Audit (A1-A2)

Question 1

Which standards provide the most authoritative US auditing guidance for non-issuers and issuers, and who issues those standards?

Answer 1

Non-issuers: Statement on Auditing Standards (SASs), issued by AIPCA Auditing Standards Board

Issuers: Auditing Standards (ASs), issues by the PCAOB.

Question 2

State the primary purposes of an audit

Answer 2

To provide financial statement users with an opinion on whether the financial statements are fairly presented, in all material respects, in accordance with the applicable financial reporting framework.

Question 3

What are the five general GAAS requirements related to the conduct of an audit?

Answer 3

S - Professional Skepticism
E - Ethical Requirements
J - Professional Judgement
E - Sufficient and Appropriate Evidence
C - Compliance with GAAS

Question 4

Identify three inherent limitations of an audit

Answer 4

The nature of financial reporting
The nature of audit procedures
Timeliness of financial reporting and the balance between benefit and cost

Question 5

When should an auditor’s opinion be modified?

Answer 5

A modification to the auditor’s report is necessary when:

• the auditor determines that the financial statements as a whole are materially misstated (GAAP issue), or
• the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatements (GAAS issue)

Question 6

What should be included in the intro paragraph of the unmodified audit opinion (non-issuer)?

Answer 6

The intro paragraph should include:

• The entity whose FS have been audited
• A statement that the FS were audited
• Title of each FS audited
• Dates or periods covered by each financial statements

Question 7

What should be included in the management responsibility (MR) paragraph of the unmodified audit opinion? (non-issuer)

Answer 7

• An explanation that management is responsible for the the preparation and fair presentation of the FS in accordance with the applicable financial reporting framework.
• A statement that this responsibility includes the (DIM) design, implementation, and maintenance of internal control relevant to the preparation and fair presentation

Question 8

What should be included in the auditor’s responsibility paragraph of the unmodified audit opinion (non-issuer)

Answer 8

• A statement that it is the auditor’s responsibility to express an opinion on the FS based on the audit.
• A statement that the audit was conducted in accordance with auditing standards generally accepted in the USA.
• A statement that standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the FS are free of material misstatements.
• Description of the audit.
• A statement whether the auditor believes the audit evidence obtained is sufficient and appropriate to provide a basis for the auditor’s opinion.

Question 9

What should be included in the opinion paragraph of the UNMODIFIED audit opinion? (non-issuer)

Answer 9

1. A statement that the FS present fairly, in all material respects, the FS of the entity as of the balance sheet date, and the results of operations and its cash flows for the period then ended in accordance with the applicable financial framework.
2. Identification of the applicable financial reporting framework and its origin.

Question 10

Where in the standard unmodified opinion (non-issuer) does the auditor refer to (1) the applicable financial reporting framework (GAAP or IFRS) and (2) generally accepted auditing standards?

Answer 10

1. GAAP Applicable financial framework is referred to in the Management Responsibility paragraph and Opinion Paragraph.
2. GAAS is referred to the in the Auditor’s responsibility paragraph.

Question 11

List in order the primary sections of an unmodified audit opinion (non-issuer)

Answer 11

1. Title: “Independent Auditors Report”
2. Addressee: (GR not to management)
3. Introduction
4. Management’s Responsibility for the FS (MR DIM)
5. Auditor’s Responsibility (REPPORTS CRAME)
6. Opinion
7. Report on Other Legal and Regulatory Requirements

Question 12

List in order the primary sections of an UNQUALIFIED audit opinion (Issuer)

Answer 12

1. Title: “Report of Independent Registered Public Accounting Firm”
2. Addressee - (GR not to management)
3. Opinion section - RAP RAP MEE MEE
4. Basis for Opinion Section
5. Signature, tenure, location
6. Report date

Question 13

What should be included in the opinion section of the unqualified audit opinion (issuer)?

Answer 13

The first section of the auditor’s report must include the section title “Opinion on the FS” and the following elements:

• Name of the company whose FS have been audited
• Statement identifying each FS and any related schedule has been audited.
• Dates or periods covered by each FS and related schedule
• Statement indicating that the FS were audited
• An opinion that the FS were present fairly in all material respects, conforming to GAAP

Question 14

Where in the standard unqualified opinion (issuer) does the auditor refer to

(1) the applicable financial reporting framework (GAAP)
(2) the standards of PCAOB?

Answer 14

1. GAAP Applicable financial framework is referred to in the Opinion Paragraph.
2. The Standards of PCAOB are referred to in the second paragraph under the Basis for Opinion section.

Question 15

What is the definition of a critical audit matter (CAM)?

Answer 15

Critical Audit Matter is defined as a matter that was communicated or required to be communicated to the audit committee and that:

1. Relates to accounts or disclosures that are material to the financial statements.
2. Involved especially challenging, subjective, or complex auditor judgement.

Note: Audit reports for issuers must include any CAMs or state that the auditors determined there were no CAMs.

Question 16

In determining critical audit matters (CAMs), what factors should the auditors consider?

Answer 16

The auditor should consider the auditor’s assessment of the risks of material misstatement, area of significant or estimation by management, nature and timing of unusual transactions, the degree of subjectivity in applying audit procedures, and the extent of specialized skill or knowledge regarding a matter.

Question 17

In most audits of issuers, how many critical audit matters (CAMs) will an auditor normally identify?

Answer 17

It is expected that in most audits, the auditors would identify at least one CAM.

Question 18

For each CAM identified, what should the audit report of an issuer include? (IPAD)

Answer 18

• Identification of CAM
• Principal considerations that led to determination of CAM
• Addressed in audit
• Disclosures/account reference

Question 19

What should the auditor of an issuer do if the auditor determines there are no CAMs?

Answer 19

Auditors should state:

“We determined that there are no CAM.”

Question 20

An auditor’s responsibility to express an opinion on the FS of a non-issuer under US auditing standards is

Answer 20

Explicitly represented in the Auditor’s Responsibility paragraph.

Question 21

When would an auditor use professional judgement to determine whether to issue a Qualified Opinion or an Adverse opinion? (GAAP)

Answer 21

When audit evidence indicates that there is material misstatement of the financial statements.

A qualified opinion is issued when the auditors concludes that misstatements, individually or in the aggregate, are material but not pervasive to the financial statements.

An adverse opinion is issued when the auditor concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.

Question 22

Describe the circumstances in which a material misstatement of the financial statements may arise

Answer 22

Misstatements may arise in relation to:

• The appropriateness of accounting policies
• The application of accounting policies
• The appropriateness of the financial statement presentation.
• The appropriateness or adequacy of disclosures in the financial statements.

Question 23

If an opinion is qualified due to material misstatement of FS on an Issuer audit report, where does the paragraph explaining the qualification appear?

Answer 23

A paragraph should be placed immediately following the opinion paragraph. There is no heading for this paragraph. It should include:

• All of the substantive reasons that lead the auditor to conclude that there has been a departure from GAAP.
• Disclosure of the principal effects of the subject matter of the qualification on financial position, results of operations, and cash flows, if practicable.

Question 24

Compared to a standard unqualified opinion for an issuer, determine the paragraphs that are modified in an audit report when the following opinions are issued due to FS issues (misstatement):

• Qualified
• Adverse

Answer 24

• Qualified: Opinion Section, “Except for..”

- Adverse: Opinion Section, “Do not present fairly..”

Question 25

Is an auditor required to report on critical audit matters (CAMs) when issuing an adverse opinion?

Answer 25

No

Question 26

When would an auditor use professional judgement to determine whether to issue a Qualified Opinion or a Disclaimer opinion? (GAAS)

Answer 26

When there is a limitation on the scope of the audit. A qualified opinion is issued when the auditor is unable to sufficient appropriate audit evidence on which to base an opinion and the auditor determines that the possible effects could material but not pervasive. An adverse opinion is issued when the auditor when the auditor is unable to sufficient appropriate audit evidence on which to base an opinion and the auditor determines that the possible effects could material and pervasive.

Question 27

Identify some examples of scope limitations (GAAS)

Answer 27

Restrictions on the auditor's ability to perform auditing procedures may be caused by: - Time constraints - Inability to observe inventory, confirm receivables - Restrictions on the use of auditing procedures, etc.

Question 28

What situations may result in a disclaimer of opinion in an audit report? (GAAS)

Answer 28

- Pervasive inability to obtain sufficient appropriate audit evidence. - Lack of independence (always results in disclaimer) - Going concern uncertainty

Question 29

If an opinion is modified, on a Non-Issuer audit report where does the paragraph explaining the modification appear?

Answer 29

Prior to the opinion paragraph. The "basis for mod" paragraph should use the appropriate heading Appropriate headings include: - Basis for Qualified Opinion - Basis for Adverse Opinion - Basis for Disclaimer of Opinion

Question 30

Before the auditor accepts an engagement, what communication between the predecessor and the auditor should be made?

Answer 30

- Obtain client's permission to make inquiries of the predecessor auditor. - Specific inquiries include: * Info that might bear on management integrity - Disagreements with management over accounting principles, auditing procedures, or other similarly significant matters. - The predecessor's understanding as to the reasons for the change of auditors. - Communication to management, the audit committee, and those charged with governance regarding fraud, illegal acts by clients, and matters relating to internal control.

Question 31

What should the auditor assess when considering the firm's client acceptance and continuance policies?

Answer 31

The auditor should assess: - The firm's ability to meet reporting deadlines - The firm's ability to staff the engagement. - Independence - Integrity of client management - The group engagement team's ability to obtain sufficient appropriate audit evidence.

Question 32

What is the purpose of an EL?

Answer 32

Reduce risk of misunderstanding. Note that anEL documenting the understanding is a requirement under PCAOB standards.

Question 33

Factors that indicate less complex operations?

Answer 33

- Fewer business lines - Less complex business processes and financial reporting systems. - More centralized accounting functions - Extensive involvement of senior management in day to day operations - Fewer levels of managements.

Question 34

The engagement partner is responsible for what three functions?

Answer 34

- Planning the audit - Supervising the work of engagement team members. - Complying with relevant audit standards

Question 35

What factors determine the nature, extent and timing of supervision?

Answer 35

- The size and complexity of the entity. - The nature of work assigned to each engagement team member - The assessed risk of material misstatement. - The qualifications of the assistants.

Question 36

Six main financial statement assertion? (COVERU)

Answer 36

``` C - Completeness O - Cutoff V - Valuation, allocation, accuracy E - Existence and occurrence R - Rights and obligations U - Understandability and classification ```

Question 37

Relevant assertions for "transactions and events"

Answer 37

``` Completeness Cutoff Accuracy Classification Occurence ```

Question 38

Relevant assertions for 'account balances'

Answer 38

Completeness Allocation and valuation Rights and obligations Existence

Question 39

Relevant assertions for "presentation and disclosure"

Answer 39

Completeness Understandability and classification Rights and obligations Valuation and accuracy

Question 40

What factors does the external auditor have to assess if he or she plans to use the internal auditors to provide "direct assistance"?

Answer 40

The external auditor has to assess the internal auditor's objectivity and competence. Note that the external auditor remains solely responsible for the audit report, and may not share judgment responsibility with the internal auditor.

Question 41

What factors does the external auditor have to assess if the external auditor would like to use the work of the internal auditor function to reduce the extent of substantive procedures?

Answer 41

The external auditor has to assess the internal auditor's objectivity and competence. And assess whether the function applies a systematic and disciplined approach.

Question 42

Provide some examples of factors that the external auditor may consider when assessing the competence of the internal auditors

Answer 42

Education Professional Certifications Experience

Question 43

Provide some examples of factors that the external auditor may consider when assessing the objectivity of the internal auditors

Answer 43

- Organization level to which the internal auditor reports - Policies prohibiting audits of areas in which the internal auditor lacks independence - Whether any constraints or restrictions are placed on the internal audit function by management or those charged with governance.

Question 44

Should an auditor refer the work of a specialist in the auditor's report?

Answer 44

Generally, in unmodified opinion, no reference is made. However, if the auditor decides to express a modified opinion due to the work of the specialist, reference to the specialist may be made. The auditor may need the permission from the specialist before making reference to the specialist.