Flashcards in Becker AUD 1.3: Reports on Audited F/S Deck (39):
1
Fair presentation in accordance with Applicable Financial reporting framework:
There are 8 items Auditor evaluates to form an opinion - what are they?
1 ) F/S ADEQUATELY DISCLOSED signification accounting POLICIES used and applied, including description of applicable Financial reporting framework
2) Consistent (consistency) in accounting policies used and applied with the applicable financial framework and are appropriate
3) Management's accounting estimates are Reasonable
4) Financial statements' presented info is RELEVANT, RELIABLE, COMPARABLE, and UNDERSTANDABLE
5) F/S has adequate disclosures to make users UNDERSTAND the effect of material transaction and events on info shown in F/S
6) Appropraite Terminology, i.e. titles, used on financial statements
7) Fairly presented are F/S's overall structure and content
8) F/S and its footnote represent underlying transactions and events in a manner that achieves fair presentation.
2
In Unmodified audit report, the addressee is to whom?
Not to whom?
Addressee is to shareholders, board of directors, some outside party.
Not to Management
3
Name the paragraphs in its order in
Unmodified opinion, including Emphasis of matter and other matter
Introductory paragraph
Management's responsibility paragraph (F/S prepared and fairly presented; Design, implement, maintain internal controls)
Auditor's Responsibility (express opinion on financial statements; test internal control, but no opinion on internal control) express GAAS.
Auditor's opinion Paragraph (express opinion on GAAP)
Other Reporting Responsibilities
Emphasis-of-matter Paragraph
Other-matter paragraph
4
Auditor's reporting date shows the final date of auditor responsbility.
True or false
For comparative purposes (auditor dates) on F/S, audit report date for the most recent audit should not be used. True or false
True. Auditor's report date is the Final Date of Auditor's responsibility
False. For comparative purposes, on F/S, audit report for most recent audit should be used.
5
Audit of Issuers (public companies) (SEC companies) = PCAOB standards - the sentence wording for this?
"We conducted our audit in accordance with standards of Public Company Accounting Board (United States)."
6
Audit of nonissuers = private companies - the sentence wording for indicating using auditing standards for nonissuer companies
What is the wording for following US GAAS and another auditing standards-type?
"Our responsibility is to express an opinion on these financial statements based on our audits. we conducted our audits in accordance with auditing standards generally accepted in the United States of America."
Both US GAAS and other standards: example:
"Our responsibility is to express an opinion on these financial statements based on our audits. we conducted our audits in accordance with auditing standards generally accepted in the United States of America and in accordance with International Standards on Auditing."
7
Pass Key:
CPA exam on unmodified audit opinion:
GAAS goes in which paragraph?
GAAP goes in which paragraph?
GAAS - Auditor's responsibility paragraph
GAAP - Opinion paragraph
8
What is Audit on Group Financial Statements?
It's auditing on a big gigantic set of Financial statements in a company that has multiple business divisions/activities (Group Financial statements)
Example: Group Financial Statement of a multi-national company that has a financial statements in Japan (component f/s here); another F/S in China (another component here), and another F/S in Europe.
9
What is Component Auditor?
What is Group Engagement Partner
Component auditor = auditor who performs audit work on F/S on component used as audit evidence in group audit. Component auditor can be part of Partner's Firm, a network firm, or another firm.
Group engagement partner: Partner or other person in firm, responsible for Group Audit Engagement and Responsible for THE AUDIT REPORT on GROUP F/S.
10
When you make reference to component auditor in Auditor's report (on group financial statement)?
When component auditor performed audit accordance to relevant section in GAAS or PCAOB
Component's auditor's report is not restricted to use
11
What is the requirement to make reference to component auditor in Auditor's report?
That the component was NOT audited by the auditor of the group statements but was AUDITED by the COMPONENT AUDITOR.
Magnitude of portion of F/S audited by Component Auditor
When component's F/S are prepared using different Financial reporin framework:
a) The financial reporting framework used by component
and
(b) that auditor of group financial statement is taking responsibility for evaluating the appropriateness of the adjustments to convert Component's F/S to Group's Financial reporting framework
4) Component's auditor report says that component does not use GAAS or PCAOB standards and Group Engagement Partner has determined that component auditor
Performed additional procedures to:
a) state the other auditing standards not GAAS/PCAOB
and
b) Additional audit procedures that Component auditor has done to meet relevant GAAS requirements
12
Component auditor issues a modified opinion or Emphasis-of-matter paragraph, or Other-matter paragraph, then what does the Group Auditor do on this case?
Group Auditor decides whether to modify the Opinion (on Group Audit report) in regards to the Group Financial Statements
Or Group Auditor includes an Emphasis-of-matter opinion or Other-Matter paragraph in the auditor's report.
13
When Group engagement auditor assumes (takes control) of Component auditor's responsibility/work, then should there be a reference to component auditor in Group Audit report or no?
No reference to component auditor.
14
When Group engagement partner assumes component auditor's responsibility/work, there are additional requirements to determine what work-type to be assumed by Group Engagement Partner or Group engagement team. Usually the work-type is something of Significant components - what are the 2 types of signification component?
Group Engagement
1) Significant due to Individual Financial significance: A component (business division/segment) has financial significance.
2) Significant due to Significant Risks of Material Misstatement: Determine if Group engagement partner or component auditor that:
a) audit on financial info
b) And/or audit on Account balances, transactions, or disclosures
c) and/or perform specified procedures related to likely signification risks of material misstatements
15
On Components that are not significant - what does the Group Engagement auditor do in this case?
Perform ANALYTICAL procedures for not-significant components.
16
When Auditor modifies its opinion from Unmodified to Qualified, Adverse, or Disclaimer?
When:
a) Entire F/S is MATERIALLY misstated (GAAP issue)
OR
b) Unable to obtain Sufficient, Appropriate Audit evidence to conclude
17
When auditor makes an adverse opinion or disclaimer of opinion on the entire Financial Statements, the auditor's report should not include?
Not include Unmodified opinion on one F/S or one or more specific elements, accounts, or items on F/S.
Example: Auditor give adverse opinion on F/S due to very pervasive and material misstatement. Then, auditor cannot give Unmodified opinion that Cash account is free from material misstatements or give Unmodified opinion that only Cash flows not misstated or give unmodified opinion that A/R is not misstated.
18
Qualified opinion
Adverse opinion
Disclaimer of opinion
Qualified opinion (GAAP or GAAS material issue): F/S still fairly stated but one of the matters on F/S has an issue. It can be a GAAP issue (a certain accounting has misstated data) or a GAAS issue (cannot get enough records from the management).
Adverse opinion (very bad GAAP opinion; very material issue (pervasive): F/S do not present fairly in accordance with an applicable financial framework.
Disclaimer of opinion: Auditor not express opinion on F/S because unable to get Sufficient, appropriate audit evidence as basis to express opinion.
*F/S here: Financial statements including balance sheet (financial position), income statement (operations), and statement of cash flows.
19
What is Emphasis-of-matter paragraph?
How to report it on Auditor's report?
When you are required to use emphasis-of-matter paragraph?
When you may use the Emphasis-of-matter paragraph?
It's a paragraph that to refer to a matter that is appropriately presented or disclosed in the F/S and it is used on Auditor's report to make users understand the F/S.
Including this EOM paragraph NOT affect Auditor's opinion
How to report it: Put EOM paragraph after Opinion paragraph. Use heading "Emphasis-of-Matter" or appropriate heading. Describe the matter and its location on F/S. Indicate that EOM not modifies Auditor's opinion
When REQUIRED to use EOM paragraph:
a) Substantial doubt on entity's going concern (stay in business)
b) Describe justified change in Accounting principle (consistency issue) that has material effect on F/S
c) Later discovered affects that leads to change in audit opinion
d) F/S are prepared in accordance with an applicable special purpose framework (other than regulatory basis F/S intended for general use).
When you MAY use EOM paragraph:
a) Uncertainy to outcom of imporatn ligitation lawsuit or regulatory action
b) Majorcatasophe like a firestorm or hurricane having signification efect on F/S
c) Significatn related party transactions
d) Unusually imporatant Significant event
20
What is other matter-paragraph?
How you report other-matter paragraph on auditor's report/
Other-matter paragraph: Refer to the other matters not relating to items disclosed/presented in F/S and are important to help the user understand the Audit, Auditor responsibilities, or the auditor's report.
How to report Other-matter paragraph in auditor's report: It is placed "After the opinion" and "After" any EOM paragraphs.
heading is "other Matter" or other appropriate heading
Describe the matter being emphasized and the location of relevant disclosure on the matter in F/S
21
When you are required to use Other-matter paragraph?
When it is maybe necessary to use Other-matter paragraph on auditor's report?
Required to use OM paragraph:
1) Telling about an Alert in Audit report that restricts the use of Auditors report
2) Change in audit opinion due to later facts discovered
3) Prior F/S audited by previous auditor and previous audit report is not REISSUED
4) Current period audited F/S are presented in comparative form with COMPLIED or REVIEWED for F/S for prior period OR in comparative form with Prior-FS (not audited, reviewed, or complied)
5) Before Auditor report date: identify material inconsistency in other information that is included
6) Auditor choose report on supplementary info presented with F/S in auditor's report NOT in a separate report
7) Refer to required supplementary information required by a Accounting standards setter to go along with F/S
8) Restrict use of auditors' report when special purpose framework statements are prepared in accordance with a contractual or regulatory basis accounting
9) Report on compliance is included in auditor's report on the F/S.
OM-paragraph may be necessary for:
1) Describe the reasons why auditor cannot withdraw from an agement when auditor is uable to obtain sufficient apprriate auidevidence due to management-imposed scope limitation
2) Law, reuglarion, or generally accepted accounting practice require or permit the auditor to provide urther exlanation of auditor's responsibilties
3) Auditor has been engaged to report on more than 1 set of F/S when each set of F/S has been prepared in accordance with different general purpose framework.
22
If there is substantial doubt on company's going-concern, the auditor should:
i) consider the adequacy of disclosure about the entity's possible inability to continue as a going concern and
(ii) include an emphasis-of-matter paragraph in the auditor's report to reflect this conclusion.
23
What are conditions and events that indicates substantial doubt on going concern?
1) Financial difficulties - loan defaults, dividend arrearages, denial of usual trade credit, debt restructuring, noncompliance with capital compliance with capital requirements, new financing sources or methods, disposal of substantial assets
2) Internal matters: work stoppages, labor difficulties, substantial dependence on a particular project, uneconomic long-term commitments, significant revision of operations
3) Negative trends-recurrent losses, working capital deficiencies, negative cash flow, adverse financial ratios
4) External matters: legal proceedings, new legislation (law), loss of key finances, loss on key license, loss on key patent, loss of principal customer or supplies, natural disaster.
24
What are the procedures to analyze audit information that there could be a going-concern issue (company may go bankrupt)?
1) Analytical procedures
2) Debt compliance - auditor should review the terms of det and loan agreements
3) Minutes - Auditor review minutes from stockholder and Board of Directors meeting
4) Inquiry of client's LEGAL COUNSEL
5) Third parties - Auditor should confirm details of financial support arrangements
6) Subsequent event review
25
What are the ways a company can mitigate its going-concern issues?
1) Plans to borrow money or restructure debt
2) Plans to sell assets
3) Plans to delay OR reduce expenditures (i.e. lease assets)
4) Plans to increase ownership equity (sell common stock to shareholders, not to executives)
26
Emphasis of Matter should include what two terms in dealing with a Going-concern issue?
It should not say for how many years?
EOM paragraphs should include these terms:
a) Substantial doubt
b) Going concern
Not say "for 1 year"
Example: The accompany financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note X to financial statements, the Company has suffering recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regards to these matters are also described in Note X. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
27
What is the International Standards Accounting (ISA) wording used for going concern issue in Emphasis-of-matter paragraph?
ISA's EOM paragraph use "significant doubt" not "substantial doubt."
28
True or false
If the entity's going-concern disclosure are inadequate, then a departure from GAAP exists.
True.`
29
Going concern issues:
When there's adequate disclosure on a company's going concern the the opinion is:
When there's Inadequate disclosure on a company's going concern the the opinion is:
When there's Significant going concern Uncertainty on a company's going concern the the opinion is:
Unmodified opinion with Emphasis-of-matter paragraph
Disqualified or Adverse
Disclaimer
30
Qualified, "except for" and Adverse opinion deals with GAAP issues.
What are the four issues for Qualified opinion and Adverse opinion?
GAAP consistency change (unjustified and auditor disagree) in accounting policies
Inadequate disclosures and presentation of financials statements that do not comply or follow an acceptable accounting framework
Departure/violation of GAAP (unjustified)
Unreasonable accounting estimate
31
What are the paragraphs (in its order) for Qualified opinion and Adverse opinion letters
Introductory (no changes)
Management Responsibility (no change)
Auditor's Responsibility (here there's a change to where the auditor is going to express a qualified opinion or adverse opinion)
"Basis for Qualified Opinion"
a) This states a description and quantification of financial effects of any misstatements that relates to specific amounts in F/S
b) States an explanation of how disclosures are misstated
c) Description on nature of omitted information and inclusion of omitted info,when practicable, and if there's omitted information that is required to be presented or closed
Opinion Paragraph
32
Practicable - what does it mean for when have to give a qualified opinion or adverse opinion?
Practicable = reasonable obtained data from mgt's accounts and records where the Auditor providing this information does not require having to prepare actual Financial statements.
33
Qualified Opinion (Material GAAP) - what is the wording for this?
Adverse opinion paragraph (very material/pervasive GAAP) - what is the wording for this?
Qualified opinion: "except for the effects of the matter(s) described in the basif ro qualified opinion paragraph, the financil statements are presented fairly, in all mterial respects, in accordance with the applicable financial reporting framework.
Adversopinion "because of the signfication of the matter(s) descried in the basis for adverse opinion paragraph, the financial statements are not presented fairly in accordance with the applicable financial reporting framekworks."
34
Never issue an adverse opinion on Scope liitations (GAAS problem) when?
The Auditor was unable to gather data or was unable to have misstatements to be detected due to management's withholding information or refusing to provide information.
This because adverse opinion deals with an actual GAAP departure problem based on already gathered evidence. If auditor does not have sufficient, appropriate audit evidence due to circumstances and not able to get data from management time, then issue a Disclaimer of opinion or Withdraw from management.
Examples of undetected misstatements due to management not giving the data or auditor can't get the date through other alternative means:
a) Confirm A/R denied
b) consolidated sub info denied
c) Audit restrictions (by management on where to audit)
d) Inadequate records
e) No management Representative letter signed
f) Clint lawyer denied (no access to lawyers to get 3rd party verification)
35
What are the paragraph headings used in a Qualified opinion for GAAS issues? Disclaimer opinion?
Qualified opinion auditor report/letter (GAAS issue):
Introductory Paragraph (no change)
Management Responsibility paragraph (no change)
Auditor's Responsibility (modified) to state "auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the auditor's qualified opinion."
Basis for Qualified Opinion (before actual qualified opinion)
- Here: described the reasons for inability to obtain sufficdent appropriate audit evidence.
Opinion Paragraph
Disclaimer Opinion letter (GAAS issue):
Introductory (modified to say that "we were engaged to audit)
Management Responsibility (no change)
Auditor's Responsibility (modified) to state "because of th matter(s) described in the basis of disclaimer of opinion, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion."
Basis for Disclaimer of Opinion
Disclaimer Opinion
36
Qualified Opinion Paragraph (Material GAAS issue) - wording
Disclaimer of Opinion paragraph (very material, pervasive, significant GAAS problem)
Qualified opinion paragraph wording: "in the auditor's opinion, except for the possible effects of the matter(s) described in the basis for qualified opinion paragraph, the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework."
Disclaimer of opinion - wording: "because of the significations of the matter(s), the auditor has not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion"
and
"accordingly, the auditor does not express an opinion on the financial statements."
37
When an auditor lacks independence and required by law to audit a company's financial statements, the auditor reports what type of opinion?
Disclaimer of opinion and the auditor states that they have lacked independence and any reasons for lacking independence.
38
Exam trick:
No audit work = then???
No audit opinion even a bad opinion.
This because you can't give a unmodified, qualified, or adverse opinion when you don't have any sufficient, appropriate audit evidence
39