Reporting on Audit Engagements Part 2 Flashcards
emphasis of matter paragraph mandatory when
-the auditor’s opinion on revised F/S differs from opinion previously expressed
-justified change in accounting principle affecting consistency
-F/S prepared using special purpose framework
-F/S prepared using a regulatory basis intended for general use
emphasis of matter paragraph optional when
-significant related party transactions
-material uncertanties (unresolved lawsuit)
-important subsequent events
-lack of consistent application of accounting principles
if management decides not to make an auditors proposed adjustments and those adjustments
are immaterial in the aggregate
no disclosure is necessary and an unmodified opinion is appropriate
ADVERSE AUDIT REPORT FOR NONISSUERS
adverse opinion
basis for adverse opinion
responsibilities of management for F/S
auditor’s responsibilities for the audit of the F/S
ADVERSE AUDIT REPORT FOR NONISSUERS: adverse opinion
first paragraph
-identify entity
-state F/S have been audited
-state title of each statement (including dates)
-refer to footnotes to F/S
second paragraph
-state auditor’s opinion: “do not present fairly”
-refer to basis for adverse opinion section
broad objectives of ICFR
- render reasonable assurance that assets are safeguarded from unauthorized use or disposition
- financial records are sufficiently reliable to permit the preparation of F/S
only adverse opinion includes the phrase:
“do not present fairly”
qualified opinion indicates F/S are fairly presented with one or more exceptions, it uses the phrase
“except for” to emphasize that the exceptions are GAAP departures
STANDARD UNMODIFIED AUDIT REPORT FOR NONISSUERS
GAAP opinion
GAAS basis for opinion (or type of opinion)
GAAP responsibilities of management for the F/S
auditors responsibilities for the audit of F/S
KAM (key audit matters)
STANDARD UNMODIFIED AUDIT REPORT FOR NONISSUERS: opinion
first paragraph
-identify the entity
-state that F/S have been audited
-state the title of each statement including dates
-refer to notes to F/S
second paragraph
state auditors opinion: “present fairly in all material respects in accordance with GAAP (or other reporting framework”
STANDARD UNMODIFIED AUDIT REPORT FOR NONISSUERS: basis for opinion (or type of opinion)
-the reasons for the opinion provided
-states audit complied with GAAS (unless disclaiming)
-refers to auditors responsibilities section
-states auditor must be independent
-states auditor believes evidence is sufficient and appropriate (unless disclaiming)
-describes reason for modified opinion, if applicable
STANDARD UNMODIFIED AUDIT REPORT FOR NONISSUERS: responsibilities of management for the F/S
-management is responsible for design, implementation and maintenance of I/C
-references GAAP
-evaluation of entity’s ability to continue as a going concern
-preparation and the fair presentation of F/S
STANDARD UNMODIFIED AUDIT REPORT FOR NONISSUERS: auditors responsibilities for the audit of F/S
-to express an opinion on F/S (not I/C)
-describes the key requirements of GAAS (understand I/C)
-includes reference to amounts and disclosures
-description of audit: “examining, on a test basis, evidence regarding the amounts and disclosures”
resonableness of significant estimates, overall presentation of F/S and appropriateness of management’s acocunitng policies
STANDARD UNMODIFIED AUDIT REPORT FOR NONISSUERS: KAM (key audit matters)
-subjects most significant in the audit of nonissuer
-address significant RMM
-areas requring a high degree of professional judgment
-significant events during the period
for an integrated audit, you can have
separate reports
REPORT ON I/C + REPORT ON F/S
OR
one report
REPORT ON I/C & F/S
audit report states:
- audit followed appropriate auditing standards (PCAOB & GAAS)
- provided reasonable assurance the F/S are fairly stated in accordance with GAAP
- the date sufficient appropriate evidence obtained to support opinion
generally the last day of fieldwork
consistency is explicitly mentioned in the an audit report only if
it is lacking:
because consistent application of accounting principles is implicit in the claim that the F/S are in accordance with GAAP
lack of consistency is justified and properly disclosed
discussed in emphasis of matter paragraph
leads to unmodified opinion
lack of consistency is not justified or properly disclosed
discussed in the basis for opinion paragraph
leads to adverse or qualified opinion
top down approach to evaluating ICFR
- start with risk assessment at F/S level
- direct attention to significant classes of transactions, accounts, disclosures
- evalute operating effectiveness of key controls
internal control deficiency
design or operation of a control does not prevent or detect financial misstatements
material weakness
-reasonable possibility of material financial misstatement
-indicators:
1. ineffective governance
2. prior year financial restatements due to error or fraud
3. material misstatements not detected by controls
4. fraud by senior management, material or immaterial
significant deficiency
-less severe than material weakness
-merits attention by those charged with governance
KAM do not refer to the issue causing the qualified opinion because the issue is described in the basis for opinion section making it confusing and redundant to describe it again in the KAM section, SO
KAM refers to the basis of opinion section
similarily, the KAM section will reference the going concern section of an audit report instead of explaining the issue
AUDITS OF ICFR CANNOT RESULT IN
A QUALIFIED OPINION
management’s responsibility
-fair presentation of the F/S
-ICFR
auditor’s responsibility
-obtain reasonable assurance
-express opinion on F/S
-assess RMM
-follow appropriate standards (PCAOB, GAAS)
an audit evaluates
-amounts
-disclosures
-appropriateness of accounting policies
-reasonableness of significant estimates
-overall presentation
accounting principles utilized in the preparation of the F/S should
- be prepared in accordance with the identified financial reporting framework
- be appropriate in the circumstances
- provide information about matters that may affect the use, understanding and interpretation of the F/S
- classify and summarize information in a reasonable manner
- reflect transactions in a manner that presents the financial position, results of operations, and cash flows stated within
a range of reasonable and practicable limits
_______ requires integrated audits of all issuers
SOX
