Reporting

Question 1

1. Examinations provide a report with a positive opinion with reasonable assurance on whether assertions follow the appropriate criteria.
2. Reviews provide a report that includes limited assurance. Limited assurance is also referred to as “negative assurance” because a phrase such as “I am not aware of any material modifications that should be made” is included in the report.
3. Agreed-upon procedures result in a report that provides a summary of findings.

Answer 1

1. Reporting

Question 2

4. 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 that there are no material modifications that need to be made.

Answer 2

1. Reporting

Question 3

1. The Sarbanes-Oxley Act of 2002 created a requirement for an integrated audit that provides assurance about the fairness of financial statements and about the effectiveness of internal control over financial reporting.
2. As implemented the audit of internal control requirement applies only to public companies with a market capitalization of $75,000,000 or more.

Answer 3

2. Public Companies (Issuers)

Question 4

1. Emphasis-of-matter paragraphs are added to audit reports in 2 situations: 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.
2. When an emphasis of matter paragraph is inserted the auditor should include it after the opinion paragraph, use the heading “Emphasis-of-matter” or other appropriate heading, include in the paragraph a clear reference to the matter emphasized and where that matter is in the financial statements, and indicate that the auditor’s opinion is not modified with respect to the matter emphasized.
3. In the following 2 circumstances (substantial doubt about ability to continue as a going concern and inconsistencies in application of GAAP), GAAS require that the auditor include an emphasis-of-matter paragraph (or other report modification)

Answer 4

3. Auditing Reports: Unmodified Opinion with Emphasis-of-Matter Paragraphs

Question 5

4. Substantial doubt about ability to continue as a going concern - Unmodified opinion with emphasis-of-matter paragraph or disclaimer (no criteria provided for deciding which is appropriate)
5. Inconsistency in application of accounting principles - Unmodified opinion with emphasis-of-matter paragraph
6. Uncertainties - Unmodified opinion with emphasis-of-matter paragraph or disclaimer (multiple uncertainties may lead to a disclaimer)
7. Other circumstances at the discretion of the auditor - Unmodified opinion with emphasis-of-matter paragraph

Answer 5

3. Auditing Reports: Unmodified Opinion with Emphasis-of-Matter Paragraphs

Question 6

1. Auditors are required to consider whether there is substantial doubt as to whether an entity will continue as a going concern for a reasonable amount of time not to exceed one year from the date of the financial statements.
2. When audit procedures indicate that substantion doubt could exist, the auditor should obtain management’s plans (including significant prospective financial information) for dealing with the conditions and events and assess the likelihood that these plans can effectively be implemented.
3. If after evaluating management’s plans substantial doubt exists, the auditor should either add an emphasis-of-matter paragraph to the report (following the opinion paragraph) or disclaim an opinion.

Answer 6

4. Substantial Doubt about Ability to Continue as a Going Concern (AU-C 570

Question 7

1. The general rule under both GAAS and PCAOB Standards is that it is an inconsistency in application of accounting principles that results in the addition of an emphasis-of-matter paragraph, while changes in accounting estimates and minor reclassifications of accounts from one year to the next do not.

Answer 7

5. Inconsistency in Application of GAAP (AU-C 708)

Question 8

1. Uncertainties are situations in which conclusive audit evidence concerning the ultimate outcome cannot be expected to exist at the time of the audit since that outcome will occur in the future.

Answer 8

6. Uncertainties (AU-C 706

Question 9

1. Modified opinions are required in 2 circumstances: 1) materially misstated financial statements (a “departure from GAAP”)-The auditor concludes that the financial statements as a whole are materially misstated. And 2) inability to obtain sufficient appropriate audit evidence (a “scope limitation”) - The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatements.
2. A qualified opinion is issued in both of the circumstances. The likely effects, while material, are not pervasive.
3. An adverse opinion is issued in the first circumstance , when financial statements are materially misstated and the effects of the misstatements are both material and pervasive.
4. A disclaimer of opinion is issued in the second circumstance, when ability to obtain sufficient appropriate audit evidence has occurred and the possible effects are both material and pervasive.

Answer 9

7. Circumstances Resulting in Audit Reports with Modified Opinions

Question 10

1. When a disclaimer of opinion occurs, the auditors attempt to obtain sufficient appropriate audit evidence by performing alternative procedures. If these procedures provide sufficient appropriate audit evidence no report modification is needed. If they do not, a decision needs to be made as to whether a qualified opinion is necessary or whether the possible effects on the financial statements are so pervasive as to require a disclaimer of opinion.

Answer 10

8. Inability to Obtain Sufficient Appropriate Audit Evidence (Scope Limitations)

Question 11

1. The group engagement partner is responsible for 1) the direction, supervision and performance of the group audit and 2) determining whether the auditor’s report on the group financial statements that is issued is appropriate.

Answer 11

9. Group Audit Requirements

Question 12

1. The Professional Standards define four special purpose financial reporting frameworks: cash basis, tax basis, regulatory basis, and contractual basis.
2. An audit report on financial statements prepared using a special purpose financial reporting framework departs from the standard form in several ways. Most important, the report should include an emphasis-of-matter paragraph alerting users that the financial statements are prepared in accordance with the special purpose financial reporting framework and refer to the financial statement note that describes the framework.

Answer 12

10. Audits of Financial Statements Prepared in Accordance with Special Purpose Financial Reporting Frameworks (AU-C 800)

Question 13

1. Auditors may be engaged to audit a single financial statement or a specific element of a financial statement, the auditors should adapt GAAS to the extent necessary in the circumstances.
2. When auditing a single financial statement or a specific element of a financial statement, the auditors should adapt GAAS to the extent necessary in the circumstances.
3. For example, sales and receivables, inventory and payables, and building and equipment and depreciation each are interrelated. Thus, when auditing a single financial statement or a specific element of a financial statement, the auditor may not be able to consider the financial statement or the element in isolation.

Answer 13

11. Audits of Single Financial Statements, and Specific Elements, Accounts, or Items of Financial Statements (AU-C 805)

Question 14

1. Reviews are also performed on interim (ordinarily, quarterly) financial information. Public companies (“issuers”) are required to have interim reviews, while nonpublic companies may choose to have reviews.
2. The objective of a review of interim financial information is to provide the accountant with a basis for communicating whether he or she is aware of any material modifications that should be made to the interim financial information for it to conform with the applicable financial reporting framework (e.g. GAAP)

Answer 14

12. Reviewed Interim (Quarterly) Statements (AU-C 930; PCAOB AU 722)

Question 15

1. Occasionally, a client prepared document will include summary financial statements (condensed financial statements) developed from audited financial statements

Answer 15

13. Summary Financial Statements (AU-C 810).

Question 16

1. A U.S. based company may prepare financial statements for use in other countries. For example, a company may have a subsidiary in Germany and may prepare financial statements for that subsidiary as part of an effort to raise capital in Germany. AU-C 820 addresses the auditors’ responsibility in this situation. When auditing the information, the auditors should comply with standards of the AICPA ( or PCAOB for a public company) to the extent the standards are appropriate.

Answer 16

14. Financial Statements Prepared Using a Financial Reporting Framework Generally Accepted in Another Country

Question 17

1. When a company wishes to issue new securities to the public, the underwriters of the securities will generally ask the company’s auditor to provide “comfort” on the financial and accounting data in the prospectus that is not covered by an accountant’s report of some form. In comfort letters, the CPAs will provide positive assurance that they are independent and that their audit followed SEC standards.
2. CPAs may be asked by specfic usersto report on the application of accounting principles to new transactions and products, or to increase the specified users’ knowledge of certain financial reporting issues.
3. Before providing a report on accounting principles, AU-C 825 requires the accountants to take steps to make sure they have a complete understanding of the form and substance of the transaction, including consulting with the company’s current auditors.

Answer 17

15. Other Reports - Auditing Standards Based

Question 18

1. AT 101 provides the framework for all attest engagements. Attestation standards apply to engagements in which CPAs are engaged to issue or do issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about subject matter, that is the responsibility of another party.
2. An assertion is a declaration about whether the subject matter is presented in accordance with certain criteria.
3. Criteria are standards or benchmarks that are used to evaluate the subject matter of the engagements. Criteria are important in reporting the CPAs’ conclusion to the users because they convey the basis on which the conclusion is formed.

Answer 18

16. Other Reports - Attestation Standards Based

Question 19

4. Suitable criteria should have an appropriate combination of the following characteristics: objective, measurable, complete, and relevant.
5. As indicated, the forms of attestation engagements are examinations, reviews, or the performance of agreed-upon procedures.

Answer 19

16. Other Reports - Attestation Standards Based

Question 20

1. AT 201 provides guidance for agreed-upon procedures engagements.

Answer 20

17. Agreed-Upon Procedures Engagements (AT 201)

Question 21

1. AT 301 presents 3 forms of accountant association with forecasts or projections - compilations, examination, and application of agreed-upon procedures.

Answer 21

18. Financial Forecasts and Projections (AT 301)

Question 22

1. AT 701 provides guidance for performing review and examination of management’s discussion and analysis. MD&A is included in reports filed with the SEC and in annual reports sent directly to shareholders

Answer 22

19. Management Discussion and Analysis

Question 23

1. Trust Services are designed to provide information system business assurance and avisory services that isntill confidence in an organization, system, or other entity by improving the quality or context of information for decision makers.
2. Trust Services view a system as consisting of five key components organized to achieve a specified objective -infrastructure, software, people, procedures, and data.
3. In a Trust Services engagement, management prepares and communicates a system description that can be included on the company’s website, attached to the practitioner’s report, or communicated to users in some other manner. It should clearly attract articulate the boundaries of the system so as to allow individuals to understand both the scope of management’s assertions related to it and the CPA’s report

Answer 23

20. Trust Services

Question 24

4. The CPA reports on whether the system meets one or more of the following principles over a particular reporting period: 1) security - The system is protected against unauthorized access (both digital and physical); 2) availability - The system is available for operation and use as committed and 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 and agreed; and 5) confidentiality - Information designated as confidential is protected as committed or agreed
5. For each principle reported upon by the author, the auditor considers each of the following 4 criteria: policies - the entity has defined and documented its policies relevant to the particular principle, Communications - The entity has communicated its defined policies to its authorized users; procedures - the entity utilizes procedures to achieve the objectives in accordance with its defined policies; and monitoring - the entity monitors the system and takes action to maintain compliance with its defined policies.

Answer 24

20. Trust Services

Question 25

1. Service organizations provide processing services to customers who decide to outsource their processing of particular data. Examples of service organizations include data centers, flexible spending account services, and medical claims processors

Answer 25

21. Service Organization Control (SOC) Reports