SU 11 Audit Reports Flashcards
Report types
Unmodified (aka unqualified or standard)
Qualified
Adverse
Disclaimed
Unmodified opinion AICPA structure
Title: Independent auditor’s report
Addressed: those who commissioned the report (BoD/Shareholders)
1) intro
2) management’s responsibility
3) auditor’s responsibility
4) Opinion
Unmodified Opinion PCAOB format
Title: Independent Auditor’s Report
Address: to BoD/ shareholders
1) Opinion on the financial statements
2) Explanatory Paragraphs
3) Critical audit matters
Emphasis of matter or other matter paragraphs
presented to emphasize items in unmodified report- does not change nature of report
Where would the ethics statement be included an opinion for an issuer
in the explanatory paragraphs
Where is an opinion on an audit ICFR included
for issuers - to the opinion paragraph
Possible reasons for qualified opinions
1) scope limitations due to insufficient evidence (if severe/ pervasive may require a disclaimed opinion)
2) Material but NON-PERVASIVE misstatements
What may result in scope limitations
Limited timing
limited access
lack of access to records
what may result in material but non-pervasive misstatement
- inappropriate selection/ application of accounting principles
- unjustified change in accounting principles
- inadequate disclosures
- omitted financial statement (statement of cash flows)
What is required for conformity with the reporting framework
- the framework is appropriate to the circumstances
- information is classified and summarized properly
- information reflects actual events & transactions
- framework used is identified
- includes any SEC reporting requirements
- ## there are no MATERIAL departures from the framework
What if a departure from the reporting framework more accurately represents reality
Okay, requires a separate paragraph to describe details and a disclosure note
must have SEC approval
then may have an unmodified opinion with a material departure
Emphasis of matter paragraphs
Regarding something in the financial statements
used to draw users attention to a matter appropriately presented or disclosed that is of fundamental importance to user’s understanding of the financial statements
does not alter the opinion
included after the opinion paragraph
Items that require a emphasis of the matter paragraph
- subsequent events and subsequently discovered facts
- consistency of financial statements
- special considerations - audits fo financial statements prepared in accordance with special purpose frameworks
- Substantial doubt about the entity’s ability to continue as a going concern
How a going concern issue is communicated
Opinion may still be unmodified (statements still presented fairly)
Auditor adds emphasis-of-matter paragraph after the opinion paragraph
Procedure if there is a major change in accounting method
Must include an emphasis of matter paragraph describing
- new principle adopted (does it conform to framework)
- are there adequate disclosures in the notes
- does the new principal improve reporting accuracy or is it required
does not require a modified opinion unless it violates the accounting framework
Consistency
internal conformity from period to period/ over multiple time periods
Comparability
ability to compare statements between entities for the same time period
Accounting treatment: change in accounting principal
RETROSPECTIVE
Earliest statement must show cumulative effects as if principle was used from the beginning
Accounting treatment: change in accounting estimate
PROSPECTIVE
change in estimate related to a change in principle (depreciation method) is treated as a change in estimate
Optional emphasis paragraphs
about items with material effects on financial statements
- uncertainties around litigation/ regulations
- major disasters impacting firm’s financials
- material related party transactions
- significant subsequent events
Dual dating option
Date 1: original end of field work date
Date 2: date of subsequent event that required revisions (these matters only are assigned the later date)
if material fact requiring revision is discovered after the report release date
notify the audit committee, statement users, and the SEC
Other matter paragraphs
issues that are not presented or disclosed in the statements (and not supposed to be) that are relevant to the users’ understanding of the audit, auditor’s responsibilities, or the audit report
included after the opinion paragraph, does not alter the opinion
Situations where other-matter paragraphs are required
- subsequent events and subsequently discovered facts
- forming an opinion and reporting on financial statements (prior period statements)
-material inconsistencies with other information presented along with financial statements - required supplementary consideration
Special considerations (special frameworks) - Reporting on compliance with aspects of contractual agreements or regulatory requirements
Responsibilities of the group engagement partner
- the engagement
- performance of the audit
- report on the group’s financial
- any work contributed by the component auditor
When does the auditor NOT refer to a component auditor’s work
- if the auditor will accept responsibility for the component auditor’s work
- if the auditor is satisfied with the component auditor’s independence and professional reputation
What does an auditor do if they do not accept responsibility for a component auditor’s work
- report refers to the work of the other auditor and indicates the division of responsibility
Auditor’s responsibility and opinion paragraphs are altered
dollar amounts or percentages of account balances must be used to describe amount of audit performed by component auditor
When does the auditor name a component auditor in their report
- they do not accept responsibility for the other auditor’s work
- the component auditor gives permission
- the other auditor’s report is presented along with the main report
What should be done if the auditor can’t rely on the other auditor’s report AND will not accept responsibility
requires a qualified or disclaimed opinion
where does the reference to another auditor’s work go in a report
in the auditor’s responsibility section and then the opinion is altered “based on our audit and the report of other auditors”
Key Audit Maters
areas of complexity and significant management/ auditor judgements
OPTIONAL in non-issuer reports - included if the auditor is engaged by the client to include them
NOT allowed in adverse or disclaimed opinions
Key Audit Matters - structure
- why the matter is significant
- how it was addressed
- if there were no KAMs
Critical Audit Matters
Now required in issuer audit reports
Areas of complexity and significant
mgmt./auditor judgments
Purpose of internal control report (ICFR)
to express an opinion on the effectiveness of the company’s internal control
Required components of ICFR report
Significant deficiencies
Material weaknesses
What should be done about deficiencies found in ICFR audit
communicated in writing to the audit committee, but not as part of the audit report
Required ICFR report date
The audit report date or no more than 60 days after
If no material weaknesses is found in an ICFR audit
Report should not say “no material weaknesses found” rather than “did not identify deficiencies that might be material weakness but they may still exist”
Internal control deficiency
internal control does not prevent, detect, or correct misstatements on a timely basis
What may create deficiencies in internal control
- poor design
- operational failures
Significant deficiency in internal control
Deficiency that merits action but does not rise to the level of a material weakness
Material weakness in internal control
Deficiencies resulting in a reasonable possibility that a material misstatement will not be prevented, detected, or corrected on a timely basis
Indicators of material weakness
- fraud by senior management
- restatements of financial statements due to material errors or fraud
- discovery of a material misstatement that internal control would not have detected
- ineffective oversight by company board or audit committee
Mixed report
audit report + internal control report
