Chapter 1 Flashcards
State the primary purpose of an audit
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
identify 3 inherent limitations of an audit
- Nature of financial reporting
- Nature of the audit procedures
- Timeliness of financial reporting and the balance between benefit and cost
which standards provide the most authoritative U.S. auditing guidance for nonissuers and issuers, and who issues those standards?
Nonissuers (Au):
Statements on Auditing Standards (SASs), issued by the AICPA Auditing Standards Board
Issuers (As): Auditing Standards (ASs), issued by the PCAOB plus all SAS adopted by the PCAOB
Describe the role of the International Auditing and Assurance Standards Board (IAASB) and the use of International Standards of Auditing (ISAs)
IAASB is a standard setting board of the International Federation of Accountants (IFAC) that establishes ISAs.
Currently, over 100 countries are using or in the process of adopting ISAs.
ISAs do not override local laws/regulations or national standards that gobern the audits of financial statements in a given country.
What are the 5 general GAAS requirements related to the conduct of an audit?
Professional Skepticism Ethical Requirements Professional Judgment Sufficient and Appropriate Audit Evidence Compliance with GAAS
List in order the primary sections of an unmodified audit opinion
Title: Independent Auditor’s Report
Addressee: Based on the circumstatnces of the engagement
Introduction: we have audited the accompanying financial statements of…
Management’s Responsibility for the Financial Statements: management is responsible for the preparation and fair presentation of the FS…
Auditor’s Responsibility: our responsibility is to express an opinion on these FS based on our audit
Opinion: in our opinion, the FS referred to above present fairly in all material respects, the financial position…
Report on Other Legal and Regulatory Requirements: if applicable
what should be included in the introductory paragraph of the unmodified audit opinion?
The introductory paragraph should include:
- the entity whose FS have been audited
- a statement that the FS were audited
- the title of each FS audited
- dates or periods covered by each financial statement
what should be included in the Management’s Responsibility paragraph of the unmodified audit opinion?
- an explanation that management is responsible for the preparation and fair presentation of the FS
- an statement that this responsibility includes the design, implementation, and maintenance of internal control
what should be included in the Auditor’s Responsibility paragraph of the unmodified audit opinion?
- 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 US
- 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 misstatement
- a description of the audit
what should be included in the opinion paragraph of the unmodified audit opinion?
- a statement that the financial statements present fairly, in all material respects, the financial position 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
- identification of the applicable financial reporting framework and its origin
Identify the key differences in the auditor’s report under US GAAS and the ISAs
Requirements in Auditor’s Report under ISAs (not GAAS):
- the introductory paragraph refers to the summary of significant accounting policies and other explanatory information
- The report may refer to “the preparation and fair presentation of the FS” (consistent with GAAS) or “the preparation of FS that give a true and fair view” (not allowed under GAAS)
- The auditor’s responsibility paragraph must include a statement that the auditing standards require that the auditor comply with ethical requirements
Requirements in Auditor’s Report under GAAS (not ISAs):
- sufficient appropriate audit evidence should include evidence that the audit documentation has been reviewed
- the description of management responsibilities for the FS in the auditor’s report should not be reference to a separate statement by management if such a statement is included in a document containing the auditor’s report
Define a component auditor and identify the 2 requirements that are necessary to reference a component auditor in the auditor’s report
A component auditor is an auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit. The component auditor may be part of the group engagement partner’s firm, a network firm, or another firm.
Reference to the component auditor in the auditor’s report can be made if the following 2 requirements are met:
- The group engagement partner has determined that the component auditor has performed an audit in accordance with the relevant requirements of GAAS, or when required, the PCAOB
- the component auditor’s report is not restricted use
what are the responsibilities of a group engagement partner (team) when they assume responsibility for the work of a component auditor?
No reference to the component auditor is made in the auditor’s report.
If the component is a significant component due to its individual financial significance, it should be audited by the group engagement team or the component auditor
When a component is deemed significant because of significant risks of material misstatement to the group FS, the group engagement team or component auditor should perform additional audit procedures pertaining to the potential risk identified
Components that are not considered significant only require that analytical procedures be performed by the group engagement team.
when should an auditor’s opinion be modified?
a modification to the auditor’s report is necessary when:
- the auditor determines that the FS as a whole are materially misstated (GAAP issue)
- the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the FS as a whole are free from material misstatement (GAAS issue)
what is the purpose of a emphasis-of-matter paragraph and how is it used (reported ) in an auditor’s report?
the purpose of an emphasis-of-matter paragraph is to reference a matter that is appropriately presented in the FS, but is of such importance that it is fundamental to the user’s understanding of the FS.
Reporting requirements for an emphasis-of-matter paragraph include:
- placing the paragraph immediately after the opinion paragraph
- using the heading “Emphasis-of-Matter” or other appropriate heading
- Describing the matter being emphasized and the location of relevant disclosures in the FS
- indicating that the auditor’s opnion is not modified with respect to the matter emphasized
