Test 4 Flashcards
PROBLEM 1.1 (SHORT ESSAY) (4pts)
Describe the 2 types of subsequent events
TYPE 1: Events that provide additional evidence about conditions that existed AT THE balance sheet date, which requires an adjustment to the financial statements if material
TYPE 2: Events that provide additional evidence about conditions that arose SUBSEQUENT (i.e. following) to the balance sheet date, which requires a disclosure in the financial statements if material
PROBLEM 1.2 (SHORT ESSAY) (1pt)
Describe length of time to search for subsequent events
At the year end date, procedures are performed related to subsequent events. These are performed until the Date of the Auditor’s Report, where the auditors may then form their opinions on the f/s and IC over financial reporting
PROBLEM 1.3 (SHORT ESSAY (5pts)
Describe procedures to search for subsequent events (go for 5)
- Review the minutes of BOD, Stockholder’s, and/or Audit Committee meetings
- Search for unrecorded liabilities
- Obtain a letter from the client’s attorney(s)
- Make inquiries of management/officers
- Obtain a letter of representation from management
PROBLEM 2 (MATCHING)
Written Representation Letter
(know the characteristics)
-REQUIRED AUDIT EVIDENCE!
-Provided by Management to Auditors
-Impress upon management its primary responsibility for the fairness of the financial statements, and absence of fraud activity by client and its personnel
-Dated using SAME DATE as audit report
-Signed by CEO and CFO
PROBLEM 2 (MATCHING)
Management Letter
(know the characteristics)
-NOT REQUIRED UNDER GAAS
-From Auditors to Client
-Reports auditor recommendations to client
-Assists client in improving its operations (effectiveness and efficiency for non-material items)
-Develops rapport with client
-Typically prepared AFTER the audit report release date
PROBLEM 2 (MATCHING)
Attorney Letter
(know the characteristics)
-REQUIRED AUDIT EVIDENCE!
-Auditor requests client to prepare and sign
-sent by auditor to attorney
-attorney’s response sent directly back to auditor
-looks for loss contingencies
PROBLEM 3 (MATCHING) - Types of Audit Report Opinions
Qualified Opinion
“except for” some matter, financial statements in accordance with GAAP
-GAAP Departure: Material, not Pervasive
-Scope Limitation: Material, not Pervasive
-Circumstance-imposed or Client-imposed
PROBLEM 3 (MATCHING) - Types of Audit Report Opinions
Adverse Opinion
financial statements “do not present fairly” the financial condition in accordance with GAAP
-GAAP Departure: Material and Pervasive
PROBLEM 3 (MATCHING) - Types of Audit Report Opinions
Disclaimer of Opinion
UNABLE to form an opinion or NO opinion is issued by the auditor
-Scope Limitation (GAAS): Material and Pervasive
EX: client lacks independence
PROBLEM 3 (MATCHING) - Types of Audit Report Opinions
Unmodified (“Unqualified”) Opinion
“clean”
Look at other questions for the four types of unmodified opinions:
1. standard report
2. emphasis of matter paragraph
3. with an other matter paragraph
4. Unmodified Opinion on group financial statements
What is performed at the Beginning of the Year date within the Audit Timeline?
Interim testing
Test of Controls
Substantive Procedures
When looking at Substantive Procedures, what are Rollforward Procedures?
audit procedures performed to EXTEND the conclusions from an interim date to the date of the financial statements
When looking at Substantive Procedures, what are Analytical Procedures?
study of relationships between financial and non-financial data
*REQUIRED during the planning and near the end of the audit
Why is it important to review accounts for “miscellaneous,” “other,” and “clearing” accounts?
May have manipulation and may relate to earning management
What does an Attorney Letter look for regarding contingencies?
if there are any loss contingencies
MULTIPLE CHOICE:
What are some of the Procedures for Litigation, Claims, and Contingencies (6)
-Inquiry of Clients
-Review minutes of meetings of stockholders, directors, and committees
-Review contracts, loan agreements, and correspondence from taxing and governmental agencies
-Obtain information concerning guarantees from bank confirmations
-Review documentation related to legal services
-Attorney letters
Within a Written Representation, what does the management provide?
Responsibilities “opinion” related to:
-their financial statements and disclosures
-effectiveness of IC over financial reporting
What is Going Concern?
auditors requested to consider whether evidence obtained during audit RAISES QUESTIONS about ability of entity to continue less than one year
In audit documentation, what are the three questions that the audit supervisor must answer?
- Have all steps in audit plan been performed?
- Is referencing among documentation clear?
- Are explanations understandable?
TRUE OR FALSE:
Auditors have a responsibility to evaluate whether financial statements properly reflect all known events through the audit report release date.
True
What is the difference between the (1) Date of Auditors’ Report and the (2) Audit Report Release Date?
(1) date on which the auditors have gathered SUFFICIENT APPROPRIATE EVIDENCE to form their opinions on the financial statements and internal control over financial reporting
(2) date on which auditors ALLOW the client to use the audit report in connection with the financial statements
Between the Attorney Letter, the Management Letter, and the Written Representation Letter, which are required and not required by GAAS?
Attorney Letter = REQ
Management Letter = NOT REQ
Written Representation Letter = REQ
What opinion is expressed in public companies but not private companies?
effectiveness of internal control over financial reporting (“integrated” audit)
MULTIPLE CHOICE:
In a standard report, what are the differences between Non-public and Public companies?
(HINT: in title, scope, and length)
Non-public:
-Independent Auditor’s Report
-in accordance with GAAS
-longer length
Public:
-Report of Independent Registered Public Accounting Firm
-in accordance with the standards of the PCAOB
-shorter length
What is an Unmodified Opinion - Standard Report?
may only be issued when the auditors have obtained sufficient appropriate audit evidence to conclude the financial statements present fairly, in all material respects
What is an Unmodified Opinion - With an emphasis of matter paragraph?
to emphasize a matter other than those presented or disclosed in the financial statements
- related to users’ understanding of the financial statements
EX: change in accounting principles, going concern
What is an Unmodified Opinion - With an other matter paragraph?
to emphasize a matter other than those presented or disclosed in the financial statements
-related to users’ understanding of audit, auditors’ responsibility, or auditors’ report
EX: other information in documents containing audited financial statements
What is an Unmodified Opinion on Group Financial Statements?
when two or more CPA firms are involved in an audit and the group auditor (firm that does most of the work) does not wish to take RESPONSIBILITY for the work of the component auditors, so refers to the OTHER auditors’ work
If group auditors make no reference to component auditors’ work for which they have relied on as part of the basis of their report, what does this mean?
they are assuming responsibility for the work of the component auditors.
Is the emphasis of matter paragraph in an Unmodified Opinion (if applicable) added before the opinion paragraph or following it?
following the opinion paragraph
Is the basis for modification paragraph in a Modified Opinion added before the opinion paragraph or following it?
before the opinion paragraph
-to explain reasons for qualification
What is the Going Concern opinion usually? If there is serious uncertainty, what type of opinion may it be?
ordinarily an UNMODIFIED OPINION with an EMPHASIS OF MATTER paragraph
if serious = may issue DISCLAIMER OF OPINION
For reports on comparative statements, what timeframe should be covered?
cover CURRENT YEAR as well as PRIOR PERIOD audited by their firm
Can different opinions be expressed on different years, when referring to comparative statements?
Yes
What is the Audit Report date?
date that auditors have gathered sufficient appropriate audit evidence (usually last day of fieldwork)
What is the Release date?
date the auditor grants the client permission to use the audit report in connection with the financial statements
