Chapter 1 Flashcards
What is the most authoritative level of auditing guidance for audits of nonissuers?
General guidance provided by a Statement on Auditing Standards
The GAAS Hierachy includes:
1 being the most authoratative
1 being the most authoritative level and 3 being the least authoritative level
- SAS (Nonissuers) and PCAOB AS (Issuers)
- Interpretative Publications
- Other Auditing Publications
SAS -Statement on Auditing Standards
PCAOB AS - Public Company Accounting Oversight Board Auditing Standards
Differentiate between Auditing Standards vs. Auditing Procedures
Auditing Standards relate to the quality of the performance opposed to Auditing Procedures that relate to acts performed
Describe Generally Accepted Auditing Standards (GAAS)
Measures of the quality of the auditor’s performance
True or False?
Something issued by the Auditing Standards Board (ASB) are always Generally Accepted Auditing Standards (GAAS)
False
True or False
The Statement of Auditing Statements (SAS) are considered interpretations of Generally Accepted Auditing Standards (GAAS)
True
Does an auditor of a nonissuer conduct an audit in accordance with ASB Standards or PCAOB Standards or both?
Both; An auditor of a nonissuer must conduct the audit in accordance with ASB Standards. They may also choose to follow PCAOB standards too.
What does “U.S. Generally Accepted Accounting Principles” mean?
Conventions, rules, and procedures necessary to define U.S. accepted accounting practice at a particular time due to GAAP changes over time
What is the relationship between AICPA and SAS?
The AICPA Provides Statements on Auditing Standards which relate to proper performances of a financial statement audit
What term indicates a presumptively mandatory requirement?
Presumptively having a reasonable basis for belief or acceptance; likely to be true
Should
What terms indicate an explanatory material?
May, Might, Could
What term indicates an unconditional requirement?
Must
When is professional judgement exercised?
When the words, “may”, “might”, and “could” are used to describe actions and procedures, auditors have a responsibility to consider for further understanding.
What is professional skepticism?
An attitude that the auditor must apply when making professional judgements that provide a basis for the auditor’s actions for the critical assessment of audit evidence (i.e., a questioning mind that may indicate possible misstatement due to error or fraud for critical assessment of audits)
“I trust you, but let’s verifiy”
Responsibilities of an Auditor:
- Appropritate competence and capabilities to perform audit
- Maintaining professional skepticism and exercising professional judgement throughout audit
- Complying with releveant ethical requirements
What is an auditor’s responsibility regarding financial statements?
Express an opinion on the financial statements based on an audit
Does this show professional skepticism?
Adopt an attitude of acceptance unless evidence indicates otherwise.
No
Does this show professional skepticism?
Assess the entity’s document-retention controls before using documents as audit evidence
No
Does this show professional skepticism?
Consider the reliability of information to be used as audit evidence
Yes
Does this show professional skepticism?
Authenticate documents used as audit evidence
No
True or False
Auditors may conduct the audit in accordance with both GAAS and Government Auditing Standards
True and they should add additional language to the Basis for Opinion paragraph
What is required of an auditor in obtaining a reasonable level of assurance about whether the financial statements are free from material misstatement, whether due to error or fraud?
Hint: what you do day-to-day
- Plan the work and properly supervise
- Determine and apply appropriate materiality levels
- Identify and assess risks of material misstatements whether due to error or fraud
- Obtain sufficient appropriate audit evidence
What term identifies a requirement for audit evidence?
Sufficient Appropriate Audit Evidence
True or False?
Auditing Standards can use the words adequate and disconfirming to describe requirements for audit evidence
False
What term describes the type of assurance gained by the auditor as the basis for the opinion?
Reasonable
Opinions for Financial Statment Issues
- Qualified Opinion
- Adverse Opinion
Opinions for Auditing Issues
- Qualified Opinion
- Disclaimer Opinion
Opinion for Financial Statments that are materially correct?
Unmodified (Nonissuer) or unqualified opinion (Issuer)
What is this opinion?
Auditing Issues that are material and pervasive are…
Disclaimer of Opinion
What is this opinion?
Financial Statements that are material and pervasive are…
Adverse
What is this opinion?
Auditing Issues and Financial Statement Issues that are material and not pervasive are…
Qualified
An auditor forms an opinion on the financial statements and considers….
whether the financial statements are prepared, in all material respects, in accordance with requirements of the applicable financial reporting framework
What is the first step to consider as an auditor asked to express an opinion on all periods presented?
For example, if comparative information is presented in a nonissuer’s financial statements.
Determine prior periods meet the requirements of the applicable financial reporting framework
What are modified opinions?
- Qualified Opinions
- Adverse Opinions
- Disclaimer of Opinions
What is the emphasis-of-matter paragraph?
Use when CAP
A paragraph used when referring to a matter that is appropriately presented or disclosed in the financial statements that is fundamental to the users’ understanding of the financial statements
Emphasizing a matter that is already disclosed in FS
Auditor’s phrase for an audit report of a nonissuer when expressing a qualified opinion in the opinion section
(For example, on the financial statements there is an inadequate disclosure that is material but not pervasive)
“Except for”
Auditor’s phrase for an audit report of a nonissuer when expressing an adverse opinion in the opinion section
(For example, on the financial statements there is an inadequate disclosure that is material and pervasive)
“Do not present fairly”
What would the expression of opinion be?
Scenario: Management refuses to allow the auditor to contact legal counsel
Disclaimer or Opinion or withdrawal from the audit
What would the expression of opinion be?
Scenario: A publicly held company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows
Qualified Opinion
When an auditor of a nonissuer expresses an adverse opinion, the opinion section should include:
A direct reference to a separate section disclosing the basis for the opinion
Which section includes a list of substantive reasons for the financial statements being incorrect or misleading?
The Basis for Adverse Opinion Section
Based on this sentence phrasing, what would the opinion be?
“In our opinion, because the significance of the matter discussed in the…the accompanying consolidated financial statements do not present fairly”
Adverse Opinion
Based on this phrasing, what would the opinion be?
“Because of the significance of the matters described in the…we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these financial statements”
Disclaimer of Opinion
Based on this phrasing, what would the opinion be?
“In our opinion, except for the omission of information described in the…of our report”
Qualified Opinion
Which section indicates the nature of the engagement of the financial statements covered in the audit for a nonissuer?
Opinion Section
Which section indicates references to GAAS, auditor independence, and states whether or not the auditor believes sufficient appropriate evidence was obtained to provide a basis for the auditor’s opinion?
The Basis for Opinion
True or False?
There is a scope paragraph in a nonissuer audit report
False
Which section references a matter that is appropriately presented or disclosed in the financial statements and is such of importance that it is fundamental to the users’ understanding of the financial statements?
Emphasis-of-matter Paragraph
Consistent application of accounting principles for a nonissuer are presented implicitly or explicitly?
Implicitly
Consistent application of accounting principles for a nonissuer are presented implicitly or explicitly?
Implicitly
Examination of evidence on a test basis for a nonissuer is presented implicitly or explicitly?
Explicitly
What is the earliest date for an auditor’s report?
No earlier than the date on which the auditor has obtained sufficient appropriate audit evidence to support the opinion
What is the basic element of the auditor’s report under U.S. Auditing Standards?
Evaluating the reasonableness of significant accounting estimates made by management
Statement
How are the management’s responsibility and auditors responsibility related in terms of representation statements in an auditor’s report for a nonissuer?
They are both stated explicitly
Which sections in the auditors report refer to GAAS?
Auditor’s Responsibility and The Basis for Opinion
Statement: We identify and assess the risks of material misstatement if the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks.
What opinion is being expressed?
An unmodified opinion
True or False?
An auditor’s report for an issuer should include references to PCAOB standards and GAAP.
True
True or False?
Language that could be viewed as disclaiming, qualifying, restricting, or minimizing the auditor’s responsibility for the critical audit matters is not appropriate and may not be used.
True
True or False?
An auditor may issue a qualified opinion under both circumstances: lack of sufficient appropriate evidence and restricition of the scope of the audit
True
True or False
Refusing to acknowledge management responsibility for the fair presentation of the financial statement in conformity with GAAP poses a scope limitation sufficient to preclude an unmodified opinion
True
What is a limitation of this audit?
Scenario: Inability to obtain audited financial statements supporting the entity’s investment in a foreign subsidiary.
Restricition on the scope of the audit (e.g. timing of work, inability to obtain sufficient appropriate audit evidence, inadequacy in the accounting records, etc.) that may require the auditor to qualify or disclaim an opinion
When an auditor of a nonissuer qualifies his or her opinion because of a scope limitation, how should the wording be in the opinion paragraph?
Includes “except for” language
The opinion paragaph should indicate that the qualifications pertains to the possible effects on XYZ not to the scope limitation itself
True or False?
An unmodified opinion implies consistency exist
True
True or False
A prospective change does not affect comparability of financial statements
True
What additional parapgraph does a change in accounting principal require?
Emphasis-of-matter because this type of change affects consistency or comparability of the financial statements
True or False?
An unmodified opinion with an emphasis-of-matter paragraph would only be acceptable if the accounting change were unjustified
False; only justified
True or False?
An emphasis of matter paragraph may use the heading of “Emphasis of Matter” or any other appropriate heading
True
When is an other-matter parapgraph neccessary?
When matters other than those presented or disclosed in the financial statements are relevant to the users’ understanding
When is an explanatory paragraph required to be included in the auditor’s report?
When there is substantial doubt about the entity’s ability to continue as a going concern
Group auditor ___________ for the work
Assumes responsibility
If a group auditor assumes responsibility for the work, they also do what?
Determine the type of work to be performed
Before reissuing the prior year’s auditor’s report on the financial statements of a former client, the auditor should….
4 requirements
- Read the financial statements of the current period
- Compare the prior-period information that the auditor reported on with the financial statements to be presented for comparative purposes
- Obtain a letter of representation from the successor auditor
- Obtain a letter of representation from the former client’s management.
Difference between recognized subsequent events and nonrecognized subsequent events
Recognized subsequent events are underlying events existing at or before the balance sheet date
(Accrue and Disclosure)
Nonrecognized subsequent events are underlying events occurring after the balance sheet date
(Disclosure only)
True or False
Subsequent to the issuance of the auditors report, the auditor should determine when there are persons relying or likely to rely on the financial statements who would attach importance to the information.
True
Fill in the blank
The auditor should perform ………procedures on required supplementary information
Limited
Examples of Special purpose framework
Cash and Modified Cash Basis, Contractual Basis, Regulatory Basis, Tax Basis, and Other Basis
Fill in the blank
A special purpose framework is a financial basis of accounting other than…that includes Cash and Modified Cash Basis, Contractual Basis, Regulatory Basis, Tax Basis, and Other Basis
GAAP
Special purpose frameworks deviate from tradition GAAP Reporting
When a CPA reports on audited financial statements prepared on the cash receipts and disbursements basis of accounting, the report should state that the basis of presentation is a:
Other comprehensive basis of accounting (OCBOA) other than GAAP
Fill in the blank
A compilation engagement occurs when there is a lack of independence and is not an assurance engagement, but an…. engagement.
Attestation Engagement
Attest engagements are defined as those in which a practitioner (CPA) is engaged to issue or does issue an examination, a review, a compilation, or an agreed-upon procedures report on subject matter, or on an assertion about the subject matter, that is the responsibility of another party (usually management).
What is the order of an auditor’s report for a nonissuers?
OBRA
- Opinion Section
- Basis for Opinion Section
- Management Responsibility Section
- Auditor Responsibility Section
- Key Audit Matters (KAM) Section (except for Adverse and Disclaimer opinions)
What is the order of an auditor’s report for an issuers?
O&B and replace R&A
- Opinion Section
- Additional Paragraph
- Basis for Opinion Section
- Critical Audit Matters (CAM) Section (except for Adverse and Disclaimer opinions)
What is the nonissuer auditor’s opinion that is being expressed?
This phrase refers to scope limitiation, “except for possible effects”
Qualified Opinion
What is the nonissuers auditor’s opinion that is being expressed?
This phrase refers to scope limitiation, “engaged to audit, no opinion expressed”
Disclaimer Opinion
Fill in the blank
Include the Key Audit Matters Section (KAM) in a nonissuer’s audit report when…. except for the following opinions, adverse and disclaimer.
Engaged
Fill in the blank
The management and auditor’s responsibility section of a nonissuer auditor’s report is…., but the content is limited when there is a scope limitation for a disclaimer opinion.
Standard
The Basis for Opinion Sections of a nonissuer auditor’s report gets amended to describe matters. Which Opinions are these true for?
- Qualified Opinions
- Adverse Opinions
- Disclaimer Opinions
True of False
Misstatements refer to Audit Issues
False they refer to financial statement issues.
True or False
Scope limitations refer to audit issues
True
True or False
A lack of independence refers to a financial statement issue.
False, refers to an audit issue
Fill in the blank
If both financial statement and audit issues are immaterial for an issuer’s audit report, the opinion section, basis for opinion section, and critical audit matters should remain….and there is no need to include an….paragraph.
Standard;Additional paragraph
What type of opinion is being expressed for an issuer’s report?
“Except for”
Qualified opinion
What type of opinion is being expressed for an issuer’s report?
“Do not present fairly”
Adverse Opinion
What type of opinion is being expressed for an issuer’s report?
“Engaged to audit and disclaimer”
Disclaimer Opinion
Issuer’s Audit report
For an issuer’s audit report Critical Audit Matters are included and standard across the board, but are ….for adverse and disclaimer of opinions.
Omitted
Issuer’s Audit report
For financial statement issues (misstatements), the basis of opinion section remains….On the other hand, audit issues (scope limitations) basis opinion changes.
Standard
Issuer’s Audit report
Audit issues that are material, but not pervasive change the basis of opinion section from the standard and state what?
“Except for”
state “except as discussed above”
Issuer’s Audit report
Audit issues that are material and pervasive change the basis of opinion section from the standard and do what?
“Engaged to audit and disclaimer”
Omit certain sentences
Audit Report for Issuers
The only time there is no opinion section and additional paragraph is when there is a disclaimer of opinion due to a….
Lack of Independence
Mnemoic for Critical Audit Matter (CAM)
IPAD
For each CAM make sure you Identify it on a PAD of paper
- Identification of CAM
- Description of the Principal considerations
- Description of how CAM was addressed
- Reference disclosures
In an auditor’s report, the framework is discussed in the….section for an issuer and for a nonissuer, the….sections
Issuer - Opinion Section
Nonissuer - Opinion Section and the Management’s Responsibility of the financial statements
Auditors standards are mentioned in the…. section for an issuer and for a nonissuer the…section
Issuer - Basis for Opinion Section
Nonissuer - Opinion Section and the Management’s Responsibility of the financial statements
Which special purpose frameworks get a single opinion and which special purpose frameworks get a dual opinion?
Single Opinion - Cash Basis, Tax Basis, Contractual Basis, Regulatory Bais,and Other Basis
Dual Opinion - Regulatory Basis for general use
Which special purpose frameworks includes a description of purpose
Regulatory Basis for general use, Contractual Basis, and Other Basis
All special purpose frameworks include an emphasis-of-matter paragraph except for….
Regulatory Basis for general use
Which special purpose frameworks include an other-matter paragraph?
Regulatory Basis, Contractual Basis, and Other Basis
