Audited F/S The Basics Company s mgmt responsible to prepare the F/S Auditors responsible to express an opinion on the F/S and on mgmts assertion on internal controls (if public) The primary assertion is whether the statements are presented fairly in accordance with GAAP Professional Standards Generally Accepted Accounting Standards GAAS Generally Accepted Government Auditing Standards GAGAS The Public Company Accounting Oversight Board PCAOB - Public accounting firms must register with PCAOB in order to audit public companies - Registered firms are subject to board inspection, disciplinary proceedings, and sanctions GAAS TIP PIE ACDO General standards TIP T Training I Independence (in fact and appearance) P Professional Care Standards of Field Work PIE P Planning and supervision I Internal control, entity and environment Strong controls imply the auditor will require less evidence Weak controls imply the auditor will require more evidence (more work) An exam trick; weak internal controls does not equal an adverse opinion E Evidence Standards of Reporting ACDO A Accounting = GAAP Explicit; Opinion must state that the acctg used was GAAP C Consistency between periods Implicit; Silence is okay cause its implied D Disclosure R Statement that the F/S as identified in the report were audited Statement that the F/S are the responsibility of mgmt and the auditors responsibility is to express an opinion Scope Paragraph APMEAM. GAAS Statement that the audit wasplanned andperformed to obtain reasonable assurance that the F/S are free from material misstatement Statement that the audit included examining evidence on a test basis. GAAP (ACDO) . Silence is okay O Express Opinion Explicit.S. APMEAM Statement that theaudit was conducted inaccordance with U. and evaluating the overall presentation Statement that the audit provides a reasonable basis for an opinion Opinion Paragraph Statement referring to the F/S specifically identified in the introductory paragraph An opinion as to the fair presentation of the F/S (ACDO) Statement regarding conformity with U. assessing the accounting principles used and significant estimatesmade bymgmt.S.Implicit. Opinion must state In our opinion Meant to prevent misinterpretation of the degree of responsibility the auditor is assuming when his/her name is associated with the F/S The auditor may express different opinions of different sections (B/S. I/S) The auditor may express an opinion on 1 section and not the others as long as information has not been limited Reports on Audited F/S The Auditors Standard Report (Unqualified Opinion) Title Addressee Introductory Paragraph R. material GAAP or GASS problem Adverse opinions very material GAAP problems Disclaimer of opinion significant GAAS problem Uncertainties impairments. or Determine that a reasonable estimate cannot be made and make the required disclosures to that effect Remember under GAAP Both probable and reasonably estimatable record Either probable or reasonably estimatable disclose If mgmt s analysis is supported and properly reported or disclosed. doesn t mean good investment Modified Unqualified opinion additional explanatory language Qualified opinion states except for . conduct the audit of a nonissuer in accordance with both GAAS and PCAOD auditing standards Unqualified opinion clean. the auditor issues and unqualified opinion . 1 requires the auditor s report to include =a reference to the standards of the PCAOB Audits of nonissuers (private companies) An auditor may.Firm Name Report Date The Report should be dated on or after the date on which appropriate audit evidence sufficient to support the opinion has been obtained Sample unqualified opinion A1-14 GAAS in referenced to in the Scope paragraph GAAP is referenced to in the Opinion paragraph PCAOB Standards for publicly traded companies Audits of Issuers (public companies) PCAOB auditing standard No. warranties Management s responsibility Estimate the effect of future events on the F/S and record and present this estimate. F/S presented fairly in all material respects. lawsuits. intangibles. but is not required to. the report will express a division of responsibility.Required SEC regulation S-K quarterly financial data has been omitted or has not been reviewed . . Qualified or Disclaimer: GAAP = ?. the auditor should consider expressing a qualified (GAAS) opinion or to disclaim an opinion to scope limitation. auditors opinion is based in part on the report of another Explanatory paragraph Justified departure from GAAP Going concern To emphasize a matter Lack of consistency Other. The principal auditor will mention this division in all three paragraphs.with no reference to the uncertainty in the report Unqualified opinion: GAAP = ok. use of inappropriate accounting principles. The additional language (modified wording or explanatory paragraph) used to highlight the certain circumstances Modified wording Division of responsibility. GAAS = ok Pass key chart on A1-19 memorize Modified Unqualified opinion still represents an unqualified opinion. GAAS = ok If the auditor is unable to obtain sufficient evidential matter involving an uncertainty and its presentation or disclosure. the auditor should express a qualified (GAAP) or adverse opinion. Make other CPA responsible by mentioning . and use of unreasonable acctg estimates Qualified of Adverse: GAAP = problem. GAAP departures include inadequate disclosures. GAAS = Problem If the auditor concludes that the F/S are materially misstated due to a departure from GAAP related to uncertainty. The name of the other auditor is not mentioned unless the auditor gives express permission and the report of the other auditor is presented.Supplementary information required by GAAP has been omitted .Other information (stuff in 10-K) is inconsistent with F/S Division of Responsibility (reference in report) The principal auditor decides to mention the work done by other auditors. Scope. loss or expiration of intellectual property The auditor is not precluded from choosing to disclaim an opinion in cases involving uncertainties The explanatory paragraph occurs after opinion paragraph It includes the terms substantial doubt and going concern Don t limit it for a time period If. and evaluation of internal controls performed by the other auditor Justified departure from GAAP The explanatory paragraph should contain a description of the departure.com Conditions or events that may indicate substantial doubt: F Financial difficulties I Internal matters N Negative trends E External matters. program steps (RIPP). Assumption of Responsibility (no reference to other CPA) The principal auditor must assure on the other auditors. independence. This may Debt compliance Review board minutes Inquiry of client s legal counsel Confirm third party arrangements/agreements Subsequent events review . legal proceedings. in the auditor s judgement. its approximate effects (if possible) and the reasons why adherence to GAAP would make the F/S misleading Going Concern The auditor should perform the following procedures: A Analytical procedures D M I T S 3 AUD . professional competency.blogspot. and Opinion paragraph.Notes Chapter 1 http://cpacfa. the entity s disclosures are inadequate. new legislation. a departure from GAAP exists. Visit the other auditor to discuss audit procedures and review audit program. reputation.them in the Intro. documentation. Emphasis when a company is a RECC Arelated party transaction Significant subsequentevents Entity is acomponent of a larger business Items that affect thecomparability (except changes in accounting principles) An explanatory paragraph is not required Lack of consistency (justified changes) ACDO if a change is GAAP has occurred between accounting periods and the effect is material. Scope limitation time constraints. Departure from GAAP GAAP: Acceptable/Justified = Modified Unqualified Not GAAP: Unacceptable/Unjustified = except for or Adverse 4. the auditor should add an explanatory paragraph to the unqualified report. an explanatory paragraph should appear before the opinion paragraph to describe the non-GAAP acctg change and the financial impact 2. Inadequate disclosure when the auditor believes that the omitted items cause the F/S to be deceptive 3. The explanatory paragraph comes after the opinion paragraph When selecting the type of opinion because of a lack of consistency.result in either a qualified or adverse opinion Emphasis of a matter auditor may wish to emphasis a particular matter but still express an unqualified opinion. Uncertainty 2. in ability to obtain sufficient competent evidential matter. Non GAAP unjustified/unacceptable change Issue is consistency (ACDO). Unreasonable accounting estimates Qualified except for Opinion for material GAAS problems 1. refusal of clients attorney to respond to inquiry . determine is the change is justified GAAP: Acceptable/Justified = Modified Unqualified Not GAAP: Unacceptable/Unjustified = Qualified or Adverse Qualified except for Opinion and Adverse Opinion for very material GAAP problems 1. refusal of mgmt to provide mgmt letter which acknowledge their responsibility for the fair presentation of the F/S in conformity with GAAP. the auditor is facing a scope limitation (because the beginning balances may not be correct) and may require a disclaimer opinion. Scope limitation 3.Deletion of the reference to the auditor s responsibility Scope paragraph omitted Explanatory paragraph is the middle paragraph and describes the reasons for the disclaimer Opinion paragraph disclaimer of opinion is given on the F/S taken as a whole Reports on Comparative Statements If the prior year s financial statements were not audited and that the current year s financial statements are being audited. and . Unaudited only an opinion paragraph. Lack of independence 4.Use the words were engaged to audit instead of have audited . States reason of unaudited F/S and we do not express an opinion Changes to the report include Introductory paragraph . Uncertainty 2. When updating (changing prior) periods the explanatory should disclose the: D Date of the auditor s previous report O Opinion type previously issued R Reason for prior opinion C Changes that have occurred S Statement opinion is different Only DORCS change their mind Update or change opinion when now in conformity with GAAP (restate prior yr F/S) Report of a predecessor auditor presented The prior (old) CPA should: Read the current period statements Compare the statements audited with the current period statements Obtain a letter of representation from the successor auditor .The scope limitation should be referred to in the scope and opinion paragraph (as an explanatory paragraph preceding before the opinion paragraph: Double except for whammy Disclaimer Opinion for significant GAAS problems 1. except for Note 2. 2000.Obtain a letter of representation from mgmt If the report is unrevised use the original report date in any reissue If the report is revised dual date Report of a predecessor auditor not presented The current (new) CPA should: Not name the predecessor auditor The date of the predecessors auditors report The type of opinion expressed by the predecessor auditor The substantive reasons for other than an unqualified report Subsequent Events Type I events conditions on or before balance sheet date. 2000 Facts discovered after report is issued (the auditors missed it) Auditor action Advise client to issue revised F/S or make additional disclosures Provide notification that the F/S can not be relied upon . the auditor may dual date the report Ex. and other committee meetings should be read Examine latest available interim F/S. compare them with the F/S under audit Auditors responsibility after the original date of the auditors report The auditor has no active responsibility. However. directors. auditor must use professional judgement to decide whether to adjust the F/S or disclosures If adjusts are made after the original date of the auditors report. looking backward Requires a F/S adjustment Type II events conditions existing after the balance sheet date. looking forward May require footnote disclosure Auditors responsibility for subsequent events PRIME is included in yr end fieldwork P Post balance sheet transactions R I M E Representation letter should be obtained from mgmt Inquiry Minutes of stockholders. if the auditor becomes aware of a subsequent event. Jan. accrue. disclose in footnotes. 21. as to which the date is Feb 3. Consider whether the client representation letter should refer to the supplementary information Segment information is required by GAAP Material misstatement GAAP problem qualified or adverse opinion Scope limitation GAAS problem qualified or disclaimer opinion When an auditor submits a document containing audited F/S to a client or others. Determine if the methods uses are consistent with mgmt s responses. audited F/S and other knowledge 3. the auditor has a responsibility to report on all information in the document The auditor must indicate in the report whether the accompanying information is fairly stated in all material respects in relation to the basic F/S taken as a whole. in all material respects Selected financial data . Condensed F/S The Auditor must indicate: That the auditor audited and expresses an opinion on the complete F/S Date of the auditors report on the complete F/S Type of opinion expressed Whether the information in the condensed statements is fairly stated. Inquire of mgmt 2. The report should also describe the character of the auditor examination and the degree of responsibility the auditor is assuming.If the client refuses to follow procedures Notify the board of the directors Dissociate with the client Inform any regulatory agencies (if applicable) Notify parties relying on the F/S Omitted audit procedures discovered after submission of the audit program (we forgot to do it) Auditor should determine whether other audit procedures tended to compensate for the omitted procedures Apply the omitted procedures (or alternative procedures) Reporting on Other Information Auditor should perform limited procedures on supplementary information and report deficiencies & omissions 1. The auditor must indicate whether the selected financial data is fairly stated. A statement that any differences in the facts. circumstances or assumptions may change the report 7. in all material respects.S. in relation to the F/S from which it has been derived. . Statement that mgmt is responsible 6.The report of the other country . descriptions of the transactions. An accountants report should include 1. only: auditor may use either . Statement that the engagement was performed in accordance with AICPA standards 3.US style report modified to the accounting principles of another country Distribution within the US: auditors report should be the US standard report modified as appropriate for departures from US GAAP. A statement describing the appropriate acctg principles (including country of origin) to be applied 5. Brief description of the nature of the engagement 2. board of directors. prior and current auditors Reporting on F/S prepared for use in other countries Distribution outside U. Restrict use of report to mgmt. statement about the source of the information 4. Identification specific entity.