Reports on Auditing Engagements -- Form and Content of an Audit Report, Including the Use of Emphasis-of-Matter and Other-Matter Flashcards
Which of the following is the correct placement for critical audit matters in an audit report?
A. Within the opinion paragraph
B. Included in the auditor’s responsibility paragraph
C. As a separate paragraph after basis of opinion paragraph
D. As a separate paragraph before opinion paragraph
The correct answer is (C).
The auditor’s report on issuer entities (to which only Critical Audit Matters apply) include the opinion paragraph as a first paragraph, followed by the basis for opinion and then the Critical Audit Matters paragraph (if needed).
The description of the auditor’s responsibilities in the audit report on the financial statements of a non issuer
A. Should include the name of the auditor with primary responsibility for the audit
B. Should state that the audit was conducted in accordance with the applicable financial reporting framework
C. Should include a reference to a footnote in the financial statements that describes an audit
D. Should include the phrase reasonable assurance
D.
The auditor’s responsibility section of the audit report should explain that US GAAS require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. Regarding incorrect answer A., the name of the auditor is not required.
Regarding incorrect answer B., the auditor’s responsibility section of the report should state that the audit was conducted in accordance with Generally Accepted Auditing Standards (GAAS) and not the applicable financial reporting framework,. In addition, it should identify the United States of America as the country of origin of those standards. (The opinion paragraph indicates whether the financial statements are presented fairly in accordance with the applicable financial reporting framework.) Regarding incorrect answer C., it would be inappropriate for the financial statements to include a disclosure that describes an audit. The description on an audit is included in the auditor’s responsibility section of the audit report.
PCAOB (Public Company Accounting Oversights Board) amended its auditor reporting standards for auditors of issuers that require the auditor to provide new information about the audit and make the auditor’s report more informative and relevant to investors and other users of Financial Statements. Which of the given statements is an example of one such amendment?
A. Statement to disclose the auditor’s tenure
B. Statement to disclose the qualifications of members of the audit team
C. A paragraph detailing reasons for not modifying/qualifying the opinion
D. All of the above
The correct answer is (A).
As per the amendments made in the auditor reporting standards by the Public Company Accounting Oversights Board, a statement disclosing the year in which the auditor began serving consecutively as the company’s auditor has been made mandatory to be included in the audit report.
An emphasis-of-matter paragraph that is included in an audit report prepared in accordance with US GAAS
A. May refer to disclosures in the financial statements required by the applicable financial reporting framework that management failed to include
B. May, in rare circumstances, be used to avoid modifying the audit opinion when, according to the auditor’s professional judgment,it is appropriate in the specific circumstances of the audit engagement
C. May be used to explain why it is not possible for the auditor to withdraw from an engagement
D. Should be communicated to those charged with governance
D.
If the auditor expects to include an emphasis-of-matter or other-matter paragraph in the audit report, the auditor should communicate with those charged with governance regarding this expectation and the proposed wording. This is usually done in the form of draft reports that are distributed prior to official issuance of the final audit report. Remember, although auditors must remain independent, theymust also be transparent with their language and any findings and as such, should relay items such as an other-matter, to governance. Regarding incorrect answers a. and b., an emphasis-of-matter paragraph is not a substitute for either (1) disclosures in the financial statements that the applicable financial reporting framework requires management to make or (2) the auditor expressing a modified opinion, when required by the circumstances of a specific audit engagement. Regarding incorrect answer c., in the rare circumstance when the auditor is unable to withdraw from an engagement even though the possible effect of an inability to obtain sufficient appropriate audit evidence due to a scope limitation imposed by management is pervasive,the auditor may consider it necessary to include an other-matter paragraph, not an emphasis-of-matter paragraph, in the audit report to explain why it is not possible for the auditor to withdraw from the engagement.
The correction of a material misstatement in the previously issued financial statements of an issuer
A. Should be recognized in the auditor’s report through the addition of an explanatory paragraph following the opinion paragraph
B. Should be recognized in the auditor’s report through the addition of an explanatory paragraph preceding the opinion paragraph
C. Should be recognized in the auditor’s report through the addition of an explanatory paragraph following the opinion paragraph if the correction involved an error in accounting principle
D. Should be recognized in the auditor’s report through the addition of an explanatory paragraph preceding the opinion paragraph if the correction involved an error in accounting principle
A.
The correction of a material misstatement in the previously issued financial statements of an issuer should be recognized in the auditor’s report through the addition of an explanatory paragraph following the opinion paragraph. If the entity was a nonissuer, the correction should be recognized in the auditor’s report through the addition of an explanatory paragraph following the opinion paragraph if the correction involved an error in accounting principle. If no element of a principle or its application is included in the error, then its correction would not be recognized in the auditor’s report for a nonissuer. Examples of such errors are mathematical mistakes, oversights, or misuse of facts that existed at the time the financial statements were originally prepared.
The predecessor auditor for a public company, who is satisfied after properly communicating with the successor auditor, has reissued a report because the audit client desires comparative financial statements. The predecessor auditor’s report should make
A. Reference to the report of the successor auditor only in the scope paragraph
B. Reference to the work of the successor auditor in the scope and opinion paragraphs
C. Reference to both the work and the report of the successor auditor only in the opinion paragraph
D. No reference to the report or the work of the successor auditor
D.
The predecessor auditor should not refer in his or her reissued report to the report or work of the successor.
Editor note: Before reissuing (or consenting to the reuse of) a report previously issued on the financial statements of a prior period, when those financial statements are to be presented on a comparative basis with audited financial statements of a subsequent period, a predecessor auditor should consider whether his or her previous report on those statements is still appropriate.
A predecessor auditor should:
Read the financial statements of the current period
Compare the prior-period financial statements that he or she reported on with the financial statements to be presented for comparative purposes
Obtain representation letters from:
Management of the former client
The successor auditor
The representation letter from the successor auditor should state whether the successor’s audit revealed any matters that, in the successor’s opinion, might have a material effect on, or require disclosure in, the financial statements reported on by the predecessor auditor.
A report on an issuer’s integrated audit must include each of the following statements, except:
A. The audit was conducted in accordance with AICPA standards.
B. The auditor believes the audit provides a reasonable basis for the issued opinion.
C. Management is responsible for maintaining effective internal control.
D. Internal control over financial reporting includes policies and procedures regarding the ability to report financial data consistent with management’s assertions.
The correct answer is (A).
The audit is conducted in accordance with Generally Accepted Auditing Standards not AICPA standards.
A report on an issuer’s integrated audit must include each of the following statements:
The auditor believes the audit provides a reasonable basis for the issued opinion.
Management is responsible for maintaining effective internal control.
Internal control over financial reporting includes policies and procedures regarding the ability to report financial data consistent with management’s assertions.
An other-matter paragraph that is included in an audit report prepared in accordance with US GAAS
A. Should not address circumstances when the auditor has other reporting responsibilities that are in addition to the auditor’s responsibility under US GAAS to report on the financial statements
B. May be used to include information that management failed to provide
C. May refer to significant transactions with related parties
D. May refer to an uncertainty relating to the future out come of unusually important litigation or regulatory action
A.
An other-matter paragraph should not address circumstances when the auditor has other reporting responsibilities that are in addition to the auditor’s responsibility under US GAAS to report on the financial statements (these other reporting responsibilities should be addressed in a separate section in the audit report that should be subtitled in a manner appropriate to its content). Regarding incorrect answer b., an other-matter paragraph should not include information that is required to be provided by management. Incorrect answers c. and d. are examples of matters that an auditor may reference in an emphasis-of-matter paragraph, not an other-matter paragraph.
Which of the following, if included in a CPA’s standard report on audited financial statements, would be inappropriate?
A. Management’s responsibility for the financial statement
B. Significant estimates made by the management
C. An assessment of the entity’s accounting principles
D. The CPA’s assessment of the sampling risk factors
The correct answer is (D).
The auditor’s assessment of the sampling risk factors will be documented in an auditor’s workpapers. It will not form part of a standard audit report.
(A), (B) and (C) are incorrect, because a standard audit report contains disclosures relating to the title, addressee, introductory paragraph, management’s responsibility paragraph, auditor’s responsibility paragraph, auditor’s opinion, Emphasis-of-matter paragraph, signature, auditor’s address, and report dates as well as other reporting responsibilities such as estimates, accounting principles, etc.
ane, CPA, concludes that there is substantial doubt about Lima Co.’s ability to continue as a going concern for a reasonable period of time. If Lima’s financial statements adequately disclose its financial difficulties, Kane’s auditor’s report is required to include an emphasis-of-matter paragraph that specifically uses the phrase(s):
“Possible discontinuance of operations”
“Reasonable period of time, not to exceed one year”
A. Yes Yes
B. Yes No
C. No Yes
D. No No
Choice “D” is correct. If, after considering identified conditions and events and management’s plans, the auditor concludes that substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time remains, the audit report should include an emphasis-of-matter paragraph (following the opinion paragraph) to reflect that conclusion. This conclusion should be expressed through the use of the phrase “substantial doubt about its (the entity’s) ability to continue as a going concern” [or similar wording that includes the terms “substantial doubt” and “going concern”]. The “reasonable period…not to exceed one year” is inherent in the definition of going concern under U.S. auditing standards and is not explicitly stated in the audit report. The phrase “possible discontinuation of operations” may be included in the going concern disclosure but is not specifically required.
Which of the following, discovered during an audit, most likely would raise a question concerning possible illegal acts?
A. Related party transactions, although properly disclosed, were pervasive during the year.
B. The entity prepared several large checks payable to cash during the year.
C. Material internal control weaknesses previously reported to management were not corrected.
D. The entity was a campaign contributor to several local political candidates during the year.
The correct answer is (B)
Several Large checks payable in cash raises suspicion as to the purpose of payment given the mode of payment is check payable in cash to keep the identity of receiver anonymous and the money untraceable possibly could be an illegal act.
Existence of related party transactions irrespective of the pervasiveness is not indicative of an illegal act.
Material Internal Control Weaknesses which were reported to management in the past, but were not corrected, raises concerns about errors and frauds not being prevented and detected, but are not as concerning as large checks payable in cash.
(Remember: The question is asking most likely)
Contribution to Political Candidates campaigns by itself is not an illegal act.
In which of the following paragraphs of the audit report of a public company does an auditor communicate the nature of the engagement and the specific financial statements covered by an audit?
A. Basis for Opinion paragraph
B. Critical Audit Matters Paragraph
C. Opinion paragraph
D. Explanatory paragraph
The correct answer is (C).
An auditor communicates the specific financial statements covered by the audit in the opening sentence of the Opinion paragraph of the audit report for a publicly-traded company.
Public companies are under the jurisdiction of the PCAOB and use TAO-BS for their audit report.
[Title]
[Addressee]
[Opinion]
[Basis for Opinion]
[Signature]
However, when a Critical Audit Matter (CAM) needs to be communicated, it uses TAO-BCS
Title
Addressee
Opinion
Basis for Opinion
Critical Audit Matters
Signature of Audit Firm
How does an auditor of a public company make the following representations when issuing the standard audit report on comparative financial statements?
Consistent application of accounting principles
Examination of evidence on a test basis
A. Implicitly Explicitly
B. Explicitly Implicitly
C. Implicitly Implicitly
D. Explicitly Explicitly
A.
The answer is the same for the standard auditor’s report for both comparative and single-year financial statements. Consistency is implied (implicit) in the standard report, i.e., if satisfied, the auditor does not refer to consistency in the audit report. The standard audit report states (explicitly) in the scope paragraph that an audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
What should an auditor do in absence of CAMs (Critical Audit Matters)?
A. Include an explanatory paragraph to report that there are no CAMs
B. Include a statement in the auditor’s report that there are no CAMs
C. Include an Emphasis of Matter paragraph to report that there are no CAMs
D. Include an Other Matter paragraph to report that there are no CAMs
The correct answer is (B).
If there are CAMs (Critical Audit Matters), communication of the CAMs is required in the audit report:
Identify the CAM
Describe the principal considerations that led the auditor to determine that the matter is a CAM
Describe how the official audit matter was addressed in the audit
Refer to the relevant F/S accounts or disclosures that relate to the CAM
However, if there are no CAMs, include a statement in the auditor’s report that there are no CAMs
The following explanatory paragraph was included in an auditor’s report on a public company’s financial statements to indicate a lack of consistency:
“As discussed in note T to the financial statements, the company changed its method of accounting for long-term contracts in Year 2.”
How should the auditor report on this matter if the auditor concurred with the change?
Type of opinion
Location of explanatory paragraph
A. Unqualified Before opinion paragraph
B. Unqualified After opinion paragraph
C. Qualified Before opinion paragraph
D. Qualified After opinion paragraph
B.
If there has been a change in accounting principles or in the method of their application that has a material effect on the comparability of the company’s financial statements, the auditor should refer to the change in an explanatory paragraph of the report. Such explanatory language (following the opinion paragraph) should identify the nature of the change and refer the reader to the note in the financial statements that discusses the change in detail.
Editor note: This is one of the circumstances that, while not affecting the auditor’s unqualified opinion, requires that the auditor add an explanatory paragraph to the standard report. The auditor’s concurrence with a change is implicit.
If a newly adopted accounting principle is not a generally accepted accounting principle; the method of accounting for the effect of the change is not in conformity with generally accepted accounting principles; or management has not provided reasonable justification for the change in accounting principle, the auditor should express a qualified opinion or, if the effect of the change is sufficiently material, the auditor should express an adverse opinion on the financial statements.
