Chapter 17 Flashcards
Audit Report
Providing an independent and expert opinion on the fairness of financial statements through an audit is the most frequent attestation service.
When performing an audit, the auditors obtain reasonable assurance that the statements are in conformity with GAAP.
Coverage of Audit reports
An opinion on :
- Financial Statements
- B/S, I/S, Statement of Cash flows, and statement of Retained earnings (equity)
- Financial Statement disclosures
- The notes to the financial statements are considered and integral part of the financial statements.
Auditor’s standard report- Nonpublic Clients
Title: includes the word independent
- Ordinarily addressed to the company itself, the shareholders, the audit committee and/or the board of directors.
- Signed with name of CPA firm not individual partner unless sole practitioner.
- Dated as of the date on which the auditors obtained sufficient appropriate audit evidence to support their opinion.
Unmodified Opinion
The auditors are able to obtain sufficient appropriate audit evidence to obtain reasonable assurance so as to be able to conclude that the financial statements as a whole are free from material misstatements.
Auditors’ Standard Report- Public Clients
- Differences from nonpublic
- includes the words “registered” and “independent” in the title.
- References standards of the PCAOB rather than GAAP
- Includes less detailed discussions of management and auditor responsibilities.
- Includes an additional paragraph indicating that the auditors have also issued a report on the clients internal control over financial reporting.
- The report on internal control may either be presented separately or combined with the report on the financial statements into one overall report. - does not include section headings.
Types of Reports with Unmodified Opinions
- Unmodified opinion- Standard report.
- unmodified opinion- with an emphasis of matter paragraph.
- Unmodified opinion- with an other matter paragraph
- Unmodified opinion on group financial statements.
unmodified opinion- with an emphasis of matter paragraph
To emphasize a matter appropriately presented in the financial statements ( e.g. change in the accounting principle)
Unmodified opinion- with an other matter paragraph
To emphasize a matter other than those presented or disclosed in the financial statements ( e.g. other information in documents containing audited financial statements).
Unmodified opinion on group financial statements
When two or more CPA firms are involved in an audit and the group auditor (firm that does most of the work) does not wish to take responsibility for the work of the component auditors.
Types of Reports with modified opinions
A qualified opinion
An Adverse opinion
A disclaimer
Qualified Opinion
States that the financial statements are presented fairly in conformity with GAAP “except” the effects of some matter.
Adverse Opinion
States that the financial statements are not presented fairly in conformity with GAAP.
Disclaimer of Opinion
It means that due to a significant scope limitation, the auditors were unable to form an opinion or did not form an opinion on the financial statements.
Going Concern
Requirements
- auditor not required to perform procedures specifically designed to test going-concers assumption but must evaluate the assumption.
Conditions:
- Negative Cash flows from operations
- Defaults on loan agreements
- adverse financial ratios
- work stoppages
- legal proceedings.
Ordinarily an unmodified opinion with an emphasis of matter paragraph is issued. Alternatively, a disclaimer of opinion may be issued.
Additional Emphasis of Matter Situations- Auditor Discretionary
- A risk or uncertainty
- Significant related party transactions described in a note to the financial statements.
- the company is a component of a larger business enterprise.
- usually important significant events.
- Accounting matters affecting comparability (other than changes in accounting principles of financial statements with those of the preceding year.
Consolidated Parent company (audited by Group auditor)
Group engagement team should obtain understanding of:
- whether component auditors are competent and understand and will comply with ethical requirements.
- Extent of group engagement team involvement with component auditors.
- Whether group engagement team will be able to obtain necessary information on the consolidation process.
- Whether component auditors operate in a regulatory environment that actively overseas auditors.
Communicate with component auditors
- inform component auditors how their work will be used.
- communicate ethical requirements
- provide list of related parties
- communicate significant risks of misstatements.
Group Auditor alternatives
- Make no reference to the component auditors
- Make reference to the component auditors.
Qualified opinion- Departure from GAAP
Departure from GAAP
- Immaterial - unmodified
- material- qualified
- material and pervasive- adverse
Misstatements become pervasive when any one of the following applies:
- not confined to specific accounts.
- if confined, they represent a substantial proportion of the financial statements.
- In relation to disclosures, they are fundamental to users’ understanding of the financial statements.
Adverse opinion
- Financial statements do not present fairly the financial position, results of operations, and cash flows of client in conformity with GAAP.
- Material and pervasive departures from GAAP.
- Auditor believes departure causes financial statements taken as a whole to be misleading.
Qualified Opinion- Lack of Sufficient Appropriate Audit Evidence (Scope limitations)
Scope Limitations
- Imposed by circumstances
- Important accounting records destroyed.
- Due to nature of audit.
- Engaged too late in year to observe client’s beginning inventory.
- Imposed by client.
- Client refused to allow auditors to send confirmations to customers.
Disclaimer of Opinion
- Auditor has no opinion
- issued whenever unable to form an opinion as to fairness of financial statements.
- circumstances resulting in a disclaimer are those in which the possible misstatements are material and pervasive.
- Multiple uncertainties may also lead to a disclaimer.
- Not an alternative to adverse opinion.
Different Opinions on Different Statements
It is acceptable to express an unqualified opinion on one statement while expressing a qualified or adverse on the others.
Reporting on Comparative F/S
Report should cover current year as well as prior period audited by their firm.
Can express different opinion on different years.
Auditor should update report for all prior periods presented for comparison.
If prior period audited by another (predecessor) CPA firm:
- Current year opinion only covers years the CPA firm audited.
- For F/S audited by predecessor auditors either
- Predecessor auditor reissues report with original date, or
- current auditors refer to report of other auditors.
