Module 5

Question 1

What are the four primary forms of a reporting done by auditors?

Answer 1

Examinations - provide a report with POSITIVE opinion with reasonable assurance on whether assertions follow the appropriate criteria

Reviews - provide a report that includes limited assurance (negative assurance) “I am not aware of any material modifications that should be made”

Agreed-Upon Procedures - report that provides a summary of findings. It is less in scope than an examination, thus the reports disclaims a positive opinion on the financial statements , and provides a list of procedures performed and related findings,

Compilations - provide a report with no assurance. The objective of performing a compilation is assisting management in presenting financial information in the form of financial statements, without undertaking to obtain any assurance in presenting financial information in the form of financial statements.

Question 2

A “good” report of a public company is called? and for a private company?

Answer 2

Public - “Unqualified”

Private - “Unmodified”

Question 3

a typical audit report contains 4 paragraphs, what are they?

Answer 3

1st - We have audited accompanying consolidated financial statements of ABC and it subsidiaries (list each statement”

2nd - Management is responsible for the preparation and fair presentation of financial statements in accordance with GAAP

3rd - Auditors responsibility - Our responsibility is to express an opinion on these consolidated financial statements. Audit conduced in accordance with GAAS “reasonable assurance”

4th - Opinion - In our opinion the financial statements referred to above are presented fairly, in all material respects, the financial position of ABC Company and it subsidiaries as of Dec 31 X1, Dec 31 X0

Question 4

Key Details in the audit report - Introduction

Answer 4

Required Title “Must contain Independent”
Addressee - highest group possible Not management”
Identify the entity audited
Financial statements have been audited
Titles of Financial statements
Date or period covered by financial statements

Question 5

Key Details in the audit report - Managements responibilities

Answer 5

1- Management’s responsibility for the preparation and fair presentation of the financial statements following applicable financial reporting framework
2- Responsibility includes design, implementation and maintenance of IC to allow preparation and fair presentation of financial statements that are free of material misstatement from errors or fraud

Question 6

Key Details in the audit report - Auditors responibilities

Answer 6

1- Express an opinion based on audit
2- Audit conducted in accordance with GAAS of USA
3- Standards require auditor to plan and perform audit to obtain reasonable assurance financial statements free of material misstatement
4- Discuss nature of audit procedures
5- Audit evidence sufficient and appropriate for opinion

Question 7

Key Details in the audit report - Opinion

Answer 7

1- Financial statements present fairly, in all material respects, financial position and results of operations and cash flows in accordance with applicable financial reporting framework.
2- Identify the financial reporting framework

Ending -
Manual or printed firm name signature
Auditor’s address (City and state)
Date (no earlier than date the auditors has obtained sufficient appropriate audit evidence.

Question 8

What are the major differences between the Audit report of private audit reports and public audit reports?

Answer 8

Public audit reports must have the title “Report of Independent Registered Public Accounting Firm”

Referral to the standards of the PCAOB, rather than GAAS

Less detailed discussions of management and auditor responsibilities

A paragraph referring to the auditor’s report on internal control

Question 9

When are Emphasis-of-Matter paragraphs added to an audit report?

Answer 9

1- when the professional standards require that, when material, the matter be brought to the attention of users in the auditor’s report in all instances and
2- when the auditor on a discretionary basis includes the matter in the audit report

When used: Include it after the opinion paragraph, and Use the heading “Emphasis of matter” or other appropriate heading. Also indicate that the auditor’s opinion is not modified with respect to the matter emphasized

Question 9

When there is substantial doubt about the ability to continue as a going concern, how is the audit report Modified?

Answer 9

An Unmodified opinion with emphasis-of-matter paragraph or disclaimer (no criteria provided for deciding which is appropriate)

Question 10

When there is an Inconsistency in application of accounting principles, how is the audit report modified?

Answer 10

An Unmodified opinion with emphasis-of-matter paragraph

Question 11

The 2 other occasions where an emphasis of matter paragraph can be added is in cases of uncertainties, and ‘other circumstances at the discretion of the auditor’ What is the audit report modification for both

Answer 11

Uncertainties - Unmodified opinion with emphasis-of-matter paragraph or disclaimer (multiple uncertainties)

‘other circumstances’ - Unmodified opinion with emphasis of matter paragraph

Question 12

What are typical audit procedures that can identify conditions that may indicate a going concern problem?

Answer 12

1- Analytical procedures
2- Review of subsequent events
3- Review of compliance with debt agreements
4- Reading of minutes of stockholders, board of directors, and other important board committees
5- Inquire of legal counsel
6- Confirmation with related third parties of the details of arrangement to provide or maintain financial support

Question 13

If the auditor adds an emphasis of matter paragraph because of a going concern doubt exists, what language MUST be included

Answer 13

“Substantial Doubt, and “Going Concern”

Question 14

What are the 4 criteria that a change in accounting principle must meet to issue an unmodified opinion? What opinion is issued if 1 of the criteria is not meet?

Answer 14

1 - Newly adopted principle is generally accepted
2- method of accounting for the effect of the change is in conformity with GAAP
3- Disclosures related to the change are adequate
4- Management has justified that the new accounting principle is preferable

If not all Met, issue either a qualified opinion or an adverse opinion

Question 15

What is a Qualified Opinion?

Answer 15

A Qualified opinion is issued in both of the circumstances 1) Materially misstated financial statements and 2) an inability to obtain sufficient appropriate audit evidence. (The Likely Affects, while material, are not considered pervasive)

Question 16

What is an Adverse Opinion?

Answer 16

An adverse opinion is issued when financial misstatements are materiel misstated and the effects of the misstatement are BOTH Material and pervasive.

Question 17

What is a Disclaimer of opinion?

Answer 17

A disclaimer of opinion is issued when there is an inability to obtain sufficient appropriate audit evidence, and the effects are both material and pervasive.

Question 18

T/F Audit reports with a modified opinion include a basis for modification paragraph that describes the matter giving rise to the modification. The paragraph is placed immediately before the opinion paragraph and has the heading Basis for Qualified opinion, basis for adverse opinion, or basis for disclaimer of opinion

Answer 18

True

Question 19

Pervasiveness is measured by three criteria, what are they?

Answer 19

1- the misstatements are not confined to a specific element, accounts, or items of the financial statements
2- They represent or could represent a substantial proportion of the financial statements
3- In relation to disclosures, are fundamental to user’s understanding of the financial statements

Question 20

What is an example of an qualified opinion paragraph? for material misstatement?

Answer 20

In our opinion, except for the effects of the matter described in the basis for qualified opinion paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of ABC company as of Dec 31, 20x1 and the results of its operations, and its cash flows for the year then ended in accordance with accounting principles generally accepted in the USA

Question 21

What is an example of an Adverse opinion? for Material misstatement

Answer 21

In our opinion, because of the significance of the matter discussed in the basis for adverse opinion paragraph, the consolidated financial statements referred to above do not present fairly the financial position of ABC company and its subsidiaries as of December 31, 20x3, or the results of their operations or their cash flows for the year then ended.

Question 22

What are three types of scope limitations?

Answer 22

1- circumstances beyond the control of the client (acctg records were destroyed
2- Circumstances relating to the nature, timing of the auditor’s work
3- The client (eg, client refused to allow auditors to send confirmations to customers.

Question 23

What is an other matter paragraph? and when is it used?

Answer 23

A paragraph added to the audit report to bring to attention to something the auditor whishes to convey that is not in the audited financial statements. It is used to explain an auditors association with a prior period financial statements, to state a previously issued report is now accurate,

Question 25

If there is doubt of the entity to continue as a going concern, what are the auditor report ramifications?

Answer 25

The auditor should (1) add an emphasis of matter paragraph to the report or (2) Disclaim an opinion

If after auditor determines managements plans. and then does not have substantial doubt continue with an unmodified opinion

Question 26

When are Qualified opinions issued?

Answer 26

IT is issued when (1) materially misstated financial statements and (2) inability to obtain sufficient appropriate audit evidence (Not pervasive)

Question 27

When is an adverse opinion issued?

Answer 27

An adverse opinion is issued when financial misstatements are materially misstated and the effects of the misstatements are both material and pervasive

Question 28

When is an Disclaimer of opinion issued?

Answer 28

IT is issued when there is an inability to obtain sufficient appropriate audit evidence and the possible effects are both material and pervasive

Question 29

What is auditors responsibilities with respect to required supplementary information?

Answer 29

They must provide limited procedures (Inquire of Management, Compare info for consistency, obtain written representations from management)

Then for PCAOB - do not include include any disclosure for public company audits

For AICPA - Require an other-matter paragraph

Question 30

What is the auditors responsibilities to supplementary information?

Answer 30

Perform analytical procedures such as (Inquiry of management, obtain an understanding of how the information was prepared, obtain written representations)

When the information is found to be fairly stated in relation to the financial statements, an other-matter paragraph is added.

Question 31

What are Service Organization Control (SOC) reports?

Answer 31

Service organizations provide processing services to customers who decide to outsource their processing of particular data. Examples of service organizations include data centers, flexible account services, and medical claims processors. The AICPA has established three types of examination services that result in the following three types of CPA reports on service organization controls (SOC)?
SOC 1
SOC 2
SOC 3

Question 32

SOC 1 is?

Answer 32

Restricted use reports on controls at a service organization relevant to a user entity’s internal control over financial reporting

Question 33

Soc 2 is?

Answer 33

Restricted use reports on controls at a service organization related to security, availability, processing integrity, confidentiality, and/or privacy.

Question 34

SOC 3 is?

Answer 34

General use SysTrust reports related to security, availability, processing integrity, confidentiality, and/or privacy

Question 35

What is an auditors responsibility over nonfinancial information that is included in a document that contains audited financial report?

Answer 35

Check for inconsistencies. If found, make sure they are corrected, or, disclose, possible issuing a qualified or adverse opinion,

Question 36

Important notes when an accountant participates in forecasts and projections?

Answer 36

1 - An accountant should not be associated with a forecast/projection that do not disclose assumptions
2- Forecasts may be for general or limited used. Projections are for limited use only
3- Independence is not required for compilations
4- Know that compilations provide no assurance.

Question 37

What is pro forma financial information, and how should it be treated?

Answer 37

it is developed when changes in capitalization which adjust earlier financial information prospectively for the effects of an actual or proposed transaction.

Accounts may either review or examine this information:
Reviews - less in scope provide negative assurance

Question 38

What are trust services?

Answer 38

Trust services - jointly developed with the Canadian Institute of Chartered Accountants are designed to provide information system business assurance and advisory services that instill confidence in an organization, system, or other entity by improving the quality or context of information for decision makers.

Question 39

Who develops Trust Services?

Answer 39

They were developed by the AICPA’s Assurance Services Executive Committee

Question 40

What are the five principles that trust services are reported on?

Answer 40

(1) Security - the system is protected against unauthorized access
(2) Availability - The system is available for operation and use as committed or agreed
(3) Processing Integrity - System processing is complete, accurate, timely and authorized.
(4) Online Privacy - Private information obtained as a result of electronic commerce is collected, used, disclosed, and retained as committed or agreed.
(5) Confidentiality - Information designated as confidential is protected as committed or agreed.

Question 41

What are the four crigeria for trust services?

Answer 41

Policies, Communications, Procedures, Monitoring

Question 42

What is a WebTrust?

Answer 42

it is a trust service that accountants issue that provides assurance on electronic commerce (including websites). The CPA is engaged to examine both that a client complied with the trust service criteria, and that it maintained effective controls over the system based on Trust Services criteria

Question 43

What is a SysTrust?

Answer 43

It is a trust service that accountants issue that provides assurance on any defined electronic system. In a SysTrust engagement the CPA is engaged to examined only that a client maintained effective controls over the system based on the Trust Services criteria.

Question 44

Reports on compliance provide positive or negative assurance?

Answer 44

Negative assurance only.

Question 45

An auditors report on compliance contains the following?

Answer 45

1- States that the financial statements were audited
2- Refers to the specific covenant or paragraph of the agreement and provides negative assurance relative to compliance
3- Describes any significant interpretations made my management relating to the agreement.

Question 46

What is the “Yellow Book”

Answer 46

It is Government Auditing Standards (GAS)

Question 47

What is a GAAS audit?

Answer 47

IT is an audit generally performed on governmental entities. (can be performed on certain nongovernmental entities that have received federal financial assistance).

It is a report that provides reasonable assurance that laws and regulations are not being violated.

The standard audit report is normally issued. If material noncompliance is detected, it should be disclosed in the financial statements, or treated as a departure from GAAP in the audit report thus requiring a qualified or adverse opinion.

Question 48

What is a GAGAS Audit?

Answer 48

It is is a generally accepted governmental auditing standards that is required for certain organizations the receive federal financial assistance. Whether a governmental organization is so required depends on the requirements of the federal financial assistance program in which it participates

GAGAS require reporting on the financial statements, internal control, and on compliance with laws and regulations.

Question 49

What are audits conducted under the single audit act?

Answer 49

More extensive that GAAS, or GAS audits. Require additional information, but should include the following:

(1) Opinion or disclaimer on whether the financial statements are in conform to GAAP?
(2) Opinion on schedule of expenditures of federal awards.
(3) Report on internal control related to the financial statements and major programs.