Ch 17 - Audit Reports

Question 1

The opinion given when the auditor concludes there are no material misstatements in the financials; “without exception”

Answer 1

Unqualified / Unmodified Opinion

Question 2

The only type of opinion the SEC will accept for publicly traded clients is…

Answer 2

an Unqualified Opinion

Question 3

The opinion given when the financials are mostly good, “except for” one area where there is a material misstatement; “with exception”

Answer 3

Qualified Opinion

Question 4

What opinion is given when there is a non-pervasive material misstatement?

Answer 4

Qualified Opinion

Question 5

When the auditor is unable to gather sufficient appropriate evidence on which to base their opinion; no auditor opinion

Answer 5

Scope Limitation

Question 6

What opinion is given when there is a non-pervasive Scope Limitation?

Answer 6

Qualified Opinion

Question 7

The opinion given when there are one or more material misstatements that cannot be limited to a small area; the financials as a whole are unreliable

Answer 7

Adverse Opinion

Question 8

What opinion is given when there are one or more pervasive material misstatements?

Answer 8

Adverse Opinion

Question 9

The opinion given when there are one or more Scope Limitations that cannot be limited to a small area. The auditor cannot form an opinion on any of the financial statements.

Answer 9

Disclaimer of Opinion

Question 10

What opinion is given when there are one or more pervasive Scope Limitations?

Answer 10

Disclaimer of Opinion

Question 11

What are 2 required situations that must be included in the audit report?

Answer 11

1) GAAP consistency issues (changes in acc method/principles)

2) Going concern issues (substantial doubt)

Question 12

What is the PCAOB Required Situation term included in the audit report?

Answer 12

Explanatory Language

Question 13

What is the AICPA Required Situation term included in the audit report?

Answer 13

Emphasis of Matter Paragraph

Question 14

What is the PCAOB & AICPA Optional Situation term included in the audit report?

Answer 14

Emphasis of Matter Paragraph

Question 15

What is the purpose of the Emphasis of Matter Paragraph?

Answer 15

To highlight items properly disclosed in the financials

Question 16

T/F: In Required, Optional, & Other Situations there are no GAAP violations/misstatements, and the core Audit Opinion is still clean/Unqualified/ Unmodified.

Answer 16

True

Question 17

A business can/will continue operating into the foreseeable future

Answer 17

Going Concern Assumption

Question 18

Is going concern a good or bad thing for a company?

Answer 18

Good!

Question 19

GAAP requires that companies evaluate whether any conditions exist that raise “Substantial Doubt” about the company’s ability to operate as a Going Concern on a ______ (monthly, quarterly, annual) basis.

Answer 19

Annual

Question 20

What are 4 things that create Substantial Doubt?

Answer 20

• Cash flow issues.
• Recurring losses.
• Critical/crippling lawsuit/fines.
• Government regulation that may close the business (making product illegal, restricting business)

Question 21

T/F: the auditor may be required to add Explanatory Language (PCAOB) / Emphasis of Matter Paragraph (GAAS) to the audit report for the Going Concern Assumption.

Answer 21

True

Question 22

If the auditor has substantial doubt & the client does NOT have a satisfactory plan to address the issues, then the extra paragraph is ________ (optional/required).

Answer 22

Required

Question 23

If the auditor has substantial doubt & the client has a satisfactory plan to address the issues, then the extra paragraph is ________ (optional/required).

Answer 23

Optional

Question 24

Investors/lenders are scared away, and the client does actually go bankrupt

Answer 24

“Self-fulfilling prophecy”

Question 25

Explain the Type 1 Error regarding substantial doubt for going concern.

Answer 25

Company has the "warning" extra paragraph but never actually goes bankrupt

Question 26

Explain the Type 2 Error regarding substantial doubt for going concern in extra paragraph.

Answer 26

Company never had the "warning" extra paragraph, but does actually go bankrupt

Question 27

T/F: If bankruptcy is “Immanent”, the client must switch to a Liquidation Basis of accounting and write-down all assets to their “fire-sale” values.

Answer 27

True

Question 28

If there is a justified change in Accounting Method/Principle, it is _______ (optional/required) to add an ____________ (Explanatory Language / Emphasis of Matter Paragraph) to the audit report.

Answer 28

Required, either depending on if the company is public or private

Question 29

If there is a Change in Acct. Estimate (i.e. useful life), it is _______ (optional/required) to add an ________ (Explanatory Language / Emphasis of Matter Paragraph) to the audit report.

Answer 29

Optional; Emphasis of Matter

Question 30

If there is an Uncertainty (i.e. contingency), it is _________ (optional/required) to add an ________ (Explanatory Language / Emphasis of Matter Paragraph) to the audit report.

Answer 30

Optional; Emphasis of Matter

Question 31

AICPA GAAS specifies that the auditor can add additional paragraphs covering items NOT INCLUDED in the financial statements.

Answer 31

Other Matter Paragraphs

Question 32

5 Instances where there may be Optional Emphasis of Matter Paragraphs added:

Answer 32

1) Change in Acc Estimates 2) Uncertainties 3) Important SEs 4) Major Catastrophes 5) Division of Responsibility

Question 33

T/F: Optional paragraphs are rarely used in reality.

Answer 33

True

Question 34

Paragraph at the end of the report describing something on the audit that was hard to deal with, that readers of the report might want to know about.

Answer 34

Critical Audit Matter or Key Audit Matter

Question 35

What's the difference between a critical audit matter and a key audit matter?

Answer 35

They mean the same thing BUT Critical audit matter - PCAOB term Key audit matter - AICPA term

Question 36

Are critical audit matters communicated to the audit committee? (yes/no) Do critical audit matters have to be material to FS? Do critical audit matters have to be especially challenging or subjective?

Answer 36

Yes Yes Yes

Question 37

T/F: Critical or Key Audit Matters change the audit opinion.

Answer 37

False; do NOT change audit opinion (doesn't necessarily mean anything was wrong)

Question 38

4 Common CAM topics that show up frequently are:

Answer 38

1) Revenue Recognition 2) Goodwill 3) Business Combinations 4) Taxes (think: RGB Tattoo)

Question 39

T/F: A parent company and subsidiary can have different auditors

Answer 39

True

Question 40

T/F: The parent auditor automatically takes responsibility for the subsidiary auditor

Answer 40

False; parent auditor can decide if they want to or not

Question 41

Do Audit Opinions of Parent/Sub have to match?

Answer 41

No, they don't

Question 42

T/F: The Audit Report and opinion covers all years presented; even prior years presented for comparative purposes.

Answer 42

True (to compare CY to PYs)

Question 43

T/F: Firms must re-audit every year presented.

Answer 43

False; Firms must Update PY opinions

Question 44

What does the firm do if PYs were audited by a different firm?

Answer 44

Firm must ask old firm to Reissue their old audit opinion

Question 45

Audit firm did not find anything during the CY audit that would make them change their opinion about the old financial statements

Answer 45

Updating (PY opinions)

Question 46

Allowing the new/current auditor to republish the Audit Report from PYs with the CY financial statements

Answer 46

Reissuing (old audit opinion)

Question 47

Before the old auditor reissues the old audit opinion, they must do these 3 things:

Answer 47

1) Read new FS 2) Compare old FS data to new FS columns 3) Get a new Management Representation Letter stating nothing has happened that would/should change the old data

Question 48

It’s good to change auditors every now and then to get a “fresh look”. This will make the audit/financials better. This is known as...

Answer 48

The Fresh Look Perspective

Question 49

If the firm/partner stays with the same client for a long time, they will become friendly/soft/predictable and the quality of the audit will suffer. This is known as...

Answer 49

The Impaired Independence Perspective

Question 50

Auditing is difficult with a large client-specific learning curve. As auditors learn more about clients, their ability to do a quality audit goes up. This is known as...

Answer 50

The Increases Competence Perspective

Question 51

Audit Partners have to rotate off clients after __ years, and stay off for another __ years, per SOX.

Answer 51

5, 5

Question 52

T/F: It's optional for audit firms to disclose how long the firm has had the client in the audit report.

Answer 52

False; it's required

Question 53

T/F: The audit partner has to sign their own (personal) name on the Form AP

Answer 53

True

Question 54

An audit partner personal signature improves audit quality for what 2 reasons?

Answer 54

1) Personally “signing off” on the audit would have a psychological effect on audit partners, causing them to take more responsibility for the audit 2) Publicly signing the audit report would do a better job of putting the auditor’s personal reputation at stake, incentivizing them to do better audits.

Question 55

T/F: The audit opinion only applies to CY data, even if PYs are presented for comparative purposes.

Answer 55

False; applies to both CY and PYs

Question 56

T/F: Regulators generally think that audit quality goes up with audit tenure because of increased auditor competence

Answer 56

False