financial statements comply in form with the accounting requirements of the SEC - positive assurance

CPAs provide negative assurance or a summary of findings on various types of accounting related matters such as the following:

  1. unaudited condensed & summarized interim information
  2. Pro-forma financial information
  3. Change subsequent to the balance sheet date
  4. Various tables of data
66
Q

Question:

Before reissuing the prior year’s auditor’s report on the financial statements of a former client, the predecessor auditor should obtain a letter of representation from who?

A

The predecessor auditor should obtain a letter of representation from

  1. Former client’s management
  2. Successor auditor

The predecessor auditor would want to obtain a letter of representation from both to protect themselves

67
Q

Question:

Compiled financial statements for the prior year presented in a comparative from with audited financial statements for the current year should be clearly marked to indicate their status and

A

Either

  1. The report on the prior period should be reissued to accompany the current period report

OR

  1. The report on the current period should include as a separate paragraph a description of the responsibility assumed for the period’s financial statements

You just have to make it clear that the financial statements are comparable, but the level of service provided is different

68
Q

Question:

In an audit of a non-issuer company, what is an auditors’ responsibility concerning required supplementary information by a designated accounting standards setter?

A

The auditor should apply certain limited procedures to the required supplementary information and report deficiencies in, or omissions of, such information

In regards to required RSI, an auditor:

  1. Has to know that the company has to have it
  2. Has to be satisfied that the information is included
  3. Has to be satisfied that the information is presented in the proper format
69
Q

How should an auditor report the financial statements of a US entity, prepared for inclusion in the consolidated financial statements of its non-US parent, assuming they are prepared in conformity with the accounting principles generally accepted in the parent’s county and are for use only in that country?

A

The auditor may present the financial statements as follows:

  1. A US-style report modified to report on the accounting principles of the parent’s country
  2. The report form of the parent’s country

Note: The auditor CANNOT present the financial statements as a US-style report (unmodified)

70
Q

What would an auditor do if financial information is presented in a printed form that prescribes the wording of the independent auditors’ report, but is not acceptable because it contains statements that are inconsistent with the auditor’s responsibility?

A

In this situation, the auditor would reword the form or attach a separate report

In this case; the auditor WOULD NOT express a qualified opinion with an explanation or limit distribution of the report

71
Q

In what situation would an auditor be required to the financial statements (a complete set or one) when they are only engaged to audit a certain account or specific element or item of a financial statement?

A

An auditor would be required to audit the financial statements (one or a complete set) if the item that the CPA was engaged to audit is dependent on a key financial statement element

For example, if you were engaged to express an opinion on an employee profit participation that is based on net income; you could not express an opinion on the employee profit participation without being satisfied that net income is fairly presented. So you would have to at least audit the income statement to be comfortable with reported net income in order to express your opinion on the employee profit participation in accordance with some type of contract/agreement

Normally, an auditor does NOT have to audit the financial statements when they are engaged to audit only a specific account or element of the financial statements

72
Q

Assume that a CPA has been asked to render an opinion on the application of accounting principles to a specific transaction by an entity that is audited by another CPA, the engaged CPA can accept the engagement to provide an opinion on the specific transaction, but should…

A

The CPA should consult with the continuing CPA to obtain information relevant to the transaction

The idea with this is someone who is not your client calls you and asks how would you handle a certain transaction. If you agree with what the client is doing to properly account for the transaction and the auditors do not agree with it; the client could potentially switch auditors to you.

From a client point of view, this is called opinion shopping. You can accept this engagement, but you must get representations from the client and the auditors + have all the facts. This can’t be done secretly

73
Q

Question:

When unaudited financial statements are presented in comparative form with audited financial statements in a document filed with the Securities and Exchange Commission, such statements should be?

A

The statements should be:

  1. Marked as unaudited
  2. Referred to in the auditor’s report - you would include an other-matter paragraph saying that last year financial statements were unaudited and current years’ were. This other-matter paragraph is needed if there were different services performed for a year and financial statements are presented in comparative form
74
Q

Can an accountant perform a review on forecasted or projection financial statements?

A

No!

An accountant CANNOT perform a review on forecasted or projection financial statements

The accountant can only perform a compilation or examination report on forecasted or projected financial statements

75
Q

In performing which level of service MUST an auditor/accountant be independent?

A

An auditor or accountant must be independent when performing the following services:

  1. Audit
  2. Review (under PCAOB for public companies or Auditing Standards Board for private companies)
  3. Examination
  4. Review (under the attestation standards)
  5. Agreed Upon Procedures
76
Q

What can the subject matter of an attestation engagement be?

A

The subject matter of an attestation engagement may take on the following forms:

  1. Historical or prospective performance or condition (i.e. historical prospective financial information, performance measurements, and backlog data)
  2. Physical characteristics (i.e. narrative descriptions, square footage of facilities)
  3. Historical events (i.e. price of a market basket of goods on a certain date)
  4. Analysis (i.e. break-even analysis)
  5. System or processes (i.e. internal control)
  6. Behavior - (i.e. corporate governance, compliance with laws & regulations, and HR practices)
77
Q

What is an assertion?

Attestation engagements

A

An assertion is a declaration about whether the subject matter is presented in accordance with certain criteria

For example, management might assert that internal control are adequately in place

78
Q

What is criteria?

Attestation engagements

A

Criteria are standards or benchmarks that are used to evaluate the subject matter or the engagements

Criteria used in an attestation engagement should be suitable and available

Suitable criteria should have an appropriate combination of the following characteristics: objective, measurable, complete, and relevant

Criteria should be available in one or more of the following ways:

  1. Publicly
  2. Inclusions - with the subject matter or in the assertion
  3. Inclusion in CPA’s report
  4. Well understood by most
  5. Available only to specified parties (in this case the CPA’s report is restricted to those parties)
79
Q

What are the most important points attestation standards say about financial forecasts and projections?

A

The following are extremely important points relative to the outlined presented in Attestation standard section 301:

  1. An accountant should NOT be associated with forecasts/projections that DO NOT disclose assumptions
  2. Forecasts may be for general or limited use, while projections are for limited use only
  3. Independence is NOT required for compilations
  4. Concerning assurance provided:
    a. Compilation report provides no assurance;
    b. An examination report provides positive assurance with respect to the reasonableness of assumptions
    c. Agreed-upon procedures report provides a summary of findings
80
Q

What is the difference between forecasted and pro-forma financial statements?

A

Forecasted financial statements are “future” oriented based on conditions expected to exist whereas pro-forma financial statements take historical statements (these can be audited or unaudited) and adjusts them for some type of event that hasn’t happened yet

81
Q

What is a Trust Services engagement?

A

Trust Services are designed to provide information system business assurance and advisory services that instill confidence in an organization, system, or other entity by improving the quality or context of information for decision makers

Trust Services view a system as consisting of 5 key components organized to achieve a specified objective:

a. Infrastructure
b. Software
c. People
d. Procedures
e. Data

82
Q

What does a CPA report on when performing a Trust Service engagement?

A

The CPA reports on whether the system meets one or more of the following principles over a particular reporting period:

  1. Security - the system (infrastructure, software, people, procedures, and data) is protected against unauthorized access (both physical and logical)
  2. Availability - the system is available for operation and use as committed or agreed
  3. Processing Integrity - system processing is complete, accurate, timely and authorized
  4. Online Privacy - private information obtained as a result of electronic commerce is collected, used, disclosed, and retained as committed or agreed
  5. Confidentiality - information designated as confidential is protected as committed or agreed
83
Q

When performing a Trust Service engagement, for each principle reported on by the CPA, what are criteria is considered?

A

For each principle reported upon by the CPA, the CPA considers each of the following 4 criteria:

  1. Policies - the entity has defined and documented its policies relevant to the particular principle. These policies are written statements that communicate management’s intent, objectives, requirements, responsibilities, and/or standards for a particular subject
  2. Communications - the entity has communicated its defined policies to authorized users
  3. Procedures - the entity utilizes procedures to achieve the objectives in accordance with its defined policies
  4. Monitoring - the entity monitors the system and takes action to maintain compliance with its defined policies
84
Q

What are the key points related to a Trust Services engagement?

A

The following are key points to consider:

  1. Management ordinarily provides the CPA with a written assertion on the system and the CPA may report either on management’s assertion or the subject matter of the engagement (one or more of the principles). When the CPA reports on the assertion, the assertion should accompany the CPA’s report or the first paragraph of the report should contain a statement of the assertion
  2. If one or more criteria relating to a principle have not been achieved, the CPA issues a qualified or adverse report. If management refuses to provide a written assertion, a disclaimer of opinion is ordinarily appropriate
  3. When reporting on more than one principle, the CPA may issue either a combined report on all principles, or individual reports
  4. Either an examination or an agreed-upon procedures engagement may be performed for a Trust Services engagement
  5. WebTrust and SysTrust (types of trust services that a CPA performs) are designed to incorporate a seal management process by which a seal (logo) may be included on a client’s website as an electronic representation of the practitioner’s unqualified WebTrust report
  6. Trust Service engagements are performed under the provisions of Statements on Standards for Attestation Engagements
85
Q

What is a WebTrust?

A

A WebTrust is one type of Trust Service that a CPA performs

WebTrust provides assurance on electronic commerce (including websites). The CPA is engaged to examine:

a. that a client compiled with the Trust Service criteria (i.e. the company uses procedures in accordance with its defined policies)
b. that it maintained effective controls over the system based on Trust Services criteria (i.e. the company’s procedures are effective)

86
Q

What is a SysTrust?

A

A SysTrust is one type of Trust Service that a CPA performs

SysTrust provides assurance on any defined electronic system. In a SysTrust engagement the CPA is engaged to examine ONLY that a client maintained effective controls over the system based on the Trust Services criteria

87
Q

When an accountant examines projected financial statements, the account’s report should include a separate paragraph that…

A

…describes the limitations on the usefulness of the presentation

This is in reference to the report where an accountant says actual results will differ and we have no responsibility to update

88
Q

What is one unique thing about financial projection examination reports?

A

A financial projection examination report CAN ONLY be for limited distribution use

An accountant can’t do a financial projection examination for general use

89
Q

What is the difference between forecasted and projected financial statements?

A

Forecasted financial statements are “future” oriented based on conditions expected to exist whereas projected financial statements are based on hypothetical assumptions

90
Q

What should a CPA include in a report on a review of pro-forma financial statements?

A

The report should include a reference to the financial statements from which the historical financial information is derived

91
Q

What are the objectives of a CPA’s examination of a client’s management discussion and analysis (MD&A) prepared pursuant to SEC rules and regulations?

A

The following are objectives of a CPA examination of a client MD&A:

  1. The historical amounts have been accurately derived, in all material respects, from the entity’s financial statements
  2. The underlying information, determinations, estimates and assumptions of the entity provide a reasonable basis for the disclosures contained herein
  3. The presentation includes the required elements of MD&A
92
Q

What is a SOC 1 report?

A

SOC 1 reports are RESTRICTED use reports on controls at a service organization relevant to a user entity’s internal control over financial reporting

93
Q

What is a SOC 2 report?

A

SOC 2 reports are RESTRICTED use reports on controls at a service organization related to security, availability, processing integrity, confidentiality, and/or privacy

94
Q

What is a SOC 3 report?

A

SOC 3 reports are GENERAL use SysTrust reports related to security, availability, processing integrity, confidentiality, and/or privacy

This is the ONLY general use reports out of the three types

95
Q

What does pervasive mean?

A

Pervasive means the effects on financial statement of misstatements or possible effects of misstatements that are undetected due to an inability to obtain sufficient appropriate audit evidence

Pervasive effects on the financial statements are those that, in the auditor’s judgment are not confined to specific elements, accounts or items of the financial statements or if so confined, represent or could represent a substantial proportion of the financial statements or in relation to disclosures, are fundamental to users’ understanding of the financial statements

These can also be qualitative (or non-quantitative) factors as well - for example, client left out a footnote that was required/essential for disclosure

96
Q

If a CPA is compiling financial statements and there is a GAAP departure that is material, but the client has correct it; how would the CPA modify the compilation report?

A

In this case, since the client corrected it, the compilation report WOULD NOT be modified. The CPA would issue a standard report

The CPA would only modify the report by adding a separate paragraph discussing the departure ONLY if its material and the client DID NOT correct it

97
Q

If a CPA is compiling financial statements and the following are noted:

  1. Lack of consistency in application of GAAP
  2. Substantial doubt regarding going concern
  3. Both items are NOT properly disclosed

How would the CPA modify the compilation report?

A
  1. If there is a going concern issue and it’s properly cited in the financial statements (footnote disclosure); then the CPA DO NOT have to mention it in the report by adding an additional paragraph. So the CPA may do it; but they don’t have to do it

Contrast this to an audit report; the CPA would have to cite a going concern issue by adding an additional paragraph in the report

  1. However; if there is a going concern issue and your issuing a compilation report with no footnotes; then as long as the CPA is satisfied that there is no intent to mislead and as long as you include the additional paragraph in the compilation report; the CPA does NOT have to mention it.

The CPA may NOT mention it in the report if it’s NOT mentioned in a footnote; which means conceivably, the CPA does NOT have to mention it at all

  1. However, assuming footnotes will be included with the compilation report; if the there is a going concern issue and the client refuses to disclose it; then the report should indicate a departure from GAAP with modification of the report’s 3rd paragraph and addition of an explanatory paragraph
98
Q

If a CPA is engaged to submit to a client a personal financial plan using unaudited personal financial statements and the CPA is anticipating omitting certain disclosures required by GAAP since the sole purpose of the financial statements will be used to develop a personal financial plan. For the CPA to be exempt from complying with SSARS requirements, the client is required to agree to what?

A

In this situation, the client would have to agree that the financial statements will NOT be used to obtain credit

The client would have to agree that the financial will not be given to outsiders; only for the client use. Otherwise, the CPA would be required to attach a compilation report

The CPA could also include a restricted use clause on each page of the financial statement to show that the statements should not be used by 3rd parties

99
Q

What type of reports are issued for compilation and reviews?

A

A CPA only issues a standard or modified compilation and review report

Note that the CPA DOES NOT issue adverse or qualified opinions on compilation and review reports. These opinions are ONLY issued for audit reports

100
Q

If a CPA compiled a private company financial statements and omitted all disclosures required by GAAP and in the next year compiled the financial statements and INCLUDED all required disclosures; if the client wanted to present both year comparatively, what is the CPA responsibility concerning the engagement?

A

The CPA may NOT report on the comparative financial statements become the prior year statements are NOT comparable to the current year statements that include the GAAP disclosures

You may NOT show as comparative where one year has footnotes and the other year doesn’t. Either footnotes have to cover both years or no years

101
Q

What is the difference between analytical procedures in an a review vs. an audit?

A

Analytical procedures in an audit are external and internal vs. internal only for a review

In an audit, if you inquire with management about something, you have to corroborate their explanation with some type of other audit procedure

In a review, if you inquire with management about something; if it’s logical and make sense, then you can accept the client’s explanation. You DO NOT have to corroborate inquiry in a review engagement

102
Q

Can an CPA issue comparative financial statements if a compilation was performed in the prior year and a review performed in the current year?

A

YES!

The financial statements are still comparable, the only difference is the level of service performed. If the CPA wants to issue comparative statements, they would write the standard review report for the current year and add a paragraph stating that the prior year financials were compiled in accordance to SSARS

or…

The financial statements could be issued separately with each separate report

Rule of thumb: Write the report for the current year and add a paragraph to site what was done in the prior year

103
Q

What kind of things can a CPA do which DO NOT require the CPA to submit compiled financial statements?

A

A CPA can do the following WITHOUT having to attach a compilation report with a set of financial statements:

  1. Simply reading or typing client-prepared financial statements
  2. Preparing a working trial balance
  3. Proposing adjusting or correcting entries
  4. Providing a client with financial statement format that does NOT include amount
104
Q

What does the concept of “submitting financial statements” entail?

A

Submitting financial statements is defined as presenting to a client or 3rd parties financial statements that the accountant has prepared either manually or through the use of computer software

A CPA should NOT submit unaudited financial statements of a non-issuer UNLESS, at a minimum, a compilation was performed

While performing a compilation is the minimum service, issuance of a compilation report is ONLY required when 3rd party reliance upon the compiled financial statements is reasonably expected

105
Q

Question:

A CPA began a financial statement audit and was asked to change the engagement to a review because of a restriction on the scope restriction. If there is reasonable justification for the change, should the CPAs review report include a reference to the following?

A

Scope limitation that caused the changed engagement -

No! - in this situation, the CPA thinks that the audit scope limitation was okay; thus they would NOT include it in the review report

Original engagement that was agreed to -

No! - For the same reason as described above the CPA would NOT make reference to this in the review report

In this situation a “step down” in services was performed - going from an audit to a review. You would issue a report for the lower level of service performed (review) and would NOT mention the higher level of service at which you started at.

So a standard review report would be issued with no modification to the report because the CPA was “okay” with the situation that arose to cause the lower level of service to be performed

106
Q

What type of service would an auditor comply with when following Accounting and Review Services committee- Statements on Standards for Accounting and Review Services (SSARS)?

A
  1. An annual review of financial statements of a nonpublic company
  2. A compilation of financial statements of a nonpublic company
  3. A quarterly review of the financial statement of a nonpublic company that annually has a review of its financial statements - since they have the annual review; then the quarterly review is under SSARS
107
Q

What type of service would an auditor comply with when following Auditing Standards Board- Statements on Auditing Standards (AS)?

A
  1. A quarterly review of financial statements of a nonpublic company that has an annual audit
  2. An audit of the financial statements of a nonpublic company
  3. A report on summary financial statement of a nonpublic company
108
Q

What type of service would an auditor comply with when following PCAOB- Auditing Standards?

A
  1. A quarterly review of the financial statements of a public company that has an annual audit
  2. A letter to an underwriter of a public company
  3. An audit of a public company
109
Q

What type of engagement is a compilation?

A

A compilation is considered to be an attestation engagement

AUD (9 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions