Chapter 12 - Reports on Audited F/S Flashcards
for nonpublic entities, what does the auditor report on?
fairness of financial statements and related disclosures
for public entities, what does the auditor report on?
fairness of F/s and related disclosures
effectiveness of internal controls over financial reporting
for public entities, what does management report on?
effectiveness of internal control over financial reporting
for public companies, what does both the auditors and management report on?
effectiveness of internal control over financial reporting
a control is…
any process to prevent or detect something
not every public entity needs a…
public control audit
what kind of public entity would not have a public control audit?
a very small company
what are the required reports for issuers?
financial statements, internal control over financial reporting (ICFR)
what are the two reporting options?
combined F/S and ICFR or separate
if separate reports, each report will…
reference the opinion and the date of the other report
the standard (unqualified) report means a “__” report
clean
three sections of auditors’ reports on F/S
opinion on F/S, basis for opinion, critical audit matters
what is in the “opinion of the F/S section”?
F/S and years examined, auditors’ opinion on the F/S, reference to report and opinion on ICFR (ONLY IF SEPARATE OPINIONS)
what is in the “basic for opinion” section?
management is responsible for F/S, auditors responsible for expressing an opinion on F/S, firm is registered with PCAOB and required to be independent, audit conducted in accordance to PCAOB stands, audit provides basis for opinion
what is in the “critical audit matters” section?
identifies any matters communicated or required to be communicated to audit committees, identifies audit procedures performed to address CAMS
any CAMs that are required to be communicated to the audit committee are…
material accounts or disclosures, involve challenging, subjective, or complex judgements
CAMs have higher levels of…
risk
CAMs have significant audit team and management…
judgement
CAMs are significant…
transactions and events
if engaged to communicate key audit matters, add CAM section following…
basis for opinion section
CAM section says why _______ and how __________
matter was considered a key audit matter, and how the matter was address in the audit
common CAMs include…
intangible assets, revenue, restructuring, etc.
what asset can never be a CAM?
cash
why can’t cash be a CAM?
because it is so low risk
what is the title to the standard report?
Reporting of Independent Registered Public Accounting Firm
who is the standard report addressed to?
the client (shareholders and board)
the standard report includes the date when…
auditors have obtained sufficient and appropriate evidence
the date of the auditors’ report is the day that…
auditors have obtained sufficient evidence
date of the auditors report is typically the same as…
the filling date with the SEC
who hires auditors?
the board
the standard report is signed by…
the accounting firm and the identification of office of firm
in the standard report, you indicate the…
tenure of accounting firm
who does not sign the standard report?
partner
four types of opinions
unqualified (standard), qualified, adverse, disclaimer of opinion
if it is a unqualified opinion…
F/S is in accordance with GAAP
standard report may be modified to disclose…
additional matters
if it is a qualified opinion…
“except for” some matter, F/S are in accordance with GAAP
if it is an adverse opinion…
F/S are not in accordance with GAAP
three reasons for departing from standard report
departures from GAAP, scope limitations, audit of group financial statements
examples of departures from GAAP
cash basis instead of accruals, expensing assets immedately (not capitalizing machinery), recording revenue before its “earned”
in a departure from GAAP, we give a standard report if…
it is not material
in a departure from GAAP, we give a qualified opinion if…
it is material but not pervasive
in a departure from GAAP, we give an adverse opinion if…
it is material and pervasive
for a departure from GAAP, it is material if…
amount would change an investment decision
in a departure from GAAP, there can be a missed statement as long as…
it is not material
pervasive means…
it reaches further
in a departure from GAAP, how would we modify the report if it is a qualified opinion?
add paragraph explaining departure and detailing $$ acts involved; indicate that “in our opinion, except for the effects of [XXX] as discussed in the following paragraph,…”
in a departure from GAAP, what is the statement needed for a qualified opinion?
in our opinion, except for the effects of [XXX] as discussed in the following paragraph, ….
in a departure from GAAP, how would we modify the report if it is an adverse opinion?
in the “opinion on the financial statements” section…
- indicate “in our opinion, because of the matters discussed in the following paragraph, the financial statements do not present fairly…”
- omit reference to “all material respects”
- add paragraph explaining departure and detailing $$ amts involved
OMIT CAM SECTION
in a departure from GAAP, for an adverse opinion, we omit…
CAM section
in a departure from GAAP, what is the statement needed for an adverse opinion?
in our opinion, because of the matters discussed in the following paragraph, the F/S do not present fairly…
in a departure from GAAP, what is omitted in the “opinion on the F/S section” for an adverse opinion?
reference to “all material respects”
scope limitation refers to the…
actual audit work
in a scope limitation, we give a standard report if…
if the limitation is not material or it is material AND there is alternative procedures available
in a scope limitation, we give a qualified report if…
the limitation is material, there are no alternative procedures, and the limitation is not pervasive
in a scope limitation, we give a disclaimer of opinion if…
it is material, there are no alternative procedures, and it is pervasive
for scope limitation, we decide if it is pervasive based on if it is _____ or ______
circumstance imposed or client imposed
for scope limitation, materiality applies to ____ as well
inventory
examples of limitations
unable to send confirmations, unable to perform inventory investigation
a circumstance imposted scope limitation is a situation in which…
matters beyond auditors’ and client’s control limit procedures performed by auditors
circumstance imposed scope limitation example
inability to observe year-end inventory because of late appointment
client imposed scope limitations are generally…
PERVASIVE
a client imposed scope limitation is a situation in which…
client specifically limits auditors’ procedures
client imposed limitation example
when client doesn’t allow auditor to come
client imposed limitation should be viewed as…
a significant restriction and a disclaimer is normal issued
what is normally issued for a client imposed limitation?
a disclaimer
for a scope limitation, how would we modify the report if it is a qualified opinion?
in opinion section…
- indicate “in our opinion, except for the effects of the XXX, as described below..”
- add a paragraph explaining scope limitation and detailing $$$ involved
in basis section…
- reference scope limitation when indicating audit conducted in accordance with PCAOB standards
for a scope limitation, what would we indicate “OPINION ON F/S SECTION” if it is a qualified opinion?
indicate “in our opinion, except for the effects of the XXX as described below…”
for a scope limitation, in the “BASIS OF OPINION” if it is a qualified opinion, we should reference ____ when indicating audit being conducted with PCAOB standards
reference scope limitations
pervasive scope limitation is usually…
client imposed
for a scope limitation disclaimer of opinion, we change the title of “opinion on f/s section” to..
“disclaimer of opinion on…”
for a scope limitation disclaimer of opinion, we modify the first sentence of opinion section to…
“we were engaged to audit”
for a scope limitation disclaimer of opinion, we modify opinion to…
“we do not express an opinion”
for a scope limitation disclaimer of opinion, how do we modify the report?
In “opinion on f/s” section…
- change title
- modify first sentence
- modify opinion
- add paragraph
in “basis for opinion” section…
- change title
- delete sentence indicating auditor’s responsibility
- delete audit conducted under pcaob paragraph
OMIT CAM SECTION
for a scope limitation disclaimer of opinion, we omit what section?
CAM
for a scope limitation disclaimer of opinion, we change the title of the “basis of opinion” section to…
“basis for DISCLAIMER of opinion”
for a scope limitation disclaimer of opinion, we delete which parts of the “basis of opinion” section>
sentence indicating auditors responsibility, paragraph indicating audit conducted under PCAOB standards
group financial statements are…
f/s comprised of more than one division/subsidiary/segment/component
principle auditors conduct…
adult of material portion of the entity
other auditors may be…
engaged by principle auditors to audit divisions, subsidiaries, or components
other auditors are not specifically named if…
they performed less than 5%
what form shows firms involved in an audit?
form AP on PCAOB website
firm AP has been required since..
2017
more people in an audit can cause…
a higher risk for error
for a group f/s audit, we issue a standard report if…
auditor takes responsibility for component auditors’ work
for a group f/s audit, we obtain and present component auditors’ report if…
principle does not take responsibility and refers to component auditors by name
for a group f/s audit, if the principle does not take responsibility and refers to component auditors by name, we…
obtain and present component auditors’ report
for a group f/s audit, we indicate division of responsibility in unqualified opinion if…
not take responsibility for component work and does not refer to them by name
principle auditors need to verify…
other auditors reputation and independence
principle auditors need to ____ and __ with other auditors
communicate and coordinate
what are the 4 options available to principle auditors for the report
- take responsibility for work (standard report)
- name other auditors
- refer to other auditors in “opinion on the f/s section)
- refer to other auditors in “basis of opinion” section
principle can only present the report of other auditors if…
they give permission
if principle is referring to other auditors in “opinion on the f/s” section, they have to…
note that opinion is based in part by other auditors, identify components examined by other auditors, still express unqualified opinion (if appropriate)
if principle is referring to other auditors in “basis for opinion section”, they have to…
note that the report of other auditors provides a basis for the opinion
assumption between adverse and disclaimer
adverse is worse
what is the general approach for other matters?
issue unqualified opinion but add explaining paragraph to report to discuss the matter
other matter situations include…
consistency, going-concern, other info, required supplementary info, emphasis of a matter
consistency relates to..
change in accounting principles, adjustments to correct misstatements in previously issued f/s
how does changes in accounting principles cause inconsistency?
years will have different basis
types of changes in accounting principles:
accounting principles GAAP to GAAP, form of reporting entity, accounting principles (non-GAAP to GAAP), accounting principle inseparable from changes in estimates
how to show the effect of consistency on a report
add explanitory paragraph following the “opinion on the f/s section”
for consistency, you may issue a qualified opinion (GAAP departure) if ..
change in not justified or accounted for in accordance with GAAP
for GC uncertainties, auditors are responsible to evaluate…
whether substantial doubt exists about ability of entity to continue in existence for one year beyond date of f/s
options for GC uncertainties
add emphasis of matter paragraph following opinion paragraph (still unmodified), if serious uncertainty, may issue disclaimer of opinion
for GC uncertainties, you may issue a _____ if serious uncertainty
disclaimer of opinion
for other info accompanying f/s, auditors required to..
ensure info consistent with f/s
for other info accompanying f/s, reporting is responsible if…
inconsistencies are noted
supplementary information is reported…
only if engaged to do so
supplementary info will indicate if…
info is fairly stated in relation to f/s
for required sup. information, auditors are required to…
perform limited procedures and expand report on f/s to address exceptions noted
for required sup. information, add an…
explanatory paragraph to identify information, describe procedures performed, and identify any issues
emphasis of a matter is…
anything that helps auditors understand
emphasis of the matter call..
user attention to important matter (ex GC)
for continuing auditors, reports should address _____ in _____ form
all years presented, comparative
continuing auditors should update opinion by…
considering if previously issued opinions still appropriate
if previously issued opinions are not appropriate…
revise option IN CURRENT REPORT (explanatory paragraph)
with permission, auditors may present ____ from predecessor on prior years…
reissued report; f/s along with successor’s report on current F/S
auditor would add an explanatory paragraph if predecessors’ report…
not repented,
in explanatory paragraph for predecessor, successor auditors’ report must…
reference predecessors’ report and opinion on prior years’ f/s
condensed f/s are derived from..
full set of f/s
auditor can only examine and report condensed if…
audited full financial statements
condensed report refers to the…
auditors report on full f/s
condensed report indicates…
whether info in condensed f/s is consistent in relation to the full statements
EBITA is not…
GAAP
association with unedited f/s means…
helping a company put together f/s for an audit but not doing the audit
in association with unedited f/s, auditors permit…
use of name in communication including f/s
for association with unedited f/s, what is issued?
disclaimer of opinion
in disclaimer of opinion for association with unedited f/s, you must…
not mention auditing procedures performed, must identify any known departures from GAAP in the report, cover all unedited prior yrs f/s
external auditor must be…
independent
if auditors begin engagement but independence is subsequently compromised…
report a single paraphrase that indicates auditors are not independent but does not indicate why independence is lacking
three scenarios to may issue disclaimer…
lack of independence, associated with unaudited f/s, material and pervasive gc uncertainty
for gc assessment, you issue an unqualified opinion when…
there is no substantial doubt or there is substantial doubt but there is mitigation factors
for gc assessment, when there is substantial doubt but no mitigating factors, you issue a…
unqualified opinion with gc explanatory paragraph
example of mitigating factor
CEO is fired