Reports on Auditing Engagements -- Form and Content of an Audit Report, Including the Use of Emphasis-of-Matter and Other-Matter Flashcards
(36 cards)
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.
Which paragraphs of an audit report with an unmodified opinion for a nonissuer refer to the applicable financial reporting framework?
Introductory paragraph
Management’s responsibility
Section Opinion Section
A. No Yes No
B. Yes Yes No
C. Yes No Yes
D. No Yes Yes
D.
The management’s responsibility and the opinion sections of an audit report with an unmodified opinion for a nonissuer refer to the applicable financial reporting framework (AFRF). The introductory paragraph does not mention the AFRF. This is true for audit reports with all types of opinions as well as a disclaimer of opinion. The Management’s Responsibility for the Financial Statements section should include the explanation that management is responsible for the preparation and fair presentation of the financial statements in accordance with the AFRF, for example, accounting principles generally accepted in the United States of America. This is true for audit reports with all types of opinions as well as a disclaimer of opinion. When expressing an unmodified opinion on financial statements, the auditor’s opinion should state 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 its operations and its cash flows for the period then ended, in accordance with the AFRF. The opinion section of an audit report with either a qualified or an adverse opinion also refers to the AFRF. A disclaimer of opinion does not refer to the AFRF.
Editor’s note: The best way to be confident in answering these types of questions is by thoroughly reading a sample auditor report, as provided in the content preceding these questions.
Which of the following paragraphs are required to be included in the audit report of an issuer client (except in case of adverse opinion or disclaimer of opinion)?
I. Critical audit matters.
II. Emphasis paragraph.
III. Opinion paragraph.
IV. Basis of opinion paragraph.
A. I and III only
B. I, II, and III only
C. III and IV only
D. I, III, and IV only
The correct answer is (D).
The opinion and basis of opinion paragraphs always form part of the audit report of an issuer client. Even if the auditor does not identify any critical audit matters, a paragraph on critical audit matters will need to be included.
If there are CAMs, need to communicate the CAMs in the audit report.
If there are no CAMs, include a statement in the auditor’s report that there are no CAMs.
However, emphasis paragraphs are required only if the auditor wants to draw the reader’s attention to matters, especially with respect to uncertainty and other optional circumstances.
Critical audit matters are:
A. Specific to each entity
B. Common for all entities
C. Common for all entities within a particular industry
D. None of the above
The correct answer is (A)
Critical Audit Matters are Matters communicated or required to be communicated to the audit committee and that:
Relate to accounts or disclosures that are material to Financial Statements
Involved especially challenging, subjective, or complex auditor judgment
The nature of these matters is such that specifying them as per a specific industry or entity is not possible. They depend entirely on an individual’s judgment and perception and their relevance in the given financial statements. A matter which is critical for one entity might not be critical for another entity within the same industry.
Jewel, CPA, audited the prior year financial statements of Infinite Co., a public company. These statements are presented with those of the current year for comparative purposes without Jewel’s audit report, which expressed a qualified opinion. In drafting the current year’s audit report, Crain, CPA, the successor auditor, should
I.Not name Jewel as the predecessor auditor
II.Indicate the type of report issued by Jewel
III.Indicate the substantive reasons for Jewel’s qualification
A. I only
B. I and II only
C. II and III only
D. I, II, and III
D.
If the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented, the successor auditor should not name the predecessor auditor in his or her current year audit report.
The successor auditor should indicate in the introductory paragraph of the report that the financial statements of the prior period:
- Were audited by another auditor
- The date of that report
- The type of report issued by the predecessor auditor
- If the report was other than a standard report, the substantive reasons
Which of the following would normally come first in an auditor’s report (Unmodified Opinion) of a non-issuer?
A. Opinion paragraph
B. Auditor’s Responsibility paragraph
C. Management’s Responsibility paragraph
D. Emphasis-of-Matter paragraph
The correct answer is (C).
The format for the Unmodified Opinion is:
TIM-AA (Timmmaaayyyyy)
Title
Introductory Paragraph
Management’s Responsibility
Auditor’s Responsibility
Audit Opinion
Note: If an Emphasis-of-Matter/Other-Matter is needed, then the format is TIM-AA EMO
Title
Introductory Paragraph
Management’s Responsibility
Auditor’s Responsibility
Audit Opinion
Emphasis-of-Matter/Other-Matter
Which of the following would not require an auditor to include an Emphasis-of-Matter paragraph in the audit report?
A. Uncertainty related to the outcome of an unusually important litigation or regulatory action
B. Existence of a going concern doubt
C. Financial statements are prepared in accordance with special purpose framework
D. Financial statements of the prior period were audited by the predecessor auditor, and the predecessor’s audit report is not reissued (Other-Matter-paragraph in the auditor’s report)
The correct answer is (D).
The Emphasis-of-Matter paragraph refers to a matter appropriately presented or disclosed in the Financial Statement that is of fundamental importance to the users’ understanding of the Financial Statement and needs to be emphasized in the Auditor’s Report.
Emphasis-of-Matter paragraph is included in the following cases:
Financial statements are prepared in accordance with the special purpose framework.
Existence of a going concern doubt.
Uncertainty related to the outcome of unusually important litigation or regulatory action, subsequent and events and related party transactions.
Changing prior period opinion.
Justified lack of inconsistency.
(A), (B) and (C) would require an auditor to include an emphasis-of-matter paragraph in his audit report.
If the financial statements of the prior period were audited by a predecessor auditor, and the predecessor’s audit report was not reissued, it would warrant an Other-Matter-paragraph in the auditor’s report.
An auditor of a public company includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph
A. Is considered an “except for” qualification of the opinion
B. Violates generally accepted auditing standards if this information is already disclosed in the notes to the financial statements
C. Necessitates a revision of the opinion paragraph to include the phrase “with the foregoing explanation”
D. Is appropriate and would not negate the unqualified opinion
The correct answer is (D).
In any report on financial statements, the auditor may emphasize a matter regarding the financial statements, while not affecting the auditor’s unqualified opinion. Such explanatory information should be presented in a separate paragraph of the report. One example is that the entity has had significant transactions with related parties.
(Editor’s note: Emphasis paragraphs are never required; they may be added solely at the auditor’s discretion. Other examples include that the entity is a component of a larger business enterprise and unusually important subsequent events.)
The other answer alternatives are false statements.
Answer (C) is incorrect because the use of phrases such as “with the foregoing explanation” in the opinion paragraph is specifically precluded by the standards if an emphasis paragraph is included in the audit report.
Which of the following phrases should be included in the opinion paragraph when an auditor expresses a qualified opinion on a public company’s financial statements?
When read in conjunction with Note X
With the foregoing explanation
A. Yes No
B. No Yes
C. Yes Yes
D. No No
D.
Neither phrase should be used.
Since accompanying notes are part of the financial statements, wording such as fairly presented, in all material respects, when read in conjunction with Note 1 is likely to be misunderstood and should not be used.
Phrases such as subject to and with the foregoing explanation are not clear or forceful enough and should not be used.
A qualified opinion should include the word except or exception in a phrase such as except for or with the exception of, for example, the opinion paragraph may start as follows.
In our opinion, except for the effects of…
Which paragraph of an audit report on a public company’s financial statements should include a reference to the auditing standards of the Public Company Accounting Oversight Board (PCAOB AS) and which paragraph should reference U.S. Generally Accepted Auditing Standards (GAAS)?
PCAOB AS
GAAS
A. Opinion Scope
B. Addressee Title
C. Basis for Opinion Auditor’s Responsibility
D. Title Introduction
C.
The auditing standards of the Public Company Accounting Oversight Board (PCAOB AS) should be referenced in the Basis for Opinion paragraph; U.S. Generally Accepted Auditing Standards (GAAS) should be referenced in the Auditor’s Responsibility paragraph.
PCAOB Unqualified Opinion:
TAO-BS
Title
Addressee
Opinion
Basis for Opinion (includes Accordance with PCAOB Standards)
Signature of Audit Firm
GAAS Unmodified Opinion:
TIM-AA
Title
Introductory
Management’s Responsibility
Auditor’s Responsibility (Audit in accordance with GAAS)
Audit Opinion
