Becker classes Flashcards
A1 - M1 TO M7
AUDIT PROCESS
- ENgagement acceptance
- Assess Risk and Plan Response
- Perform Procedures and Obtain evidence (EVIDENCE that has been corrobarated should lead AUDITOR to the answer)
- Form Conclusions
- Reporting (focus/objective) - How to get to this point using all above 4 points in the process.
Main parties in AUDIT - Auditor and Management
Other parties - Audit Committee, Those charged with Governance
DISTINCTION between Management and Audito responsibilities shows up in:
1. ENGAGEMENT letter
2. MANAGEMENT REPRESENTATION LETTER
3. AUDIT REPORT
Auditor has a very specific source of responsibility
Management Responsibilities
- FINANCIAL STATEMENTS - Preparation and fair presentation of the FS in accordance with the applicable fin reporting framework or GAAP (FS rule book)
- INTERNAL CONTROL OVER FINANCIAL REPORTING, ICFR - The DESIGN, IMPLEMENTATION and MAINTENANCE of INTERNAL CONTROL relevant to the preparation of financial statements that are free of material misstatetment due to error or fraud.
AUDITOR’S RESPONSIBILTIES
1. EXPRESSING an OPINION on FS based on the audit (Are FS fairly stated in all MATERIAL aspects?)
2. Auditor is responsible for -
-Maintaining professional skepticism
-Complying with ethical requirements (Independent, ethical, objective)
-Exercising Professional judgement
-Obtaining sufficient and appropriate evidence
-Complying with GAAS (Generally Accepted Auditing Standards, Audit Rulebook) - (i) AICPA or the AUDITING STANDARDS BOARD for Non-Issuers and (ii) PCAOB for Issuers.
AUDITOR Obtains REASONABLE (or HIGH) ASSURANCE that FS are free from material misstatements whether due to error or fraud.
INHERENT LIMITATIONS
1. Nature of Fin reporting - i.e. SUBJECTIVE DECISIONS, such as allowance for doubtful accounts
2. Nature of audit procedures - i.e. management may not provide complete information
3. Timeliness of financial reporting and the balance between cost and benefit (i.e. auditor may sample a population)
AUDITOR can be asked to audit single period or multiple periods(all 4 quarters at once), complete FS or single FS (e..g audit only on BS) or specific elements (e.g. AR only), accounts or items of a financial statement.
NON-ISSUER/pvt company is a default, if question does not specifically mention that.
NON-ISSUERS have the CHOICE of
- FS Audit only (where one opinion is rendered on the fairness of FS)
OR - INTEGRATED AUDIT (where 2 opinions are rendered - One opinion on FAIRNESS of FS and OPINION on the OPERATING EFFECTIVENESS of ICFR
ISSUER=Public company
ISSUERS - ALWAYS/MUST INTEGRATED AUDIT
1. One opinion on the fairness of the FS
2. One opinion on the OPERATING EFFECTIVENESS of ICFR
Same firm should do integrated audit - FS audit and ICFR
Complete Set of FS
-BS
-Statement of Income
-Statement of changes in equity
-Cash flow statement
-Related disclosures (footnotes)
Management can select:
- Cash basis
- Tax Basis
- GAAP
UNMODIFIED/UNQUALIFIED OPINION
- Nonissuers - Unmodified
- Issuers - Unqualified
CLEAN OPINION
1. Whether SUFFICIENT APPROPRIATE audit evidence was obtained
2. Whether UNCORRECTED MISSTATEMENTS are material, individually or in the aggregate and
3. Whether the FS are prepared in accordance with the applicable Fin reporting framework.
MODIFICATIONS to the AUditor’s opinion
- Audit Issues - Auditor is unable to obtain sufficient appropriate audit evidence
- FS Issues - Auditor concludes that the FS, as a whole, are materially misstated e.g. Inaccurate numbers, missing disclosures.
There are 3 types of MODIFIED opinions:
1. Qualified opinion
2. Adverse opinion
3. Disclaimer of opinion
QUALIFIED - Material and not Pervasive
DISCLAIMER/ADVERSE - Material and Pervasive
Pervasive = Far reaching effects
UNMODIFIED AUDIT OPINION (NONISSUERS) REPORT (4/5 sections)
OBRA
- Opinion (GAAP)
- Basis for Opinions (GAAS)
* - Mgt’s Responsibilities of the FS (Framework reference, ie. GAAP)
- Auditor’s Responsibilities of the FS (GAAS referenced)
*KAMs for NON-ISSUERS are OPTIONAL- and can be added anywhere in the report after the 2nd section.
KAMs is added when the adutor is engaged to report on KAM when an UNMODIFIED/QUALIFIED opinion is issued)
A QUALIFIED OPINION - Should be referenced in the BASIS FOR OPINION section for further explanation.
SUBSTANTIAL DOUBT existing about an entity’s ability to continue as a GOING CONCERN - Should be referenced elsewhere in the report.
UNQUALIFIED AUDIT OPINION
(ISSUERS) REPORT (3 sections)
- Opinion on the FS
- Basis for Opinion - (Add paragraph in the report describing departure from framework and quantiy the effects (if possible)
e.g. GAAP requires inventories to be stated at the lower of cost of market. A write down of $xx would have been required as of Dec 31, 2001. Accordingly, cost of sales would have been increased by $xx and net income, income taxes and stockholders’ equity would have been reduced by $XX as of and for the year ended Dec 31, 2001.
*
3. *CAMs/Critical Audit Matters (can appear anywhere in the report AFTER 2nd section which is BASIS FOR OPINION)
CAMS are required/mandatory for ISSUERS when an UNQUALIFIED/QUALIFIED opinion is issued.
The auditor’s report MUST include any CAMs arising from the current period’s audit of FS.
CAM section can appear anywhere after the 2nd section.
TO BE CONSIDERED A CAM, a matter must meet all 3 criteria:
- Be a matter that was communicated or is required to be communicated to the audit committee
- Relate to accounts or disclosures material to the FS
- Involve challenging, subjective or complex auditor judgment.
IDENTIFICATION OF CAMs-IPAD
I - Identiy each CAM in the audit report
P - Describe the principal considerations that led the auditor to determine a CAM
A - Describe how the CAM was addressed in the audit
D - Refer to the relevant financial statement accounts and disclosures.
AUDITS in accordance with 2 sets of stds
Auditor may use 2 sets of standards for auditing when:
- It is required; e.g. when auditing a governmental entity, the auditors use both (A) GAAS and (B) Govt auditing standards (YELLOW Book)
- The auditor references both auditing standards in the:
(a) Basis for opinion section
(b) Auditor’s responsibilities for the Audit of the Financial Statements section
ATTESTATION
- Examination - Opinion
- Review - Conclusion
- Agreed Upon Procedures - Findings
ISSUER - CAMs
CRITICAL AUDIT MATTERS
NON-ISSUER REPORT (optional section)-
KAMs - can be added anywhere in the report after the 2nd section
KEY AUDIT MATTERS
-It is added when the client engages the auditor to communicate KAMs
-Provides visibility into the more complex areas or areas that require judgement in the audit.
Communicating KAMs is prohibited when the auditor expresses an adverse opinion or discliams on opinion (red zones).
FS ISSUES or ACCOUNTING ISSUES or GAAP ISSUES: QUALIFIED OR ADVERSE OPINION (Material and Pervasive)
- Don’t follow GAAP
- Inappropriate accounting principles
- Unreasonable estimates
- Inadequate disclosure
- Incorrect numbers
- No reasonable justification for change in accounting principles.
FS ISSUES or ACCOUNTING ISSUES or GAAP ISSUES:
UNQUALIFIED/UNMODIFIED
- Sufficient evidence
- Follows GAAP
- Immaterial or no issues
NON-ISSUER QUALIFIED REPORT
- Except for, is mentioned in the “BASIS OF opinion”
ISSUER QUALIFIED REPORT
- EXCEPT FOR - included in the same OPINION Section
AUDIT ISSUES
SCOPE LIMITATION
- Time constraints
- Inability to obtain sufficient appropriate audit evidence, such as: inability to observe inventory, inability to confirm receivables, inability to obtain audited FS of a consolidated investee, restrictions on the use of auditing procedures, inadequacy of accounting records, refusale of client’s attorney to respond to inquiry
AUDIT ISSUES that RESULTS in DISCLAIMER
- Not independent
- Unaudited financial statements
- Refusal of mgt to provide written representation and/or to acknowledge its responsibility for the fair presentation of the financial statements in conformity with GAAP (may also withdraw)
NON-ISSUER - Emphasis of Matter paragraph and Other Matter Paragraph
Immaterial - No revision to the report is necessary
Material - ADD EMPHASIS OF MATTER PARA
EMphasis of Matter Paragraph is required in the following circumstances:
- Lack of Consistency - To describe a justified change in accounting principle that has a material effect on the entity’s FS (e.g. change in the method of accounting for inventories)
- Audit Opinion change - Subsequently discovered facts lead to a change in AUDIT OPINION (the auditor may use an emphasis of matter or other matter paragraph, as appropriate).
- FS are prepared in accordance with an applicable special purpose framework (other than regulatory basis financial statements intended for general use)
- Correction of a material misstatement in previously issued financial statements
- Even if the previous principle was not GAAP and even if mgt lacks reasonable justification for the change.
The auditor will normally not add an emphasis-of-matter paragraph for uncertainties that are appropriately accounted for. However, if a question INDICATES that the uncertainty (such as the lawsuit) is UNUSUALLY IMPORTANT, then an EMPHASIS-OF-MATTER paragraph may be added.
OTHER-MATTER PARAGRAPHS - for issues not disclosed or presented in FS is used in following circumstances:
- Restrict use of report - Report on compliance included in auditor’s report on the FS
- FS prepared using contractual or regulatory basis of accounting (except when intended for general use)
- COmparative FS
- Prior FS audited by prior auditor and prior auditor’s report is not presented.
SEPARATE SECTION
1. Going concern when substantial doubt is NOT ALLEVIATED
2. Refer to OTHER INFO (OI)
3. REPORT on SUPPLEMENTARY INFORMATION
4. REFER to REQUIRED SUPPLEMENTARY INFORMATION
ISSUER - Explanatory paragraph ONLY when
- Required by PCAOB auditing standards or
- At the auditor’s discretion
Immaterial - No revision to the report is necessary
Material - ADD EXPLANATORY PARA
IncluSion does not impact the auditor’s opinion
Location of the explanatory paragraph will generally follow the OPINION parapgraph when added to an UNQUALIFIED/CLEAN REPORT.
- CASH to Accrual
- Correction of a material misstatement in previously issued financial statements
- Change in accounting estimate that is inseparable from a change in accounting principle (e.g. change in depreciation method)
NO INCONSISTENCY - A CHANGE in ACCOUNTING ESTIMATE such as change in USEFUL LIFE OF A DEPRECIABLE ASSET is accounted for PROSPECTIVELY and DOES NOT AFFECT the COMPARABILITY of FS between periods. Because the auditor’s UNMODIFIED OPINION implies that CONSISTENCY exists, NO MODIFICATION TO THE REPORT is necessary.
REPORTING WITH PREDECESSOR AUDITORS
Prior period FS REVIEWED OR COMPILED
When the current period FS were reviewed or compiled and the report of the PRIOR PERIOD is not reissued, the auditor should include an OTHER-MATTER PARA (Nonissuer) or EXPLANATORY PARA (ISSUER) that includes:
- The service (review or compilation) performed in the prior period
- The date of the prior period report
- A description of any material modifications described in the report; and
- A statement that the service was less in scope than an audit and does not provide the basis for expressing an opinion on the FS as a whole (REVIEW); or
- A statement that no opinion or other form of assurance is expressed (COMPILATION)
If the prior period financial statements were not audited, reviewed, or compiled, the auditor should include an other-matter paragraph (nonissuer) or explanatory paragraph (issuer) stating that the auditor did not audit, review, or compile the prior period financial statements and that the auditor assumes no responsibility for them.
Whenever unaudited financial statements are presented in comparative form with audited financial statements, the unaudited financial statements should be clearly marked to indicate their status.
If unaudited financial statements are presented in comparative form with audited financial statements in documents filed with the SEC, such statements should be marked “unaudited,” but should not be referred to in the auditor’s report.
If it was an SEC Filing, tiny difference. YOU STILL mark the statements as an AUDITED, But it’s not mentioned in the Audit report. So there is no need for that additional para.
Group Engagement Partner (AICPA)
or Principal Auditor (PCAOB):
the partner or other person in the firm who is responsible for the group audit engagement and the auditor’s report on thegroup financial statements.
*
Group Financial Statements: financial statements that include the financial information of more than one component (i.e., subsidiaries).
*
Group Engagement Team: includes the group engagement partner, other partners, and staff who establish the overall audit strategy, communicate with component auditors, perform work on the consolidation process, and evaluate the conclusions drawn from the audit evidence as the basis for forming an opinion on the group financial statements.
*
Component: an entity or business activity that prepares financial information that is included in the group financial statements.
*
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.
The group engagement team will determine:
*The extent to which the group engagement team will be involved in the work of the component auditor
*Components that are significant or insignificant. Significant components will need to be audited (by either the group engagement team or the component auditor) and insignificant components will just need analytical procedures performed by the group engagement team
When the group engagement team relies on the work of the component auditor, the group engagement team has two alternatives:
*Option 1: Group engagement team takes full responsibility for the audit of the component – do not reference the component auditor.
*Option 2: Group engagement team and component auditor divide responsibility – reference the component auditor
Option 1: Assume Responsibility - Make No Reference in Audit Report
When the group engagement partner decides to assume responsibility for the work of the component auditor, no reference to the component auditor should be made in the auditor’s report. In this case, the group engagement team is responsible for:
*
Determining the type of work to be performed on the financial information of the components
*
Reviewing component auditor’s work
Option 2: Divide Responsibility – Make Reference in Audit Report
When the group engagement partner decides to divide responsibility with the component
auditor, the audit report on the group financial statements should reference the component
auditor in the audit report.
In this situation, the group engagement partner is not assuming responsibility for the
component auditor’s work.
The component auditor will provide their audit report to the group engagement team.(Component audit must be performed in accordance with relevant requirements of GAAS, or when required, PCAOB AS and the component auditor’s report should not be restricted.)
The group engagement partner will determine the appropriate opinion based on the group engagement audit and the audit report provided by the component auditor.
Even when responsibility is divided, the group engagement team still needs to be confidentthat the component auditor is independent, competent, and has a good reputation.
REISSUE by nature says REISSUE as it was which does not cause you to change the opinion.
An auditor would change the opinion if PY FS are restated to conform with GAAP. Previous report - qualified or adverse due to a departure from GAAP would no longer be appropriate in the event of the restatement of the PY FS to be in conformity with GAAP.
Auditor’s Responsibility for Subsequent Events
Examine—the auditor should examine the most recent interim financial statements and compare them with the financial statements under audit.
The auditor should understand management’s process to evaluate subsequent events and perform the following procedures (PRIME):
Post Balance Sheet Transactions—the auditor should review post balance sheet transactions.
Representation Letter—the auditor should obtain a management representation letter regarding whether any events occurred during the subsequent period that require adjustment or disclosure in the financial statements.
Inquiry—the auditor should inquire of the client’s legal counsel and management about whether any subsequent events have occurred. Example inquiry matters include:
*Status of any litigation, claims, and assessments
*New commitments, borrowings, or guarantees
*Unusual transactions
Minutes—the auditor should obtain and review the minutes of stockholders, directors, and other committee meetings during the subsequent period.
Examine—the auditor should examine the most recent interim financial statements and compare them with the financial statements under audit.
AUDITOR’S RESPONSIBILITY (PRIME)
P-Post Balance Sheet Transactions
R-Representation Letter
I-Inquiry
M-Minutes
E-Examine
e.g. Feb 10 Audit report date
FS issuance date Feb 15
Auditor is responsible for evaluating subsequent events until audit report date.
The auditor has NO active responsibility to make inquiries or perform procedures after the original date of the auditor’s report.
Feb 20 - However, there might be cases where after the issuance of the audit report, auditor becomes aware of the material information that they should have known about when they issued their report.
Auditor will need to investigate if this information is reliable, if it existed at the report date and would have affected the auditor report.
Auditor should discuss the matter with management and, when appropriate, those charged with governance. The auditor should advise the client to immediately disclose the new information and its impact on the financial statements to those persons currently relying on the financial statements. This can be accomplished by:
*
Advising the client to issue revised financial statements (along with a new audit report) describing the reasons for the revision;
*
Advising the client to make necessary disclosures and revisions to any imminent
financial statements (accompanied by an auditor’s report for a subsequent period); or
*
If effect cannot be determined on a timely basis, providing notification that the financial statements and auditor’s report should not be relied upon.
If the client refuses to take the appropriate action to address information that materially affects the report after report issuance, the auditor should notify each member of the board of directors and perform the following additional steps (“DAR them to fix it”):
Disassociate—notify the client that the auditor’s report must no longer be
associated with the financial statements.
Alert agencies—notify any applicable regulatory agencies that the auditor’s
report should no longer be relied on.
Relying parties—notify persons known to be relying or likely to rely on the financial
statements that the auditor’s report should no longer be relied on.
Annual report of ABC Company
Table of Contents
INTRODUCTORY SECTION
_____________________________
OTHER INFORMATION - Report by those charged with governance
Oganizational Chart
FINANCIAL SECTION
_________________________
Independent auditor’s report
BASIC FINANCIAL STATEMENTS
Balance sheets
Statement of Operations
Statement of changes in equity
Statement of cash flows
Notes to financial statements
REQUIRED SUPPLEMENTARY INFORMATION
STATISTICAL SECTION
______________________
Other information - Financial trends
OTHER INFORMATION Includes:
A report by management or those charged with governance on operations
o
Financial summaries or highlights
o
Employment data
o
Financial ratios
o
Selected quarterly data
Other information does not include:
o
Press releases or cover letters accompanying the document containing the audited financial statements and auditor’s report.
o
Information contained in analyst briefings.
o
Information contained on the entity’s website
Other Information
Material Inconsistencies: Auditor Action
*
Upon identification of material inconsistencies between the audited financial statements and the other information, the auditor’s action depends upon what information requires revision:
*
If the audited financial statements require revision and management refuses, the auditor should modify the opinion.
*
If the other information requires revision and management refuses, the auditor should communicate the matter to those charged with governance and:
o
Consider the implications for the auditor’s report;
o
Withhold the use of the report; or
o
Withdraw from the engagement and consult with legal counsel.
© Becker
Reporting on Supplementary Information
*
An auditor may be engaged to report (provide an opinion) on supplementary information in relation to the financial statements as a whole.
*
Supplementary information is information presented outside of the basic financial statements that may be presented in a document containing the audited financial statements or separate from the financial statements.
*
The auditor reports on the supplementary information that is derived from the audited financial statements.
*
The auditor is not providing an opinion on information unrelated to the financial statements.
© Becker Professional Education Corporation. All rights reserved.
The auditor has two objectives:
1.
To evaluate the presentation of the supplementary information in relation to the financial statements as a whole.
2.
To report (provide an opinion) on whether the supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole.
NON-ISSUERS - SUPPLEMENTARY REPORT
- Separate section in the auditor’s report on the FS with the heading SUpplementary information
- Separate report
If financial statements get an adverse opinion or a disclaimer:
*The auditor cannot issue an opinion on supplemental information.
ISSUER
If financial statements get an adverse opinion or a disclaimer:
*The auditor should issue the same opinion on the supplemental information.
The auditor should perform LIMITED procedures or RSI
RSI
Nonissuers
The auditor of a nonissuer should add a separate section to the auditor’s report on the financial statements with the heading “Required Supplementary Information” to explain the following circumstances, as applicable:
*
The required supplementary information is included, and the auditor has applied the required procedures;
*
All or some of the required supplementary information is omitted;
*
Some required supplementary information is missing and some is presented in accordance with the prescribed guidelines;
*
The auditor has identified material departures from the prescribed guidelines;
*
The auditor is not able to complete the required procedures or there are unresolved doubts about conformance of required supplementary information.
The separate section should state that the required supplementary information is the responsibility of management, and the auditor does not express an opinion on such information.
For nonissuers, whenever required supplementary information is required to presented, a separate section is added to the audit report, regardless of whether there are issues or not with the information.
RSI - NON ISSUER
THe auditor should PERFORM PROCEDURES on RSI Such as:
1. Inquiry of management
2. Determine if RSI is consistent.
3. Obtain written management representations
The audit report for nonissuers on the FS should include a separate section in the auditor’s report on the FS that states that the RSI is included and the auditor has applied the required procedures.
RSI
Issuers
PCAOB standards do not require the auditor to add an explanatory paragraph to the audited financial statements or refer to the supplementary information unless one of the following is applicable:
*
The required information is omitted;
*
There are material departures from the prescribed guidelines;
*
The auditor is unable to complete prescribed procedures; or
*
There are unresolved doubts about conformance of required supplementary information.
SPECIAL PURPOSE FRAMEWORK = OCBOA
Cash basis = e.g. Depreciation
Tax Basis - used to file its income tax return
Regulatory basis - Used to comply with the requirements or financial reporting provisions of a regulatory agency having jurisdiction over the reporting entity. DUAL OPINION on SPECIAL FRAMEWORK and GAAP
Contractual basis - Used to comply with an agreement between the entity and one or more third parties (other than the auditor).
Other basis -Used to define a set of logical, reasonable criteria that is applied to all material items appearing in the financial statements.
APPROPRIATE NON GAAP TITLES
1. Balance Sheet - Cash basis
2. Statement of Income - Regulatory basis
3. STatement of Revenue and Expenses - Income Tax Basis
When mgt has a choice of Fin reporting framework, the mgt’s responsibility section should make reference to its responsbility for determining the applicable FIN REPORTING framework, as acceptable in the circumstances.
Emphasis-of-Matter Paragraph
Indicates that the financial statements are prepared in accordance with the applicable special purpose framework.
The following items are the significant differences between the standard nonissuer auditor’s report and a report on special purpose financial statements:
If required, the report should include an emphasis-of-matter paragraph that:
Refers to the note in the financial statements that describes the framework.
States that the special purpose framework is a basis of accounting other than GAAP.
States that the financial statements may not be suitable for any purpose other than the stated purpose (when the purpose is required to be described).
OTHER MATTER PARAGRAPH - Restricts use
