Reporting on Compliance M6 Flashcards
What are the manager assumptions that a compliance audit is based on?
- The audit includes obtaining an understanding of internal control over financial reporting.
- Management is responsible for maintaining effective internal control.
- The auditor believes the audit provides a reasonable basis for the issued opinion.
How must an auditor issue a report on a client’s compliance with contractual agreements or regulatory requirements in connection with a financial statement audit?
- The auditor must have audited the client’s financial statements.
- Expressed an unmodified or qualified opinion.
- The auditor may only issue negative assurance on compliance in this situation, when there is NO non-compliance/ NO OPINION.
- If Adverse Opinion or Disclaimer of Opinion is expressed on the financial statements, then an auditor should only issue a report on compliance when there are identified instances of noncompliance.
Which reports does auditor provide positive assurance in?
- In a report on a specified account in a financial statement.
- Is provided in a report on other comprehensive basis of accounting financial statements.
- Is provided in a report on a financial presentation to comply with contractual agreements or regulatory requirements.
What procedures must an auditor perform to examine a clients compliance with specified requirements?
- Perform a risk assessment and design responses to such assessment.
- A practitioner must include documentation regarding the assessed risk of material noncompliance, responses to the risk assessment, the basis or rationale for materiality levels, and compliance with supplemental requirements in an examination.
- Determine if supplementary audit requirements exist.
- Obtain written representations from management regarding compliance with the specified requirements.
- A practitioner must be independent in examination engagements.
- The practitioner should design the examination to detect both intentional and unintentional material noncompliance.
- A practitioner provides an opinion on an entity’s compliance
with specified requirements. - A practitioner in an examination provides reasonable assurance, when providing an opinion on the entity’s compliance with specified requirements.
What is the purpose of a compliance examination?
- For purposes of a compliance examination, control risk represents the risk that material noncompliance will not be prevented or detected on a timely basis by the entity’s controls.
When would an Auditor test the operating effectiveness of controls in a compliance audit with known material noncompliance?
Tests of the operating effectiveness of controls may be required if any one of the following exist:
1. The risk assessment includes an explanation of the operating effectiveness of controls over compliance.
2. Substantive procedures do not provide enough evidence to support a conclusion.
3. Tests of controls are required by the applicable governmental audit requirements.
How does materiality differ in a compliance audit from GAAS?
- The practitioner’s consideration of materiality differs from GAAS. It is affected by (a) the nature of the compliance requirements, which may or may not be quantifiable in monetary terms; (b) the nature and frequency of noncompliance identified with appropriate consideration of sampling risk; and (c) qualitative considerations, including the needs and expectations of the report’s users.
What is risk of material non-compliance inversly related too?
- As risk of material noncompliance increases, detection risk of
noncompliance should decrease to reach a desired level of overall audit risk of noncompliance. This concept is identical to the relationship between risk of material misstatement and detection risk.
NOTE
* AR of noncompliance = risk of material noncompliance X DR
* IR + CR = Risk of material noncompliance
