AUD - Notes Chapter 1Audited F/S – The Basics The Independent Audit Function What is the purpose of an audit? To provide financial statement users with an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with GAAP (the applicable financial reporting framework). It gives credibility to the financials (auditors are unbiased and have no conflicts of interest) What does the applicable financial reporting framework (GAAP) include? It includes the conventions, rules, and procedures necessary to U.S. accepted accounting practice at a particular time. What are management’s responsibilities? 1. The preparation and fair presentation of the financial statements in accordance with GAAP 2. The design, implementation, & maintenance of internal controls relevant to the presentation/preparation of the f/s 3. Providing the auditor with access to information and persons within the entity needed to complete the audit What are the auditor’s responsibilities? 1. 2. 3. 4. 5. Expressing an opinion on the financial statements based on the audit Having appropriate competence and capabilities to perform the audit Comply with ethical requirements Maintain professional scepticism Exercise professional judgement throughout the planning/performing of the audit In order to express an opinion, the auditor obtains reasonable assurance about whether the financial statements are free from material misstatement. In order to obtain reasonable assurance, the auditor must do what? 1. 2. 3. 4. Plan the work and properly supervise any assistants Determine and apply appropriate materiality levels Identify and assess risks of material misstatement due to fraud or error Obtain sufficient appropriate audit evidence The auditor is unable to obtain absolute assurance that the financial statements are free from material misstatement because of inherent limitations. What are some of the inherent limitations? 1. Those items that involve management judgement, subjective decisions/assessments, or have a degree of uncertainty Intangibles Impairments Asset life/ salvage value Bad debt Warranties Lawsuits 2. Fraud 3. Errors The auditor should form an opinion on the f/s within a reasonable time period and should achieve a balance between the cost and benefit of an audit. It is impractical to address all info that may exist so what is absolutely necessary for the auditor to do in an audit? 1. Plan the audit so that it is performed effectively 2. Direct efforts to areas most expected to contain risk of material misstatement and 3. Use testing and other means of examining populations for misstatement Professional Standards Auditing Standards What are Generally Accepted Auditing Standards (GAAS)? They guide the auditor in the performance of a properly planned and executed audit. Measures of the quality of the auditor's performance. 1 PCAOB establishes auditing standards to be used in the preparation and issuance of auditing reports for issuers (public co. 2. and statements of position 3. implemented. and accounting/review services to adopt a system of quality control o A quality control system = policies and procedures that are designed. free from material misstatement due to error or fraud. but may be helpful Includes textbooks. Professional skepticism = the recognition that circumstances may exist that cause the financials to be materially misstated 2 . Statements on Standards for Attestation Engagements (SSAE) 2. To obtain reasonable assurance about whether the financials are.Notes Chapter 1 Compliance with GAAS is mandatory on all audit engagements Describe some traits about Statements on Auditing Standards (SAS).) o A privately own company does not have to comply (they can choose to follow) The Public Company Accounting Oversight Board was established by what? The Sarbanes-Oxley Act of 2002 Standards for Engagements Other than Audits What are standards for engagements other than auditing? 1. and maintained to ensure that the firms complies with professional standards and appropriate legal and regulatory requirements Auditing Guidance: The GAAS Hierarchy What are the levels of auditing guidance?(provide some traits about each one) 1. To report on the financials and communicate their findings What are the general requirements related to the conduct of the audit?(Describe each component) 1. Statement of Standards for Accounting and Review Services (SSARS) Other Guidelines What does the AICPA Code of Professional Conduct provide? Guidelines for behavior in the conduct of their professional affairs Assurance to the public that the profession intends to maintain high standards Enforce compliance with these standards by its members What do the Statements on Quality Control Standards require? Firms providing auditing. as a whole. Interpretive publications Provides recommendations regarding how SASs should be applied in specific situations They are not accounting standards Includes interpretations. journals. AICPA Statements of Auditing Standards (SASs) and PCAOB Auditing Standards Provides the most authoritative guidance An auditor should use professional judgement in applying SAS or PCAOB standards Any departures from the requirements require justifications 2. guidance.) are issued by Auditing Standards Board (ASB) in the form of SASs Describe some traits about the Public Company Accounting Oversight Board (PCAOB). exhibits. and articles Auditors are required to comply with ________ for audits of nonissuers and ________ for audits of issuers. Other auditing publications They have no authoritative status. Audits for nonissuers (private co. publications.AUD . attestation. Nonissuers = Statements of Standards (SAS) Issuers = Public Company Accounting Oversight Board (PCAOB) auditing standards Overall Objectives of the Auditor and the Conduct of the Audit What are the overall objectives of the auditor when conducting a financial statement audit? 1. or disclaimer) opinion: described in later flashcard if not unmodified Auditor’s Opinion: own card Other Reporting Responsibilities: If the auditor uses other reporting responsibilities other than GAAS Signature of the auditor Auditor’s Address: name of city and state where the auditor practices Date of the auditor’s Report: shows the final date of auditor responsibility A R What is included in the introductory section? Identify the entity whose f/s have been audited State the f/s were audited Identify the title of each f/s Specify the dates or periods covered by each f/s A R What is included in the Management Responsibility section? MR PPP DIM Explanation that management is responsible for preparation and fair presentation of the f/s in accordance with accounting principles generally accepted in the United States. An auditor may have to comply with other auditing requirements in addition to GAAS. and understandable The applicable financial reporting framework is identified and includes an adequate description of the framework Unmodified Audit Opinion When will an auditor express an unmodified opinion? When the auditor concludes that the financial statements are presented fairly. Using third party confirmations to provide support for management's representations. 2. 3 . Reports on Audited F/S Forming an Opinion on the Financial Statements In order to form an opinion. 3. adverse. in all material respects. or auditing standards of a specific jurisdiction or country. What would be examples of professional skepticism? Performing additional audit procedures designed to obtain more reliable evidence. comparable. 11. and material transactions/events Accounting estimates are reasonable Information is relevant. 10. 5. Compliance with GAAS = comply with all GAAS relevant to the audit. Professional judgement = use judgement to interpret ethical requirements.Notes Chapter 1 2. Sufficient appropriate audit evidence and audit risk = to obtain reasonable assurance and therefore enabling the auditor to draw a reasonable conclusion on which to base their opinion on 5. Obtaining corroboration of management's explanations through consultation with a specialist. etc. the auditor needs to evaluate if the f/s are fairly presented. materiality. 7. 6. Examples = PCAOB standards. in accordance with the applicable financial reporting framework. 4. GAAS. Title: Independent Auditor’s Report Addressee: goes to the entity that engaged them Introductory Paragraph: own card Management’s Responsibility for the F/S: own card Auditor’s Responsibility: own card Basis for (qualified. 9. How do you determine if the f/s is fairly presented? Accounting policies are consistent with GAAP and are appropriate There are adequate disclosures about accounting policies. 4. government auditing standards (GAGAS). 8. international standards on auditing (ISA). A R What are the elements of the auditor’s report?(describe some of the components) 1. risk. reliable. Ethical requirements = follow the code of professional conduct including being independent in fact and appearance 3.AUD . and maintenance of internal controls relevant to the preparation and presentation of f/s that are free from material misstatement whether due to fraud or error. Component auditor = an auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit 3. What does it mean when that a statement was explicit versus implicit stated? Explicit = precisely and clearly expressed or readily observable Implicit = implied though not directly expressed In response to an unmodified audit opinion. o They should also make reference to GAAP Nonissuers (private co) = Include a reference to generally accepted auditing standards in the U. and staff who establish the overall audit strategy.. Example = “We conduct our audits in accordance with…. and evaluate the conclusions drawn from the audit evidence. As a U. etc.S. including the assessment of the risks of material misstatement of the f/s The auditor considers internal controls relevant to the entity’s preparation/presentation of f/s to design audit procedures that are appropriate An audit includes evaluating the appropriateness of the accounting policies used and the reasonableness of significant accounting estimates made by management as well as evaluating the overall presentation of the f/s The audit evidence obtained is sufficient and appropriate for an opinion A R What is included in the opinion section? Statement that the f/s present fairly the financial position of the entity as of the b/s date and the results of operations and its cash flows for the period are in accordance with accounting principles generally accepted in the United States. Component = an entity or business activity that prepares financial information that is included in group financial statements 2. GAAS is referenced in which section? GAAP is referenced in which section? GAAS = Auditor’s Responsibility Paragraph GAAP = Management Responsibility Paragraph And the opinion paragraph How should audits of issuers make reference to auditing standards in the audit report? What about nonissuers? Issuers (public co) = Include a reference to PCAOB in the U. Group F/S = financial statements that include financial information of more than 1 component 4 . CPA firm. 5. A R What is included in the Auditor’s Responsibility section? ARE C PRPA JR CD RES Statement that auditor’s responsibility is to express an opinion on the f/s based on the audit The audit was conducted with auditing standards generally accepted in the United States The standards require that the auditor plan and perform the audit to obtain reasonable assurance that f/s are free from material misstatement An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the f/s Procedures selected depend on the auditor’s judgement. implementation.Notes Chapter 1 Statement that this responsibility includes the design. Canada. other partners. GE partner = the partner or other person in the firm who is responsible for the group audit engagement and the auditor’s report on the group F/S 4. GE team = includes the engagement partner. you need assistance with other foreign accounting firms for Wal-Mart’s other divisions. China. and 5) group financial statements.” o If the auditor followed 2 sets of standards.S. 2) component auditor. Audits of Group Financial Statements What do audits of group financial statements mean and deal with? When a large company has many divisions overseas and has a foreign auditor assist in the audit Example. 3) group engagement partner. mention them both.S. Define the following terms: 1) component. Brazil.Wal-Mart operates in the U.S. Japan. perform work. 1. 4) group engagement team.AUD . The f/s are presented fairly in all material respects and the financial position. presentation.Notes Chapter 1 What does it mean when an auditor makes reference to the component auditor versus when an auditor does not make reference to a component auditor? If we reference a component auditor we are saying "that guy did the work.. and estimates Weak internal controls doesn’t necessarily mean adverse opinion 4.AUD . disclosures. presentation. If a material departure from GAAP is justified. o GAAP = accounting policy. The auditor does not express an opinion because they were not able to obtain sufficient appropriate audit evidence to provide a basis for an opinion o GAAS = Insufficient evidence. The magnitude of the portion of the f/s audited by the component auditor 3. a UM is still possible 2. States that except for the effects of the matter(s) to which the qualification relates. State it was “based on our audit and the report of other auditors” Types of Opinions What are the types of opinions and how would you end up with that opinion? M O D I F I E D 1. o You need to be able to trust his independence and reputation. 4. fraudulent. state the set of auditing standards used by the component auditor and that additional audit procedures were performed by the component auditor to meet the relevant requirements of GAAS Opinion 1. o GAAP = accounting policy. the f/s present fairly the financial position…with the applicable financial reporting framework. results of operations. Unmodified opinion = clean. significant going concern uncertainty. Qualified opinion = material GAAP or GASS problem. and cash flows of the entity are in conformity with applicable financial reporting framework. That the component was not audited by the auditor of the group statements. 2. or misleading When an auditor expresses an adverse opinion or a disclaimer of opinion on the f/s as a whole. or lack of independence When would you withdraw from an audit? The financial information is false. Adverse opinions = very material (pervasive) GAAP problems. or item on f/s Emphasis-of-Matter and Other-Matter-Paragraphs 5 . Disclaimer of opinion = very material (pervasive) GAAS problem. o The group engagement partner must contact the component auditor and review the audit program and working papers pertaining to the component A R What should be stated in the auditor’s report on the group financial statements when making reference to the component auditor? The Auditor’s Responsibility – The auditor is dividing up the responsibilities when making reference 1. they are responsible if something should come up" o They are dividing up the responsibility o Group engagement partner finds it impractical to review the component auditor's work If you do not reference the component auditor it means that you trust him and are willing to take any blame for his incompetence.. and estimates o GAAS = Insufficient evidence 3. When the component’s f/s are prepared using a different financial reporting framework from the group f/s…state the financial reporting framework used by the component and that the auditor of the group f/s is taking responsibility for evaluating the appropriateness of the adjustments to convert the components f/s to the group f/s framework. disclosures. account. the auditor should not do what? They should NOT include an unmodified opinion on a single f/s or 1+ specific elements. The f/s do not present fairly the financial position…with the applicable financial reporting framework. When the auditor’s report on the component’s f/s does NOT state that the audit was performed in accordance with GAAS or PCAOB standards. but was audited by the component auditor. deceptive. Notes Chapter 1 What is the purpose of the Emphasis-of-Matter Paragraphs? The auditor may determine that it is necessary to add additional communications to the auditor’s report without modifying the auditor’s opinion. 2.S.AUD . Used when referring to a matter that is appropriately presented or disclosed in the f/s and is of such importance that it is fundamental to the users’ understanding of the f/s What are some of the required traits for an emphasis-of-matter paragraph in the auditor’s report? Should be placed immediately after the opinion paragraph Describe the matter being emphasized and location of relevant disclosures of the matter in the f/s Indicate that the auditor’s opinion is not modified with respect to the matter emphasized What would cause an emphasis-of-matter paragraph to be required? 1. but not limited to.S. o Note: time reference should not be included in the auditor’s report Going Concern-. auditing standards? Under ISAs. twelve months from the date of the f/s being audited.Under International Standards on Auditing. 3.What are types of conditions or events that may indicate substantial doubt about going concern?(Give examples of each) FINE Financial difficulties 6 . the going concern period is _____? What about under U. the going concern period cannot exceed one year from the date of the f/s being audited. the going concern period must be at least. There is doubt about the entity’s ability to continue as going concern To describe a justified change in accounting principle that has a material effect (lack of consistency) Subsequent discovered facts lead to a change in audit opinion The f/s are prepared in accordance with an applicable special purpose framework What would cause an emphasis-of-matter paragraph to possible be necessary (use professional judgement)? A major catastrophe having a significant effect on the entity’s financial position Significant related party transactions Unusually important subsequent events An uncertainty related to the outcome of unusually important litigation (no need if it is disclosed) What is the purpose of the Other-Matter Paragraphs? Used when referring to matters other than those presented or disclosed in the f/s and that are relevant to the users’ understanding It is required when… o To report on supplementary information o When an alert is included that restricts the use of the auditor’s report o Identifies a material inconsistency in other information o The f/s of the prior period were audited by a predecessor auditor and the predecessor’s audit report is not reissued o When the current period f/s are audited and presented in comparative form with compiled or reviewed f/s for the prior period o A report on compliance Going Concern-. Under U.What types of procedures should the auditor perform to obtain evidence about an entity’s ability for going concern? ADMITS Analytical procedures Debt compliance = review the terms of debt and loan agreements Review minutes = from stockholder and BOD meetings Inquiry of client’s legal counsel Third party arrangements/agreements = confirm the details of financial support arrangements Subsequent events review Going Concern-. auditing standards. 4. and adverse financial ratios External matters Legal proceedings. What must this plan include? Plans to borrow money or restructure debt Plans to sell assets Plans to delay or reduce expenditures (delay/postpone due dates) can also lease rather than purchase Plans to increase ownership equity (sell stock) A R Going Concern--What types of words must be included in the auditor’s report when there is a going concern issue? Emphasis-of-Matter 1. what items should be included in the audit documentation? 1. labor difficulties. If the new principle is in accordance with the applicable financial reporting framework If the method of accounting for the change is acceptable The disclosures related to the change are appropriate and adequate The entity has justified that the new principle is preferable Consistency—What type of opinions can occur in relations to a lack of consistency? 7 . noncompliance with capital requirements. uneconomic long-term commitments. loss of a key franchise. 3. dividend arrearages. or patent. 4. working capital deficiencies. 2. The conditions or events that gave rise to the substantial doubt Any mitigating factors that the auditor considers significant Audit work performed to evaluate management’s plans The auditor’s conclusion about whether substantial doubt remains or is alleviated The effect of the auditor’s conclusion on the evaluation of the f/s and related disclosures and on the resulting auditor’s report Going Concern—When would different types of opinions occur in relations to going concern? If the entity’s disclosures are adequate = unmodified with an emphasis-of-matter paragraph If the entity’s disclosures are inadequate = qualified or adverse with an emphasis-of-matter paragraph If disclosures are adequate.AUD . new financing sources or methods. license. What does a lack of consistency mean? This deals with the comparability of the f/s from year to year. 3. 5. denial of usual trade credit. or significant revision of operations Negative trends Recurring losses. substantial dependence on a particular project. If the auditor doesn’t say there is a lack of consistency. new legislation. not to exceed one year” Going Concern-. Draw attention to the f/s and state the areas of concern Do not mention “reasonable period of time. or disposal of substantial assets Internal matters Work stoppages. 2.Notes Chapter 1 Loan defaults.When an auditor believes that there is substantial doubt about an entity’s ability to continue as a going concern. “Going concern” 3. 4. natural disaster. but there is a significant going concern uncertainty = disclaimer Consistency—A lack of consistency is one reason an emphasis-of-matter paragraph would be needed. what should the auditor consider? 1. “Substantial doubt” (significant doubt for ISA) 2. debt restructuring. the f/s are comparable between periods. and loss of a principal customer or supplier Going Concern-. (implicitly stated) The issue of comparability is affected by changes in accounting principle or by an adjustment to correct a material misstatement in a previously issued f/s o Correction of errors of a principle always require an E-O-M paragraph o A change of principle depends on certain factors Correction of mathematical errors or changes in estimates do NOT affect the auditor’s report Consistency—When evaluating the acceptability of an accounting principle.When an auditor believes there is substantial doubt about the ability of the entity to continue as a going concern for a reasonable time period. negative cash flows. the auditor is required to consider management’s plans for dealing with the conditions or events (mitigating factors) that led to the auditor’s beliefs. because of the significance of the matter(s) described in the basis for an adverse paragraph. but satisfactory evidence for all other items in the f/s is present = disclaimer o Scope limitations. then you do not need to mention it at all in the auditor’s report GAAP Issues: Qualified or Adverse Opinion What are the 2 types of GAAP issue opinions and what would cause that type of opinion for each? 1. then consider the change in principle is unjustified and the auditor should issue an adverse or qualified opinion (not disclaimer) o When management does not provide reasonable justification that a change in accounting principle is preferable and it presents comparative FS. disclosures. and/or estimates 2.They read the f/s for obvious material misstatements. then the opinion can be unmodified with an E-O-M paragraph Note: the auditor will not say that they concur explicitly with the change If not all 4 are met. the auditor should express a qualified opinion each year that the f/s initially reflecting the change are presented If the change has an immaterial impact. and violations: Policies don’t follow GAAP or there is an error in the application F/S do not fairly present transactions and events that achieves fair presentation F/S are missing disclosures (example = related party transactions) or they don’t follow GAAP Required info (cash flow. departures. Qualified = material issue w/ accounting policy. and/or lack of independence o Scope limitations. etc. except for effects of the matter(s) described in the basis for a qualified paragraph. There is also no need for an E-O-M paragraph in this situation) If alternative procedures cannot be applied.circumstances: When an auditor wasn’t engaged at the beginning of the year when opening inventory should have been observed (disclaimer) The CPA was not independent (disclaimer) -.) has not been included If there are no GAAP issues or they are immaterial = unmodified opinion GAAP allows different methods for inventory as long as disclosed = unmodified Weak internal controls doesn’t necessarily mean adverse opinion A R What changes in the auditor’s report when a qualified or adverse opinion is given? The Auditor’s Responsibility paragraph is modified: o Amend to audit evidence obtained is sufficient and appropriate for a qualified or adverse opinion The report will include a Basis for “Qualified or Adverse” Opinion paragraph which goes immediately before the opinion paragraph: o Have a description and quantification of the financial effects of any misstatement that relates to specific amounts in the f/s o An explanation of how disclosures are misstated (if any) o A description of the nature of omitted info (if any) Opinion paragraph is modified to say “qualified or adverse opinion” paragraph: o Qualified opinion = State that in the auditor’s opinion. The f/s were unaudited (disclaimer) When certain circumstances prevent the auditor from performing a specific procedure (unless an auditor can obtain sufficient evidence by performing alternative procedures. presentation. significant going concern uncertainty. presentation. Adverse = material and pervasive issue w/ accounting policy.AUD . the f/s are presented fairly in accordance with the applicable financial reporting framework (operations…cash flows…) o Adverse opinion = State that in the auditor’s opinion. and/or estimate o The type of opinion is determined by judgement o Unjustified/unreasonable estimates. Disclaimer = material and pervasive issue with insufficient evidence (scope limitation). Qualified = material issue with insufficient evidence (scope limitation) 2.Notes Chapter 1 If all 4 criteria are met.management: (all disclaimer) 8 . the f/s are not presented fairly in accordance with the applicable financial reporting framework (operations…cash flows…) GAAS Issues: Qualified or Disclaimer Opinion What are the 2 types of GAAS issue opinions and what would cause that type of opinion for each? 1. unjustified policies. disclosures. What would cause an auditor from being able to withdraw? If the auditor has substantially completed the audit OR the audit is required by law or regulation A R What changes in the auditor’s report when a qualified or disclaimer opinion is given? The Auditor’s Responsibility paragraph is modified: o Qualified = Amend to say audit evidence obtained is sufficient and appropriate for a qualified opinion o Disclaimer = State that their responsibility is to express an opinion on the f/s based on conducting the audit in accordance with auditing standards generally accepted in the U. the f/s are presented fairly in accordance with the applicable financial reporting framework (operations…cash flows…) When an auditor qualifies his opinion because of a scope limitation.AUD . the wording in the opinion paragraph should indicate that the qualification pertains to “the possible effects on the financial statements” and not to the scope limitation itself.S.Notes Chapter 1 Confirming A/R was denied Consolidated subsidiary info denied or is unable to be obtained Audit restrictions Inadequate accounting records No management representation letter signed Client lawyers denied If there are no GAAS issues or they are immaterial = unmodified opinion When management causes a scope limitation what type of opinion should be given? A qualified/disclaimer opinion or they should withdraw from the engagement (NEVER adverse) If an auditor cannot obtain appropriate audit evidence due to management-imposed limitations and the possible effects of any undetected misstatements could be material and pervasive. because of the significance of the matter(s) described in the basis for a disclaimer paragraph. the auditor should withdraw from the engagement. Because of the matter(s) described in the basis for a disclaimer paragraph. but is required by law to report on f/s. Therefore. except for effects of the matter(s) described in the basis for a qualified paragraph. what type of opinion should be given? A disclaimer If an auditor has no audit work. what type of opinion should be given? There should be no audit opinion Summary – What type of opinion relates to a group audit and what are a few traits? Unmodified o No emphasis-of-matter paragraph o No basis for opinion paragraph Summary – What type of opinion relates to a going concern and what are a few traits? Adequate disclosures = unmodified o Yes emphasis-of-matter paragraph o No basis for opinion paragraph Inadequate disclosures (GAAP) = qualified or adverse o Yes emphasis-of-matter paragraph o Yes basis for opinion paragraph Significant going concern uncertainty (GAAS) = disclaimer 9 . we do not express an audit opinion A disclaimer of opinion will also require modification in the introduction paragraph: o Amend to state that the auditor “were engaged to audit” instead of “have audited” the f/s… If an auditor is not independent. we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. we have not been able to obtain sufficient appropriate evidence to provide an opinion. o Disclaimer opinion = State that in the auditor’s opinion. The report will include a Basis for “Qualified or Disclaimer” Opinion paragraph which goes immediately before the opinion paragraph: o Describe the reasons for the inability to obtain sufficient appropriate audit evidence Opinion paragraph is modified to say “qualified or disclaimer opinion” paragraph: o Qualified opinion = State that in the auditor’s opinion. however. in our opinion.Notes Chapter 1 o o No emphasis-of-matter paragraph Yes basis for opinion paragraph Summary – What type of opinion relates to a lack of consistency and what are a few traits? Justified = unmodified o Yes emphasis-of-matter paragraph o No basis for opinion paragraph Unjustified = adverse or qualified o Yes emphasis-of-matter paragraph o Yes basis for opinion paragraph Immaterial = do not mention it in the report Summary – What type of opinion relates to a misstatement (GAAP) and what are a few traits? Immaterial = unmodified o No emphasis-of-matter paragraph o No basis for opinion paragraph Material = qualified o No emphasis-of-matter paragraph o Yes basis for opinion paragraph Material and pervasive = adverse o No emphasis-of-matter paragraph o Yes basis for opinion paragraph Summary – What type of opinion relates to a scope limitation (GAAS) and what are a few traits? Immaterial = unmodified o No emphasis-of-matter paragraph o No basis for opinion paragraph Material = qualified o No emphasis-of-matter paragraph o Yes basis for opinion paragraph Material and pervasive = disclaimer o No emphasis-of-matter paragraph o Yes basis for opinion paragraph Summary – What type of opinion relates to an uncertainty (GAAP and GAAS) and what are a few traits? No material misstatement & there is sufficient evidence = unmodified o Maybe emphasis-of-matter paragraph o No basis for opinion paragraph Material misstatement (GAAP) = qualified or adverse o No emphasis-of-matter paragraph o Yes basis for opinion paragraph Insufficient evidence (scope limitation—GAAS) = qualified or disclaimer o No emphasis-of-matter paragraph o Yes basis for opinion paragraph Reports on Comparative Statements Reporting with Different Opinions A R What is the main difference on the auditor’s report when going from an unmodified opinion in the prior year to a qualified opinion for the current year? Opinion Paragraph o State. except for the effects on the 201X f/s of matter(s) described in the basis for a qualified paragraph.AUD . the f/s are presented fairly. Updating/Changing Prior Opinions 10 . or compiled. o Indicate that the f/s have been restated and should express an unmodified opinion with respect to the restated f/s. but before the f/s are issued. an auditor should change the previously issued opinion (for example an adverse or qualified) on the prior year's financial statements if what happens? The prior year's f/s are restated to conform with generally accepted accounting principles.AUD . give the reasons o The nature of any emphasis-of-matter or other-matter paragraph included in the predecessor audit’s report o The date of the predecessor auditor’s report Prior Period F/S Not Audited If the prior period financial statements were not audited. What are the 2 types of subsequent events?(describe them) 11 .Notes Chapter 1 When reporting on comparative financial statements (prior year and current year are presented). What items should be disclosed? Only DORCS change their mind In the emphasis-of-matter or the other-matter paragraph disclose… 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 that the “opinion…is different” Prior Period F/S audited by a Predecessor Auditor What should the prior/old (predecessor) CPA do when they are deciding to present (reissue) their audit report? Read the current period statements Compare the statements audited with the current period statements Obtain a letter of representation from the successor auditor Obtain a letter of representation from management o If the report is unrevised use the original report date in any reissue o If the report is revised use the dual date A R What should the current/new (successor) CPA do when they do not present (don’t reissue) the predecessor’s audit report? They should express an opinion on the current period f/s only In the other-matter paragraph they should indicate… o The f/s of the prior period were audited by a predecessor auditor (do not name them) o The type of opinion expressed by the predecessor auditor If it was modified. the auditor should disclose the reason(s) in the auditor’s report. what needs to be shown? The f/s should be clearly marked and The auditor’s report should include an other-matter paragraph to indicate that the auditor did not audit the prior period f/s and the auditor assumes no responsibility for them. When the prior year’s f/s were not audited and the current year’s f/s are being audited. If during the current examination the auditor becomes aware of evidence that affects the prior statements and opinion that was expressed what should the auditor do? Update the opinion in the current year’s report You only update/change an opinion when the entity is not in conformity with GAAP A R If the updated/changed opinion differs from the previous opinion. what type of opinion should be issued? Disclaimer (like a scope limitation) may be required on items Events Occurring After Year-End Subsequent Events Subsequent events are events or transactions that occur after the balance sheet date. reviewed. events have occurred that could effect f/s… ex) litigation. the auditor must use professional judgement to decide whether to adjust the F/S or disclosures if the information existed at the report date If the auditor believes the f/s need to be revised to reflect the sub. However. event and mgmt. doesn’t make the revision. What actions should the auditor take? First = Determine whether there are persons currently relying on. after the audit report has been submitted. or likely to rely on. events up to that later date Subsequent Discovery of Facts after the Report Release Date: (we missed something) Usually. “Jan. the auditor should take appropriate action. but before f/s were issued What is the auditor’s responsibility (type of procedures do they need to perform) for subsequent events? PRIME is included in year-end fieldwork Post balance sheet transactions = review for proper cutoff and to better evaluate year-end balances Representation letter should be obtained from mgmt = about events that need adjustmnts/disclosures Inquiry of mgmt = if sub.AUD . but before the f/s was issued. no further action is necessary 12 . What actions should the auditor take? Auditor should determine whether other audit procedures were adequate to compensate for the omitted audit procedures o If so. and other committee meetings should be read during sub. new info Minutes of stockholders. during a firm’s internal inspection program or during peer review. if the auditor becomes aware of material information (something the auditor missed) that would have affected the report. the auditor takes responsibility for all sub. it was written off due to the customer filing bankruptcy Type II events = conditions existing after the balance sheet date o These are nonrecognized events o May require footnote disclosure The company closed the purchase of a competitor after the B/S date. Advise the client to issue revised f/s describing the reasons for the revision Advise the client to make the necessary disclosures and revisions to the f/s Provide notification that the f/s cannot be relied upon if the effects on the f/s cannot be determined on a timely basis If the client refuses to follow procedures. 2015” If they decide not to dual date. an auditor has no obligation to make continuing inquiries after the date of the report.Notes Chapter 1 Type I events = conditions on or before the balance sheet date o These are recognized events o Requires a F/S adjustment A large A/R was included in the f/s. 2015. if the auditor becomes aware of a subsequent event. as to which the date is Feb 3. event Ex. However. what should the auditor do? Notify the board of the directors of the refusal and that they will take additional steps to prevent further reliance on the auditor’s report and f/s “DAR” them to fix it o Dissociate with the client = notify the client that the auditor’s report must no longer be associated with the f/s o Alert agencies = notify any regulatory agencies that the auditor’s report should no longer be relied on o Relying parties = notify any relying parties that the auditor’s report is no longer to be relied on Omitted Audit Procedures Discovered after Submission of the Audit Program: (we forgot to do it) Omitted audit procedures may be discovered. 21. directors. a qualified or adverse opinion should be issued o If adjusts are made after the original date of the auditors report. period Examine latest available interim F/S and compare them with the F/S under audit What is the auditor’s responsibility after the original date of the auditor’s report? The auditor has no active responsibility. except for Note 2. claims. the f/s and whether those persons would attach importance to the information. the auditor may dual date the report which extends their responsibility on that specific sub. what are the auditor’s responsibilities when required by GASB or FASB? Apply certain limited procedures to the required supplementary information. apply the omitted procedures (or alternative procedures) Note: If the auditor did not perform the omitted or alternative procedures. info. an auditor is not responsible for determining whether other info in the documents is properly stated. need to be revised. such as annual reports to the shareholders or reports by charitable orgs. an auditor must perform sufficient audit procedures When reporting on supplementary information. is fairly stated. fraudulent. To report on whether the sup. o If the material inconsistency relates to the audited f/s and management refuses to change/eliminate the issue then modify the opinion o If the material inconsistency relates to other info and management refuses to change/eliminate the issue then the auditor should communicate this matter to those charged w/ governance and… Include in the auditor’s report an other-matter paragraph describing the material inconsistencies Withhold the use of the report Withdraw from the engagement and consult with legal counsel if it was false. info is included and the required procedures has been applied or o State that the required sup. and o Inquire of management about methods used to prepare the sup. What are some other traits about the reporting accountant? They may NOT report on hypothetical transactions. in all material respects in relation to the f/s as a whole In order to report on this information though. Generally. info has some deficiencies and/or omissions and disclaim an opinion Reports on Application of the Requirements of an Applicable Financial Reporting Framework A reporting accountant is an accountant who prepares a written report on 1) the application of the requirements of an applicable financial reporting framework to a specific transaction or 2) the type of report that may be rendered on a specific entity’s f/s. Evaluate the presentation of the sup. info Add an other-matter paragraph to the financial statement audit report.Notes Chapter 1 o If not. this would impair the auditor’s ability to support the previously issued option Reporting on Other Information Other Information in Documents Containing Audited Financial Statements Frequently. What are the objectives in this type of engagement? 1. deceptive. the reporting accountant should consult with the continuing accountant to ascertain all the available relevant facts 13 . but the auditor should read the other info because of the credibility of the audited f/s may be undermined if there are material inconsistencies or material misstatement of fact between the audited f/s and the other info. o State that the required sup. info o Determine if the sup. audited f/s are incorporated into other documents. info in relation to the f/s as a whole 2. What should the auditor do if they identify a material inconsistency or misstatement of fact? The auditor should determine whether the audited f/s or the other info. or misleading Reporting on Supplementary Information Supplementary information is info presented outside the basis f/s that may be presented in a document containing the audited f/s or separate from the f/s.AUD . to the general public. info is consistent with management’s responses and audited f/s o Obtain an understanding of the methods used to prepare the info o Evaluate the appropriateness and completeness of the info o Obtain written management representations regarding the required sup. An auditor may be engaged to report on the supplementary info. o A proposed transaction is okay as long as the transaction involves the facts and circumstances of a specific entity They are NOT required to be independent o If they are not independent they must state that in the accountant’s report If the transaction is audited by another CPA. the specific transaction. entity that have been prepared in accordance with a financial reporting framework generally accepted in another country. statement of relevant facts. and source of info 4. may change the report 6. 14 . If the accountant is not independent. circumstances. an auditor practicing in the U. etc.S. or specific parties What items should be included in the accountant’s report? 1. should do what? Understand the purpose for which the f/s are prepared o Done by obtaining a written representation letter from management Understand whether the financial reporting framework is a fair presentation framework Understand the intended users of the f/s Understand the applicable legal responsibilities involved if the auditor plans to use the form and content of the auditor's report of another country.Notes Chapter 1 The accountants report should be restricted only to management. BOD. Identification of the specific entity. a statement stating their lack of independence 7.S. Statement saying management is responsible for proper accounting treatment 5.AUD . Statement saying that any difference in facts. Engagement was performed in accordance with AICPA standards 3. Describe the nature of the engagement 2. circumstances. A separate paragraph restricting the use of the report to specific parties only Reporting on F/S Prepared in Accordance with a Financial Reporting Framework Generally Accepted in another Country Before reporting on the financial statements of a U.