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Flashcards in Reporting Deck (67):
1

What is a comfort letter?

A comfort letter (aka letters for underwriters) are signed by the independent auditor. In a comfort letter, issued in conjunction with a registration of securities, an auditor refers to subjects such as independence, compliance of audited FS with SEC requirements, unaudited FS, changes subsequent to the latest FS, and statistical tables.
Addressed to underwriter and signed by auditor.

2

What is a disclaimer of opinion

Statement by auditors that they do not express an opinion on the financial position of a firm because (1) they have not completed an examination of its accounts, or (2) the examination is not broad enough in scope to enable them to form an opinion.
OR if auditor is not independent

3

Adverse opinion

Departure from GAAP
Independent auditor's written view (with supporting reasons) that the financial statements of an organization (1) do not fairly present its actual financial position, (2) are not in conformity with the provisions GAAP and/or, (3) the required information was either not disclosed, or (if disclosed) was inadequately disclosed or was inaccurate. Also called auditor's adverse opinion.

4

Qualified opinion

Independent auditor's opinion, (given as part of an audit report) stating: (1) the audit was restricted in scope otherwise the financial statements present fairly the financial position of the firm, or (2) the audit was unrestricted and for the entire accounting period but an unqualified opinion cannot be expressed because (a) the account books and records do not completely reflect conditions that conform to the provisions of GAAP, (a) there has been a material change (between accounting periods) in accounting policies or in the methods of their application, (c) there are significant uncertainties regarding assumptions underlying the financial statements, (d) the auditor was unable to conduct complete verification of the accuracy of the accounting records due to certain omissions, (e) the auditor and the management were unable to reach a compromise agreement regarding method of treatment or valuation of certain assets, and/or (f) the management was unwilling or unable to correct certain unacceptable practices or situations. Also called auditor's qualified opinion.

5

Unqualified opinion

Also known as a complete audit. An audit that has been performed and researched so thoroughly that the only possible remaining discrepancies stem from information that could not be obtained by the auditor. An unqualified audit analyzes both the internal systems of control, as well as all of the details in the organization's books. All ancillary documentation and supporting records are used in an unqualified audit.

6

What report is issued if the auditor suspected illegal bribes but the audit committee and legal counsel cannot help to determine if it is material or whether mgmt was involved?

Disclaim an opinion as unable to obtain sufficient competent evidential matter

7

When will the auditor not refer to the work or findings of a specialist?

In an unqualified opinion, the audit should not refer to the use of a specialist.
When an auditor decides to modify the audit opinion as a result of the report or findings of the specialist, reference to and identification of the specialist may be made in the auditor's report if the auditor believes such reference will facilitate the understanding.

8

Attestation standards require that suitable criteria be

Objective
Measurable
Complete
Relevant

9

Why would an audit report be dual dated?

An audit report is dual dated for a subsequent event occurring after completion of fieldwork, the auditor's responsibility for events occurring subsequent to the completion of the fieldwork is limited to the specific event for which the report is dual dated.
If the auditor dates the report as of the subsequent event occurring after the completion of fieldwork, the auditor's responsibility is extended to all events occurring to the date of the last subsequent event.

10

Read auditor's report carefully.
What type of opinion and where in the report is the explanatory prgh placed that indicates a lack of consistency, company changed deprec method

Inconsistency in the application of GAAP usually results in an unqualified report with explanatory language (read carefully - auditor agreed). Explanatory paragraphs for inconsistency in unqualified reports follow the opinion prgh.

11

What happens when restrictions that significantly limit the scope of the audit are imposed by the client, such as not making essential corporate minutes available

The auditor generally should disclaim an opinion on the FS.

12

What does the comfort letter provide to the underwriter?

A comfort letter will generally provide negative assurance as procedures short of an audit are applied to info such as capsule info.

13

What happens if there is a lack of sufficient evidence

Scope limitation that may result in a qualified opinion

14

What happens if there is inability to estimate the amount of loss

Uncertainty that may result in an unqualified opinion with an explanatory prgh

15

What if the entity has a lack of experience with pending litigation or lack of insurance coverage for possible losses from such litigation?

Uncertainty that may result in an unqualified opinion with an explanatory prgh

16

When does GAAP apply in an audit

Auditor's judgment concerning the fairness of FS (presentation of financial position, results of operations, statements of cash flows) should be applied within the framework of GAAP.

17

When does GAAS apply in an audit

Relates to the conduct of audit engagements

18

What does Quality control relate to

Relates to the policies and procedures established by a CPA firm to provide reasonable assurance that GAAS are being complied with on all audit engagements

19

What happens when there is a departure from GAAP

Auditor will express a qualified opinion. When the auditor intends to express a qualified report, he should disclose all substantive reasons in a separate explanatory prgh.

20

What are examples of subsequent events which should be disclosed

Write off of receivable from debtor suffering from deteoriating financial conditions over past 6 years that files for bankruptcy after year end.
Sale of a bond issues or issuance of capital stock
Loss of plant or inventories due to a natural catastrophe (such as fire/flood)
Settlement of litigation
GAAP requires retroactive adjustment for stock splits.
Note that a major drop in the quoted market price of the stock would not affect the FS and does NOT need to be disclosed.
Note that acquisition of a subsidiary after year end should be disclosed only.

21

What happens with reporting on compliance with laws and regulations in a financial audit under Government Auditing Standards (the Yellow Book)

In certain circumstances, auditors must report fraud and illegal acts to external parties (often regulatory agencies).
Note GAS does not modify auditor GAAS responsibilities.

22

When can condensed FS be used by the auditor?

A report may be issued by the auditor when the info in the condensed FS is fairly stated in all material aspects.
Condensed FS may be distributed publicly.

23

What is a common element of the scope of audits of recipients of federal financial assistance?

All such audits require auditors to document an understanding of internal control established to ensure compliance with the applicable laws and regulations.

24

What type of reports are issued if a material disclosure is missing

When FS are materially affected by this departure from GAAP, the auditor should express a qualified OR adverse opinion

25

What type of reports are issued if there is a material scope restriction

qualified OR disclaimer

26

How could suitable criteria be available?

1 - publicly
2 - includes with the subject matter or in the assertion
3 - included in CPA's report
4 - well understood by most users
5 - available only to specified parties

27

What is required if there is a material change in an accounting estimate?

This would affect comparability which requires disclosure in a note to the FS, but does not require a consistency modification in the auditor's report.

28

What is an agreed upon procedures engagement?

This engagement is to present specific findings to assist users in evaluating mgmt's assertions about an entity's compliance with specified requirements, not to evaluate the competence or objectivity.
An accountant will perform math computation.
An accountant may 1 - compare procedures to written requirements, 2- discuss procedures to be applied with specified users, and/or 3-review relevant contracts or communication from specified users to report on mgmt's assertions. In reporting to users, only specified info will be presented.

29

What standards are followed for public vs nonpublic companies

Public - Audit report must indicate that the audit was performed in accordance with standards of the Public Company Accounting Oversight Board (PCAOB)
Nonpublic - GAAS

30

What opinion is given when there is inaccurate interim info required by FASB

This info is considered unaudited and thus an UNqualified opinion with an explanatory prgh is appropriate.

31

How does an auditor handle a public entity's FS that includes segment info?

Auditor has to audit the segment info, and if the info is adequate and in conformity with GAAP, does not need to make reference to the segment info in the auditor's report.

32

When a CPA prepares forecasts, what must be disclosed?

1 - sources of info included in forecasts
2-character of work performed by CPA
3- major assumptions used
Note a CPA should not vouch for the achievability of forecasts and should not disclose the probability of achieving estimates.

33

What forms of auditor association are possible relating to MD&A?

SSAE 8 (AT701) provides for both review AND examinations of MD&A.

34

What are examples of notes in FS?

Subsequent events, pro forma effects of a business combination, sale of a discontinued operation
Note would not include results of APs

35

What types of reports can be issued?
Auditor cannot obtain audited FS of consolidated investee
Mgmt does not provide reasonable justification for a change in accounting principles
Company failed to make a count of physical inventory and auditor is unable to apply alternative
Mgmt refuses to allow the auditor access to cancelled checks and bank statements

Auditor cannot obtain audited FS of consolidated investee - scope limit - qualified/disclaim
Mgmt does not provide reasonable justification for a change in accounting principles - departure from GAAP - qualified/adverse
Company failed to make a count of physical inventory and auditor is unable to apply alternative - scope limit - qualified/disclaim
Mgmt refuses to allow the auditor access to cancelled checks and bank statements - mgmt imposed scope limit - disclaim

36

What must the predecessor auditor do before reissuing a report which was previously issued on the FS of a prior period?

AU508 predecessor should obtain a letter of representation from the successor auditor. The predecessor must also read the current FS and compare them to the prior period statements.
Note that the predecessor is not required to review the successor's working papers

37

What is required for the accountant in an engagement to compile prospective FS?

AT301 requires that accountants make inquiries about the accounting principles used in the preparation of prospective FS. The prospective FS does not need to be compared to historical results. Accountant does not need to inquire about possible future transactions. Does not need to test internal control.

38

When is a special report issued?

If auditor follows GAAS and concludes FS is fairly presented in another basis other than GAAP such as cash basis, the auditor would issue a special report / comprehensive basis report - the opinion would be unqualified.

39

How do suitable criteria and written assertion relate to all attestation engagements?

An attestation engagement will always have subject matter, it sometimes will not have a written assertion (ex: if client is not responsible for the subject matter)

40

When FS of a prior period are presented on a comparative basis with FS of current period, what does auditor do with prior?

Must update his report on the FS of the one or more prior periods presented regardless of the opinion previously issued.

41

What is disclosed on auditor's report when FS are not are not prepared in accordance with GAAP

- disclosure fact that statements are not intended to be presented in conformity with GAAP
- include opinion as to whether the statements are presented fairly in conformity with that basis of accounting
- opinion as to whether the disclosed basis of accounting has been applied consistently (with preceding period)
Note no comment need be made on the appropriateness of method

42

What does a CPA's report on an examination of a forecast include?

- describe the forecast info - description of what the forecast info is intended to represent
- a caveat as to the ultimate attainment of the forecasted results - actual may vary and could be material
- CPA assumes no responsibility to update the report for events occurring after the report date
Note a forecast examination report presents an opinion concluding whether the forecast meets AICPA guidelines, not on whether the forecast is fairly presented.

43

What is the appropriate title for a statement of revenue and expenses prepared using an other comprehensive basis of accounting (OCBOA)

AU623 "Statement of income - regulatory basis"
Note that "income statement" or 'statement of operations' are applicable only to FS prepared following GAAP.

44

When does the consistency standard apply?

A change in accounting estimate does not affect consistency standard - may require disclosure in footnotes to FS
Change in reporting entity is a change in accounting principle - consistency std applies
Change in accounting principle that is not generally accepted is considered a correction of an error in principle
An accounting principle inseparable from a change in estimate does affect the consistency standard

45

What is the auditor required to communicate to an entity's audit committee?

AU380 requires that the auditor communicate adjustments (ex: that were suggested by the auditor and recorded by mgmt that have a significant effect on the entity's financial reporting process), whether they are recorded or not recorded.

46

What should the auditor do when a contingency is resolved immediately after the issuance of a report which was qualified with respect to the contingency?

Take no action
Resolution of the contingency after the issuance of the report is not subsequent discovery of facts existing at the date of the auditor's report. Because the contingency did result in a qualified report, the auditor was aware of the facts existing at the date of the auditor's report.
Since the contingency was disclosed in the FS and audit report, the statements were not misleading at the time of issuance and do not have to be revised.

47

What engagement is restricted when third party use of prospective FS is expected?

Standards restrict the review form for prospective FS.
Compilation, examination, and agreed upon procedures are allowed - accountant can accept agreed upon procedures if restricted to 3rd party users who have participated in establishing the nature and scope of the engagement and who take responsibility for the adequacy of the procedures.

48

What is indicated in the successor's audit report of the predecessor?

In the intro prgh
1) the FS of the prior period were examined by other auditors
2) the date of the other auditor's report
3) the type of opinion expressed
4) the substantive reasons therefore, if it was other than unqualified.

49

What should the auditor do with supplementary info, which is outside the basic FS but required by GASB?

While an auditor applied limited procedures and reports deficiencies or omission of such info, it does not result in modification of the audit opinion - info should be reported in a separate explanatory prgh, before the opinion, to describe the omission/deficiency.
Ex: compare the required supplementary info for consistency with audited FS

50

What happens if client asks CPA for an opinion when they are already audited by another CPA?

Accept the engagement but consult with the continuing CPA to ascertain all the available facts relevant to forming a professional judgment.

51

When is consistency modification required

A change from an unacceptable accounting principle to a generally accepted one results in consistency mod.
Does not apply to a change in estimate, classification, or correction of an error (treated as prior period adj).

52

What is CPA Sys trust?

Developed by AICPA to provide evidence on the reliability of electronic systems. In a sys trust engagement, the CPA is engaged to examine whether a client maintained effective controls over the system based on Trust Services criteria that have been developed by the AICPA.
Provides assurance on a system's reliability.

53

What is auditor required to include on compliance with laws and regulations when auditing a not for profit org under GAS?

AU801 requires that the report on compliance with laws and regulations include all material instances of noncompliance, and all instances or indications of illegal acts which could result in criminal prosecution.
Note immaterial is not included.
Note that material weaknesses are included in the report on internal control, not compliance report.

54

What is the objective of the consistency standard?

1 - to give assurance that the comparability of FS between periods has not been materially affected by changes in accounting principles
2 - if comparability has been materially affected by such changes, to require appropriate reporting by the independent auditor regarding such changes.
Auditor is not required to be consulted first.
Standard only requires the communication of the fact that a lack of consistency exists in the handling of items between periods.

55

For each trust services principle, what criteria does the auditor consider?

policies
communications
procedures
monitoring

56

What are the Trust Services (Sys trust) principles

Security
Availability
Processing Integrity
Online Privacy
Confidentiality

57

What report is issued?
Client does not present supplementary info reqd
Inadequate material disclosure
Client imposed scope limit
Qualification by the other auditor of a subsidiary where there is division of responsibility

Client does not present supplementary info reqd - no effect on opinion, include explanatory prgh
Inadequate material disclosure - qualified/adverse
Client imposed scope limit - disclaim
Qualification by the other auditor of a subsidiary where there is division of responsibility - may lead to overall report modification

58

What is required for the auditor on "other info" in client annual report

An auditor is required to read the other info to determine whether it is consistent with the FS
Note required to extend examination to verify
Not to modify auditor's report

59

What is the auditor required to communicate to an entity's audit committee

The process used by mgmt in formulating sensitive accounting estimates
Do not need to explain the basis for assessing control risk

60

What happens if the principal auditor cannot review the work of the other auditor (of material subsidiary) who had expressed unqualified opinion?

The principal auditor will make reference to the examination of the other auditor and issue an unqualified report. This indicates the division of responsibility between the portion of the FS covered by the principal vs the other auditor.
If no reference is made, then additional procedures are required.

61

Segment info is required, how is it reflected in auditor's quantitative measurement of materiality?

Evaluated primarily by relating the $ magnitude of the info to the FS as a whole, NOT the segment alone

62

Where on the report does auditor disclose the substantive reasons for expressing adverse opinion

In the explanatory prgh BEFORE the opinion prgh

63

What is required to report on internal control for GAS?

A description of the scope of auditor's work, stating that the auditor obtained an understanding of the design of relevant controls, determined whether those controls have been implemented, and assessed control risk.
Statement on whether the auditor believes any of the significant deficiencies described in the report are material weaknesses, and if they are, it must identify the material weaknesses noted.
GAS (Yellow Book) requires written report on understanding of internal control and assessment of control risk

64

What is included in the audit report on the FS of a public company?

Indicate that FS follow GAAP
Titled "Report of Independent REGISTERED Public Accounting firm"
Indicate the city in which the report was issued
All audit reports include signature or printed name of the CPA firm

65

What if the client refuses to present the statement of cash flows in an audit where it is required?

Qualify opinion with an except for qualification and a description of the omission in an explanatory prgh of the report.
Disclaimer is not necessary

66

GAS illegal and fraud acts - what happens?

Illegal acts may need to be reported beyond senior officials of the entity audited.
All instances of abuse, fraud, mismgmt, and waste need not be disclosed.
All privileged and confidential info need not be reported to senior officials of the organization that arranged for the audit.

67

What does the successor auditor do when prior FS is included audited by predecessor auditor?

The predecessor auditor must not be named.
Following info must be indicated in the intro prgh of successor's audit report
1- the FS of the prior period were examined by other auditors
2- the date of the other auditor's report
3- the type of opinion expressed
4- the substantive reasons therefore, if it was other than unqualified.