Chapter 1 Section 3: Reports on Audited Financial Statements Flashcards
What 8 things does the auditor need to evaluate?
- Adequate disclosure
- Consistency
- Accounting estimates are reasonable
- Information is relevant, reliable, comparable, and understandable
- Enables users to understand the effects of material transactions and events
- Terminology is appropriate
- They are fairly presented
- They represent the underlying transactions fairly
What is an unmodified opinion?
Expressed when the statements are presented fairly. It’s a clean opinion
What is the order of the paragraphs in the auditor’s report for an unmodified opinion?
- Title
- Addressee (usually not to management)
- Introductory paragraph
- Management’s responsibility for the financial statements
- Auditor’s responsibility
- Auditor’s opinion
- Other reporting responsibilities
- Signature of auditor
- Auditor’s address
- Date of the report
What is management’s responsibility for the financial statements?
MR DIM
Management’s Responsibility:
Design, Implementation, and maintenance of internal controls
What statements should be in the auditor’s responsibility paragraph for an unmodified opinion?
REPPORTS CRAME
- auditor’s Responsibility
- Express an opinion on the statements
- standards require that the auditor Plan and Perform to obtain reasonable assurance
- Performing procedures…
- to Obtain audit evidence
- it depends on the auditor’s judgment, including assessment of Risks
- auditor considers (Tests) internal controls
for the presentation of financial Statements - it is not a statement on the effectiveness of internal Control
- assesses Reasonableness of…
- significant Accounting estimates….
- made by Management, …
- as well as Evaluation overall presentation
What does the auditor’s opinion paragraph say for an unmodified opinion?
The financial statements PRESENT FAIRLY, in all material respects, the financial position of the entity as of the balance sheet date and the results of operations and its cash flows for the period then ended, IN ACCORDANCE WITH THE APPLICABLE FINANCIAL REPORTING FRAMEWORK
What is the earliest date a report should have?
No earlier than the date on which the auditor obtained sufficient appropriate audit evidence
For an unmodified opinion, what does GAAS impact?
GAAP?
Auditor’s ReSSSponsibility paragraph
Management’s Responsibility PPParagraph and oPPPinion paragraph
Name one difference between ISAs and GAAS?
ISAs indicate that the description can refer to the preparation and fair presentation of the financial statements OR the preparation of financial statements that give a fair view. GAAS doesn’t mention “true and fair view”
Define component
An entity
Define component auditor
An auditor who performs work on the financial information of a component
Define group engagement partner
The partner responsible for the group audit engagement
Define group engagement team
Includes the group engagement partner, other partners, and staff who establish the overall audit strategy, communication with component auditors, and perform work
Define group financial statements
Statements that include the financial information of more than one component
What if the group engagement team has concerns regarding the component auditor’s independence?
They should not use the work of the component auditor or make reference to them in their own work
What are the two requirements for making reference to the component auditor?
- The component auditor has performed an audit in accordance with the relevant requirements of GAAS or PCAOB
- The component auditor’s report is not restricted use
When should you make reference to the component auditor’s work if they use a different financial reporting framework?
If the frameworks are similar
2. The group engagement team has obtained sufficient appropriate audit evidence to evaluate the appropriateness of the adjustments needed
What should be clearly indicated when making reference to a component auditor’s work in the auditor’s report?
- The component was audited by the component auditor, not them
- The magnitude of the portion of the statements audited by the component auditor
- If a different framework was used, which it was and that the auditor of the group statements takes responsibility for the adjustments needed
- If the component doesn’t say it was performed in accordance with PCAOB or GAAS, but the group has determined they did enough to satisfy the requirements, say what the standards used were and what additional procedures were performed to get the work up to standards
Under ISAs, when can you make reference to a component auditor’s work?
Only when required by law or regulation
What if the component auditor issued a modified opinion?
The group auditor should determine the impact of that on the group statements
What if the group engagement partner decides to assume responsibility for the work of the component auditor?
Don’t reference the component auditor
What needs to be done when assuming responsibility for the work of a component auditor?
The group needs to determine the type of work to be done on the financial information of the components
For a significant component, when assuming responsibility, what if it’s FINANCIALLY significant?
It should be audited by the group engagement team or the component auditor
For a significant component, when assuming responsibility, what if it’s significant because of RISKS OF MATERIAL MISSTATEMENT?
The group engagement team or a component auditor should perform an audit of the financial information, and/or audit of the account balances, transactions, or disclosures related to the likely significant risk of material misstatement, and/or perform specified procedures related to the likely significant risks of material misstatement
What if you’re assuming responsibility for the work of a component auditor on an insignificant component?
The group engagement team should only perform analytical procedures
What opinion do you issue if there is a problem with accounting policy, presentation, disclosures, or estimates?
Qualified (“Except For”)
What opinion do you issue if there is a problem with insufficient evidence?
Qualified (“Except For”)
What opinion do you issue if there is a big problem with accounting policy, presentation, disclosures, or estimates?
Adverse
What opinion do you issue if there is a big problem with insufficient evidence, significant going concern uncertainty, or lack of independence?
Disclaimer
What if there is fraudulent, false, deceptive, or misleading information?
Withdraw
What opinion do emphasis-of-matter or other-matter paragraphs go with?
When are they used?
Unmodified
When additional communication is needed, without modifying the auditor’s opinion
What are the three types of modified opinions?
Qualified, adverse, and disclaimer
When is a qualified opinion issued?
For material issues with GAAP or GAAS
When is an adverse opinion issued?
For a very material (pervasive) GAAP issue
When is a disclaimer of opinion issued?
For a very material (pervasive/significant) GAAS issue
If you issue an adverse or disclaimer opinion, can you express an unmodified one for one piece of the statement?
No
Define pervasive
Very material
Not confined to specific places
If confined, they are big places
When is an emphasis-of-matter paragraph used?
When referring to a matter that is appropriately presented or disclosed in the financial statements and is of such importance that it is fundamental to the users’ understanding of the financial statements.
Where does an emphasis-of-matter paragraph go?
Immediately after the opinion
When is an emphasis-of-matter paragraph REQUIRED?
Going concern issues
Consistency - justified change in accounting principal
Changing prior opinion
Special purpose framework
When is an emphasis-of-matter paragraph not required, but permissible?
Uncertainty regarding the outcome of litigation
Major catastrophe
Significant related party transactions
Subsequent events
When is an other-matter paragraph used?
They refer to matters other than those presented or disclosed in the financial statements that are relevant to the user’s understanding of the audit
Where does an other-matter paragraph go?
After opinion and after emphasis-of-matter
When is an other-matter paragraph REQUIRED?
Restricted use of the report
Change in audit opinion
Prior period was audited by someone else and they are not reissuing it
Comparative financials were anything less than audited
Material inconsistencies
Reporting on supplementary information
Compliance report
When is an other-matter paragraph not required, but permissible?
To describe why you can’t withdraw when you normally would
Law requires further explanation\
What procedures are used to evaluate a going concern issue?
ADMITS
Analytical Debt compliance Minutes Inquiry Third parties Subsequent events review
What conditions or events may be indicative of a going concern issue?
FINE
Financial difficulties
Internal matters
Negative trends
External matters
What mitigating factors can alleviate going concern issues?
Plans to borrow money or restructure debt
Plans to sell assets
Plans to delay or reduce expenditures
Plans to increase ownership equity
With a going concern issue, what is the alternative to an emphasis-of-matter paragraph?
A disclaimer
What two phrases must be included in an emphasis-of-matter paragraph for going concern?
“Substantial doubt”
“Going concern”
What must not be mentioned in an emphasis-of-matter paragraph for going concern?
Any reference to the length of time you think they’ll last
What is the important qualifier when looking at a lack of consistency and an emphasis-of-matter paragraph?
It must be an acceptable and justifiable change in accounting principal
How long should an emphasis of matter paragraph be included for a change in accounting principal?
In the period of the change and in all subsequent periods until everything presented is following that principal
When should an emphasis of matter be used to alert the reader to a restricted use?
- Measurement or disclosure criteria are suitable for only a limited number of users who have an adequate understanding of the criteria
- Measurement or disclosure criteria are available only to specified parties
- Matters identified during an audit engagement that are not the primary objective of the audit engagement
Define by-product report
When matters identified during an audit engagement are not the primary objective of the audit engagement
What opinions are available for GAAP issues?
Qualified or adverse
When you use a qualified or adverse opinion, which paragraphs are not changed?
Intro and management’s responsibility
What changes in the auditor’s responsibility paragraph when there is a qualified or adverse opinion?
It should state that the auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the auditor’s modified audit opinion
What additional paragraph is needed when a qualified or adverse opinion is used?
A basis for modification paragraph
Where does the basis for modification paragraph go?
Before the opinion
Define practicable
The information is reasonably obtainable from management’s accounts and records and that providing the information in the report does not require the auditor to assume the position of a preparer.
What phrases should be used in a qualified opinion paragraph?
“Except for”
“Presented fairly”
What phrases should be used in an adverse opinion paragraph?
“Because of”
“Not presented fairly”
What opinions are available for GAAS issues?
Qualified or disclaimer
What can cause a scope limitation?
Circumstances (not being auditor at beginning of year, time constraint)
Management (not being helpful. You may want to withdraw if you feel they’re covering something up)
Can you issue an adverse opinion if you feel management is hiding something?
No - you don’t have evidence of it. Either withdraw or issue an emphasis-of-matter if you have already done a lot of the work
What paragraphs don’t change with a qualified or disclaimer of opinion?
Management responsibility
What change needs to be made to the intro paragraph when there is a modified opinion for GAAS?
Which opinion requires it?
Say you were engaged to audit the financial statements
Disclaimer
What change needs to be made to the auditor’s responsibility paragraph when there is a qualified opinion with a GAAS issue?
Say you believe the audit evidence obtained is sufficient and appropriate to provide a basis for the auditor’s qualified audit opinion
What change needs to be made to the auditor’s responsibility paragraph when there is a disclaimer of opinion?
Say that because of the matter described in the basis of disclaimer of opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.
Where does the basis for modification paragraph go?
Before the opinion
What phrases need to be in the qualified opinion paragraph with a GAAS issue?
“Except for”
“Fairly presented”
What phrases need to be in the disclaimer of opinion paragraph?
“Because of”
“Does not express an opinion”
