A1: Audit Reports

Question 1

Opinion Elements/Paragraphs

Answer 1

Intro Paragraph

Management’s Responsibility

Auditor’s Responsibility

Basis for Modification/Opinion

Opinion

Emphasis of Matter Paragraph

Other Matters Paragraph

Report on Other Legal/Regulatory Responsibilities

Question 2

Elements of Management’s Responsibility Paragraph

Answer 2

M – Management’s
R – Responsibility
(for preparation and fair presentation of financial statements)

D – Design
I – Implementation, and
M – Maintenance (of internal controls)

Question 3

Elements of Auditor’s Responsibility Paragraph

Answer 3

R – auditor’s Responsibility
E – Express opinion on financial statements
P – Plan and perform the audit
P – Perform procedures to
O – Obtain evidence
R – assess Risks of material misstatement due to fraud or error
T – (Test) consider internal control relevant to
S – preparation and fair presentation of financial Statements
C – not for purpose of opining on Controls
R – evaluate Reasonableness of
A – Accounting estimates of
M – Management and
E – Evaluate overall financial statement presentation

Question 4

Elements of Opinion Paragraph

Answer 4

Financial statements present fairly, in all material respects, financial position, in accordance with applicable reporting framework

Identify applicable reporting framework

Question 5

Where reference to GAAS/other audit standard?

Answer 5

Auditor’s Responsibility Paragraph

Question 6

Where reference to GAAP/other financial reporting framework?

Answer 6

Opinion Paragraph

Question 7

Opinion changes if refer to other auditor?

Answer 7

Modify auditor’s responsibility

Modify Opinion

Question 8

Opinion changes if do not?

Answer 8

None

Question 9

When to issue qualified opinion?

Answer 9

Statements materially misstated or unable to obtain evidence to conclude statements are free from material misstatements

Question 10

Opinion differences (Qualified)?

Answer 10

Modify Auditor’s Responsibility Paragraph (evidence supports qualified opinion)
Basis of Qualified Opinion Paragraph
Modify Opinion Paragraph (Except for…[matter in Basis of Opinion Paragraph], present fairly…)

Question 11

When to issue adverse opinion?

Answer 11

Statements contain pervasive (very material) misstatements

Question 12

Opinion differences (Adverse)?

Answer 12

Modify Auditor’s Responsibility Paragraph (evidence supports adverse opinion)
Basis of Adverse Opinion Paragraph
Modify Opinion Paragraph (Because of [matter in Basis of Opinion Paragraph], not presented fairly…)

Question 13

When to issue disclaimer of opinion?

Answer 13

Unable to obtain sufficient evidence to provide basis for an opinion that no pervasive (very material/significant) material misstatement
(significant scope limitations, significant going concern uncertainty, lack of independence)

Question 14

Opinion differences (Disclaimer)?

Answer 14

Modify Intro Paragraph (engaged to audit)
Modify Auditor’s Responsibility (Because of matters discussed in [Basis of Modification paragraph], unable to obtain sufficient evidence to provide opinion)
Basis for Disclaimer (describe why unable to obtain sufficient evidence)
Modify Opinion (Because of matters in [Basis paragraph], unable to obtain sufficient evidence and therefore does not express an opinion)

Question 15

When use Emphasis of Matters Paragraph?

Answer 15

Required: Going Concern, Justified accounting principle change has material effect, Change prior opinion (eg, now in compliance with GAAP), use of other special purpose financial reporting framework

Maybe: uncertainty relating to litigation or regulation, major catastrophe, major related party transactions, important subsequent events

Question 16

Going Concern Procedures?

Answer 16

A – Analytical Procedures
D – Debt compliance
M – Minutes
I – Inquiry of legal counsel
T – Third parties (confirm support arrangements)
S – Subsequent events

Question 17

Going Concern Paragraph Language?

Answer 17

“Substantial doubt” and “going concern”
Do not say “for 1 year”

Also option to Disclaim an Opinion due to significant going concern uncertainty
Qualified or Adverse if inadequate disclosure regarding going concern issue

Question 18

Consistency/Change in Accounting Principle

Answer 18

Immaterial: no change to report

Otherwise: emphasis-of-matter paragraph until new principle applied to all periods presented

Question 19

Common GAAP Issues (Qualified or Adverse Opinion)

Answer 19

• unjustified change in accounting principle
• inadequate disclosure
• unjustified departure from/violation of GAAP
• unreasonable accounting estimates

Question 20

Withdrawal?

Answer 20

Report is false, fraudulent, deceptive or misleading

Question 21

Common GAAS Issues (Qualified or Disclaimer)

Answer 21

• uncertainty
• scope limitations (opinion refers to possible effect on financial statements, not the limitation itself)
• independence
• unaudited financials (disclaimer)

Question 22

Prior year’s financials not audited

Answer 22

Likely scope limitation – disclaimer on all statements other than Balance Sheet if unable to determine beginning year Inventory

Question 23

Update Prior Opinion – why?

Answer 23

Often when now in conformity with GAAP

Question 24

What needed in new opinion?

Answer 24

D – Date of prior report
O – Opinion previously given
R – Reason for prior opinion
C – Changes occurred
S – Statement that opinion is different

Question 25

Prior audit by other auditors: | -predecessor reissues report?

Answer 25

- get reps letters from new auditor and management about changes/modifications - reissue opinion with old date (if no changes) or dual date (if revised)

Question 26

Prior audit by other auditors: | -report not reissued?

Answer 26

-opinion only on current period and include other-matter paragraph (type of old opinion and reasons for any modification or emphasis or other matters)

Question 27

Prior year financials not audited by anyone | -were reviewed or compiled?

Answer 27

-other matter paragraph: service done previously, any modifications, statement that service was weaker than audit or didn’t provide opinion on financials

Question 28

Prior year financials not audited by anyone | -not audited, reviewed or compiled?

Answer 28

-other matter paragraph: previously not audited/reviewed and no responsibility for prior period statements

Question 29

Types of subsequent Events

Answer 29

Type I – Recognized Events – conditions on or before balance sheet date – adjustment to statements Type II – Nonrecognized Events –conditions after balance sheet date – disclosure required

Question 30

Procedures to check for subsequent events

Answer 30

``` P – Post-balance sheet transactions R – Rep letter from management I – Inquiries of management/attorneys M – Minutes of meetings E – Examine interim financials ```

Question 31

Auditor responsibility after original report date

Answer 31

No active responsibility If become aware of events before report release, may be necessary to adjust financials or disclosures – if management does not, may need to issue Qualified or Adverse Opinion

Question 32

Auditor discover facts after report released

Answer 32

-if materially affects report and persons relying on statements: advise client to update statements/disclosures -if client refuses: DAR Dissociate report from financials Alert regulatory agencies Notify relying parties that report shouldn’t be relied upon

Question 33

Discover omitted audit procedures

Answer 33

- Were omitted procedures material to report? - Were alternative procedures adequate to compensate for omission? - if people relying on report, apply omitted (or alternative procedures)

Question 34

Responsibility for other information

Answer 34

- read for any material inconsistencies - if inconsistency, management refuses to revise, notify board and: describe in Other Matters Paragraph, withhold use of report, or withdraw from engagement - or may include Other Matter Paragraph disclaiming opinion on other information

Question 35

Engaged to Report on supplemental information

Answer 35

- objectives: evaluate presentation of such info in relation to financials as a whole, and report whether such info is fairly stated in relation to financials - info must be derived from info used to prepare audited financials - must obtain rep letter from management - report in separate report or Other Matters Paragraph

Question 36

Required Supplementary Information

Answer 36

- limited procedures required: inquiries of management, see if consistent with financials, obtains rep letter from management - Other Matters Paragraph: Disclaim opinion on the info, report any deficiencies/omissions/ uncertainties, or that info is included and auditor did required procedures

Question 37

Report on Application of Reporting Framework to transaction

Answer 37

- may not report on hypothetical transaction - accountant need not be independent - must: understand transaction, review requirements of framework, consult with continuing accounting - report: describe engagement, performed under AICPA standards, transaction and findings, restriction of use (management, board, previous/current auditors), disclose if not independent

Question 38

Report on Financials prepared under non-GAAP (or non-IFRS)

Answer 38

- non US distribution: use report of other country or US form - US distribution: use US form with emphasis-of-matter paragraph noting the relevant framework, and that it differs from GAAP