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CPA - AUD - Becker > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

State the primary purpose of an audit.

A

To provide F/S users with an opinion on whether the F/S are fairly presented, in all material respects, in accordance with the applicable financial reporting framework

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2
Q

Identify three inherent limitations of an audit

A
  1. The nature of financial reporting
  2. The nature of audit procedures
  3. Timeliness of financial reporting and the balance between benefit and cost
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3
Q

Which standards provide the most authoritative U.S. audting guidance for nonissuers and issuers, and who issues those standards?

A

Nonissuers:

Statements onf Auditing Standards (SASs), issued by the AICPA Auditing Standards Board

Issuers:

Auditing Standards (ASs), Issued by the Public Company Accounting Oversight Board (PCAOB) plus all SAS adopted by the PCAOB

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4
Q

Describe the role of the International Auditing and Assurance Standards Board (IAASB) and the use of International Standards of Auditing (ISAs)

A

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 govern the audits of F/S in a given country

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5
Q

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

A

S - Profeesional SKEPTICISM

E - ETHICAL Requirements

J - Professional JUDGMENT

E - Sufficient and Appropriate Audit EVIDENCE

C - COMPLIANCE with GAAS

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6
Q

List in order the primary sections of an unmodified audit opinion

A

Title - Independent Auditor’s Report

Addressee - Based on the circumstances of the engagement

Introduction - We have audited the accompanying F/S of …

Management’s Responsibility for the F/S: Management is responsible for the preparation and fair presentation of the F/S…

Auditor’s Responsbility - Our responsibility is to express an opinion on these F/S based on our audit.

Opinion - In our opinion, the F/S referred to above present fairly in all material respects, the financial position…

Report on Other Legal and Regulatory Requirements: If Applicable

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7
Q

What should be included in the introductory paragraph of the unmodified audit opinion?

A

The introductory paragraph should include:

  • The entity whose F/S have been audited
  • A statement that the F/S were audited
  • The title of each F/S audited
  • Dates or periods covered by each financial statement
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8
Q

What should be included in the Management’s Responsibility paragraph of the unmodified audit opinion?

A
  • An explanation that management is responsible for the preparation and fair presentation of the F/S
  • A statement that this responsibility includes the design, implementation, and maintenance of internal control
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9
Q

What should be included in the Auditor’s Responsibility paragraph of the unmodified audit opinion?

A
  • A statement that it is the auditor’s responsbility to express an opinion on the F/S 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 F/S are free of material misstatement
  • A description of the audit
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10
Q

What should be included in the opinion paragraph of the unmodified audit opinion?

A
  1. A statement that the F/S present fairly, in all material respects, the financial position of the entity as of the B/S date and the results of operations and its cash flows for the period ended, in accordance with the applicable financial framework
  2. Identification of the applicable financial reporting framework and its origin
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11
Q

Identify the key differences in the auditor’s report under U.S GAAS and the ISAs

A

Requirements in Auditor’s Report under ISAs (not GAAS)

  • The introductory paragraph refers to the summary of significant accounting policies and other explantory information
  • The reporting may refer to “the presentation and fair presentation of the F/S” (consistent with GAAS) or “the preparation of F/S that give a true and fair view” (not allowed under GAAS).
  • The auditor’s responsiblity 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 managment responsibilities for the F/S in the auditor’s report should not be referenced to a seperate statement by management if such a statement is included in a document containing the auditor’s report
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12
Q

Define a component auditor and identify the three requirements that are necessary to reference a component auditor in the auditor’s report

A

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 three requirements are met:

  1. The component’s F/S are prepared using the same financial reporting framework as the group F/S
  2. The component auditor has performed an audit in accordance with GAAS, or when required, the PCAOB
  3. The component auditor’s report is not restriced use.
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13
Q

What are the responsbilities of a group engagement partner (team) when they assume responsibility for the work of a component auditor?

A

No reference to the component auditor is made in the auditor’s.

If the component is a significant component due to its individual financial significance, it should be audited by the group engagement team or them or the component auditor.

When a component is deemed significant because of signifcant risks of material misstatement to the group F/S, the group engagement team or component auditor should perform additional audit procedures pertaining to the potential risk identified.

Components that are not considered signficiant only require that analytical procedures be performed by the group engagement team

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14
Q

When should an auditor’s opinion be modified?

A

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

  • The auditor determines that the F/S as a whole are materially misstated (GAAP issue); or
  • The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the F/S as a whole are free from material misstatements (GAAS issue).
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15
Q

What is the purpose of an emphasis-of-matter paragraph and how is used (reported) in an auditor’s report?

A

The purpose of an emphasis-of-matter paragraph is to reference a matter that is appropriately presented in the F/S, but is of such importance that it is fundamental to the user’s understanding of the F/S

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 F/S
  • Indicating that the auditor’s opinion is not modified with respect to the matter emphasized
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16
Q

Under what circumstances would an emphasis-of-matter paragraph be required in an auditor’s report?

A

An emphasis-of-matter paragraph should be used in teh auditor’s report when:

  • The auditor determines there is substantial doubt regarding the entity’s ability to continue as a going-concern for a reasonable time period
  • There is a need to describe a justified change in accounting principle that has a material effect on the entity’s financial statements
  • Facts are subsequently discovered that lead to a change in the auditor’s opinion (note: an other-matter paragraph may also be appropriate); or
  • The F/S are prepared in accordance with an applicable special purpose framework, other than regulatory basis financial statements intended for general use
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17
Q

Under what circumstances would an auditor use an other-matter paragraph in an auditor’s report?

A

Use of an other-matter paragraph is required in the auditor’s report if:

  • The auditor includes an alert in the audit report that restricts its use;
  • Facts are subsequently discovered that lead to a change in auditor’s opinion (note: an emphasis-of-matter paragraph may also be appropriate);
  • Prior period F/S were audited by a predecessor auditor and the predecessor’s audit report is not reissued;
  • Current period F/S are audited and presented in comparative form with compiled or reviewed F/S for the priod period
  • Prior to the release date, the auditor identifies a material inconsistency in other information included in a document with audited F/S that requires revision and management refuses to make the revision
  • The auditor chooses (or is required) to report on supplementary information presented with F/S in the auditor’s report
  • Special purpose F/S are prepared in accordance with a contractual/regulatory basis of accounting (requiring a restriction on the use of the auditor’s report); or;
  • The auditor’s report on the F/S includes a compliance report
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18
Q

Evidence from what auditing procedures may lead the auditor to conclude that there is significant doubt an entity’s ability to continue as a going concern?

ADMITS!

A

Evidence obtained from the following procedures may reveal going concern issues:

ANALYTICAL procedures

DEBT compliance (review compliance)

MINUTES (review from board meetings)

INQUIRY of client’s legal counsel

THIRD parties (review financial support arrangments)

SUBSEQUENT events review

19
Q

What conditions and events may indicate substantial doubt about an entity’s ability to continue as a going concern?

What is the going concern period?

FINE

A

The following conditions and events may be indicative of substantial doubt:

  • FINANCIAL difficulties
  • INTERNAL matters, such as labor difficulties, substantial dependence on a particular project, etc.
  • NEGATIVE trends
  • EXTERNAL matters, such as legal proceedings, new legislation, loss of a principal customer, natural disasters, etc.

The going concern period should not exceed one year under U.S auditing standards, but may be greater than or equal to one year under ISAs.

20
Q

What phrases must be included in a going concern emphasis-of-matter paragraph?

A

“Substantial doubt”

and

“Going concer”

21
Q

When there is a year-to-year lack of comparability (consistency) in an entity’s F/S due to an acceptable change in accounting principle, how does the auditor reflect this in the current year’s auditor’s report?

A

When the auditor concludes that the change in accounting principle is acceptable (justified), the auditor should include an emphasis-of-matter paragraph in the auditor’s report describing the change in accounting principle and provide a reference to the entity’s disclosure of the change.

If the justified change in accounting principle is deemed immaterial, no revision to the report is necessary

22
Q

How is an alert that restricts the use of teh auditor’s written communication reflected in the auditor’s report and what items should be included in the alert?

A

An other-matter paragraph is used to restrict the use of the auditor’s report when required by GAAS or when the auditor deems it necessary.

The alert that restricts the use of the auditor’s written communication includes:

  • A statement that the auditor’s written communciation is intended soley for the information and use of the specified parties;
  • Identification of the specified parties for whom use is intended: and
  • A statement that the auditor’s written communication is not intended to be and should not be used by anyone other than the specified parties
23
Q

When would an auditor use professional judgment to determine whether to issue a qualified opinion or an adverse opinion?

A

When audit evidence indicates that there is material misstatement of the F/S

A qualified opinion is issued when the auditor concludes that misstatements, individually or in the aggregagte, are material but not pervasive to the F/S

An adverse opinion is issued when the auditor concludes that misstatements, individually or in the aggregate, are both material and pervasive to the F/S

24
Q

Describe the circumstances in which a material misstatment of the F/S may arise

A

Misstatements may arise in relation to:

  • The appropriateness of accounting policies
  • The application of accounting policies
  • The appropriateness of the F/S presentation
  • The appropriateness of adequacy of disclosures in the F/S
25
Q

When would an auditor use professional judgement to determine whether to issue a qualified opinion of a disclaimer of opinion?

A

When there is a limitation on the scope of the audit

A qualified opinion is issued when an auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion and the auditor determines that the possible effects could be material but not pervasive

A disclaimer of opinion is expressed when the auditor unable to obtain sufficient appropriate audit evidence on which to base an opinion and the auditor determines that the possible effects could be both material and pervasive

26
Q

Identify some causes of scope limitations

A

Restrictions on the auditor’s ability to perform auditing procedures may be caused by:

  • Circumstances
  • Managment
  • Inability to observe inventoy
  • Inability to confirm receivables
  • Refusal of the client’s attorney attorney to respond to inquiry
  • Refusal of managment to provide a representation letter
27
Q

The auditor’s report should not be dated earlier than the date on which the auditor has obtained sufficient appropriate audit evidence. This should include evidence that what three things have occured?

A

Evidence that:

  1. Audit documentation has been reviewed
  2. Financial statements have been prepared, and
  3. Managment has taken responsibility for the F/S
28
Q

How do uncertainties affect the auditor’s report?

A
  • If management’s analysis is supported and properly reported or disclosed, the auditor issues an unmodified opinion with no reference to the uncertainty in the audit report. Note: The auditor can add an emphasis-of-matter paragraph to the unmodified opinion if the auditor determines that futher explanation of the uncertainty is necessary for the user’s understanding of the F/S
  • If the auditor is unable to obtain sufficient audit evidence involving an uncertainty and its presentation or disclosure in the F/S, the auditor should consider the need to express a qualified (GAAS) opinion or to disclaim an opinion due to a limitation in scope
  • If the auditor concludes that the F/S are materially misstated due to a departure from GAAP related to an uncertainty, the auditor should express a qualified (GAAP) or adverse opinion
29
Q

If, during the current examination of comparative F/S, the auditor discovers evidence that affects the prior statements and the opinion that was expressed, what action should be taken?

Only DORCS change their mind!

A

The auditor should update the opinion in the current year’s report. If the opinion differs from the previous opinion, the reason(s) should be disclosed in a seperate emphasis-of-matter or other-matter paragraph following the opinion paragraph

The explantory paragraph should disclose the:

DATE of the auditor’s previous report

OPINION type previously issued

REASON for the prior opinion

CHANGES that have occured

STATEMENT “opinion…is different”

30
Q

The predessor auditor should take what steps before reissuing an audit report on prior period F/S?

A
  • Read the statements for the current period
  • Compare the previous audited statements with the current period statements
  • Obtain a letter of representation from the successor auditor
  • Obtain a letter of representation from the managment at or near the date of reissuance
  • If unrevised, use the orignal date , if revised, dual date the report
31
Q

What is the effect on the audit report when the current period financial statements are audited and presented in comparative format with prior period F/S that were not audited?

A

If the prior period F/S were reviewed or compiled, and other-matter paragraph is added that includes:

  • A description of the service performed in the prior period;
  • The date of the prior period report;
  • A description of any material modifications in the report; and
  • A statement that the service was less in scope that an audit and does not provide a basis for expressing an opinion on the F/S

If the prior period F/S were not audited, reviewed, or compiled, the other matter paragraph should indicate this and state that the auditor assumes no responsibility for the F/S

32
Q

Define the two types of subsequent events

A

A Recognized subsequent event relates to a condition that existed on or before the balance sheet date. Recognized subsequent events require financial statement adjustment

A Nonrecognized subsequent event occurs after the balance sheet date. Nonrecognized subsequent events generally do not require financial statement adjustment, but may require footnote disclosure.

33
Q

What procedures should the auditor perform during the subsequent period?

A

Between the date of the financial statements and the date of the auditor’s report (subsequent period), the auditor should:

P - Review POST balance sheet transactions

R - Obtain a REPRESENTATION letter from managment describing events that occured during the subsequent period required adjustment to the F/S

I - INQUIRE with management of those charged with governance whether subsequent events occurred that could impact F/S

M - Review MINUTES of board and committee meetings

E - EXAMINE current interim F/S and compare to F/S under audit

34
Q

After the date of the auditor’s report, what actions should an auditor take regarding subsequent events?

A

None. While the auditor is responsible for investigating subsequent events until the date of the auditor’s report, the auditor has no active responsibiilty to make inquiries or perform auditing procedures after that date.

35
Q

When and why is dual dating used?

A

Dual dating is used when subsequent events requiring F/S adjustment or disclosure come to the auditor’s attention after the original date of the audit report but before the audit report is issued. Dual dating extends the auditor’s responsibilty only for the particular subsequent event. The orignal date of the report is retained for the rest of the F/S

36
Q

After issuance of the report, what actions should an auditor take upon discovering information that materially affects the report?

A

DETERMINE whether thare are persons relying or likely to rely on the F/S

ADVISE the client to immediately disclose the new information to persons currently relying or likely to rely on the F/S. This disclosure may take the form of REVISED F/S, DISCLOSURES and revisions to any imminent F/S, or NOTIFICATION that the F/S and report should not be relied upon

ADVISE the client to discuss the new disclosures or revisions with the SEC, stock exchanges, and appropriate regulatory agencies.

ENSURE that appropriate steps have been taken by client

37
Q

What actions should an auditor take upon discovering omitted audit procedures?

A

The auditor should:

  1. Determine whether other procedures were adequate to compensate for the omitted procedures
  2. If not, and if there are people likely to be relying on the report, apply the omitted (or alternative) procedures
  3. If facts emerge that support a different opinion, advise teh client to make appropriate disclosure and notification
38
Q

What is the auditor’s responsibility with respect to information accompanying the basic financial statements in a client-prepared document?

A

The auditor should read the other information to determine that it is consistent with the audited F/S and that there are no material inconsistencies or material misstatements of fact.

The auditor may (but is not required to) report on the other information

39
Q

What are the two objectives of engagements to report on supplementary information?

A
  1. To evaluate the presentation of the supplementary information in relation to the F/S as a whole
  2. To report on whether the supplementary information is fairly stated, in all material respects, in relation to the F/S as a wholle
40
Q

What procedures would an auditor perform related to supplementary information that is required by GAAP and accompanies the F/S?

A

Inquire regarding how the supplementary information was prepared, including changes from prior years and significant assumptions used.

Determine whether the methods used are consistent with management’s responses, audited F/S, and other knowledge

Obtain written management representations regarding teh required supplemental information

The auditor may (but is not required to) issue an opinion on the information

41
Q

List several features of a report on the application of the requirements of an applicable financial reporting framework

A
  • Description of engagement, entity, and transaction
  • Reference to AICPA standards
  • Description of the appropriate application of the requirements of the applicable financial reporting framework to the specific transaction or type of report
  • Preparers are responsible for proper accounting
  • Difference in facts, circumstances, or assumptions may change the report
  • Restricted use paragraph
42
Q

When accepting an engagement to audit F/S prepared in accordance with a financial framework generally accepted in another country, the auditor should obtain an understanding of:

A
  • The purpose of which the F/S are prepared
  • Whether the financial reporting framework is a fair presentation framework
  • The intended users of the F/S
  • The steps taken by managment to ensure that the appicable financial reporting framework is acceptable under the circumstances
43
Q

What are teh reporting options for the F/S prepared in accordance with a financial reporting framework generally accepted in another country when the F/S will be distributed outside the U.S. only? What if the F/S are also intended for use within the U.S.?

A

Distributed outside the U.S. only

  • Report form of the other country or the report sent out in the ISAs (if applicable); or
  • U.S. style report modified to refer to the financial reporting framework generally accepted in another country

Distributed within the U.S.

Standard U.S. report with an emphasis-of-matter paragraph that:

  • Identifies the financial reporting framework
  • Refers to the note in the F/S describing the framework
  • Indicates the framework differes from accounting principles generally accepted in the U.S.A.

CPA - AUD - Becker (6 decks)

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