Audit Section 4 Flashcards
A client’s fixed asset experienced a significant impairment loss but the client refuses to record the impairment loss in the financial statements.
This is a material departure from GAAP that is neither necessary nor justified by the client. When a misstatement is material but not pervasive, the auditor should issue a qualified opinion.
Refrigerators Inc. changed its estimate for warranty expense from $110 per refrigerator sold in the prior year to $150 per refrigerator sold. This change is properly accounted for and disclosed in the financial statements. The auditor of Refrigerators Inc.
should issue a
The auditor should express an unmodified opinion as the financial statements are fairly stated. A change in warranty expense “estimate” is a change in estimate. Changes in estimate do not require an emphasis-of-matter paragraph.
Under U.S. auditing standards, the auditor expresses an opinion on the financial statements’ conformity with GAAP in the Opinion section and the Management’s Responsibility section that the management is responsible for
the preparation and fair presentation of the financial statements in accordance with GAAP.
An auditor reporting on the audit of financial statements of an issuer should indicate in the Basis for Opinion section that the engagement was conducted in accordance with
PCAOB standards, and should refer to GAAP in the Opinion on the Financial Statements section.
The auditor’s responsibility paragraph of the unmodified opinion audit report explicitly states that an audit includes
identifying and assessing the risks of material misstatement and designing and performing audit procedures responsive to those risks.
When circumstances indicate that a financial presentation in accordance with U.S. GAAP would be misleading, a departure from U.S. GAAP is
permissible. In such cases, the auditor should issue an unmodified opinion because the financial statements are not materially misstated.
Is a basic element of the auditor’s report under U.S. auditing standards
An audit includes evaluating the reasonableness of significant accounting estimates made by management.
“Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.” The statement is
Consistent is implicit in the auditor’s report, and will be explicitly mentioned in an emphasis-of-a-matter paragraph only if there are issues with consistency.
An auditor’s responsibility to express an opinion on the financial statements of a nonissuer under U.S. auditing standards is
Explicitly represented in the Auditor’s Responsibility paragraph.
The auditor obtained sufficient appropriate audit evidence and concludes that misstatements are both material and pervasive to the financial statements.
best describes when an auditor should express an adverse opinion
The opinion paragraph in an adverse opinion should state that
in the auditor’s opinion, because of the significance of the matters) discussed in the Basis for Adverse Opinion section, the accompanying consolidated financial statements do not present fairly…
An adverse opinion is issued when the financial statements are
not presented in accordance with GAAP.
The auditor would explain to the client that in order for the entity’s financial statements to be in conformity with GAAP, there must be
adequate disclosures of all material matters including all financial statements and the supporting footnotes. As a result, the auditor would tell Zag that without adequate disclosure of the entity’s cash flows, the audit report would have to be issued with a qualified or adverse audit opinion.
Inadequate disclosure of a material related party transaction would result in a
qualified or adverse opinion.
“In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion section of our report, the accompanying consolidated financial statements do not present fairly the financial position…” is an example of
An adverse opinion
The auditor should disclose the substantive reasons for expressing an
adverse opinion in a separate Basis for Adverse Opinion section following the Opinion section.
If management does not provide reasonable justification for a change in accounting principles
the auditor would issue a qualified or adverse opinion, depending on materiality.
An auditor may express a qualified or disclaimer of opinion when
due to a scope limitation, the auditor is unable to perform all the tests necessary to complete an audit. Management’s refusal to permit inquiry of the attorneys generally will result in a disclaimer of opinion or withdrawal from the audit.
If a company issues financial statements that purport to present financial position and results of operations but omits the related statement of cash flows, the auditor will normally conclude that the omission requires
qualification of the opinion. Which is an auditor’s opinion that the financials are fairly presented, with the exception of a specified area.
Inadequate disclosure of material information is a departure from GAAP and may result in either a
qualified or adverse opinion, depending on materiality.
The failure of the financial statements to contain adequate disclosure of related party transactions, or other required disclosures, would result in a
qualified or adverse opinion, not a disclaimer of opinion.
When a qualified opinion results from an inability to obtain sufficient appropriate audit evidence, the situation should be described in a
Basis for Qualified Opinion section following the Qualified Opinion section and should be referred to in the Qualified Opinion section. The scope limitation is not mentioned in the Management’s Responsibility paragraph.
Client-imposed restrictions of scope such as those caused by inadequate records would cause the auditor
to choose between issuing a disclaimer of opinion and a qualified opinion.
Since the CPA could not determine whether the suspected illegal bribes were material to the financial statements, or whether senior management was involved in the scheme, Morris should
disclaim an opinion on the financial statements.
When an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that
the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself.
1) A disclaimer of opinion means that the auditor was 2) An unjustified change in accounting principle could result in a
1) unable to obtain sufficient appropriate audit evidence to provide a reasonable basis for an opinion, thus, no opinion is expressed.
2) material misstatement of the financial statements that would result in a qualified or adverse opinion, not a disclaimer of opinion.
Refusal of the client’s attorney to respond to inquiry is an example of
a scope limitation. The auditor must consider the impact of the scope limitation on the audit opinion to be issued.
Due to the significance of the inventory balance, the effects of undetected misstatements could be both
material and pervasive. In this situation, U.S. GAAS allows the auditor to consider whether to withdraw or disclaim an opinion on the financial statements.
Restrictions on the scope of the audit, such as the
timing of the work, the inability to obtain sufficient appropriate audit evidence, or an inadequacy in the accounting records, may require the auditor to qualify or disclaim an opinion. Inability to obtain audited financial statements supporting the entity’s investment in a foreign subsidiary is such a restriction on the scope of the audit.
An auditor may issue a qualified opinion (or a disclaimer, depending on materiality) when
there is a lack of sufficient appropriate audit evidence, or when there are restrictions on the scope of the audit.
When an auditor is not independent with respect to an entity, only a
disclaimer of opinion may be issued.
Management’s refusal to furnish written representations is a significant client imposed restriction on
the scope of an audit, ordinarily warranting a disclaimer of opinion.
The refusal of a client’s attorney to respond to an audit inquiry letter is an example of
a scope limitation. The auditor must use professional judgment in determining whether that scope limitation warrants a qualified opinion or a disclaimer of opinion.
If a contingent liability is probable, but not estimable, and it is disclosed in the footnotes, the auditor should
issue an unmodified opinion.
An auditor would add an other-matter paragraph when
current period financial statements are audited and presented in comparative form with compiled or reviewed financial statements from the prior period or in comparative form with prior period financial statements that were not audited, reviewed, or compiled.
An unjustified accounting change may cause the auditor to issue a
qualified or adverse opinion. A material weakness must be reported to management and those charged with governance, but would not be disclosed in an emphasis-of-matter paragraph added to an otherwise unmodified opinion.
The auditor’s standard report implies that the auditor is satisfied that the
comparability of financial statements between periods has not been materially affected by changes in accounting principles and that such principles have been consistently applied between or among periods. Since the auditor has gathered sufficient evidence about consistency, no reference need be made in the report.
The title and sentences represent an emphasis-of-matter paragraph. An emphasis-of-matter paragraph is required when the
financial statements are prepared in accordance with an applicable special purpose framework, such as the cash basis of accounting. Note that an emphasis of matter paragraph may use the heading of “Emphasis of Matter” or any other appropriate heading.
Following is an example of an appropriate emphasis-of-matter paragraph: “As discussed in Note X to the financial statements, the company changed its method of accounting for income taxes in X2.”
The paragraph should refer to the note in the financial statements that discusses the change in detail.
An emphasis-of-matter paragraph is required to describe a
justified change in accounting principle that is material to the financial statements.
A change in accounting estimate (such as a change in the useful life of a depreciable asset) is accounted for
prospectively and does not affect the comparability of financial statements between periods. Because the auditor’s unmodified opinion implies that consistency exists, no modification to the report is necessary.
A justified lack of consistency caused by a material change in GAAP between periods would be reported in
an emphasis-of-matter paragraph. Under these circumstances, the auditor issues an unmodified opinion.
An other-matter paragraph refers to matters other than those
presented or disclosed in the financial statements that are relevant to the users’ understanding. If the auditor has been engaged to report on more than one set of financial statements that have been prepared in accordance with different report frameworks, the other-matter paragraph may be necessary.
Details concerning the results of audit procedures (such as the results of confirmation of receivables) generally
do not appear in the footnotes.
If a component auditor does not meet the independence requirements that are relevant to a group audit of a nonissuer’s financial statements, then the group engagement team should first attempt to
obtain sufficient appropriate audit evidence relating to the financial information of the component without making reference to or using the work of the component auditor.
“Those statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for X Company, is based solely on the report of the other auditors.”
Such a statement is included in the Opinion section of the auditor’s report.
When the group engagement auditor accepts responsibility for the work performed by a component auditor, the group engagement partner must contact
the component auditor and review the audit program and working papers pertaining to the component.
Under U.S. GAAS, if, among other requirements, the group engagement partner is satisfied as to the
independence and the professional reputation of the component auditor, the group engagement partner may express an opinion on the financial statements taken as a whole without making reference to the audit of the component auditor.
When the group auditor decides not to make reference to the audit of a component auditor, 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. If the component is significant, the component should be audited by the group engagement team or the component auditor.2
If the auditor discovers a material inconsistency in other information accompanying the audited financial statements, the financial statements do not require revision, and the client refuses to eliminate or revise the inconsistency, the auditor should communicate the matter with those charged with governance and then consider
1) revising the report to include a separate “Other Information” section describing the material inconsistency,
2) withholding the use of the report, or
3) withdrawing from the engagement and consulting with legal counsel.
If the quarterly data required by SEC Regulation S-K have been omitted, the auditor’s report must include a
statement indicating that the company has not presented such data.
The auditor should read the “other information” in a client’s document containing audited financial statements to
determine that it is consistent with the audited financial statements.
The auditor would not perform a review or express negative assurance on
supplementary information required by GAAP.
The auditor should perform limited procedures on required
supplementary information accompanying the financial statements. In addition, the auditor’s report on the financial statements should include a separate section with the heading, “Supplementary Information.”
The audit report for nonissuers should include a
separate section with the heading “Required Supplementary Information” when reporting on required supplementary information that is presented with the basic financial statements.
The auditor should inquire of management regarding
the purpose of the supplementary information and the criteria used to prepare the information. This is done in addition to the procedures performed during the audit of the financial statements.
For additional supplementary information required by the FASB, the auditor should apply certain
limited procedures to the information and add a separate section with the heading “Required Supplementary Information” to the financial statement audit report.
If the auditor is unable to obtain sufficient appropriate audit evidence to support an opinion on the supplemental information, the auditor should
disclaim an opinion on the supplemental information. In those situations, the auditor’s report on the supplemental information should describe the reason for the disclaimer and state that the auditor is unable to and does not express an opinion on the supplemental information.
A report on other comprehensive basis of accounting (“OCBOA”) financial statements should include an
emphasis-of-matter paragraph stating the basis, referring to the footnote that describes it, and indicating that it is a non-
GAAP basis.
If information accompanying the basic financial statements has been subjected to auditing procedures, the auditor may include in the auditor’s report on the financial statements an opinion that the accompanying information is fairly stated
All material respects in relation to the financial statements as a whole.
When reporting on financial statements prepared in conformity with a basis of accounting other than GAAP, the auditor should include an
emphasis-of-matter paragraph that states that the special purpose framework is a basis of accounting other than GAAP.
When reporting on financial statements prepared on the same basis of accounting used for income tax purposes, the auditor should include in the report a
paragraph that states that the income tax basis of accounting is a basis of accounting other than GAAP. Examples of an appropriate title for this paragraph are “Emphasis of Matter” or “Basis of Accounting.”
Other comprehensive basis of accounting financial statements include financial statements prepared in accordance with a
regulatory basis of accounting. An income statement prepared in accordance with a regulatory basis of accounting could be entitled “Statement of income-regulatory basis.”
Non-GAAP statements should be suitably titled. For example, instead of an income statement, an appropriate cash basis financial statement title might be
“statement of revenues collected and expenses paid.”
IFRS (the standards promulgated by the International Accounting Standards Board) and GAAP (the standards promulgated by the Financial Accounting Standards Board) are general purpose frameworks. Special purpose frameworks include:
- Cash basis and modified cash basis
- Tax basis
- Regulatory basis
- Contractual basis
- Other basis
A description of how the income tax basis differs from GAAP should be included in the
notes to the financial statements.
The auditor would not indicate in his/her report an opinion as to whether the
method of accounting used is appropriate.
Financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP that are not suitably titled require a
qualified opinion with a basis for modification paragraph.
PCAOB standards surrounding internal control apply only to
audits of issuers.
In an audit of an issuer, the auditor must provide an opinion on
1) Financial Statements
2) The effectiveness of internal control
Under the Sarbanes-Oxley Act, the chief executive officer is required to
certify (or sign off) on all the other items, but is not required to certify the financial expertise of the audit committee. The expected financial expertise of the audit committee is typically verified by the entity’s board.
In order for an auditor to audit and report on a nonissuer’s internal control, management must
present its written assessment about the effectiveness of internal control.
If a service auditor is unable to obtain a written assertion from the service organization’s management regarding its system and the suitability of the design and operating effectiveness of controls, it would be most appropriate for the auditor to
withdraw from the engagement unless prohibited by law.
When planning an audit of the effectiveness of the entity’s internal control in an integrated audit of a nonissuer, a practitioner would be least likely to
consider the evaluation of the operating effectiveness of the controls. The evaluation of the operating effectiveness of controls occurs after the planning stage.
The auditor’s conclusion on the operating effectiveness of a given control is not a role of
the risk assessment process. The auditor’s conclusion on the operating effectiveness of internal control occurs after the risk assessment process.
1) Entity level controls include
2) Controls regarding the company’s annual stockholder meeting are controls related to
1) controls related to the control environment, the risk assessment process, and the policies over risk management practices.
2) a specific event, rather than the entity as a whole.
Controls over the completeness of deposited cash relates to controls
at the account level.
An auditor that is testing controls at a company with multiple business units should test controls over
specific risks at business units that are material to the company’s consolidated financial statements.
In an audit of an issuer, the auditor is required to communicate both
significant deficiencies and material weaknesses to management and the audit committee, but only material weaknesses result in an adverse opinion on the effectiveness of internal control.
The auditor is required to communicate all
deficiencies in internal control to management, and deficiencies that constitute a significant deficiency or a material weakness to management and the audit committee.
The auditor is not required to communicate all
control deficiencies to those charged in governance.
However, control deficiencies that are determined to be significant deficiencies and material weaknesses are required to be communicated to those charged with governance.
A scope limitation requires the auditor to
disclaim an opinion or withdraw from the engagement, and a material weakness in internal control requires the auditor to issue an adverse opinion. Neither situation would result in a qualified opinion.
Negative assurance may be expressed when an accountant is requested
to report on the results of performing a review of management’s assertion.
Management of Eva Industries, an issuer as defined under the Sarbanes-Oxley Act, believes it has eliminated a material weakness previously noted in its assessment of internal control, and has hired Henna and Company, CPAs, to attest to the improvements in internal control.
Eva’s management must provide a written report to accompany Henna and Company’s report.
A CPA should refer to Statements on Standards for Attestation Engagements (SSAE) for a
review of pro forma financial information.
The consistency assertion in an MD&A presentation addresses whether
nonfinancial data has been accurately derived from related records.
A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements (SSAE) when
engaged to provide assurance on investment performance statistics prepared by an investment company on established criteria. SSAE provide guidance on engagements other than reporting on historical financial statements.
The practitioner should refer to Statements on Standards for Attestation Engagements for an attestation engagement. In an attest service, the practitioner is engaged to issue
a report on subject matter or on an assertion about the subject matter (in this case, the square footage of the warehouse), that is the responsibility of a party other than the practitioner (in this case, management).
Attest engagements covered under Statements on Standards for Attestation Engagements (SSAE) specifically exclude services performed
in accordance with Statements on Standards for Accounting and Review Services (SSARS). Since a review of a nonpublic company’s financial statements is conducted under SSARS, it is not subject to attestation standards.
There is no requirement that the accountant’s report be restricted to
specified parties when reporting on an assertion about the subject matter instead of reporting directly on the subject matter.
A report on agreed-upon procedures should include
a list of the procedures performed (or reference thereto) and the related findings.
1) Financial projections are
2) Financial projections are
1) hypothetical, “what if” prospective financial statements. Because the user may need to ask the responsible party questions about the underlying assumptions
2) “restricted use” reports, whose use is restricted to the responsible party and those third parties with whom the responsible party is negotiating directly.
When a CPA examines projected financial statements, the standard report should include
a statement that the examination “… included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the projection.”
Prior to the issuance of the practitioner’s report, the engaging party (normally the client) must acknowledge and agree that
the procedures performed were appropriate to meet the intended purpose of the engagement.
A report on agreed-upon procedures should include a
disclaimer of responsibility for the sufficiency of the procedures.
A practitioner’s report on agreed-upon procedures that is in the form of procedures and findings should contain a statement that the
subject matter is the responsibility of the responsible party.
Mill’s report on these agreed-upon procedures should include a
description of the procedures performed and Mill’s findings.
It is appropriate to include a description of the
1) procedures performed
2) related findings
3) materiality thresholds in the practitioner’s report in an agreed-upon procedures engagement.
A practitioner should include
all findings from the application of the agreed-upon procedures in an agreed-upon procedures report.
financial statements is(are) appropriate for general use
A financial forecast is appropriate for general use, but a financial projection is not.
Any type of prospective financial statements (financial forecasts and financial projections) would normally be
appropriate for limited use.
An accountant performing an engagement to compile prospective financial statements should make
inquiries about the accounting principles used in the preparation of the prospective financial statements.
Accepting an engagement to compile a financial projection for a nonissuer most likely would be
inappropriate if the projection were to be distributed to all stockholders of record as of the report date (general use). Only a financial forecast is suitable for general use.
Financial projections are appropriate only for
limited use. Limited use means that the financial statements will only be used by the responsible party alone or by parties negotiating directly with the responsible party (the issuing company).
An accountant’s standard report on a compilation of a projection does not include
a statement that the hypothetical assumptions used in the projection are reasonable in the circumstances.
The date of the agreed-upon procedures report is ordinarily determined by
the completion of the agreed-upon procedures.
When an accountant accepts a compilation engagement, he or she should indicate that it is
limited in scope and would not include an opinion or assurance on the projected financial statements or the related assumptions.
Whenever an accountant reports on prospective financial statements, the report should
include a caveat that prospective results may not be achieved.
A compilation of prospective financial statements is not intended to provide
assurance on the prospective financial statements or the assumptions underlying such statements.
An examination report on prospective financial statements states that the
prospective results might not be achieved.
When performing an attestation engagement related to a client’s prospective financial statements, the accountant should ensure
that the client discloses all significant assumptions that are used for the prospective financial statements.
A compilation of a financial projection report describes the limitations on
the usefulness of the projection by including a caveat that the prospective results may not be achieved.
If one or more of the significant assumptions do not provide a reasonable basis for the financial statements
an adverse opinion would be issued.
This is included in a separate paragraph that describes the limitations on the usefulness of the presentation: “..there will usually be differences between the forecasted and actual results… [that] may be material.”
The accountant’s standard report on an examination of projected financial statements should include a caveat that the projected results may not be achieved.
A practitioner may perform an agreed-upon procedures engagement on projected financial statements provided that the projected financial statements include a
summary of significant assumptions.
All reports on prospective financial statements require a statement indicating that the
prospective results may not be achieved.
A review of pro forma financial information provides limited assurance about the
effect of a future or hypothetical event (in this case, a change in capitalization) by showing how it might have affected the historical financial statements if it had occurred at an earlier date.
A presentation of pro forma financial statements should include all
significant direct effects related to the transaction. The presentation does not need to include indirect effects related to the transaction.
The accountant’s report on a review of pro forma financial information should include a reference to
the financial statements from which the historical information is derived and a statement as to whether such financial statements were audited or reviewed.
An accountant has been engaged to examine pro forma adjustments that show the effects on previously audited historical financial statements due to a proposed disposition of a significant portion of an entity’s business. Other than the procedures previously applied to the historical financial statements,
The accountant should evaluate the pro forma adjustments, but need not reevaluate the entity’s internal control over financial reporting.
Negative assurance, not an opinion, may be rendered in an engagement in which the auditor is reporting
on compliance with aspects of contractual agreement in connection with audited financial statements.
If the auditor issues a report on compliance with contractual agreements in connection with the audit of financial statements, the report should include a
reference to the specific covenants of the contractual agreements. This is required in cases of compliance or noncompliance.
The purpose of examination procedures applied to compliance requirements is for the practitioner to
accumulate sufficient evidence regarding an entity’s compliance with specified requirements to allow for the practitioner to issue an opinion with reasonable assurance.
Representations from management regarding compliance with specified requirements must be
in writing. Oral representations are not sufficient.
Compliance attestation standards apply for an examination of a client’s compliance with specified requirements
such as debt covenants associated with a bank loan. In addition, examination engagements fall under attestation standards.
As risk of material noncompliance increases, detection risk of noncompliance should
decrease to reach a desired level of overall audit risk of noncompliance. This concept is identical to the relationship between risk of material misstatement and detection risk.
Tests of the operating effectiveness of controls may be required if any one of the following exist:
- The risk assessment includes an explanation of the operating effectiveness of controls over compliance,
- Substantive procedures do not provide enough evidence to support a conclusion, or
- Tests of controls are required by the applicable governmental audit requirements.
Generally Accepted Government Auditing Standards primarily apply to
audits of federal financial assistance and government organizations but have been adopted by some states for audits of state financial assistance and other governmental funding.
An auditor of a government entity may use a specialist on the engagement.
The use of specialists is permitted under GAAS. GAAS and GAGAS are the sources of standards for governmental audits.
Presumptively mandatory indicates that the requirement must be followed in all cases where the requirement is relevant, except in
rare circumstances in which auditors and audit organizations determine it is necessary to depart from the presumptively mandatory requirement. If, in rare circumstances, auditors judge it necessary to depart from a relevant presumptively mandatory requirement, they must provide a special explanation, which includes their justification for the departure and how the alternative procedures performed in the circumstances were sufficient to achieve the intent of that requirement. Generally accepted government auditing standards uses the term “should” to describe presumptively mandatory items.
Government Audit Standards define three types of engagements
1) financial audits
2) Attest engagements
3) performance audits.
An auditor who identifies a potential fraud that is significant within the context of the audit under generally accepted government auditing standards would most appropriately respond by
first extending audit procedures as necessary to determine whether fraud has occurred.
If the entity does not have adequate documentation to support $5 million in operating expenses paid from federal program funds, then the auditor would conclude that questioned costs of $5 million for operating expenses have been identified.
This will appear on the schedule of findings and questioned costs for federal awards.
Government auditing standards require a
written report on internal control in every audit.
The report on the audit of financial statements should describe
the scope of the auditor’s testing of compliance with laws and regulations and internal control over financial reporting, and present the results of those tests.
The auditor will not express an opinion on the
effectiveness of internal control over compliance.
Documentation of conclusions for an opinion would not be appropriate.
When auditing an entity’s financial statements in accordance with Government Auditing Standards, an auditor is required to report on the
scope of the auditor’s testing of internal control, but not on noteworthy accomplishments of the program.
Auditors should report on the
scope of their testing of compliance with laws and regulations and of internal controls.
A concurrent opinion on the financial statements taken as a whole is
not a required part of the auditor’s report.
Per Government Auditing Standards, audit documentation should contain
sufficient information so that supplementary oral explanations are not required.
Government Auditing Standards require that the auditor issue a written report on internal control in all audits. As part of this reporting requirement, the auditor must describe the
scope of the auditor’s work in obtaining an understanding of internal control and his or her assessment of control risk.
Basic elements of a report on compliance include a statement that the audit should be
planned to obtain reasonable assurance about whether noncompliance could have a material effect on the programs audited.
The audit opinion states that the audit was conducted in order to
express an opinion on compliance but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance.
The auditor’s report on compliance and on internal control over financial recording (based on an audit) must include
the scope of testing of compliance and internal control.
The auditor does not express an opinion on the
effectiveness of internal control over compliance.
Materiality limits would not contribute to that nonexistent objective.
The auditor’s report either asserts that there are
no findings or references a separate schedule of findings, which includes disclosure of material instances of fraud and illegal acts.
When reporting under Government Auditing Standards, the auditor should consider
whether any noted deficiencies in such internal controls should be reported to specific legislative and regulatory bodies.
Material instances of fraud and illegal acts discovered need to be communicated in the
auditor’s report on compliance. If applicable, the report should state that other instances of noncompliance were communicated to management in a separate letter.
Under Government Auditing Standards (GAS), the auditor has an
additional responsibility to communicate fraud to individuals contracting for or requesting the audit.
The auditor should obtain written representation that management has
responsibility for understanding and complying with compliance requirements.
The management letter will include
identification of management’s interpretation of compliance requirements that are subject to different interpretations.
The risk-based approach of the Single Audit Act is designed to focus the auditor’s tests of
federal financial assistance on the programs with the highest risk.
Under the Single Audit Act, materiality is determined
separately for each major federal financial assistance program.
A nonfederal entity that expends federal financial assistance administered by another entity is a
sub recipient. For example, a state might receive federal funds and in turn provides those funds to a not-for-profit organization to accomplish an objective (e.g., mental health care, homeless relief, etc.). The not-for-profit organization would be the sub recipient.
A cognizant agency for the audit is typically the
federal awarding agency that provides the most amount of direct funding to a nonfederal entity.
If material instances of noncompliance are identified, the auditor should
express either a qualified or adverse opinion on compliance.
A preparation engagement is considered a
non-attest engagement.
An accountant should establish an understanding with management, and when appropriate those charged with governance, regarding the
services to be performed for the preparation engagement. This should be documented in an engagement letter.
Preparation engagements should be performed in accordance with
Statements on Standards for Accounting and Review Services.
One of management’s responsibilities in a preparation engagement is for the
accuracy and completeness of the accounting records, which includes the accuracy of significant judgments provided to the accountant who has been engaged to prepare the financial statements.
If an accountant is unable to include a statement indicating that “no assurance is provided” on each page of the financial statements in a preparation engagement, then the auditor should either
issue a disclaimer that makes clear that no assurance is provided on the financial statements, perform a compilation engagement, or withdraw from the engagement.
If management will not allow a statement to be included on each page of the financial statements indicating that no assurance is provided, it would be appropriate for the accountant to issue a
disclaimer making it clear that no assurance is provided. The accountant could also choose to instead perform a compilation engagement or withdraw from the engagement altogether.
An accountant is precluded (prevented) from preparing financial statements that omit substantially all disclosures when the accountant becomes aware that the omission was undertaken
with the intent to mislead users of the financial statements.
For a preparation engagement, management takes responsibility for the completeness of information.
Accountants are not required, but may, make
inquiries to verify the completeness of the information provided by the client.
An engagement letter should be included in the
documentation of a preparation.
In a compilation engagement, the accountant should
read the financial statements for obvious material misstatements.
Financial statements compiled by an accountant should be accompanied by a
report stating that the financial statements have not been audited or reviewed
A compilation cannot be relied upon to disclose errors, fraud, or illegal acts. Because a compilation is
not an assurance engagement, a compilation engagement does not require the accountant to verify the accuracy or completeness of the information provided by management or otherwise gather evidence to express an opinion or conclusion on the financial statements.
The accountant’s report includes a statement that the accountant is not required to
perform any procedures to verify the accuracy or completeness of the information provided by management.
In compilation and review engagements, the accountant is not required to
specifically assess fraud risk or to perform procedures designed to detect material misstatements due to fraud or noncompliance with laws and regulations.
A compilation provides the
least amount of assurance because it provides no assurance.
In order to compile a nonissuer’s financial statements, the accountant should obtain an
understanding of the client’s transaction types and frequency of transactions.
The study of relationships among financial statement elements is part of
performing analytical procedures. The auditor is not required to perform analytical procedures as part of a compilation engagement.
During a compilation engagement, if the accountant believes that the financial statements are materially misstated, then the accountant should
obtain the additional or revised information needed to correct the financial statements.
Compiled financial statements should be accompanied by a report stating that the compilation was conducted in accordance with
SSARS promulgated by the Accounting and Review Services Committee of the AICPA.
The accountant’s compilation report should state that the accountant does not express an
opinion, a conclusion, nor provide any form of assurance on the financial statements.
A compilation of financial statements is not an assurance engagement, therefore the report does not provide any
opinion or conclusion on the financial statements. The report of a compilation engagement indicates that management is responsible for the financial statements and that the accountant does not express an opinion or conclusion, nor does it provide any form of assurance on the financial statements.
The accountant’s report in a compilation engagement should include a statement that the accountant was
not required to perform any procedures to verify the accuracy or completeness of the information provided by management.
Documentation provides the support that the accountant compiled with
SSARS when performing the compilation engagement. SSARS does not require internal control procedures, such as review of segregation of duties, to be performed in a compilation engagement.
Financial statements of a nonissuer that have been compiled should be accompanied by
a report explicitly stating that the accountant does not express an opinion and stating that the accountant has not audited or reviewed the financial statements.
A standard compilation report implies that substantially all disclosures required by GAAP are
included in the financial statements.
When an accountant compiles a client’s financial statements accompanied by supplemental information, the accountant’s separate report on the supplemental information should include a
statement that the information has been compiled from information that is the representation of management without audit or review.
SSARS does not require that the compilation report be
printed on the accountant’s letterhead, nor does it require a manual signature. Although a signature is required, it need not be manual. Also, the report may be presented in the accountant’s letterhead, but is not required.
The standard compilation report includes a disclaimer, indicating that the accountant
does not express an opinion, a conclusion, nor provide any assurance with respect to financial statement presentation. When substantially all disclosures are omitted, the report should also include a paragraph disclosing such omissions and stating that if the omitted disclosures were included, they might influence the user’s conclusions.
The accountant may compile financial statements that omit substantially all disclosures provided that:
- The accountant’s report clearly indicates the omission by including an additional paragraph disclosing such omissions.
This paragraph should state that if the disclosures were included, they might influence the user’s conclusions, and should indicate that the financial statements are not designed for those who are uninformed about the omitted disclosures; and - In the accountant’s professional judgment, the financial statements would not be misleading to users.
West, CPA, is engaged to compile the financial statements of Lake Co., a nonissuer. Lake’s financial statements are prepared in conformity with the cash basis of accounting. If Lake’s financial statements do not disclose the basis of accounting used
West should disclose the basis of accounting used in West’s compilation report.
An accountant who is not independent with respect to an entity may compile
financial statements for such an entity and issue a report. However, the last paragraph of the report should disclose this lack of independence. The accountant is permitted, but not required, to disclose the reason(s) for the lack of independence.
If the accountant is not independent, he should
specifically disclose the lack of independence.
Otherwise, independence is implied.
Financial statements reviewed by an accountant should be accompanied by
a report stating that a review is substantially less in scope than an audit.
An accountant’s report on a review of the unaudited financial statements of a nonissuer should provide
limited assurance on the financial statements by stating that the accountant performed procedures to obtain limited assurance that there are no material modifications that should be made to the financial statements.
Performed by the accountant during a review engagement of a nonissuer in accordance with Statements on Standards for Accounting and Review Services
A. Inquiring about actions taken at meetings of the board of directors that may affect the financial statements.
B. Issuing a report stating that the review was performed in accordance with Statements on Standards for Accounting and Review Services.
C. Reading the financial statements to consider whether they conform with generally accepted accounting principles.
A review provides limited assurance that there are
no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles, whereas a compilation provides no assurance.
In reviewing the financial statements of a nonissuer, the accountant’s first step would be to
obtain a general understanding of the entity’s organization, its operating characteristics, and its products or services.
The accountant is not required to
evaluate control risk or test the operating effectiveness of controls in a review of a nonpublic entity’s financial statements.
Before performing a review of a nonissuer’s financial statements, an accountant should obtain a
sufficient level of knowledge of the accounting principles and practices of the industry in which the entity operates.
In a review of a nonissuer’s financial statements, an accountant should inquire about
the existence of related party transactions.
A CPA usually performs inquiry of management, including inquiring about
restrictions on the availability of cash balances, when reviewing the financial statements of a nonissuer.
In a review engagement, the accountant is required to obtain
a representation letter from management.
If the review report on the current period includes a separate paragraph describing the responsibility assumed for the prior period’s financial statements, the additional paragraph should explicitly state
that no audit procedures were performed subsequent to the previous period’s audit.
If the accountant concludes that the financial statements contain material misstatements, the review report should
be modified to include either a qualified (material but not pervasive issue) or adverse (material and pervasive issue) conclusion.
An accountant should add an other-matter paragraph in the review report when the accountant considers it necessary to communicate a matter that
is not presented or disclosed in the financial statements.
Since there is appropriate disclosure regarding going concern, and the entity’s ability to continue as a going concern for a reasonable period of time has been alleviated by management’s plans, Baker is
not required to modify the accountant’s review report. Baker may, however, choose to emphasize this issue in the report.
Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant is required to
compare the prior year’s financial statements with those of the current year.
Unaudited financial statements for the prior year presented in comparative form with audited financial statements for the current year should be clearly marked to indicate their status and
I. The report on the prior period should be reissued to accompany the current period report.
Il. The report on the current period should include as a separate paragraph a description of the responsibility assumed for the
prior period’s financial statements.
When the prior period has been audited, the accountant should issue the current period compilation or review report, and any additional paragraph should indicate:
- That prior period statements were audited;
- The date of the previous reports);
- The opinions expressed, and, if other than unmodified, the reasons for the modification; and
- That no auditing procedures have been performed since the previous report date.
Because comparative financial statements are being reported, and last year’s audit engagement included a scope limitation on the audited financial statements, Hart should include a
separate paragraph in the review report outlining the substantive reasons for the client’s qualified report.
When audited financial statements are presented in comparative form with compiled financial statements from a prior year, the auditor should either
reissue his or her report on the compiled statements or include a separate paragraph in the current year report describing the responsibility assumed for the compiled statements.
When unaudited financial statements are presented in comparative form with audited financial statements in documents filed with the SEC, such statements should be clearly marked as
“unaudited,” but should not be referred to in the auditor’s report. The statements need not be withheld until audited.
Failure to return records to a client after the client makes a demand is considered to be an act
discreditable to the profession, and as such violates the profession’s ethical standards.
A CPA must always be objective; however
a CPA need not be independent, except when engaged in public practice
A distinguishing mark of a profession is its
acceptance of responsibility to the public.
The AICPA code of professional conduct governs any service that a member of the AICPA performs including
compilations and reviews.
Professional engagement exceeds the CPA’s personal competence.
Exercise of due care dictates consultation or referral when a There is no requirement to obtain specialty accreditation.
Control that a member can exert over the investment. While it is still not desirable to even own shares in a nonclient regulated mutual fund that has investments in the client company, this answer choice is the best given the choices. The member does not control which stocks the mutual fund is investing in.
According the Independence Rule of the Code of Professional Conduct, independence is impaired based on control or the appearance of
Any direct financial interest in a client
impairs independence, even if it is immaterial.
Is it acceptable for Bingham to join the board of directors of a local bank where several of Bingham’s clients have savings accounts.
It would be acceptable
The manager may participate in an audit of a period that begins after his or her employment and disassociation with the client.
Therefore, an audit covering a period beginning November 1, Year 1, is acceptable because the manager completed disassociation from the company on September 1, Year 1. This engagement was not awarded until after the manager was disassociated.
CPA’s spouse, parent, child, sibling, etc. are employed by the client in a position that is audit sensitive (i.e., internal auditor, cashier, accounting supervisor, etc.).
Independence of a member is impaired
A member’s independence is impaired if a member has a
Loan with a client and that loan is preferential in relationship to “other borrowers.” Since this loan was fully secured and there was no indication of a “preference,” it appears to be in the ordinary course of business. Furthermore, the CPA was no longer a debtor of the financial institution at the time of the audit engagement.
The Independence Rule of the Code of Conduct requires that members be independent in audits and attestation services. Independence is impaired if an auditor is an
employee of an audit client or is able to make management decisions on behalf of an audit client. An advisor of an audit client’s board of directors is not an employee, nor is the advisor able to make management decisions for the audit client. The advisor does not make decisions, the advisor simply gives advice that the client is free to accept or reject.
A CPA may perform non-attest services for a client and still be independent if the CPA does not serve, or appear to serve, as a
member of client’s management. As making payments from a client’s restricted account and having signing authority and control over such account appear to be duties of management, this would impair the independence of the CPA.
With regard to business relationships, independence is impaired if the
member is an employee of an attestation client or is able to make management decisions on behalf of the client. Independence would, therefore, be impaired if a CPA contracted with the client to supervise the client’s office personnel (e.g., in the performance of normal recurring activities).
Examples of activities with an attestation client that impair independence would include
bookkeeping activities that include authorizing, executing or consummating a transaction on behalf of a client or preparing source documents or originating data (e.g., purchase orders).
The AICPA Code of Professional Conduct’s general standards include
professional competence, due professional care, planning and supervision, and sufficient relevant data. Internal control is not one of the general standards.
The General Standards Rule of the AICPA Code of Professional Conduct states that the auditor must have
adequate technical training as an auditor.
According to the Independence Rule of the Code of Professional Conduct, a member’s independence is impaired with respect to a client who is more than .
one year overdue in the payment of professional fees. An attestation engagement, such as an audit, requires independence of mind and in appearance. Fees from prior work must be paid in full before the issuance of a report on the following year’s work
The Accounting Principles Rule of the Code of Professional Conduct of the AICPA states that if the financial statements or data contain a GAAP departure
1) the departure may be justified if the CPA can demonstrate that due to unusual circumstances, such as new legislation or the evolution of a new form of business transaction, the financial statements would otherwise be misleading.
2) Under these circumstances, the auditor’s report should describe the departure, its approximate effects, if practicable, and the reasons why compliance with the generally accepted principle would result in a misleading statement.
Fees are not regarded as being contingent when they are
- Fixed by courts or other public authorities or in tax matters, if they are based on the results of court proceedings or the findings of governmental agencies. 2. Further, contingent fees are permitted for compilations only if the member includes a statement that the member is not independent.
Contingent fee arrangements
impair the auditor’s independence.
An ethics ruling related to the Confidential Client Information Rule states that it is
permissible for a member to disclose the name of a client without the client’s consent unless the disclosure of the client’s name results in the release of confidential information.
According to the Advertising and Other Forms of Solicitation Rule
advertising that is not false, misleading or deceptive is permitted by the CPA.
The Code of Professional Conduct provides that a CPA may not
1) Commit a discreditable act
2) Retaining a client’s records after a demand for their return has been ruled to be a discreditable act.
Designating itself as CPAs when not all of its owners are CPAs is
acceptable and acceptable to use the names of one or more past owners.
Providing extensive advisory services for a client.
The CPA’s role here is merely as an advisor. Activities would most likely not impair a CPA’s independence.
