Chapter 12 Flashcards
What reports accompany fiancial statements?
- Opinion on financial statements and related disclosures
- Opinion on internal control over financial reporting
Opinion on financial statements and related disclosures
Are F/S presented per applicable financial reporting framework (GAAP)?
Prepared by Auditor
Opinion on internal control over financial reporting
Is I/C effective?
Prepared by Auditor only for accelerated filers
Prepared by Management only for issuers
What are the five types of auditor’s reports?
- Unqualified/unmodified opinion
- Unqualified/unmodified opinion with explanatory paragraphs
- Qualified opinion
- Adverse opinion
- Disclaimer of opinion
Unqualified/unmodified opinion
“clean” opinion
Unqualified/unmodified opinion with explanatory paragraphs
Financial statements are in conformity with GAAP, additional matters are disclosed in report
Qualified opinion
“except for” some matter, financial statements are in conformity with GAAP
Adverse opinion
Financial statements are not in conformity with GAAP
Disclaimer of opinion
No opinion is issued by auditors
What are the four types of explanatory paragraphs?
- Reference to ICFR opinion
- Going concern
- Lack of consistency
- Critical audit matters (CAMs)
Reference to ICFR Opinion
Can issue two separate reports or one combined report
If separate reports, each report will reference date and opinion in the other report
Going-concern
Auditors are responsible to evaluate whether substantial doubt exists about ability of entity to continue in existence for a “reasonable period of time” (typically about a year)
If there are uncertainties about going-concern what are auditors’ options?
- Add explanatory paragraph - still unqualified opinion
- Disclaimer of opinion (if serious, very rare)
- Qualified/adverse opinion (if uncertainty was not properly disclosed by client - departure from GAAP)
Consistency - what are situations that the auditor would call inconsistent?
- Change in accounting principles (from one GAAP method to another GAAP method)
- Changes in the form of reporting entity (other than that resulting from a transaction or event).
- Changes in accounting principle that is not a GAAP to one that is a GAAP
- Changes in accounting principles inseparable from changes in estimates
Is changing the useful life in a depreciation calculation a consistency issue?
No
Is changing from straight-line to double-declinging depreciation a consistency issue?
Yes
What is the effect of an inconsistency?
- Add explanatory paragraph
- May issue a qualified opinion (GAAP departure) if: the change is not justified OR the change is not accounted for in conformity with GAAP
CAMs
matters that have been communicated to the audit committee, are related to accounts or disclosures that are material to the financial statements, and involved especially challenging, subjective, or complex auditor judgment
CAMs are effective for large accelerated filers for audits for fiscal years ending on or after…
June 20, 2019.
CAMs are effective for issuers that are not large accelerated filers for audits for fiscal years ending on or after…
December 15, 2020
Conditions for Departure from “Clean” Opinion
- Scope limitation
- Departure from GAAP
What does a scope limitation or departure from GAAP result in?
A qualified, disclaimer, or adverse opinion
Immateral Misstatement
Unqualified/Unmodified Opinion (sometimes with an explanatory paragraph)
Material Misstatement
Qualified (either for scope limitation or GAAP departure)
Pervasively Material Misstatement
Disclaimer or adverse opinion
When is an unqualified opinion given with an explanatory paragraph?
Immaterial…
1. Other auditors
2. Going concern
3. Lack of consistency
4. Additional emphasis
5. Refer to audit of internal controls
When is a qualified opinion given?
Material…
1. Scope limitation (client-imposed or condition-imposed)
2. GAAP departure
When is a disclaimer given?
A pervasively material…
1. Scope limitation
2. Lack of independence
3. Substantial doubt about the entity’s ability to continue as a going concern
When is an adverse opinion given?
A pervasively material…
1. GAAP departure
Circumstance-Imposed Scope Limitation
Situation in which matters beyond auditors’ and client’s control limit procedures performed by auditor
What is an example of a Circumstance-Imposed Scope Limitation?
inability to observe year-end inventory because of late appointment
Client-Imposed Scope Limitation
Situation in which client specifically limits auditors’ procedures
What is the result of a Client-Imposed Scope Limitation?
Should be viewed as a significant restriction and a disclaimer is ordinarily issued
Group financial statements
Financial statements comprised of more than one division/subsidiary/segment/component
“consolidated financial statements” -> multinational company that has operations in several different countries
Group auditors
Conduct audit of material portion of the entity
Component auditors
May be engaged by group auditors to audit divisions, subsidiaries, or components
Does the group auditor normaly take responsibility for the component auditor’s work?
Yes, because the auditing firm usually uses an affiliate firm (ex: Deloitte US wants to use Deloitte Sweden to audit the Sweden component).
Group auditors should…
- Verify component auditors’ reputation and independence
- Communicate and coordinate with component auditors
If the group auditors take responsibility for the component auditors’ work…
There is a standard (unmodified) report
If the group auditors do not take responsibility for the component auditors’ work…
The component auditors are named (the component auditors’ report is presented only with their permission)
The component auditors’ work is referred to
Comparative Financial Statements - Continuing Auditors
- Update opinion by considering if previously-issued opinions still appropriate
- Must be clear which opinion applies to which f/s
Comparative Financial Statements - Predecessor Auditors
- Predecessor auditor may reissue their report
- If predecessors’ report not presented, current auditors’ report must reference predecessors’ report and opinion on prior-years’ F/S
Auditing standards provide guidance for the auditor’s consideration of other information contained in:
- Annual reports
- Other documents to which the auditor devotes attention at the entity’s request
Auditor is required to read the client’s other information and consider whether it is consistent with the information contained in the audited f/s, however…
the auditor has no obligation to perform any audit procedures over the other information
Auditors found that the entity has not capitalized a material amount of leases in the financial statements. When considering the materiality of this departure from GAAP, the auditors would choose between which reporting options?
A. Unqualified opinion OR disclaimer of opinion.
B. Unqualified opinion OR qualified opinion.
C. Unqualified opinion with an emphasis of matter paragraph OR an adverse opinion.
D. Qualified opinion OR adverse opinion
D. is the correct answer
How will materiality and pervasiveness influence auditors’ reporting decisions in the following circumstances?
A. The entity prohibits confirmation of A/R, and sufficient appropriate audit evidence cannot be obtained using alternative procedures. Scope issue.
B. The entity leases buildings under terms that qualify as capital leases under ASC 840. These leases are not capitalized as leased assets and lease obligations.
C. The entity has lost a lawsuit in court. The case is on appeal in an attempt to reduce the amount of damages awarded. No loss amount is recorded.
A. Scope issue. If pervasive: disclaimer. If material: qualified.
B. GAAP issue. If pervasive: adverse. If material: qualified.
C. GAAP issue. If pervasive: adverse. If material: qualified.
When is a misstatement pervasively material?
- It affects multiple accounts
- Affects a large portion of the financial statements
- Fundamental for user’s understanding (the most important account for investors)
