First AUD Flashcards
Go through AUD CLASSES
Make notes from BOOK
Take SE and Make notes from Book accordingly to bridge the gap
Read Glossary from Becker
Read Flashcards from Becker
Tables from UWorld
Farhat or i75 lectures
Adverse Opinion
FS issue (ADF acronym)-Material effect
DISCLAIMER of opinion (AD acronym)
Insufficient Evidence =Audit Issue
Management could selct FIN REPORTING FRAMEWORK
- CASH BASIS
- TAX BASIS
- GAAP
Generally accepted auditing standards (“GAAS”) (GAAS are not rules) are _____________
measures of the quality of the auditor’s performance and guide the auditor in the performance of a properly planned and executed audit.
The auditor may conduct an audit in accordance with :
Both GAAS ad Govt auditing stdnards (GAGAS)
It is acceptable for an auditor to apply both GAAS and auditing standards of another jurisdiction or country.
In certain audit engagements, the auditor may be required to comploy with Intl Stds on Auditing in addition to GAAS even if the audit is conducted in the USA.
The auditor may conduct the audit in accordance with both GAAS and auditing stds issued by the PCAOB. aN ADDITONAL statemet would be added to the BASIS for OPINION paragraph stating that both sets of standards were applied.
An auditor of a non-issuer must conduct the audit in accordance with ASB standards.
The literature pertaining to U.S. GAAP changes over time, and therefore U.S. generally accepted accounting principles is an ACCOUNTING TERM can be said to encompass the conventions, rules, and procedures necessary to define accepted accounting practice _____________
at a particular time.
ACCOUNTING ESTIMATES
- Provision for expected credit losses
- Employee retirement benefit liabilities
- Warranty obligations
- Probability of loss and related amounts due to pending litigation
- FV os assets or liabilities including goodiwll and intangible assets.
NONISSUERS - UNMODIFIED
ISSUERS-UNQUALIFIED
Unmodified (unqualified) opinion states that the financial statements are presented fairly, in all material respects, in accordance with the applicable FIN REPORTING framework.
In order to issue an UNMODIFIED (UNQUALIFIED) Opinion, the auditor should take into account:
- Whether sufficient appropriate audit evidence was obtained
- Whether uncorrected misstatements are material, individually or in the aggregate and
- Whether the FS are prepared in accordance with the applicable FIN REPORTING framework.
3 Types of MODIFIED OPINIONS
- Qualified opinion (except for) (modification required)
- Adverse opinion (modification required)
- Disclaimer of opinion (audit is incomplete MEANING an auditor was unable to obtain sufficient appropriate audit evidence to provide a reasonable basis for an opinion, thus no opinion is expressed)
CHATGPT:
Qualified Opinion: A negative aspect is present (e.g., scope limitation, non-compliance), but the issue does not affect the overall fairness of the financial statements.
CHATGPT:
Unqualified Opinion: The auditor finds no issues, and the financial statements are fairly presented with no reservations
PERVASIVE meaning (pervasive effects on the FS)_____
CHATGPT:
In the context of an auditor’s opinion, “pervasive” refers to the extent or severity of an issue found in the financial statements. Specifically, if an issue is described as “pervasive,” it means that the problem or misstatement is widespread and significantly impacts the overall reliability and presentation of the financial statements.
Pervasive Issues:
Affecting multiple areas: The issue is not isolated to just one aspect of the financial statements, but instead, it has a broad or significant effect on various parts.
Materially impacts the financial statements: The issue is so significant that it would affect users’ understanding of the company’s financial position and results.
Not easily corrected: The effect of the issue is difficult to overcome through additional explanations, disclosures, or adjustments.
- Far reaching effects(wide-spread) across several accounts e.g. 70% of assets is inventory
- If specific to only one account, it
-represents a significant portion of the FS
-Has issues with disclosues that are fundamental to the users understanding.
AUDITORS ISSUE a Disclaimer of Opinion if they___
- conclude that the possible effect is material and pervasive
- Deny rendering an opinion as they:
are unable to gather sufficient appropriate audit evidence
ADVERSE = Material and pervasive
QUALIFIED = Material but NOT PERVASIVE
AUDITORS issue an ADVERSE OPINION if they conclude that the financial statements:
- HAVE MISTATEMENTS that are material and pervasive
- DO NOT present fairly
e.g. Inadequate disclosure of a material related party transaction would result in a qualified or adverse opinion.
Inadequate disclosure of material information is a departure from GAAP and may result in either a qualified or adverse opinion, depending on materiality.
NONISSUER (Unmodified audit opinion), required SECTIONS in the report (OBRA):
SECTIONS:
- OPINION - Framework reference (i.e. GAAP)
- BASIS for OPINIONS (GAAS referenced)
- Responsibilities of Mgt for the FS (Framework reference ie. GAAP)
- AUDITOR’s responsibilities for the AUDIT of the FS (GAAS referenced)
The auditor may use 2 sets of stds for auditing when:
1. It is required for e.g. when auditing a govt. entity, the auditors use both GAAS and govt auditing standards.
2. The auditors are engaged by the client to do so.
The auditor references both auditing standards in the:
1. Basis for opinion section
2. Auditor’s responsibilities for the audit of the FS section
CHATGPT: Qualified Opinion: If the issue is not pervasive (limited in scope or impact), the auditor may issue a qualified opinion, stating that, except for the specified issue, the financial statements present fairly.
CHATGPT: Adverse Opinion: If the issue is pervasive (widespread) and significantly affects the financial statements as a whole, the auditor issues an adverse opinion, stating that the financial statements do not present a fair and accurate picture of the company.
Disclaimer of Opinion: If there is a pervasive scope limitation (e.g., insufficient evidence), the auditor may disclaim an opinion, meaning they cannot form any opinion about the financial statements.
Example:
Non-pervasive Issue: A company fails to report a small number of transactions, but the rest of the financial statements are unaffected. This may lead to a qualified opinion.
Pervasive Issue: A company fails to follow accounting standards across multiple areas of their financial statements, resulting in a major misrepresentation of the financial position. This may lead to an adverse opinion because the issues are widespread and significantly impact the financial statements as a whole.
KAMs section (KEY AUDIT MATTERS) Section: NON-ISSUER REPORT
- May be added to the nonissuer report (optional section)
- Is added when the client engages the auditor to communicate KAMs
- Provides visibility into the more complex areas or areas that require judgement in the audit
KEY AUDIT MATTERS are those matters that were communicated with those charged with governance and, in our professional judgment, were of most significance in our audit of the FS of the current period. These matters were adressed in the context of our audit of the FS as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. E.g. KAMr are complex issues, judmentally difficult, required audit attention.
ORDER OF KAMs listed is a JUDGEMENT DECISION.
KAMs section can be added anywhere in the report after the 2nd section. (OPINION section and BASIS for OPINION SECTION)
KAMs should NOT include the matters giving rise to:
1. A QUALIFIED OPINION - should be referenced in the BASIS for OPINION section for further explanation
2. SUBSTANTIAL DOUBT existing about an entity’s ability to continue as a going concern
*Should be referenced elsewhere in the report.
Communicating KAMs is PROHIBITED when the auditor expresses an ADVERSE OPINION or DISCLAIMS an OPINION (red zones).
ISSUER - just 2 sections in the report which are _________
OPINION and
BASIS FOR OPINION
Audit issues ONLY - Disclaimer of opinion (An audit can disclaim the opinion in AUDIT issues only)
FS or GAAP issues = Adverse opinion
TO BE considered as a CAM, matter must meet all 3 criteria:
1. Be a matter that was communicated or is required to be communicated to the audit committee
2. RELATE to accounts o disclosures material to the FS
3. Involve challenging, subjective, or complex auditor judgement
For each critical audit matter identified, the auditor should include a description of the principal considerations that led the auditor to determine that the matter was a critical audit matter.
For each critical audit matter identified, the auditor should include a description of how the critical audit matter was addressed in the audit.
For each critical audit matter identified, the auditor should reference relevant financial statement accounts that relate to the critical audit matter.
IDENTIFICATION OF CAMs (IPAD):
1. Identify each CAM in the audit report
2. Describe the PRINCIPAL CONIDERATIONS that led the audiot to determine a CAM
3. Describe how the CAM was ADDRESSED in the AUDIT
4. Refer to the relevant FS accounts and disclosures
A critical audit matter is a matter that was communicated or is required to be communicated to the audit committee and involves an especially challenging judgment made by the auditor.
NON-ISSUER:
KAMs are OPTIONAL for a NON-ISSUER
ISSUER:
(CRITICAL AUDIT MATTERS) CAMS are REQUIRED for an ISSUER (when an unqualified/qualified opinion is issued):
- Opinion on the FS
- Basis for OPINION
- CRITICAL AUDIT MATTERS
The auditor’s report must include any CAMs arising from the current period’s audit of the financial stateemnts.
Report wording in opinion section and basis for opinin section is often boiler plate and does not provide much visibility into the audit.
The CAM section provides more visibility into the more challenging areas of the audit.
CIRCUMSTANCE - FS ISSUES
QUALIFIED (material) or ADVERSE (material and pervasive)
EXAMPLES - (1) Don’t follow GAAP
(2) Inappropriate accounting principles
(3) Unreasonable estimates
(4) Inadequate disclosures
(5) Incorrect numbers
(6) No reasonable justification for change in accounting principles
The following non-issuer headings will change when modified opinions are isued:
1. OPINION
2. BASIS FOR OPINION
NO MATERIAL ISSUES
Unmodified/Unqualified (CLEAN=FS free from material misstatements in all respects) opinion
- Sufficient evidence
- Follows GAAP
- Immaterial or no issues
GENERAL Guidance provided by a Statement on Auditing STDs is the MOST AUTHORITATIVE of level of auditing guidance for audits of nonissuers.
AUDITOR RESPONSIBILITIES
- aUDITOR Must plan the work and properly supervise any assistants
- Determine and apply appropriate materiality levels
- Identify and assess risks of material misstatement, whether due to error or fraud and
- Obtain sufficient appropriate audit evidence
The auditor obtains reasonable assurance NOT ABSOLUTE assurance. REASONABLE ASSURANCE is a high level of assurance. The auditor is unable to obtain ABSOLUTE assurance because of the INHERENT LIMITATIONS of an AUDIT.
Examination of ALL EVIDENCE would NOT BE FEASIBLE.
MANAGEMENT RESPONSIBILITES:
- Determine the applicable FIN REPORTING framework and prepare an adequate description of the framework for inclusion in the FS
- Designing and Implementing programs and controls to prevent, deter and detect fraud.
AUDITORS RESPONSIBILITY
The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the FS are free of material misstatement whether caused by error or fraud.
SUFFICIENT, APPROPRIATE AUDIT evidence to afford a RESONABLE basis for the opinion.
In the FS, including accompanying notes fail to disclose info that is required by GAAP, the auditor should express a QUALIFIED OR ADVERSE OPINION, depending on PERVASIVENESS.
An auditor of a nonissuer concludes that a client’s illegal act, which has a material effect on the FS, has not
NO ISSUE
Unqualified, Unmodified.
AUDIT ISSUES
Qualified (material) or disclaimer (material and pervasive)
- Time constraints
- Inability to obtain sufficient appropriate audit evidence, such as:
(a) inability to confirm receivables
(b) Inability to observe inventory
(c) Inability to obtain audited financial statements of a consolidated investee
(d) Restrictions on the use of auditing procedures
(e) Inadequacy of accounting records’
(f) refusal of client’s attorney to respond to inquiry
(g) Auditor is unable to determine the amounts associated with an employee fraud scheme
RESULTS IN DISCLAIMER
______________________________
1. Not independent
2. Unaudited FS
3. Refusal of management to provide written representation and/or to acknowledge its responsibility for the fair presentation of the FS in conformity with GAAP (may also withdraw)
A critical audit matter is a matter that was communicated or is required to be communicated to the audit committee and relates to accounts or disclosures that are material (not immaterial) to the financial statements.
A critical audit matter is a matter that was communicated or is required to be communicated to the audit committee and involves a particularly complex judgment made by the auditor (not a complex transaction made by management.)
The scope limitation is not mentioned in the management’s responsibility paragraph. The management’s responsibility section remains unchanged when a qualified opinion is issued, but the BASIS for qualified opinion section should describe the reasons for the qualification.
The REASONS for the inability to obtain sufficient appropriate audit evidence should only be described in the Basis for Qualified Opinion section of the auditor’s report and the Management’s Responsibility section should remain unchanged.
The reasons for the inability to obtain sufficient appropriate audit evidence should be described in the BASIS for Qualified Opinion section of the auditor’s report.
DISCLAIMER OF OPINION - Unable to obtain sufficient appropriate audit evidence to provide a reasonable basis for an opinion, thus, no opinion is expressed.
Management’s refusal to provide written representations (a type of audit evidence) is a significant client-imposed restriction on the audit, which may result in a disclaimer of opinion.
If the auditor is unable to obtain the audited financial statements of a consolidated investee, a qualified opinion or a disclaimer of opinion would be issued, depending on materiality.
An auditor may issue a qualified or disclaimer of opinion when an auditor is unable to obtain sufficient appropriate audit evidence. For example, when an auditor is unable to determine the extent of or the amounts associated with a pervasive employee fraud scheme, there is not sufficient appropriate audit evidence, and a qualified or disclaimer of opinion may be appropriate
Assuming the effect is material, a change in accounting principle results in the addition of an emphasis of matter paragraph in the auditor’s report.
An emphasis of matter paragraph is required even if the previous accounting principle was not GAAP and even if management lacks reasonable justification for the change.
(Note: A lack of reasonable justification for the change may also give rise to a report modification based on material misstatement of the FS)
A justified departure from GAAP results in the addition of an emphasis-of-matter paragraph to the unmodified opinion.
UPDATING (CHANGING) PRIOR OPINIONS: FORMAT
The auditor should include an emphasis of matter or other matter paragraph (nonissuer) or explanatory paragraph (issuer) disclosing the following:
DORCS
D-Date of the auditor’s previous report
O-Opinion type previously issued
R - Reason for the prior opinion
C -Changes that have occurred
S- statement that the opinion is different.
REMEMBER - only DORCS change their mind
REPORT OF PREDECESSOR AUDITOR PRESENTED
- Prior auditor’s report is presented - PY auditor’s report is issued
- In determining if previously presented FS are still appropriate as issued, the predecessor auditor should:
(a) read the statements for the current period.
(b) Compare the audited statements with the current period statements
(c) Obtain a letter of representation from the successor auditor stating whether the successor auditor’s audit revealed any matters that may have a material effect on the statements reported on by the predecessor auditor.
(d) Obtain a letter of representation from mgt stating whether any previous mgt representations have changed or whether subsequent events have occurred that may require adjustment or disclosure in the reissued FS.
PRIOR YEAR FS REVIEWED OR COMPILED
- When the current period FS were reviewed or compiled and the report of the PRIOR PERIOD is not reissued, the auditor should include an other-matter paragraph (non-issuer) or explanatory paragraph (issuer) that includes:
(a) The service (review or compilation) performed in the prior period
(b) The date of the prior period report
(c) a description of any material modifications described in the report.
(d) A statements that the service was less in scope than an audit and does not provide the basis for expressing an opinion on the FS as a whole (review) or
(d) A statement that no opinion or other form of assurance is expressed (compilation)
When FS contain a departure from U.S. GAAP because due to unusual circumstances, the statements would otherwise be misleading, the auditor be misleading, the auditor should express an opinion that is __________
UNMODIFIED (a DEPARTURE from US GAAP is permissible when circumstances indicate that a financial presentation in accordance with US GAAP would be misleading.
The opinion para in an auditor;s report should indicate a statement regarding the auditor’s opinion and an indication of the applicable FIN reporting framework and its origin.
The auditor’s opinion section indicates the nature of the engagement (i.e. audit), the financial statements covered in the audit engagement, NAME of the entity whose FS have been audited and the dates covered by each FS.
BASIS for OPINION section references 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 word INDEPENDENT should be included in the report TITLE and not the OPINION PARAGRAPH in an auditor’s report.
A description of the auditor’s responsibility would be included in a SEPARATE PARA stating the auditor’s responsibility rather than in the opinion paragraph.
An indication of mgt’s responsibility for the fair presentation of the FS should be included in a separate PARA explaining mgt’s responsibility rather than in the opinion para.
Emphasis of matter paragraphs are used when required by SAS or when the auditor believes they are necessary. They are 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 FS. This para does not affect the auditor’s opinion.
An auditor’s responsbility to express an opinion on the FS of a nonissuer under US auditing stds is __________
explicitly represented in the Auditor’s responsibility section of the nonissuer audit report.
Consistency is implicit in the auditor’s report and will be explicitly mentioned in an emphasis of a matter paragraph only if there are issues with consistency.
Within the Auditor’s Responsibility section of the report, the following statement is explicitly made: “Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.”
The consistency of the application of accounting principles is implicit while the examination of EVIDENCE on a test basis is explicitly stated in the Auditor’s Responsibility section.
The auditor’s report should be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence to support the opinion.
The earliest an audit report may be dated is when the auditor has obtained sufficient appropriate evidence to support an opinion
The auditor’s report should be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence to support the opinion. The auditor may not have received sufficient appropriate evidence by the last day of fieldwork. For example, the partner’s review of the audit evidence may take place after the last day of fieldwork.
The final assembly of the audit file often occurs after the date of the audit report. This assembly may occur up to 45 or 60 days following the report release date for issuers and nonissuers, respectively.
Audit documentation may be completed after the date of the audit report. Generally, changes to audit documentation after the date of the audit report are administrative in nature. For example, the auditor may sort and cross-reference workpapers.
The CPA’s report on audited financial statements includes an explanation that management is responsible for the preparation and fair presentation of the financial statements
The CPA’s audit includes evaluating the appropriateness of the accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. This is mentioned in the auditor’s responsibility paragraph.
The CPA’s report on audited financial statements does not include matters related to the auditor’s assessment of specific risk factors.
Under U.S. auditing standards, the auditor’s audit report includes a statement that: “In performing an audit in accordance with GAAS, we evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management…”
The audit report does not state that disclosures provide reasonable assurance that the financial statements are free of material misstatement. The correct statement is: “Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement..
The audit report does not state that the auditor evaluated the overall internal control. The correct statement is “In performing an audit in accordance with GAAS, we obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstance…”
The audit report does not state “The financial statements are consistent with those of the prior period.” Consistency is implicitly reported; only if there is an inconsistency is an explicit statement included
The responsibility of the auditor and the responsibility of management are stated explicitly in the auditor’s report of a non-issuer. There is a Management’s Responsibility section and an Auditor’s Responsibility section.
In an auditor’s report, there is a section for explicitly stating both management and the auditor’s responsibilities related to the audit.
GAAP = Under U.S. auditing standards, the auditor expresses an opinion on the financial statements’ conformity with GAAP in the Opinion section and the Management’s Responsibility section that the management is responsible for the preparation and fair presentation of the financial statements in accordance with GAAP.
GAAS = The Basis for Opinion section would refer to GAAS rather than GAAP.
GAAS = The Auditor’s Responsibility section of the report would refer to GAAS rather than GAAP.
GAAS = . The Auditor’s Responsibility section would refer to GAAS rather than GAAP, which the Management’s Responsibility section would include a reference to GAAP.
The auditor’s responsibility paragraph of the unmodified opinion audit report explicitly states that an audit includes identifying and assessing the risks of material misstatement and designing and performing audit procedures responsive to those risks.
ISSUER = PCAOB and GAAP (no need for GAAS)
An auditor reporting on the audit of financial statements of an issuer should indicate in the Basis for Opinion section that the engagement was conducted in accordance with PCAOB standards, and should refer to GAAP in the Opinion on the Financial Statements section.
An auditor reporting on the audit of financial statements of an issuer is required to refer to PCAOB standards. There is no requirement to reference GAAS.
An auditor reporting on the audit of financial statements of an issuer should indicate in the audit report that the engagement was conducted in accordance with PCAOB standards. This is an explicit statement in the report; it is not implied or assumed.
OPINION
____________________
QUALIFIED = MATERIAL
OPINION
______________________________
DISCLAIMER = MATERIAL AND PERVASIVE
AUDIT ISSUES
____________________
Qualified (Material) or Disclaimer (Material and Pervasive)
- Time constraints
- Inability to obtain sufficient appropriate audit evidence, such as:
(a) inability to observe inventory
(b) inability to confirm receivables
(c) inability to obtain audited FS of a consolidated investee
(d) Restrictions on the use of auditing procedures
(e) Inadequacy of accounting records
(f) Refusal of client’s attorney to respond to inquiry
AUDIT ISSUES
________________
Results in Disclaimer
- Not independent
- Unaudited F/S
- Refusal of mgt to provide written representation and/or to acknowledge its responsibility for the fair presentation of the FS in conformity with GAAP (may also withdrawal)
- Audit/Evidence issue - CEO is unwilling to sign the mgt representation letter.
- Audit/EVIDENCE issue - The client refuses to permit the auditor to confirm certain AR or apply alternative procedures to verify their balances.
FS ISSUES
Qualified(Material) or Adverse (Material and Pervasive)
- Don’t follow GAAP
- Inappropriate accounting principles
- Unreasonable estimates
- Inadequate disclosure
- Incorrect numbers
- No reasonable justification for change in accounting principles
- GAAP issues
NO MATERIAL ISSUES
Unmodified/unqualified
- Sufficient evidence
- Follows GAAP
- Immaterial or no issues
The statement “do not present fairly” would be used in an adverse opinion.
When inadequate disclosure has a material but not pervasive effect on the financial statements, the auditor’s opinion should state “In our opinion, except for the omission of the information described in the basis for qualified opinion section of our report . . .”
An immaterial unjustified departure from GAAP would not affect the unmodified opinion. Note that if the effect were material, a qualified or adverse opinion would be appropriate.
A material change in accounting principle would result in the addition of an emphasis-of-matter paragraph to the unmodified opinion.
If internal control is so poor that it cannot be relied upon, the auditor must consider the effect on the audit procedures and subsequent report, but would not issue an adverse opinion.
An adverse opinion is issued when the financial statements are not presented in accordance with GAAP.
Substantial doubt with regard to the entity’s ability to continue as a going concern should be disclosed in either an emphasis-of-matter paragraph (optional when doubt is alleviated) or a separate section of the auditor’s report (doubt remains) appended to an otherwise unmodified (unqualified) opinion.
The client’s refusal to provide access to the minutes of the Board of Directors’ meetings would result in a disclaimer of opinion.
Requirements of due care
- Observe technical stds
- Observe ethical stds (e.g. Code of professional conduct)
- Strive to improve competence (professional education)
- Perform duties diligently
The auditor’s opinion may differ with respect to different peiods.
e.g. 2011 - qualified opinion
2010 - unmodified opinion
UNREVISED - use original report date when reissuing previous report
REVISED - dual date is used in the event that the predecessor auditor revises the report.
Reporting with predecessor auditors
In determining if previously presented financial statements are still appropriate as issued, the predecessor auditor should:
- Read the statements for the current period
- Compare the audited statements with the current period statements
- Obtain a letter of representation from the successor auditor stating whether the successor auditor’s audi revealed any matters that may have a materal effect on the statements reportedon by the predecessor auditor.
- OBTAIN a letter of representaton from management stating whethr ny previous management representations have change or whether any subsequent events have occurred that may require adustment or disclosure in the reissued FS
Prior period FS was not audited or not reissued but just REVIEWED OR COMPILED:
CY auditor should include an OTHER-MATTER PARAGRAPH (nonissuer) or explanatory paragraph (issuer) that includes:
- The service (review or compilation) performed in the prior period
- The date o the prior period report
- A description of any material modifications described in the report
- A statement that the service was less in scope than an audit and does not provide the basis for expressing an opinion on the FS as a whole (review)
- A statement that no opinion or other form of assurance is expressed (compilation).
AICPA - Group Engagement Partner
PCAOB calls it Principal Auditor - The partner or other person in the firm who is RESPONSIBLE for the group audit engagement and the auditor’s report on the group FS
GROUP FS - FS that iclude the financial info of more than one component (i.e. subsidiaries)
GROUP ENGAGEMENT TEAM: includes the group engagement partner, other partners, and staff who establish the overall audit strategy, communicate with component auditors, perform work on the consolidation process, and evaluate the conclusions drawn from the audit evidence as the basis for forming an opinion on the group FS
COMPONENT - An entity or business activity that prepares Financial info that is included in the group FS
COMPNENT AUDITOR: An auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit.
WHen the GROUP ENGAGEMENT team relies on the work of the component auditor, the group engagement team has 2 alternatives:
OPTION 1 - Group engagement team takes full resposibility for the audit of the component - do not reference the component auditor
Option 2 - Group engagement team and component auditor divide responsibility - reference the component auditor.
UPDATING PRIOR OPINIONS
If during the current audit, the auditor becomes aware of evidence that affects the prior statements and the opinion that was expressed, the auditor should update the opinion in the CY’s report.
E.g. PY FS are restated to conform with GAAP
e.g. a previous report that was qualified or adverse due to a departure from GAAP would no longer be appropriate in the event of the restatement of the PY’s FS to be in conformity wit GAAP.
REPORT OF THE PREDECESSOR AUDITOR NOT REISSUED
THE succesor auditor should express an opinon on the CURRENT PERIOD FS only and indicate in an OTHER MATTER PARAGRAPH (non-issuer) or EXPLANATORY para (ISSUER):
- That the FS of the prior period were audited by a predecessor auditor. The predecessor auditors should not be named unless the practice of the predecessors was acquired by or merged with that of the sucessor
- The type of the opinion expressed by the predecessor auditor and if the opinion was modified, the reasons for the modification.
- The nature of any emphasis of matter, other matter or explanatory para included in the predecessor’s auditor’s report.
MANAGEMENT’S RESPONSIBILITIES
- The preparation and FAIR presentation (requires IDENTIFICATION of the applicable FIN REPORTING Framework, inclusion of an adequate description of the framework in the FS)) of the FS in accordance with the applicable FIN REPORTING Framework
- The design, implementation and maintenance of internal control relevant to the prep and fair presentation of FS that are free of material misstatement due to error or fraud and
- Providing the auditor with access to info and persons within the entity needed to complete the audit.
AUDITOR’S RESPONSIBILITIES
- Maintaining PROFESSIONAL SKEPTICISM
- Complying with relevant ethical requirements
- Exercising professional judgment throughout the planning and performance of the audit
- Obtaining sufficient appropriate audit evidence
- Complying with GAAS (AUDITING STANDARDS)
The auditor should neither assume that mgt is DISHONEST nor assume UNQUESTIONED HONESTY. A belief that management is honest and has INTEGRITY does not relieve the auditor of the need to maintain professional skepticism or allow the auditor to be satisfied with less than persuasive evidence.
Example of impediments
- Unconscious human bias
- DEV of inappropriate level of trust or confidence in mgt, which may result in the auditor not taking as questioning a stance as needed.
- Pressure to avoid potential negative interactions with or consequences to individuals whom auditors know (e.g. mgt ) instead of representing the int of investors.
- scheduling and workload demands, which may result in auditors making shortcuts in judgement, such as seeking audit evidence that is easier to obtain rather than evidence that is more reliable and relevant or giving more weight to supporting evidence without considering contrary evidence.
REPSONSIBILITIES OF BOTH AUDITOR AND MANAGEMENT
ELEMENTS OF QUALITY CONTROL
HELP ME
HUMAN RESources
Engagement or client acceptance and continuance
Leadership responsibilities
Performance of the engagement
Monitoring
Ethical requirements
MONITORING
The monitoring component or function of the internal control framework is designed to ensure that controls continue to operate effectively. Monitoring of internal control effectiveness is done to provide an assessment of the performance of the system of internal control over time. Monitoring is designed to ensure that controls operate effectively.
. Periodically comparing and updating the mission vision and values of a not-for-profit could best be classified as a monitoring activity.
Monitoring is the process that assesses the quality of control performance over time. Monitoring may include, among other things, the evaluation of communications from external parties such as customers, regulatory agencies, and external auditors.
CHATGPT
Unqualified Opinion (Clean Opinion): Financial statements are fairly presented.
Qualified Opinion: Financial statements are fairly presented, except for a specified issue.
Adverse Opinion: Financial statements are not fairly presented.
Disclaimer of Opinion: The auditor cannot provide an opinion due to scope limitations or other issues.
Substantive procedures are used to detect ___________
material misstatements
Smaller reporting company____
less than $100 million in annual revenue
Form AP/ Audit participants - who the engagement partner was ,
date of audit report , if other audit firms participated
To be filed within 35 days AFTER THE AUDIT REPORT
If incuded with reg statemnt - muat
If as an auditor we are changing the opinion, we also need to change the basis of opinion.
MODIFY auditor’s responsibility section in the case of DISCLAIMER , since there are lot of things that we could not do or complete due to incomplete info?
AUDIT PROCESS
- General Principles - Overall objectives, documentation, communication, quality control-firm
- Engagement acceptance - Ethics and Independence and terms of engagement
- Assess Risk and Plan Response
(a) Audit planning, including audit strategy materiality
(b) Risk assessment procedures- Understand the entity and its environment
(c) Identify and assess risk
(d) Respond to risk - Perform PROCEDURES and OBTAIN SUFFICIENT EVIDENCE
Test of controls, if applicable
Substantive testing - FORM CONCLUSIONS
(a) Subsequent events
(b) MAnagement representation
(c) Evaluate audit results
(d) QUality control - engagement - REPORTING
report on audited FS
Other reporting considerations
The auditor’s report gives credibility to the FS. The auditor’s as a group independent of mgt, have an objective view and can report on a company’s activities without bias or conflict of interest.
FS of an enterprise are prepared by the mgt of the enterprise NOT the independent auditor.
In certain audit engagements, the auditor may be required to COMPLY with OTHER AUDITING requirements in addition to GAAS. GAAS do not override laws or regulations that govern an audit of FS. The auditor may conduct the audit in accordance with both GAAS and:
- Auditing standards issued by the PCAOB
- Requirements of the ERISA (Employee Retirement Income Security Act of 1974)
- International Standards on Auditing (ISAs)
- Govt auditing standards (GAGAS)
- Auditing standards of a specific jurisdiction or country
THe overall objectives of the auditor when conducting an ERISA plan FIN STATEMENT Audit are:
- Accept an ERISA plan audit engagement when the basis upon which it is to be performed has been agreed upon through establishing whether the preconditions for the audit are present.
A “compilation report” refers to a report related to a ____________.
non-public entity
A division of responsibility affects the opinion section of the report, but does not impact any other report section.
Involvement of another auditor does not prevent the issuance of an unmodified opinion.
Those charged with governance are __________
BOD or Audit Committee
(may also refer to members of the entity’s legal structure, external parties such as legal committees)
The auditor may reference in the engagement letter the involvement of internal auditors. However, internal auditors may _________________ such as determining materiality.
not make significant audit decisions,
______________ is responsible for providing a representation letter to the auditor at the conclusion of the audit.
management
An auditor may not be paid in stock of the entity because this would impair the auditor’s independence.
The engagement letter would include the scope of the audit and the scope of any additional services to be provided by the auditor to the entity. The engagement letter is a means by which the parties agree to the terms of the engagement.
A successor auditor most likely would make specific inquiries of the predecessor auditor regarding:
A. Disagreements with management as to auditing procedures.
Chatgpt
Audit = Reasonable assurance, detailed testing, auditor opinion.
Review = Limited assurance, analytical procedures, no opinion, just a statement of no material misstatements.
Regulatory Requirements:
In certain jurisdictions, publicly traded companies or companies of a certain size may legally be required to undergo a full audit (i.e., an audit opinion) regardless of whether the company prefers a review.
For example, in the U.S., public companies must have an audit of their financial statements performed by an independent auditor under the Sarbanes-Oxley Act.
In many countries, smaller private companies may have the option to choose between an audit or a review, depending on their size, industry, and local regulations.
Management Decision:
In cases where a full audit isn’t required by law (for example, smaller private companies or certain non-public organizations), the company’s management and board can choose to have a review done instead of an audit.
They might make this decision to save costs, simplify the process, or for other business reasons. However, they must still ensure that their financial statements comply with relevant accounting standards and regulations.
Contact with the predecessor auditor before client acceptance is mandatory, but client permission is required.
If the predecessor auditor refuses to give the current auditor of a nonissuer access to the documentation, the current auditor should review the risk assessment of the opening balances of the financial statements.
An auditor is performing an audit for a company and has a close family member working as a senior executive at that company. While the auditor may be independent in fact (i.e., they do not let this relationship influence their judgment), the appearance of independence may be compromised. Investors or other stakeholders might perceive that the auditor could be biased because of this familial connection, even though the auditor’s decisions are unaffected by it.
AUDITOR SPECIALIST - Assist auditor in obtaining audit evidence expertise other than accounting or auditing. Expertise other than accounting or auditing.
MANAGEMENT SPECIALIST- Hired by client to assist entity in preparing the FS
CONSOLIDATION SIM -
It came in Trupti’s exam
The COSO Cube links all five components with all three objectives categories and all levels of the organizational structure; everything is interrelated, which is illustrated by the cube itself.
According to COSO, an executive’s deliberate misrepresentation to a banker who is considering whether to make a loan to an enterprise is an example of which of the following internal control limitations?
Management override
INTERNAL CONTROL includes
- Control Environment
- Monitoring
- Information and Communication Systems
- Risk Assessment
- Existing control activities
Internal Audit function is part of MONITORING
Establishing a control baseline needs to be the first monitoring step in evaluating the effectiveness of an internal control system. Without a baseline for comparison, there is nothing to compare against when the evaluation is performed.
The control environment component of the internal control integrated framework includes such principles as commitment to competency, accountability, and organizational structure, etc.
The risk assessment component of the internal control integrated framework includes such principles as specify objectives, identify/analyze risks, and consider fraud and control changes. The risk assessment component of the COSO framework includes principles associated with management’s consideration of the risk of material misstatement, not the assurance that controls continue to operate effectively.
The control activities component of the internal control integrated framework includes such principles as deployment of policies and procedures and the selection and development of controls around information technology.
The information and communication components of the COSO framework consider those systems that identify, capture, process, and distribute information supporting the accomplishment of financial reporting objectives, not the assurance that controls operate effectively.
The information and communication component of the internal control integrated framework includes such principles as internal and external communication as well as obtaining and using information
The control environment sets the overall tone of the organization and is considered the foundation for the other components of internal control. The other components of internal control are risk assessment, information and communication, control activities, and monitoring.
The control environment is sometimes referred to as the “tone at the top.” The control environment is the framework upon which all other principles are built. It is not as specifically designed to ensure that controls continue to operate effectively as is monitoring
The “tone at the top” represents the culture of an organization in terms of the standards related to controls and conduct that senior management and the board of directors set for an entity. When employees are focused on doing the right thing, when management quickly addresses and resolves issues, and when fairness and honesty prevail in dealings with internal and external people, a positive tone for the organization is established.
Logical controls use software and data to monitor and control access to information and computing systems.
An uninterrupted power supply is considered a physical control. Physical controls monitor and control the environment of the workplace and computing facilities. They also monitor and control access to and from such facilities.
General controls are designed to ensure that an organization’s control environment is stable and well-managed.
Information-processing controls can be automated or manual, and apply to the processing of information and transactions to help ensure transactions occurred, are authorized, and are completely and accurately processed and reported.
Communication of control deficiencies in INTERNAL CONTROL - FS AUDIT ONLY, NONISSUER - CONTROL DEFICIENCY, SIGNIFICANT DEFICIENCY, MATERIAL WEAKNESS.
Communication should be made within 60 days (FOR NON ISSUER) of the report release date.
(14 DAYS FOR ISSUER)
INTERNAL FACTORS - Mgt performance based compensation, financing methods.
EXTERNAL FACTORS - Business cycles, regulatory factors, industry factors
Identify and assess risk of material misstatement at the financial statement level =
Respond with financial level response (i.e. increase level of supervision)
Identify and assess risk of material misstatement at assertion level =Respond at assertion level by changing NET
Inherent risk * Control risk
Assertion - COVERUP
Relationship between RMM and NET
Drafting the audit plan
1. OBJECTIVE - All AR exist
2. ASSERTION - Existence
3. AUDIT PROCEDURE - Confirm(NATURE) 25 (EXTENT) AR as of 12/31/year 1 (TIMING)
Susbstantive procedures
- Used to detect material misstatements to transaction classes, account balances, and disclosures.
- Includes other audit procedures required by GAAS (i.e. letter of lawyer inquiry)
Test of Details - Applied to transaction classes, account balances and disclosures. Consist of audit procedures used to gather evidence to support the account balances as reflected in the financial statements.
SUBSTANTIVE ANALYTICAL PROCEDURES
1. Evaluations of Fin Information made by a study of plausible relationships among both Financial and nonfinancial data
2. Generally involve comparisons of recorded amounts to independent expectations developed by the auditor.
ELEMENTS OF QUALITY CONTROL
- HUMAN resources
- Engagement/Client Acceptance and Continuance
- Leadership Responsibilities
- Performance of the engagement
- Monitoring
- Ethical Requirements
Inherent rrisk factors may be qualitative or quantitative and include factors such as:
- Complexity
- Subjectivity
- Change
- Uncertainty
- Mgt bias or fraud risk
- Significance
- Volume or lack of uniformity
AUDIT objectives are the same in both __________
computerized and manual environments
CHATGPT - Assertion level
Assertion level in the context of auditing refers to the specific representations made by management in the financial statements regarding the accuracy and completeness of the financial information. These assertions are made about individual transactions, account balances, and disclosures in the financial statements.
When auditors perform their work, they need to test these assertions to determine whether the financial statements are fairly presented in accordance with the applicable accounting framework (e.g., GAAP or IFRS). These assertions help auditors identify areas where misstatements might occur and guide the audit process.
The key assertions typically covered during an audit include:
Existence (or Occurrence)
Meaning: The items or events actually exist or have occurred.
Example: The company’s reported assets, like inventory, actually exist at the balance sheet date.
Completeness
Meaning: All transactions, balances, and disclosures that should have been included are indeed included.
Example: All liabilities are reported and none are left out.
Rights and Obligations
Meaning: The entity has the legal rights to the reported assets, and it is obligated for the reported liabilities.
Example: A company reports ownership of its property and has responsibility for any reported debts.
Valuation or Allocation
Meaning: The amounts are properly valued and recorded in the correct accounting period.
Example: Inventory is valued correctly based on its cost or market value, and no overstatements are made.
Presentation and Disclosure
Meaning: The financial statements are properly classified, described, and disclosed in accordance with the applicable financial reporting framework.
Example: The financial statements clearly present the entity’s activities, and all required disclosures are made, such as contingent liabilities or related-party transactions.
Accuracy
Meaning: Transactions and events have been recorded at the correct amounts.
Example: The sales figures recorded reflect the accurate amount billed to customers.
By evaluating these assertions, auditors assess whether the financial statements present a true and fair view of the company’s financial performance and position. The assertion level is crucial for auditors to focus their testing on areas of high risk or potential misstatements.
Audit documentation supports the ______
Opinion
Mgt representation letter
All material matters have been adequately disclosed to the AUDITOR
A written audit program is required for every audit
engagement letter - mandatory
Hospitals - less affected by business cycles
Documentation may include any item the AUDITOR can (Acronym -FIND):
- F - Flowchart
- I - Internal control questionnaire or checklists
- N - Narrative
- D - Documentation from the client, including copies of the entity’s procedures manuals and org charts.
The determination of whether a risk is a significant risk should ignore the effects of controls related to the risk and should be based entirely on inherent risk. A significant risk exists when inherent risk is higher on the spectrum of inherent risk.
Testing of Design and Operating Effectiveness
Procedures to test design effectiveness:
- INQUIRIES
- OBSERVATION
- INSPECTION
Walkthroughs that include these procedures are sufficient to test design effectiveness.
Procedures to test OPERATING effectiveness:
- INQUIRIES
- OBSERVATION
- INSPECTION
- REPERFORMANCE
Used exclusively for testing operating effectiveness.
Controls that are tested only during an interim period should be supplemented by additional evidence for the remaining period.
Also known as rollforward procedures for remainder year
E.g. Interim testing period
Even if controls have not changed, operating effectiveness must be tested at least once ___________
every third year
IR = RMM (Risk of Material Misstatement)
IR*CR=RMM
Susbtantive procedures are used to detect material misstatements to transaction classes, account balances and disclosures at the relevant assertion level.
Includes other audit procedures required by GAAS (i.e. letter of lawyer inquiry)
2 types
- Test of details - Applied to transaction classes, account balances, and disclosures
Consist of audit procedures used to gather evidence to support the account balances as reflected in FS. - Substantive Analytical procedures - Evaluations of FI made by a study of plausible relationships among both financial and nonfinancial data. Generally involve comparisons of recorded amounts to independent expectations developed by the auditor.
Ratios and Subsequent events and Consolidation sim to be revised from FAR
Planning stage - auditor should make a preliminary judgement of ________
materiality
More complex indicators
- Several business lines
- Many levels of mgt
- Complex transactions
Less complex indicators”
- Fewer business lines
- More centralized accounting functions
- Few levels of management
Audit procedures - 2 categories
- Risk assessment Procedures
- Further Audit procedures - further into 2 categories - A. TEST OF CONTROLS (if applicable) and B. SUBSTANTIVE PROCEDURES (required)
AUDIT PLAN should include info related to NATURE, EXTENT AND TIMING of audit procedures: NET
- Nature refers to the type of procedure that’s going to be performed
- Extent refers to number of items
- Timing refers to the testing period or testing as of date.
Performance MATERIALITY (Nonissuer)
Tolerable Misstatement (Issuer)
MISSTATEMENTS include:
- Inaccuracies in the collection of processing of data
- Departures from GAAP
- Omissions
- Inappropriate selection or application of accounting policies
- Inappropriate classification, aggregation, or disaggregation of information
TYPES of MISSTATEMENTS
- FACTUAL (about which there are no doubt)
- JUDGEMENTAL (differences arising from the judgments of mgt, including those concerning recognition, measurement, presentation, and disclosure in the FS(including the selection or application of accounting policies that auditor considers unreasonable or inappropriate)
- PROJECTED (These are the auditor’s best estimate of misstatements identified in audit samples to the entire population from which the samples were drawn.)
AUDIT RISK (should be low) = Risk of Material Misstatement (Assessed by Auditor)* Detection Risk (controlled by auditor)
Audit risk = RMM*DR
RMM = IR*CR
The auditor must perform a separate assessment of INHERENT RISK (IR) and CONTROL RISK (CR).
The components of audit risk may be assessed either:
1. Quantitatively (e.g. as a %); or
2. Nonquantitatively (e.g. High, medium, low, etc.)
Audit risk equation
AR = RMMDR = IRCR*DR
or DR = AR/RMM
Types of Fraud
- Fraudulent Financial Reporting
- Misappropriation of Assets
Fraud Triangle
- Incentives/Pressures - a reason to commit fraud. e.g. excessive pressure for mgt to meet aggressive goals
- Opportunity - a lack of effective controls. Example -weak controls over cash (no locks on cash register)
- Rationalization/Attitude - an attempt to justify fraudulent behavior. Example includes:
Disregard for authority (i.e. known history of violations of securities law)
Confirmation of accounts payable is a test of details, not an analytical procedure.
Scanning payroll files for terminated employees is a test of details, not an analytical procedure.
Recalculating interest expense based on notes payable balances is a test of details, not an analytical procedure.
Total transactions = Total revenue
Something not in FS, e.g. Compliance (never part of FS)
Report in Other Matter Paragraph
Examination engagement - Opinion report
Review - Conclusion
Agreed-upon Porcedures - Findings
Examination can be an assertion based examination or a direct examination
ASSERTIONS - MNEMONIC COVER UP
- COMPLETENESS - all account balances, transactions, and disclosures that should have been recorded and included in the FS.
- CUTOFF- Transactions - Transactions have been recorded in the correct accounting period.
- VALUATION, ALLOCATION AND ACCURACY - Account balances, transactions and disclosures are recorded and described fairly and measured at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded.
- EXISTENCE AND OCCURRENCE - Account balances exist, and transactions that have been recorded and disclosed have occurred and pertain to the entity.
- RIGHTS AND OBLIGATIONS - The entity holds or controls the rights to assets and liabilities are the obligations of the entity. Account balances and disclosures.
- UNDERSTANDIBLITY OF PRESENTATION AND CLASSIFICATION- Transactions have been recorded in the proper accounts and appropriately aggregated or disaggregated. Fin Information is appropriately presented and descibed and disclosures are clearly expressed and understandable in the context of the applicable financial reporting framework.
Control and Detection
Inverse relation
Test of controls cannot detect misstatements but can only be used to assess the risk of material misstatements
Inherent risk is a component of audit risk and not of detection risk.
Detection risk is a component of audit risk and not vice versa.
Compilation Agreement
The effect that independent impairments if present will have on the expected form of the accountant’s report.
Issuer = 14 or 45? days after re[prt release date, retained for 7 yrsrd
Non issuers = 60 days after report release date, 5 years
AUDIT REQUIREMENTS WHEN USING A SPECIALITIST
- Evaluate his competence and objectivity
- Assess the risk of material misstatement with the subject matter
- Understand and evaluate the external IT auditor’s or specialist’s work
- Verify any relationships with the client are appropriate
MONITORING sequence of activities
- cconduct ongoing and/or separate evaluations to determine if IC are in place and functionning
- EValuate and control IC deficiencies
- CONTROL baseline - Understand internal controls (I/C) system and develop baseline
- Change IDENTIFICATION - identify changes in I/C effectiveness through ongoing and/or separate evaluations
- Change management - Implement I/C Changes are needed.
- Control revalidation/update Develop new baseline after I/C revisions
To what degree, is a significant deficiency related to a material weakness
IT Is LESS SEVERE than a MATERIAL WEAKNESS.
Disclaimer of opinion
Auditors cannot/do not express an opinion
KEY POSITION- Any position that gives the ability to exercise influence over financial statements.
CEO, CFO, Controller, Director of internal audit
LEADING INDICATIORS
LAGGING INDICATORS - inventories to sales ratios, prime rate charged by banks
Shortgaes may occur during a PEAK
TROUGH - Profit at lowest, firms have excess capacity and must reduce COSTS and their WORKFORCES.
RECOVERY -
Contraction - Decrease in economic activity, when the economy is contracting
Periodic reconciliation of changes to the data is considered a detective control because it reviews changes. This control helps to verify that any changes made to the data follow the established policies and procedures, including appropriate review and approval.
. In every audit, the auditor should obtain a sufficient understanding of the design of relevant controls pertaining to financial reporting in each of the five internal control components.
AR = RMM DR= IRCR*DR
ATTEST = Examination, Review and Agreed-upon procedures (ERA)
Vulnerability controls identify and prevent security issues for newly installed applications and post-installation applications on an ongoing basis. This control is not related to job role duties.
Authentication controls validate a user’s identity for system access, ensuring that only the appropriately designated person accesses a system. This control is not violated because Computing Corp. granted system access for Janice for both job roles, so she would be the proper person to allow access during the authentication process.
Access control lists are a type of authentication control that governs the level of access that a user has, such as the ability to create content, read it only, or remove data. There is no mention of the type of access Janice has been given in her two job roles, which means there is no indication that this type of access control was violated.
Computing Corp. violated the preventive control of segregation of duties. To implement this control, organizations identify job role functions that have conflicts of interest or functions that should otherwise not be performed by the same person because that could lead to fraudulent behavior or errors. If Janice is both a security administrator and a programmer, she would have the ability to create an application that circumvents network security protocols, violating the control of segregation of duties.
Substantive testing is typically not utilized to identify relevant controls. Substantive testing is an audit procedure designed to detect material misstatements. Auditors typically will assess the risk of material misstatement, which includes obtaining an understanding of controls, and then will determine the nature, extent, and timing of substantive procedures.
An auditor is not required to evaluate operating effectiveness as part of understanding the system of internal control. Tests of controls are performed when the auditor’s risk assessment is based on the assumption that controls are operating effectively or when substantive procedures alone are insufficient (e.g., when the entity makes extensive use of information technology).
3 impairments
PERSONAL, ORGANIZATIONAL and EXTERNAL
GAGAS
Yellow book
Auditors of public companies of any size are not covered by ________
GAO rules (Govt Accountability office)
Detection risk
A risk that a misstatement can go undetected
Professional judgement is based on
Training, knowledge and experience
On the job training does not qualify as CPE under GAO rules and over a 2 year period. ABC will need 80 hours of CPE of which at least ______should cover subject matter that deals directly with auditing in the govt. environment.
24 hours
GAO’s conceptural framework includes a unique ___________that derives from an auditing organization’s placement within a government entity which might, in combination with the structure of the entity being audited, impact the auditor’s ability to work and report results objectively.
STRUCTURAL THREAT - GAO
Testing at interim is often performed when the ___________________
risk of material misstatement is low
Attestation services are non-audit services.
e.g. assertions/ claims made by another party. examination/forecasts
- examination 2. reviews 3. agreed upon procedures
Disposes off shares within 30 days - does not create AUD problem
True
- Other partner in the office even if he is not providing service to the client
2.DHG firm providing audit services
COVERED member
If loan payments are uptodate and terms are completely normal, no problem arises if staff took bank from the loan staff is auditing.
True
Blank confirmations provide the most assurance because they require that the 3rd party writes down the amount they believe they owe the client. The auditor can then compare what the 3rd party wrote down to what the client has reported.
Blank confirmations require the customer to input the amount that they owe the company (your audit client). Blank forms will often provide a greater amount of assurance; however, they will often result in lower responses as people are less likely to make the effort to fill them out. Blank confirmations provide the highest level of assurance.
Motivation, Rationalization and Opportunity
Fraud Triangle
COMPILATIONS do not require independence but lack of independence should be ____________
DISCLOSED.
what is scope limitation in Audit
ChatGPT said:
In auditing, scope limitation refers to a situation where the auditor is unable to obtain sufficient appropriate audit evidence to form an opinion on the financial statements due to restrictions imposed by the client or other circumstances. These limitations prevent the auditor from fully assessing the financial records, transactions, or internal controls of the entity being audited.
Scope limitations can arise in various ways, such as:
Client-imposed limitations: The client may refuse to provide access to certain records or documents, restrict access to key personnel, or limit the auditor’s ability to perform certain audit procedures.
Inability to perform necessary audit procedures: Sometimes, due to time constraints, lack of cooperation, or inability to access certain information (such as records from a third party), the auditor cannot complete the audit process as planned.
Circumstances beyond the auditor’s control: There may be instances where natural disasters, fire, or theft result in the destruction of accounting records, or where legal restrictions prevent certain information from being reviewed.
Types of Scope Limitations:
Complete scope limitation: When the auditor is unable to perform any of the planned audit procedures.
Partial scope limitation: When the auditor cannot perform specific procedures in some areas, but the audit can still proceed in other areas.
Impact on the Audit Opinion:
If a scope limitation is significant and cannot be resolved, the auditor may issue a qualified opinion, indicating that they were unable to obtain sufficient evidence to form an opinion on certain aspects of the financial statements.
In extreme cases, if the scope limitation is pervasive and affects the entire audit, the auditor might issue a disclaimer of opinion, stating that they cannot express an opinion on the financial statements due to the lack of sufficient evidence.
Scope limitations are taken very seriously in audits, as they could signal potential issues or risks with the entity’s financial reporting.
ChatGPT
A Financial Reporting Framework Audit is an examination of an entity’s financial statements to ensure they comply with the applicable financial reporting framework (FRF) in place. These frameworks provide the guidelines for how financial statements should be prepared and presented. The audit ensures that the financial statements are accurate, complete, and fairly represent the financial position of the company or entity in accordance with the chosen framework.
Key Financial Reporting Frameworks (FRFs)
Generally Accepted Accounting Principles (GAAP) – Widely used in the United States, it outlines the rules and procedures for accounting in various industries.
International Financial Reporting Standards (IFRS) – Used globally, IFRS is a set of standards set by the International Accounting Standards Board (IASB).
Other FRFs – Some organizations may follow specialized frameworks such as the cash basis, tax basis, or regulatory basis depending on their specific needs and jurisdiction.
Steps in a Financial Reporting Framework Audit
Understanding the Entity: The auditor will review the company’s business model, operations, and the regulatory environment to determine the most relevant financial reporting framework.
Evaluating Internal Controls: The auditor evaluates the effectiveness of internal controls over financial reporting to assess how accurately the financial information is compiled.
Testing Financial Statements: The auditor tests the financial statements against the selected framework (e.g., GAAP or IFRS) to ensure compliance. This includes:
Verifying the accuracy of financial data
Ensuring correct classification of assets, liabilities, revenues, and expenses
Assessing the adequacy of disclosures required by the chosen framework
Identifying Material Misstatements: The auditor looks for any material misstatements or deviations from the framework and evaluates whether these issues are significant enough to impact the overall reliability of the financial statements.
Forming an Opinion: After assessing the financial statements, the auditor forms an opinion on whether the financial statements are prepared in accordance with the financial reporting framework, offering one of the following opinions:
Unqualified Opinion: The financial statements are presented fairly in accordance with the applicable framework.
Qualified Opinion: The financial statements are mostly compliant with the framework, but there are exceptions.
Adverse Opinion: The financial statements do not conform to the framework.
Disclaimer of Opinion: The auditor is unable to form an opinion due to significant limitations in the scope of the audit.
Importance of a Financial Reporting Framework Audit
Transparency: It ensures that the company is transparent in its financial reporting, providing stakeholders with reliable and consistent information.
Compliance: Ensures the entity adheres to relevant legal and regulatory requirements.
Investor Confidence: Proper audits enhance the credibility of financial statements, reassuring investors, creditors, and other stakeholders.
Financial Decision-Making: Accurate and reliable financial information is crucial for internal management decisions and external investments.
Material effect
add EMPHASIS MATTER para
Anything that’s not disclosed in FS
Other matter PARA
Omits one of the financial statements
Qualified opinion
e.g. GAAP DEPARTURE
Does not issue/omit cash flow statement
Reviewing confirmations of loans receivable and payable is useful for determining the existence of related party transactions because guarantees are commonly provided by or for related parties.
Recurring transactions after year-end are a usual business occurrence. Related party transactions would most likely be nonrecurring.
The auditor would generally rely on persuasive evidence rather than conclusive evidence.
To be assured beyond a reasonable doubt would require that the auditor test near or at 100% of the items in the population for a given audit procedure. This is not practical in many cases.
Cash disbursements
Attribute sampling is also known as
Sampling internal control
After obtaining an understanding of how management developed its estimate, the auditor would perform one or a combination of the following procedures:
Review subsequent events and transactions (occurring prior to completion of fieldwork) that corroborate the value of the estimate (choice “A”).
Develop an auditor’s point estimate or range (choice “B”).
Review and test the procedures used by management to develop the estimate (choice “D”).
Social media post -Unstructured data
spreadsheet, data mart data - structured data
Variance analysis-bullet charts
Scatter plots - analyzing relationships
Pie chart
Propotional make up of analysis of category of population
Ratio estimation is most effective if there is a correlation between book values and audit amounts.
A relatively small number of differences do not improve the effectiveness of ratio estimation sampling relative to other techniques.
Overstated units have a higher (not lower) probability of sample selection than units that are understated, because with PPS sampling, each item is given a probability of selection in proportion to its recorded amount (probability-proportional-to-size).
. The sampling distribution does not have to approximate the normal distribution in order for PPS sampling to be used.
Sampling interval = Tolerable misstatement/Reliability factor
Dollar unit sampling or In PPS sampling, the auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan. The inputs for PPS are tolerable misstatement, risk of incorrect acceptance (reliability factor), and the recorded amount of the population being sampled.
An emphasis-of-matter paragraph is used to emphasize a matter that is appropriately presented or disclosed in the financial statements.
An other-matter paragraph is used to refer to matters other than those presented or disclosed in the financial statements.
Negative cash flows from operations are examples of negative trends that the entity has experienced. They may be an indicator of financial difficulties that the entity is facing.
. If substantial doubt remains, a separate section should be added to the auditor’s report with the heading “Substantial Doubt About an Entity’s Ability to Continue as a Going Concern.” If management’s plans alleviate the substantial doubt, an emphasis-of-matter may be added (optional).
When a CPA concludes that there is substantial doubt about an entity’s ability to continue as a going concern and that doubt remains (is not alleviated by management’s plans) and the entity adequately discloses its financial difficulties, an unmodified opinion is appropriate. A separate section with the heading “Substantial Doubt About the Entity’s Ability to Continue as a Going Concern,” rather than an emphasis-of-matter paragraph, should be added to the auditor’s report. This paragraph should include the phrases “substantial doubt” and “going concern.”
If substantial doubt about the entity’s ability to continue as a going concern has been removed in the current period, the separate going concern section included in the prior period auditor’s report should not be repeated, and no description of the reasons or plans for recovery need be included.
Inadequate disclosure of the substantial doubt about an entity’s ability to continue as a going concern is a departure from GAAP, resulting in either a qualified or adverse opinion.
Scope limitations result in either a qualified opinion or in a disclaimer of opinion, but not in an adverse opinion.
Risk of incorrect acceptance:
Deciding from the sample that the balance is correct when it is really materially misstated; affects audit effectiveness.
Risk of incorrect rejection:
Deciding from the sample that the balance is materially misstated when it is really correct; affects audit efficiency.
Risk of assessing control risk too low:
The risk that the assessed level of control risk is less than the true risk, which is caused by thinking that the control is more effective and reliable than it really is; affects AUDIT EFFECTIVENESS.
Risk of assessing control risk too high:
The risk that the assessed level of control risk is greater than the true risk, which is caused by thinking that the control is less effective and reliable than it really is; affects audit efficiency.
Sampling risk + reliability (confidence)=
100%
Attribute sampling
These factors affect sample size in an attribute sampling application:
- Risk of assessing control risk too low (inverse relationship)
- Tolerable deviation rate (inverse relationship)
- Expected deviation rate (direct relationship)
- Population size (not an issue if the population is large)
The auditor compares the upper deviation rate with the tolerable deviation rate in drawing conclusions about an attribute sampling application. If the upper deviation rate exceeds the auditor’s tolerable deviation rate, the auditor will not rely on the control.
(The upper deviation rate is the sample deviation rate plus an allowance for sampling risk)
