Reports on Audited Financial Statements

Question 1

Reports on Audited Financial Statements

When should an auditor’s opinion be modified?

Answer 1

1. the auditor determines that the financial statements as a whole are materially misstated (GAAP)
2. the auditor is unable to obtain appropiate sufficient audit evidence to conclude that the financial statements are free from material misstatements (GAAS)

Question 2

What is the purpose of an emphasis-of-matter paragraph?

What is the purpose of an emphasis-of-matter paragraph?

Answer 2

The purpose of an emphasis-of-matter paragraph is to reference a matter that is appropiately presented in the financial statements, but is of such importance that it is fundamental to the user’s understanding of the financial statements.

It does not change the opinion of the auditor.

Question 3

Reports on Audited Financial Statements

What are the reporting requirements for an emphasis-of-matter paragraph?

Answer 3

Reporting requirements of an emphasis-of-matter include:

1. Placing the paragraph inmediately after the opinion paragraph.
2. Using the heading “Emphasis-of-matter” or another appropiate heading.
3. Describing the matter being emphasized and the location of relevant disclosures in the financial statements.
4. Indicating that the auditor’s opinion is not modified with respect to the matter emphasized.

Question 4

Reports on Audited Financial Statements

Under what circumstances would an emphasis-of-matter paragraph be required in an auditor’s report?

Answer 4

1. there is substantial doubt regarding the entity’s ability to continue as a going concern for a reasonable time period.
2. describe a justified change in accounting principle that has a material effect on the entity’s financial statements.
3. facts are subsequently discovered that lead to a change in the auditor’s opinion (other-matter paragraph could also be appropiate); or
4. the financial statements are prepared in accordance with an applicable special framework, other than regulatory basis financial statements intended for general use.

Question 5

Reports on Audited Financial Statements

What are the reporting requirements for an other-matter-paragraph?

Answer 5

1. placing the paragraph inmediately after the opinion paragraph and after any Emphasis-of-matter paragraph.
2. using the heading “Other-matters” or another appropiate heading.
3. describing the matter being emphasized and the location of the relevant disclosures, if applicable, in the financial statements.

Question 6

Reports on Audited Financial Statements

Under what circumstances would an auditor use an Other-matter-paragraph in an auditor’s report?

Answer 6

The auditor includes an alert in the auditor’s report if:

1. the auditor includes an alert in the audit report that restricts its use;
2. facts are subsequently discovered that lead to a change in auditor’s opinion (emphasis-of-matter could also be appropiate)
3. prior period financial statements were audited by a predecessor auditor and the predecessor’s audit report is not reissued;
4. current period financial statements are audited and presented in comparative form with compiled or reviewed financial statements for the prior period;
5. prior to the release date, the auditor identifies a material inconsistency in other information included in a document with audited financial statements that requires revision and management refuses to make the revision;
6. the auditor chooses (or is required) to report on supplementary information presented with financial statements in the auditor’s report;
7. special purpose financial statements are prepared in accordance with contractual/regulatory basis of accounting (requiring a restriction on the use of the auditor’s report; or
8. the auditor’s report on the financial statements includes a compliance report.

Question 7

Reports on Audited Financial Statements

Evidence from what auditing procedures may lead the auditor to conclude that there is significant doubt about an entity’s ability to continue as a going concern?

ADMITS

Answer 7

1. Analytical procedures
2. Debt compliance
3. Minutes
4. Inquiry of client’s legal counsel
5. Third parties
6. Subsequent events

Question 8

Reports on Audited Financial Statements

What conditions and events may indicate substantial doubt about an entity’s ability to continue as a going concern?

FINE

Answer 8

1. Financial difficulties
2. Internal matters (labor, substantial dependence on a project)
3. Negative trends
4. External matters (legal procedures, new legislation, loss of main customer,,,)

Question 9

Reports on Audited Financial Statements

According to US Auditing Standards, what phrases must be included in a going concern emphasis-of-matter paragraph?

Answer 9

“Substantial doubt”

and

“Going Concern”

Question 10

Reports on Audited Financial Statements

What is the going concern period for (1) US GASS and (2) ISA?

Answer 10

1. The going concern period should not exceed one (1) year under US auditing standards.
2. The going concern period may be greater than equal to one year under ISAs.

Question 11

Reports on Audited Financial Statements

When there is a year-to-year lack of comparability (consistency) in an entity’s financial statements due to an acceptable change in accounting principle, how does the auditor reflect this in the current year’s auditor’s report?

Answer 11

When the auditor concludes that the change in accounting principle is acceptable (justified), the auditor should include an emphais-of-matter paragraph in the auditor’s report describing the change in acounting principle and provide a reference to the entity’s disclosure of the change.

If the justified change in accounting principle is deemed immaterial, no revision to the report is necessary.

Question 12

Reports on Audited Financial Statements

How is an alert that restricts the use of the auditor’s written communication reflected in the auditor’s report and what items should be included?

Answer 12

An other-matter paragraph is used to restrict the use of the auditor’s report when required by GAAS or when the auditor deems it necessary.

The alert that restricts the use of the auditor’s written communicaction includes:

1. statement that the auditor’s written communication is intended solely for the information and use of the specified parties;
2. identification of the specifies parties for whom use is intended; and
3. a statement that the auditor’s written communication is not intended to be and should not be used by anyone than the specific parties.

Question 13

Reports on Audited Financial Statements

Identify the key differences in the auditor’s report under GAAS and the ISA’s.

Answer 13

ISA’s

• introductory paragraph refers to the summary of significant accounting policies and other explanatory information.
• “the preparation and fair presentation of the financial statements” - ok with GAAS; “true and fair view” - not ok with GAAS
• auditor’s responsability paragraph must include a statement that the auditing standards require that the auditor comply with ethical requirements.

GAAS

• sufficiente appropiate audit evidence should include evidence that the audit documentation has been reviewed.
• description of management responsbilities for the financial statements in the auditor’s report should not be referenced to a separate statement by management if such document is included in a document containing the auditor’s report.

Question 14

Reports on Audited Financial Statements

Define a component auditor.

Answer 14

A component auditor is an auditor who performs work on the financial information of a component that will be used as audit evidence for the group auditor. The component auditor may be part of the group’s engagement partner’s firm, a network firm, or another firm.

Question 15

Reports on Audited Financial Statements

Identify the two (2) requirements that are necessary to reference a component auditor in the auditor’s report.

Answer 15

1. The component auditor has performed an audit in accordance with GAAS, or when required, the PCAOB.
2. The component auditor’s report is not restricted use.

Question 16

Reports on Audited Financial Statements

What are the responsbilities of a group engagement partner (team) when it assumes responsability for the work of a component auditor.

Answer 16

1. No reference to the component auditor is made in the auditor’s report.
2. If the component is a significant component due to its individual financial significance, it should be audited by the group engagement team or the component auditor.
3. When a component is deemed significant because of significant risk of material misstatement to the group financial statements, the group engagement team or component auditor should perform additional audit procedures pertaining to the potential risk identified.
4. Components that are not considered significant only require that analytical procedures be performed by the group engagement team.

Question 17

Reports on Audited Financial Statements

When would an auditor use professional judgement to determine wheter to issue a qualified opinion or an adverse opinion?

Answer 17

When audit evidence indicates that there is material misstatement of the financial statements.

1. A qualified opinion is issued when the auditor concludes that misstatements, individually or in the aggregate, are material but not pervasive.
2. An adverse opinion is issued when the auditor concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.

Question 18

Reports on Audited Financial Statements

Describe the circumstances in which a material misstatement of the financial statements may arise.

Answer 18

Misstatements may arise in relation to:

1. Appropiateness or application of accounting policies
2. Appropiateness of the financial statement presentation
3. Appropiateness or adecuacy of disclosures in the financial statements

Question 19

Reports on Audited Financial Statements

When would an auditor use professional judgement to determine wheter to issue a qualified opinion or a disclaimer opinion?

Answer 19

When there is a limitation on the scope of the audit.

1. A qualified opinion is issued when an auditor is unable to obtain appropiate sufficient audit evidence on which to base an opinion and the auditor determines that the possible effects could be material but not pervasive.
2. A disclaimer opinion is issued when an auditor is unable to obtain appropiate sufficient audit evidence on which to base an opinion and the auditor determines that the possible effects could be both material and pervasive.

Question 20

Reports on Audited Financial Statements

If an opinion is modified, where does the paragraph explaining the modification appear?

Answer 20

The paragraph explaining the modification would appear prior to the opinion paragraph. The “Basis for modification” paragraph should use the appropiate heading. Appropiate headings include:

• Basis for Qualified Opinion
• Basis for Adverse Opinion
• Basis for Disclaimer Opinion

Question 21

Reports on Audited Financial Statements

Identify some causes of scope limitations.

(restrictions)

Answer 21

Restrictions (scope limitations) on the auditor’s ability to perform auditing procedures may be caused by:

• Circumstances
• Management
• Inability to observe inventory
• Inability to confirm receivables
• Refusal of the client’s attorney to respond inquiry
• Refusal of management to provide a representation letter

Question 22

Reports on Audited Financial Statements

The auditor’s report should not be dated earlier than the date on which the auditor has obtained sufficient appropiate audit evidence that what three things have occured?

Answer 22

1. audit documentation has been reviewed;
2. financial statements have been prepared; and
3. management has taken responsability for the financial statements.

Question 23

Reports on Audited Financial Statements

What situations may result in a disclaimer of opinion in an audit report?

Answer 23

• Pervasive inability to obtain sufficient appropiate audit evidence.
• Lack of independence (always results in disclaimer).
• Going concern uncertainty (Note: If adequate disclosure of going concern exists, the auditor may choose between an unmodified opinion with an emphasis-of-matter paragraph or a disclaimer of opinion).

Question 24

Reports on Audited Financial Statements

Compared to a standard unmodified opinion, determine the paragraphs that are modified in an audit report when the following opinions are issued:

• Qualified
• Adverse
• Disclaimer

Answer 24

Ver tabla…notas,,,

Question 25

Reports on Audited Financial Statements

How do uncertainties affect the auditor’s report?

Answer 25

Ver tabla…

Question 26

Reports on Audited Financial Statements

According to GAAP, when are contingencies (such as pending litigation) required to be:

1. accrued or disclosed?
2. disclosed only?

Answer 26

Ver tabla…

Question 27

Reports on Audited Financial Statements

If, during current examination of comparative financial statements, the auditor discovers evidence that affects the prior statements and the opinion that was expressed, what action should be taken?

Only DORCS change their mind!

Answer 27

The auditor should update the opinion in the current year’s report. If the opinion differs from the previous opinion, the reason (s) should be disclosed in a separate emphasis-of-matter paragraph following the opinion paragraph.

Date of the auditor’s previous report

Opinion type previously issued

Reason for prior opinion

Changes that have ocurred

Statement of “opinion … is different”

Question 28

Reports on Audited Financial Statements

The predecessor auditor should take what steps before reissuing an audit report on prior financial statements?

Answer 28

• read the statements for the current period.
• compare the previous audited financial statements with the current period statements.
• obtain a letter of representation from the successor auditor.
• obtain a letter of representation from management at or near the date of reissuance.
• if unrevised, use the original report date; if revised, dual date the report.

Question 29

Reports on Audited Financial Statements

What statements should be included in the auditor’s report in an other-matter paragraph when comparative financial statements are presented and the prior auditor’s report is not reissued?

Answer 29

The other-matter paragraph should include the following:

1. A statement that financial statements of the prior period were audited by the predecessor auditor.
2. The type of opinion expressed by the predecessor auditor. If the opinion was modified, include the reasons for the modification.
3. The nature of any emphasis-of-matter or other-matter paragraph included in the predecessor report.
4. The date of the predecessor auditor’s report.

Question 30

Reports on Audited Financial Statements

What is the effect on the audit report when the current period financial statements are audited and presented in comparative format with prior period financial statements that were not audited?

Answer 30

If the prior period financial statements were reviewed or compiled, an other-matter paragraph is added that includes:

• a description of the service performed in the prior period;
• the date of the prior report;
• a description of any material modifications in the report;
• a statement that the service was less in scope than an audit and does not have a basis for expressing an opinion on the financial statements.

If the prior period financial statements were not audited, reviewed, or compiled, the other-matter paragraph should indicate this and state that the auditor assumes no responsability for the financial statements.

Question 31

Reports on Audited Financial Statements

Define the two (2) types of subsequent events.

Answer 31

• A recognized subsequent event relates to a condition that existed on or before the balance sheet date. Recognized subsequent events require financial statement adjustment. (Type I)
• A nonrecognized subsequent event occurs after the balance sheet date. Nonrecognized subsequent events generally do not require financial statement adjustment, but may require footnote disclosure. (Type II)

Question 32

Reports on Audited Financial Statements

What procedures should the auditor perform during subsequent period?

PRIME

Answer 32

• review post balance sheet transactions.
• obtain a representation letter from management describing events that ocurred during the subsequent period requiring adjustment to the financial statements.
• inquire with management or those charged with governance whether subsequent events occurred that could impact financial statements.
• review minutes of board and committee meetings.
• examine current interim financial statements and compare to financial statements under audit.

Question 33

Events Occuring After Year-End

After the date of the auditor’s report, what actions should an auditor take regarding subsequent events?

Answer 33

None. Although the auditor is responsable for investigating subsequent events until the date of the auditor’s report, the auditor has no effective responsability to make inquiries or perform auditing procedures after that date.

Question 34

Occuring After Year-End

When and why is dual dating used?

Answer 34

• Dual dating is used when subsequent events requiring financial statement adjustment or disclosure come to the auditor’s attention after the original date of the audit report. Dual dating extends the auditor’s responsabilty only for the particular subsequent event. The original date of the report is retained for the rest of the financial statements.

Question 35

Occuring After Year-End

After the issuance of the report, what actions should an auditor take upon discovering information that materially affects the report?

DAAE

Answer 35

• Determine whether there are persons relying or likely to rely on the financial statements.
• Advise the client to immediately disclose the new information to persons currently relying or likely to rely on the financial statements. This disclosure may take the form of revised financial statements, disclosures and revisions to any imminent financial statements, or notification that the financial statements and report should not be relied upon.
• Advise the client to discuss the new disclosures or revisions with the SEC, stock changes, and appropiate regulatory agencies.
• Ensure that appropiate steps have been taken by the client.

Question 36

Occuring After Year-End

What actions should an auditor take upon discovering omitted procedures?

Answer 36

The auditor should:

1. Determine whether other procedures were adequate to compensate for the omitted procedures.
2. If not, and if there are people likely to be relying on the report, apply the omitted (or alternative) procedures.
3. If facts emerge that support a different opinion, advise the client to make appropiate disclosure and notification.

Question 37

Reporting On Other Information

What is the auditor’s responsability with respect to information acompanying the basic financial statements in a client-prepared document?

Answer 37

1. The auditor should read the other information to determine that it is consistent with the audited financial statements and that there are no material inconsistencies or material misstatements of fact.
2. The auditor may (but is not required to) report on the other information.

Question 38

Reports on Audited Financial Statements

What are the two (2) objectives of engagements to report on supplementary information?

Answer 38

1. To evaluate the presentation of the supplementary information in relation to the financial statements as a whole.
2. To report on whether the supplementary information is fairly stated, in all material aspects, in relation to the financial statements as a whole.

Question 39

Reporting On Other Information

What procedures would an auditor perform related to supplementary information that accompanies the financial statements and is required by a designated accounting standards setter, such as the FASB?

Answer 39

Apply limited procedures, which includes:

• Inquiring regarding how the supplementary information was prepared, including changes from prior years and significant assumptions used.
• Determining whether the methods used are consistent with management’s responses, audited financial statements, and other knowledge.
• Obtaining written management representations regarding the required supplemental information.
• The auditor may (but is not required to) issue an opinion on the information.

Question 40

Reports on Audited Financial Statements

List several features of a report on the application of the requirements of an applicable financial reporting framework.

Answer 40

• Description of engagement, entity, and transaction
• Reference to AICPA standards
• Description of the appropiate application of the requirements of the applicable financial reporting framework to the specific transaction or type of report
• Preparers are responsable for proper accounting
• Differences in facts, circumstances, or assumptions may change the report
• Restricted use paragraph

Question 41

Reporting on Other Information

When accepting an angagement to audit financial statements prepared in accordance with a financial framework generally accepted in another country, the auditor should obtain an understanding of:

(5)

Answer 41

1. the purpose for which the financial statements are prepared
2. whether the financial framework is a fair presentation framework
3. the intended users of the financial statements
4. the steps taken by management to ensure that applicable financial reporting framework is acceptable under the circumstances
5. the legal responsabilities involved (if using the form and content of another country’s audit report)

Question 42

Reports on Audited Financial Statements

What are the reporting options for financial statements prepared in accordance with a financial reporting framework generally accepted in another country when the financial statements will be distributed outside the US only? What if the financial statements are also intended for use within the US?

Answer 42

Outside of the US Only:

• report form of the other country or the report sent out in the ISAs (if applicable);
• US style report modified to refer to the financial reporting framework generally accepted in another country.

Within the US:

Standard US report with an emphasis-of-matter paragraph that:

• identifies the financial reporting framework
• refers to the note in the financial statements describing the framework
• indicates the framework differs from accounting principles generally accepted in the US

Question 43

Audited Financial Statements

State the primary purpose of an audit.

Answer 43

To provide financial statements users with an opinion on whether the financial statements are fairly presented, in all material respects, in accordance with the applicable financial reporting framework.

Question 44

Audited Financial Statements

Identify three inherent limitations of an audit.

Answer 44

• nature of financial reporting
• nature of audit procedures
• timeliness of financial reporting and the balance between benefit and cost

Question 45

Professional Standards

Which standards provide the most authoritative US auditing guidance for nonissuers and issuers, and who issues those standards.

Answer 45

Nonissuers:

• Statements on Auditing Standards (SASs)
  
  • AICPA Auditing Standards Board

Issuers:

• Auditing Standards (ASs)
  
  • Public Company Accounting Oversight Board (PCAOB) plus all SAS adopted by the PCAOB

Question 46

Professional Standards

Describe the role of the International Auditing and Assurance Standards Board (IAASB) and the use of International Standards of Auditing (ISAs).

Answer 46

• IAASB is a standard-setting board of the International Federation of Accountants (IFAC) that establishes ISAs.
• over 100 countries are using or are in the process of adopting ISAs.
• ISAs do not override local laws/regulations or national standards that govern the audits of financial statements in a given country.

Question 47

Professional Standards

What are the five general GAAS requirements related to the conduct of an audit?

SEJEC

Answer 47

S - Professional Skepticism

E - Ethical Requirements

J - Professional Judgement

E - Sufficient Appropiate Audit Evidence

C - Compliance with GAAS

Question 48

Reports on Audited Financial Statements

List in order the primary sections of an unmodified audit report.

(7)

Answer 48

1. Title: Independent’s Auditor’s Report
2. Addressee: Based on the circumstances of the engagement
3. Introduction: We have audited the accompanying financial statements of…
4. Management’s Responsability for the Financial Statements: Management is responsible for the preparation and fair presentation of the financial statements…
5. Auditor’s Responsibility: Our responsibility is to express an opinion on these financial statements based in our audit.
6. Opinion: In our opinion, the financial statements reffered to above present fairly, in all material respects, the financial position…
7. Report on Other Legal and Regulatory Requirements: If applicable

Question 49

Reports on Audited Financial Statements

What should be included in the introductory paragraph of the unmodified audit opinion?

Answer 49

Introductory paragraph of unmodified opinion:

• entity whose financial statements have being audited
• statement that the financial statements were audited
• title of each financial statement audited
• dates or periods covered by each financial statement

Question 50

Reports on Audited Financial Statements

What should be included in the Management’s Responsbility paragraph of the unmodified opinion?

Answer 50

• An explanation that management is responsible for the preparation and fair representation of the financial statements;
• A statement that this responsibility includes the design, implementation and maintenance of internal control

Question 51

Reports on Audited Financial Statements

What should be included in the Auditor’s Responsibility paragraph of the unmodified opinion?

(4)

Answer 51

• statement that is the auditor’s responsibility to express an opinion on the financial statements based on the audit
• statement that the audit was conducted in accordance with auditing standards generally accepted in the US
• statement that requirethat the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements
• description of the audit

Question 52

Reports on Audited Financial Statements

What should be included in the opinion paragraph of the unmodified audit opinion?

Answer 52

• statement that the financial statements present fairly, in all material respects, the financial position of the entity as of the balance sheet date and the results of operations and its cash flows for the period then ended, in accordance with the applicable financial framework.
• identification of the applicable reporting framework and its origin.

Question 53

Reports on Audited Financial Statements

Where in the unmodified opinion does the auditor refer to: (1) the applicable reporting framework (GAAP, IFRS) and (2) generally accepted auditing standards?

Answer 53

• applicable reporting framework
  
  • Management’s Responsibility paragraph
  • Opinion paragraph
• GAAS
  
  • Auditor’s Responsibility paragraph