A1 - Audit Reports Flashcards
1
Q
What is professional skepticism?
A
It is an attitude that includes a questioning mind and a critical assessment of audit evidence. Recognizes that circumstances may exist that may cause the financial statements to be materially misstated.
1
Q
What are things the auditor should consider when applying professional skepticism?
A
- Possible fraudulent activity
- audit evidence that is contradictory to evidence provided by management.
- Information that calls into question the reliability of documents and responses to inquires that may be used as audit evidence.
- Circumstances that suggest the need for audit procedures in addition to those required by GAAS.
2
Q
What are the primary paragraphs of a nonissuer (private company) audit report?
A
1) opinion: Required for every report
2) Basis for Opinion: required for every report
3) Going Concern
4) Key Audit Matters (KAM): only if engaged to report on key audit matters.
5) Responsibilities of management
6) Auditor’s responsibilities
3
Q
What are the primary paragraphs of an issuer (public company) audit report?
A
1) Opinion: Required for every report
2) Basis for Opinion: Required for every report
3) Critical Audit Matter (CAM): Required for every report
4
Q
What does the auditor’s responsibility paragraph from the nonissuer audit report refers to?
A
- Plan and perform audit to perform reasonable assurance whether F/S are free from material misstatement, whether caused by error or fraud.
- Provides an assessment of risk prior to performing test of detail. Explicit statement saying “such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the F/S”
- Express an opinion on the F/S presented by management.
5
Q
What does the auditor’s opinion paragraph from the nonissuer audit report refers to?
A
1) Indicates nature of engagement (audit)
2) Financial statements covered in the audit engagement (e.g., balance sheet, income statement, etc.)
3) Name of company audited.
4) Dates of period covered by each financial statement (e.g., December 31, 20XX)
5) Should identify the applicable financial reporting framework and its origin
6
Q
Who are the addressees in the nonissuer audit report?
A
Addressed to the company owners or the company requesting the audit (e.g., the company engaged auditor to perform an acquisition audit). It is not addressed to management or external parties (e.g., bank).
7
Q
What is the date of auditor’s report in the nonissuer audit report?
A
Audit report should be dated no earlier than the date in which they have obtained sufficient appropriate audit evidence.
8
Q
What would the Key Audit Matters (KAM) paragraph from the nonissuer audit report refer to?
A
1) Higher/significant risk: Areas of higher assessed risk of material misstatement, or significant risk identified.
2) Significant/challenging auditor judgement: significant management judgement, including accounting estimates that have been identified as having high estimation uncertainty.
3) Impact from significant events or transactions: The effect on the audit of significant events or transactions that occurred during the period.
9
Q
What would the Critical Audit Matters (CAM) paragraph from the issuer audit report refer to?
A
A matter that was communicated or is required to be communicated to the audit committee and involves an especially challenging, subjective, or complex auditor judgement. It can be included in both unmodified or modified audit reports.
10
Q
What is included in the auditor’s secondary/final paragraph from the nonissuer audit report refers to (CODA)?
A
C - City and state where audit report is issued.
O - Other information (related to management’s and the auditor’s responsibilities)
D - Date of the auditor’s report (same date as when sufficient appropriate audit has been obtained and mgmt asserted on the F/S)
A - Audit Firm Signature
11
Q
When does the auditor has to modify the audit opinion?
A
The audit opinion is modified when the auditor concludes that the financial statements as a whole are materially misstated.
12
Q
When does the auditor gives an unmodified opinion?
A
When the auditor gives a clean opinion or has performed other procedures to satisfy the auditor and the reasonableness of account balances.
Unmodified = clean opinion
13
Q
What action would the auditor take if it gives an unmodified opinion?
A
- The auditor can add an emphasis-of-matter paragraph if there was a change that is not consistent with comparative financial statements
- Issue the independent auditor’s report without modification if the financials do not represent any audit or accounting issues and information is properly disclosed. if a proposed adjustment by the auditor is immaterial, there is no need to disclose this information.
14
Q
When does the auditor gives an “Except for” qualified opinion?
A
When the financials have any of the following issues, and the issue is material but not pervasive.
1. Accounting/GAAP issue
2. Audit/GAAS issue
15
Q
When does the auditor gives an Adverse opinion?
A
When the financials have accounting/GAAP issues, those are significant (material) and pervasive, and the auditor was able to obtain sufficient evidence to provide that opinion.
16
Q
What action would the auditor take if it gives an “Except for” qualified or Adverse opinion?
A
The auditor will modify the opinion and basis for opinion sections
17
Q
When does the auditor gives a disclaimer opinion?
A
A disclaimer opinion when there is an audit/GAAS issue, the issue is significant/material and pervasive, the auditor is unable to obtain sufficient documentation to conclude on the audit. This represents a change to the report all together.
18
Q
What action would the auditor take if it gives a disclaimer opinion?
A
- The auditor will modify the auditor’s responsibility section
- The auditor will modify the opinion and basis for opinion section
19
Q
What are scope limitations in an audit that could result in a disclaimer of opinion?
A
- Auditor’s inability to perform substantive test:
- Inability to confirm accounts receivable
- Inability to observe inventory
- Restricted use on audit tests
- Inability to obtain the financial statements of a subsidiary owned by the entity being audited.
- Inadequacy of accounting records - Management’s refusal to provide the auditor a representation letter and/or acknowledge its responsibility for the fair presentation of the financial statements in conformity with GAAP.
- Timing constraints (not enough time to properly conduct the audit)
- Refusal of the client’s attorney to respond to inquiries
- The auditor fails to meet independence requirements
20
Q
How does an independent CPA associated with the financial statements of a public entity, but has not audited or reviewed such statements issue the report?
A
The independent CPA must issue a disclaimer of opinion on the statements.
21
Q
What is a qualified opinion phrase included in the opinion section of the report?
A
A qualified opinion phrase is, “in our opinion, except for [reference to matter given rise for qualification] described in the Basis for Qualification section of our report..”
22
Q
When is a departure from US GAAP permissible that will result in a unmodified opinion?
A
When circumstances indicate that a financial presentation in accordance with US GAAP would be misleading. The financials are not materially misstated.
23
Q
When is the auditor required to comply with auditing requirements in addition to GAAS?
A
In certain engagements, the auditor may be required to comply with other auditing requirements in addition to GAAS.
24
What are the other audit requirements in addition to GAAS the auditor has to comply with?
1. Auditing standards issued by the PCAOB
2. International Standards on Auditing (ISA)
3. Government auditing standards (GAGAS), or
4. Auditing standards of a specific jurisdiction or country.
25
What does the term Generally Accepted Auditing Standards ("GAAS") means?
Measures the quality of the auditor's performance, and guides the auditor in the performance of a properly planned and executed audit.
26
What is reasonable assurance?
Is a high, but not absolute, level of assurance.
27
What does the auditor need to obtain reasonable assurance?
1. Plan the work and properly supervise any assistants
2. Determine and apply appropriate materiality levels
3. Identify and assess risks of material misstatement, whether due to fraud or error
4. Obtain sufficient appropriate audit evidence
28
What is the primary use of the emphasis-of-matter paragraph from a nonissuer?
1. to describe a justified change in accounting principle that has a material effect (unjustified change in accounting principle results in a modified opinion)
2. To describe subsequently discovered facts that lead to a change in audit opinion
3. The financial statements are prepared in accordance with applicable special purpose framework (other than regulatory basis financial statements intended for general use).
29
In what other instances would the emphasis-of-matter paragraph be used?
When referring to any matter that is appropriately presented or disclosed in the financial statements and is of such importance that is fundamental to the user's understanding of the financial statements
30
What are examples of other instances described in the emphasis-of-matter paragraph?
1. Uncertainty related to litigation or regulatory action
2. A major catastrophe having impact in the F/S
3. Significant related party transactions.
4. Subsequent events.
5. Subsequent doubt about an entity's ability to continue as a going concern
31
What is the responsibility of the group engagement partner?
1. Responsible for the group engagement 2. Determines materiality levels
3. Obtain sufficient appropriate audit evidence related to the component financial information.
4. Express an opinion on whether the F/S are in accordance with the framework
5. Communicates clearly with component auditors.
6. Determines whether to refer to the component auditor's work in the audit report on the group F/S.
32
What is the responsibility of the Group Auditor?
Examine much of the financial information or examine the parent company
33
What is the responsibility of the Component Auditor?
Will do a portion of the work. A component auditor audits one or more investees or subsidiaries.
34
What does a component means?
A component may be a subsidiary, joint venture, or equity method investee.
35
Who signs the audit report on the group financial statements?
Only the group auditor signs the audit report.
36
How is materiality of a component compared to the group financial statements?
Component materiality should be lower than materiality for the group financial statements as a whole.
37
How does the group engagement partner gets comfort to not reference the component auditor in the audit report?
The "group auditor" must be satisfied with "component auditor" independence and professional reputation, including "ethical requirements." Inability to be satisfied might be a scope limitation resulting in a qualified or disclaimer of opinion.
38
What actions are taken by the group engagement partner if it decides to assume responsibility in the audit report?
1. The Group engagement partner choses not to mention the component auditor in the audit report.
2. Review the audit documentation of the component auditor and possibly performing supplemental audit test depending on significance of subsidiary.
39
When does the auditor dual date the report when there are subsequent events?
If adjustments or disclosures are made after the original date of the auditor's report, the auditor may dual date the report to extend responsibility only for the particular subsequent event. The original date of the report is retained for the rest of the financial statements.
40
After issuing a report, is the auditor obligated to make continuing inquiries or perform other procedures concerning audited financial statements?
No, the auditor is not obligated to perform other procedures or perform inquiry, unless information, which existed at the report date and may affect the report, comes to the auditor's attention (and the auditor has not been asked to reissue the report).
41
What action should the auditor take If the client refuses to disclose new information materially affecting the audit report after issuance?
The auditor should notify each member of the board of directors and the fact that the auditor will take additional steps to prevent further reliance on the auditor's report.
42
What is an auditor responsibility when reporting on the Supplementary Information?
The auditor should perform limited procedures on the Supplementary Information section in the report.
43
What is a Special Purpose Framework?
It is a financial basis of accounting other than GAAP that includes cash basis, tax basis, regulatory basis, and contractual basis.
44
What Special Purpose Frameworks have a General Use?
1. Cash basis
2. Income Tax basis
3. Regulatory frameworks - for general use
45
What Special Purpose Frameworks have a Restricted use of specified parties?
1. Contractual basis
2. Regulatory framework - not for general use
46
What special purpose frameworks will require an emphases-of-matter paragraph on the audit report?
1. Cash basis
2. Income Tax basis
3. Contractual Basis
4. Regulatory frameworks - Not for general use
47
What is the purpose of using an emphasis-of-matter paragraph when using a special purpose framework?
To describe what the framework is and that it's used as a basis other than GAAP. The auditor can reference to the note in the FS that describes the basis of presentation.
48
What special purpose frameworks will require an other-matters paragraph on the audit report?
1. Contractual Basis
2. Regulatory frameworks - Not for general use
49
What needs to be performed when the regulatory basis is for general use?
The report needs two opinions:
1. One regarding GAAP, adverse
2. whether or not the FS are prepared in accordance with the special purpose framework
No emphasis or other matters paragraph is required when the regulatory report is available for general use.
50
what opinion is given when the financial statements prepared under the basis of a special purpose framework are not suitably titled?
A qualified opinion with a basis for modification paragraph.
51
Where is a description of how the special purpose framework differs from GAAP reported?
Notes to the financial statements.
52
How is an auditor reporting a US subsidiary's financial statements if the parent company uses a financial reporting framework generally accepted in the parent's country?
The auditor may report either:
1. US-style report modified to report on the financial reporting framework of the parent's country
2. The report form of the parent's country
53
What is a Reporting Accountant?
An accountant in public practice, other than the continuing accountant, who prepares a written report (or provides an oral advice) on:
1. The application of the requirements of an applicable financial reporting framework to a specific transaction
2. The type of report that may be rendered on a specific entity's financial statements.
54
How does the auditor determines if a CAM requires especially challenging, subjective, or complex auditor judgement?
The auditor takes into account certain factors such as:
1. Including the auditor's assessment of the risks of material misstatement
2. Areas of significant judgement or estimation by management
3. Nature and timing of unusual transactions
4. the degree of subjectivity in applying audit procedures
5. the extent of specialized skill or knowledge regarding a matter.
55
What should the successor auditor request to a new client?
The successor auditor should seek permission to their client to inquire with the predecessor auditor and review their engagement documentation.
56
What are the audit procedures to discover subsequent events (PRIME)?
P - Post balance sheet transactions
R - Representation letter
I - Inquiry (lawsuits, claims, etc.)
M - Minutes of Board meetings
E - Examination of interim financial statements.
57
What does the term "Must" mean in auditing standards?
"Must" or "is required" represent a requirement that is considered to be unconditional. conditions are required to be followed in all relevant cases.
58
What does the term "Should" mean in auditing standards?
"Should" represents a presumptively mandatory requirement, that must be followed in all cases. An exception exists for situations in which departure from this requirement is permitted as long as a reasonable explanation exists. Reasonable documentation should exist.
59
What does the term "could", "might", "may" mean in auditing standards?
"could", "might", "may" represents explanatory material that will not enforce a professional performance requirement (e.g., by exercising professional judgement in the circumstances)
60
When does a direct financial interest in an entity impairs the covered member's independence?
Having a direct financial interest will impair independence regardless of its materiality to the financial statements. Situation where the covered member can be receiving gains directly from the client.
61
What are examples of direct financial interest?
1. Ownership in client stock
2. Financial interest in trust when the member is a trustee
3. Financial interest in a partnership when the member is considered a general partner.
62
When does an indirect financial interest in an entity impairs the covered member's independence?
Having an indirect financial interest will impair independence only if it is material to the financial statements
63
What are examples of indirect financial interest?
1. Ownership in diversified mutual funds that contain the client's stock (e.g., i can't audit this client because my defined contribution plan owns stock in the company)
2. Direct financial interest in a subsidiary, in which the subsidiary has a direct financial interest in the client (e.g., i can't audit this client as my firm owns a subsidiary that owns stock in the client")
64
What are the auditor's responsibilities in an audit (MECCO)?
M - Maintain professional skepticism
E - Exercising professional judgement through planning and performance of audit
C - Complying with relevant ethical requirements
C - Complying with GAAS
O - Obtaining sufficient appropriate audit evidence (competence/capabilities)
65
What are auditor's responsibilities when conducting an audit in accordance with GAAS?
1. Plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatements, whether caused by error or fraud.
2. Provide an assessment of the risk of material misstatements prior to performing test of details.
3. Express an opinion on the financial statements presented by management
66
What are management's responsibilities when conducting an audit in accordance with GAAS?
1. Prepare financial statements in accordance with the applicable financial reporting framework.
2. Design, implement, and maintenance of internal controls.
67
What would the successor auditor do if the predecessor does not present prior-year's audit report?
The successor auditor should no reference the predecessor auditor in the current year audit report.
68
If the auditor finds a material inconsistency in the separate explanatory/emphasis-of-matter paragraph in the F/S, what should the auditor do?
1. Auditor determines whether the audited F/S or other information needs to be revised (refusal ends in modified opinion/withdrawal)
2. If the other information requires a necessary revision due to a material inconsistency and management refuses to make the revision, then the auditor should do the following:
- Report matters to those charged with governance
- Include an other-matters (nonissuer) or an explanatory paragraph (issuer) that describes the inconsistency.
- Withhold use of audit report
- Withdraw from the engagement entirely and seek legal counsel
69
How would an auditor report a material related party transaction that was properly accounted for but not disclosed?
Inadequate disclosure of a material related party transaction may lead the auditor to render a qualified or adverse opinion.
70
When would the auditor independence will not be impaired when there is a broker-dealer relationship?
When the auditor has a cash balance in a brokerage account that is fully covered by the Securities Investor Protection Corporation.
71
Would the auditor relationship with a client get impaired if the auditor receives a token gift?
Yes, the auditor's relationship with the client gets impaired if the client gives a token gift of more than $100.
72
What are the 7 principles of the auditor's professional conduct (RODISIP)?
R - Responsibility principle
O - Objectivity
D - Due care
I - Independence (only for CPAs in public practice)
S - Scope and nature of service
I - Integrity
P - Public interest
73
Where in the audit report is documented the use of special purpose framework?
The auditor will document the use of a special purpose framework (e.g., cash-basis or income tax basis) under the emphasis-of-matter paragraph in the audit report.
74
When is use of the other-matter paragraph from a nonissuer required ?
1. Subsequently discovered facts
2. Comparative F/S are used with F/S reviewed/compiled from prior periods
3. Comparative F/S are used with unaudited F/S from prior periods
4. Auditor uses a restricted alert
5. Auditor elects to use supplementary information and refers to it.
6. Prior period F/S were audited by predecessor auditor
7. auditor is reporting on compliance
8. Component auditor includes a modified opinion in the report.
9. Material inconsistencies found prior to audit report date.
75
When does the auditor express a modified opinion due to misstatement in the F/S?
When the auditor issues a Qualified or Adverse opinion
76
When is the explanatory paragraph of an issuer included in the auditor's report?
When the auditor express an unmodified opinion and the auditor wants to emphasize financial statement readers of things they should be aware of.
77
What information will be included in the explanatory paragraph of the issuer's audit report?
1. Auditor's opinion is based on the report of another auditor
2. Substantial doubt about the entity's ability to continue as a going concern
3. material changes between period in accounting principles or in methods of their application
4. Correction of material misstatements reported in previous F/S
5. Circumstances related to comparative F/S
6. Omission/not review of quarterly financial data required by the SEC Regulation S-K
7. Supplemental information required by FASB and other regulatory bodies.
8. Material inconsistency with other info documented in audited F/S and info appearing in the F/S.
78
What are the titles used for F/S created under the cash basis?
1. Balance sheet
2. Statement of assets and liabilities arising from cash transactions
3. Statement of revenue collected and expenses paid
79
What are the titles used for F/S created under the income tax basis?
1. Statement of assets, liabilities, and stockholders' equity
2. Statement of revenue and expenses
3. Statement of operations
80
What are the titles used for F/S created under a regulatory basis?
Statement of income - regulatory basis
81
How does dual dating of the report occurs for nonissuers?
dual dating may occur if adjustments or disclosures are made after the original date of the auditor's report
82
How does dual dating of the report occurs for issuers?
Dual dating occurs if adjustments are made after the original date of the auditor's report. If adjustments are made to the F/S without footnote disclosure, the original date of the report should be used.
83
What should the predecessor auditor do when comparative statements are issued by successor auditor and prior-year F/S are reissued (DROCO)?
D - Date the report as appropriate (dual dated or unrevised-if not work was done to change the opinion)
R - Read the CY report
O - Obtain a letter of representation of new auditor
C - Compare CY to PY
O - Obtain a letter of representation from client's management at the date of reissuance
84
What is a subsequent event?
Subsequent event occurs after the date of the F/S but before the statements are issued (issuer) or available-to-be-issued (nonissuer).
85
What is a type 1 subsequent event?
If the condition resulting as subsequent event was known prior to the F/S date, the subsequent event is recognized (adjustment). (e.g., a loss and liability is adjusted because a lawsuit known before the B/S date settled)
86
What is a type 2 subsequent event?
If the condition did not exist at the B/S date but occurs in the subsequent period, it just requires footnote disclosure (e.g., company issues new equity or debt in the subsequent period, footnote disclosure only)
87
Does issuance of stock subsequent to F/S requires recognition?
No, issuance of new stock does not require restatement but footnote disclosure only.
88
How are stock splits and stock dividends treated if issued in the subsequent period?
The company may adjust the financial statements, change the number of shares of C/S outstanding as a result of the stock split.
89
What does implied means in the audit report?
The auditor assumes, for instance, if the report does not mention that "Consistent application of GAAP," the auditor implies or assumes that the standard is applied in a consistent manner.
90
What does the auditor's opinion paragraph from the issuer should include in the audit report?
1. Heading "Opinion on the Financial Statements"
2. Name of company audited
3. Financial statements covered in the audit engagement (e.g., balance sheet, income statement, etc.)
4. Dates of period covered by each financial statement (e.g., December 31, 20XX)
5. Statement saying F/S include notes and related schedules were audited
6. Opinion that F/S were fairly presented, in all material respects, based on applicable financial reporting framework (e.g., GAAP) and its origin (USA)
91
How is a change in principle inseparable from a change of estimate treated?
It is treated prospectively and it's appropriate under US GAAP.
92
How is a change in principle treated?
It requires retrospective approach as the new principle has to be applied to prior year F/S. This a restatement to the F/S.
93
Is the auditor required to state in the audit report that consistency in standards is applied?
No, the use of the standard report procedure implies that standards have been applied consistently, unless stated otherwise.
94
What should be included in the Auditor's responsibility paragraph of the audit report?
1. Plan and perform audit to perform reasonable assurance whether F/S are free from material misstatement, whether caused by error or fraud.
2. Provides an assessment of risk prior to performing test of detail. Explicit statement saying "such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the F/S"
3. Express an opinion on the F/S presented by management.
95
What is not a requirement to ensure that F/S are presented fairly in conformity with the applicable financial reporting framework?
The applicable financial reporting framework is not required to be applied consistently with those followed in prior years. The auditor should evaluate the acceptability of accounting changes. Examples:
1. Newly adopted accounting principle is in accordance with reporting framework
2. method of accounting for the change is acceptable
3. Disclosures related to change are appropriate and adequate
4. Entity has justified that the alternative accounting principle is preferrable.
96
