AUD - Notes Chapter 1
Audited F/S – The Basics Basics The Independent Audit Function
What is the purpose of an audit? provide financial statement users with an opinion on whether the financial statements are presented fairly, in − To provide
all material respects, in accordance with GAAP (the applicable financial reporting framework! It gives credibility to the financials (auditors are unbiased and have no conflicts of interest
What does the applicable financial reporting framework (GAAP) include?
− It includes the conventions, rules, and procedures necessary to "!#! accepted accounting practice at a particular time!
What are management’s responsibilities? $! The preparat preparation ion and fair fair presentati presentation on of the the financial financial statements statements in accordanc accordancee with GAAP GAAP %! The design, design, implementatio implementation, n, & maintenance maintenance of internal internal controls controls relevant to the presenta presentation'p tion'prepar reparation ation of the f's ! Providing Providing the auditor auditor with access access to informati information on and persons persons within within the entity needed needed to comple complete te the audit audit
What are the auditor’s responsibilities? responsibilities? $! %! ! .! 0!
)*pressing )*pressing an opinion opinion on the the financia financiall statements statements based based on the the audit audit +aving appropriate appropriate competence competence and capabil capabilities ities to perform perform the audit audit omply omply with with ethi ethical cal re-uir re-uireme ements nts /aintain /aintain profes profession sional al scepti scepticism cism )*ercise )*ercise professiona professionall 1udgement 1udgement throughout throughout the the planning'pe planning'perform rforming ing of the audit audit
In order to express express an opinion the auditor auditor obtains reasonable reasonable assurance about whether the financial financial statements are free free from material misstatement! In order order to obtain reasonable reasonable assurance the auditor auditor must do what? $! %! ! .!
Plan the the work work and prop properl erly y superv supervise ise any any assista assistants nts 2eterm 2etermine ine and apply apply appro appropri priate ate mater materiali iality ty levels levels Identify Identify and assess risks risks of material material misstatem misstatement ent due to fraud fraud or error error 3btain 3btain suff suffici icient ent appro appropri priate ate audit audit evide evidence nce
"he auditor is unable to obtain absolute assurance that the financial statements s tatements are free from material misstatement because of inherent limitations! What are some of the inherent limitations? $! Those items items that involve managem management ent 1udgement, 1udgement, sub1ective sub1ective decisions decisions'assessm 'assessments, ents, or have a degree degree of uncertainty − Intangibles − Impairments − Asset life' salvage value − 4ad debt − 5arranties − 6awsuits %! Fraud ! )rrors
"he auditor should form an opinion on the f#s within a reasonable time period and should s hould achie$e a balance between the cost and benefit of an audit! It is impractical to address all info that ma% exist so what is absolutel% necessar% for the auditor to do in an audit? $! Plan the the audit audit so that that it it is perform performed ed effec effectiv tively ely %! 2irect effor efforts ts to areas most e*pected e*pected to contai contain n risk of material material misstatemen misstatementt and ! "se testing testing and other means means of e*amining e*amining popula populations tions for for misstateme misstatement nt
Professional Standards Standards Auditing #tandards
What are Generall% Accepted Auditing &tandards (GAA&)? − They guide the auditor in the performance of a properly planned and e*ecuted audit! − /easures of the -uality of the auditor7s performance! 1
AUD - Notes Chapter 1 ompliance with GAA# is mandatory on all audit engagements
'escribe some traits about &tatements on Auditing &tandards (&A&)! − Audits for nonissuers (private co! are issued by Auditing #tandards 4oard (A#4 in the form of #A#s 'escribe some traits about the Public ompan% Accounting $ersight *oard (PA*)!
− PA34 establishes auditing standards to be used in the preparation and issuance of auditing reports for issuers (public co! o A privately own company does not have to comply (they can choose to follow
"he Public ompan% Accounting $ersight *oard was established b% what? − The #arbanes83*ley Act of %99% #tandards for )ngagements 3ther than Audits What are standards for engagements other than auditing? $! #tatements on #tandards for Attestation )ngagements (##A) %! #tatement of #tandards for Accounting and :eview #ervices (##A:#
3ther Guidelines What does the AIPA ode of Professional onduct pro$ide? − Guidelines for behavior in the conduct of their professional affairs − Assurance to the public that the profession intends to maintain high standards − )nforce compliance with these standards by its members What do the &tatements on +ualit% ontrol &tandards re,uire? − Firms providing auditing, attestation, and accounting'review services to adopt a system of -uality control o
A -uality control system ; policies and procedures that are designed, implemented, and maintained to ensure that the firms complies with professional standards and appropriate legal and regulatory re-uirements
Auditing Guidance< The GAA# +ierarchy What are the le$els of auditing guidance?(pro$ide some traits about each one) $! AIPA #tatements of Auditing #tandards (#A#s and PA34 Auditing #tandards − Provides the most authoritative guidance − An auditor should use professional 1udgement in applying #A# or PA34 standards − Any departures from the re-uirements re-uire 1ustifications 2. Interpretive publications − Provides recommendations regarding how #A#s should be applied in specific situations − They are not accounting standards − Includes interpretations, e*hibits, guidance, and statements of position 3. 3ther auditing publications − They have no authoritative status, but may be helpful − Includes te*tbooks, publications, 1ournals, and articles
Auditors are re,uired to compl% with -------- for audits of nonissuers and -------- for audits of issuers! − =onissuers ; #tatements of #tandards (#A# − Issuers ; Public ompany Accounting 3versight 4oard (PA34 auditing standards 3verall 3b1ectives of the Auditor and the onduct of the Audit What are the o$erall ob.ecti$es of the auditor when conducting a financial statement audit? $! To obtain reasonable assurance about whether the financials are, as a whole, free from material misstatement due to error or fraud! %! To report on the financials and communicate their findings
What are the general re,uirements related to the conduct of the audit?('escribe each component) $! Professional skepticism ; the recognition that circumstances may e*ist that cause the financials to be materially misstated 2
%! ! .! 0!
AUD - Notes Chapter 1 )thical re-uirements ; follow the code of professional conduct including being independent in fact and appearance Professional 1udgement ; use 1udgement to interpret ethical re-uirements, GAA#, materiality, risk, etc! #ufficient appropriate audit evidence and audit risk ; to obtain reasonable assurance and therefore enabling the auditor to draw a reasonable conclusion on which to base their opinion on ompliance with GAA# ; comply with all GAA# relevant to the audit! An auditor may have to comply with other auditing re-uirements in addition to GAA#!
− )*amples ; PA34 standards, international standards on auditing (I#A, government auditing standards (GAGA#, or auditing standards of a specific 1urisdiction or country!
What would be examples of professional skepticism? − Performing additional audit procedures designed to obtain more reliable evidence! − 3btaining corroboration of management7s e*planations through consultation with a specialist! − "sing third party confirmations to provide support for management7s representations!
Reports on Audited F/S Forming an 3pinion on the Financial #tatements In order to form an opinion the auditor needs to e$aluate if the f#s are fairl% presented! /ow do %ou determine if the f#s is fairl% presented? − Accounting policies are consistent with GAAP and are appropriate − There are ade-uate disclosures about accounting policies, and material transactions'events − Accounting estimates are reasonable − Information is relevant, reliable, comparable, and understandable − The applicable financial reporting framework is identified and includes an ade-uate description of the framework
"nmodified Audit 3pinion When will an auditor express an unmodified opinion? − 5hen the auditor concludes that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework!
What are the elements of the auditor’s report?(describe some of the components)R $! %! ! .! 0! ?! @! ! B! $9! $$!
Title< Independent Auditor>s :eport Addressee< goes to the entity that engaged them Introductory Paragraph< own card /anagement>s :esponsibility for the F'#< own card Auditor>s :esponsibility< own card 4asis for (-ualified, adverse, or disclaimer opinion< described in later flashcard if not unmodified Auditor>s 3pinion< own card 3ther :eporting :esponsibilities< If the auditor uses other reporting responsibilities other than GAA# #ignature of the auditor Auditor>s Address< name of city and state where the auditor practices 2ate of the auditor>s :eport< shows the final date of auditor responsibility R A
What is included in the introductor% section? − Identify the entity whose f's have been audited − #tate the f's were audited − Identify the title of each f's − #pecify the dates or periods covered by each f's R A
What is included in the 0anagement 1esponsibilit% section?
/: PPP 2I/
)*planation that management is responsible for preparation and fair presentation of the f's in accordance with accounting principles generall% accepted in the "nited #tates!
AUD - Notes Chapter 1 #tatement that this responsibility includes the design, implementation, and maintenance of internal controls relevant to the preparation and presentation of f's that are free from material misstatement whether due to fraud or error! R A
What is included in the Auditor’s 1esponsibilit% section? A:) P:PA : 2 :)# − − #tatement that auditor’s responsibilit% is to express an opinion on the f's based on the audit − The audit was conducted with auditing standards generally accepted in the "nited #tates − The standards re-uire that the auditor plan and perform the audit to obtain reasonable assurance that f's are free
− − − − −
from material misstatement An audit involves performing procedures to obtain audit e$idence about the amounts and disclosures in the f's Procedures selected depend on the auditor>s .udgement , including the assessment of the risks of material misstatement of the f's The auditor considers internal controls relevant to the entity>s preparation'presentation of f's to design audit procedures that are appropriate An audit includes evaluating the appropriateness of the accounting policies used and the reasonableness of significant accounting estimates made by management as well as e$aluating the overall presentation of the f's The audit evidence obtained is sufficient and appropriate for an opinion
R A What is included in the opinion section? − #tatement that the f's present fairly the financial position of the entity as of the b's date and the results of
operations and its cash flows for the period are in accordance with accounting principles generally accepted in the "nited #tates!
What does it mean when that a statement was explicit $ersus implicit stated? − )*plicit ; precisely and clearly e*pressed or readily observable − Implicit ; implied though not directly e*pressed In response to an unmodified audit opinion GAA& is referenced in which section? GAAP is referenced in which section? − GAA# ; Auditor>s :esponsibility Paragraph − GAAP ; /anagement :esponsibility Paragraph And the opinion paragraph
/ow should audits of issuers make reference to auditing standards in the audit report? What about nonissuers? − Issuers (public co ; Include a reference to PA34 in the "!#! They should also make reference to GAAP − =onissuers (private co ; Include a reference to generally accepted auditing standards in the "!#! − )*ample ; C5e conduct our audits in accordance withD!E o If the auditor followed % sets of standards, mention them both! o
Audits of Group Financial #tatements What do audits of group financial statements mean and deal with?
− 5hen a large company has many divisions overseas and has a foreign auditor assist in the audit −
)*ample8 5al8/art operates in the "!#!, hina, anada, 4rail, apan, etc! As a "!#! PA firm, you need assistance with other foreign accounting firms for 5al8/art>s other divisions!
'efine the following terms2 3) component 4) component auditor 5) group engagement partner 6) group engagement team and 7) group financial statements! $! omponent ; an entity or business activity that prepares financial information that is included in group financial statements %! omponent auditor ; an auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit ! G) partner ; the partner or other person in the firm who is responsible for the group audit engagement and the auditor>s report on the group F'# .! G) team ; includes the engagement partner, other partners, and staff who establish the overall audit strategy, perform work, and evaluate the conclusions drawn from the audit evidence! 0! Group F'# ; financial statements that include financial information of more than $ component 4
AUD - Notes Chapter 1
What does it mean when an auditor makes reference to the component auditor $ersus when an auditor does not make reference to a component auditor? − If we reference a component auditor we are saying Hthat guy did the work, they are responsible if something
should come upH They are dividing up the responsibility o Group engagement partner finds it impractical to review the component auditor7s work o If you do not reference the component auditor it means that you trust him and are willing to take any blame for his incompetence! ou need to be able to trust his independence and reputation! o The group engagement partner must contact the component auditor and review the audit program and o working papers pertaining to the component
What should be stated in the auditor’s report on the group financial statements when making reference to the R A component auditor? − The Auditor>s :esponsibility J The auditor is dividing up the responsibilities when making reference
$! That the component was not audited by the auditor of the group statements, but was audited by the component auditor! %! The magnitude of the portion of the f's audited by the component auditor ! 5hen the component>s f's are prepared using a different financial reporting framework from the group f'sDstate the financial reporting framework used by the component and that the auditor of the group f's is taking responsibility for evaluating the appropriateness of the ad1ustments to convert the components f's to the group f's framework! .! 5hen the auditor>s report on the component>s f's does =3T state that the audit was performed in accordance with GAA# or PA34 standards!!! state the set of auditing standards used by the component auditor and that additional audit procedures were performed by the component auditor to meet the relevant re-uirements of GAA# 3pinion $! #tate it was Cbased on our audit and the report of other auditorsE
Types of 3pinions What are the t%pes of opinions and how would %ou end up with that opinion?
/ 3 2 I F I ) 2
$! "nmodified opinion ; clean! The f's are presented fairly in all material respects and the financial position, results of operations, and cash flows of the entity are in conformity with applicable financial reporting framework! If a material departure from GAAP is 1ustified, a "/ is still possible %! Kualified opinion ; material GAAP or GA## problem! #tates that e*cept for the effects of the matter(s to which the -ualification relates, the f's present fairly the financial positionDwith t he applicable financial reporting framework! o GAAP ; accounting policy, presentation, disclosures, and estimates o GAA# ; Insufficient evidence ! Adverse opinions ; very material (pervasive GAAP problems! The f's do not present fairly the financial positionDwith the applicable financial reporting framework! o GAAP ; accounting policy, presentation, disclosures, and estimates 5eak internal controls doesn>t necessarily mean adverse opinion .! 2isclaimer of opinion ; very material (pervasive GAA# problem! The auditor does not e*press an opinion because they were not able to obtain sufficient appropriate audit evidence to provide a basis for an opinion o GAA# ; Insufficient evidence, significant going concern uncertainty, or lack of independence
When would %ou withdraw from an audit? − The financial information is false, fraudulent, deceptive, or misleading When an auditor expresses an ad$erse opinion or a disclaimer of opinion on the f#s as a whole the auditor should not do what? − They should =3T include an unmodified opinion on a single f's or $L specific elements, account, or item on f's )mphasis8of8/atter and 3ther8/atter8Paragraphs 5
AUD - Notes Chapter 1
What is the purpose of the 8mphasis9of90atter Paragraphs? − The auditor may determine that it is necessary to add additional communications to the auditor >s report without
modifying the auditor>s opinion! "sed when referring to a matter that is appropriately presented or disclosed in the f's and is of such importance that it is fundamental to the users> understanding of the f's
What are some of the re,uired traits for an emphasis9of9matter paragraph in the auditor’s report? − #hould be placed immediately after the opinion paragraph − 2escribe the matter being emphasied and location of relevant disclosures of the matter in the f's − Indicate that the auditor>s opinion is not modified with respect to the matter emphasied What would cause an emphasis9of9matter paragraph to be re,uired? $! %! ! .!
There is doubt about the entity>s ability to continue as going concern To describe a 1ustified change in accounting principle that has a material effect (lack of consistency #ubse-uent discovered facts lead to a change in audit opinion The f's are prepared in accordance with an applicable special purpose framework
What would cause an emphasis9of9matter paragraph to possible be necessar% (use professional .udgement)? − A ma1or catastrophe having a significant effect on the entity>s financial position − #ignificant related party transactions − "nusually important subse-uent events − An uncertainty related to the outcome of unusually important litigation (no need if it is dis closed What is the purpose of the ther90atter Paragraphs? − "sed when referring to matters other than those presented or disclosed in the f's and that are relevant to the users>
understanding It is re-uired whenD o To report on supplementary information o 5hen an alert is included that restricts the use of the auditor>s report Identifies a material inconsistency in other information o The f's of the prior period were audited by a predecessor auditor and the predecessor>s audit report is not o reissued 5hen the current period f's are audited and presented in comparative form with compiled or reviewed f's o for the prior period o A report on compliance
Going oncern99 :nder International &tandards on Auditing the going concern period is -----? What about under :!&! auditing standards? − "nder I#As, the going concern period must be at least, but not li mited to, twelve months from the date of the f's being audited! − "nder "!#! auditing standards, the going concern period cannot e*ceed one year from the date of the f's being audited! o =ote< time reference should not be included in the auditor>s report
Going oncern99 What t%pes of procedures should the auditor perform to obtain e$idence about an entit%’s abilit% for going concern? − A2/IT# Analytical
procedures Debt compliance ; review the terms of debt and loan agreements :eview minutes ; from stockholder and 432 meetings In-uiry of client>s legal counsel Third party arrangements'agreements ; confirm the details of financial support arrangements Subse-uent events review
Going oncern99 What are t%pes of conditions or e$ents that ma% indicate substantial doubt about going concern?(Gi$e examples of each) − FI=) Financial
AUD - Notes Chapter 1 6oan defaults, dividend arrearages, denial of usual trade credit, debt restructuring, noncompliance with capital re-uirements, new financing sources or methods, or disposal of substantial assets Internal matters 5ork stoppages, labor difficulties, substantial dependence on a particular pro1ect, uneconomic long8term commitments, or significant revision of operations Negative trends :ecurring losses, working capital deficiencies, negative cash flows, and adverse financial ratios E*ternal matters 6egal proceedings, new legislation, loss of a key franchise, license, or patent, natural disaster, and loss of a principal customer or supplier
Going oncern99 When an auditor belie$es that there is substantial doubt about an entit%’s abilit% to continue as a going concern the auditor is re,uired to consider management’s plans for dealing with the conditions or e$ents (mitigating factors) that led to the auditor’s beliefs! What must this plan include? − Plans to borrow money or restructure debt − Plans to sell assets − Plans to delay or reduce e*penditures (delay'postpone due dates can also lease rather than purchase − Plans to increase ownership e-uity (sell stock Going oncern99What t%pes of words must be included in the auditor’s report when there is a going concern R A issue? − )mphasis8of8/atter $! C#ubstantial doubtE (significant doubt for I#A %! CGoing concernE ! 2raw attention to the f's and state the areas of concern 2o not mention Creasonable period of time, not to e*ceed one yearE
Going oncern99 When an auditor belie$es there is substantial doubt about the abilit% of the entit% to continue as a going concern for a reasonable time period what items should be included in the audit documentation? $! %! ! .! 0!
The conditions or events that gave rise to the substantial doubt Any mitigating factors that the auditor considers significant Audit work performed to evaluate management>s plans The auditor>s conclusion about whether substantial doubt remains or is alleviated The effect of the auditor>s conclusion on the evaluation of the f's and related disclosures and on the resulting auditor>s report
Going oncern;When would different t%pes of opinions occur in relations to going concern? − If the entity>s disclosures are ade-uate ; unmodified with an emphasis8of8matter paragraph − If the entity>s disclosures are inade-uate ; -ualified or adverse with an emphasis8of8matter paragraph − If disclosures are ade-uate, but there is a significant going concern uncertainty ; disclaimer onsistenc%;A lack of consistenc% is one reason an emphasis9of9matter paragraph would be needed! What does a lack of consistenc% mean? − This deals with the comparability of the f's from year to year! − If the auditor doesn>t say there is a lack of consistency, the f's are comparable between periods! (implicitly stated − The issue of comparability is affected by changes in accounting principle or by an ad1ustment to correct a material misstatement in a previously issued f's orrection of errors of a principle always re-uire an )838/ paragraph o A change of principle depends on certain factors o orrection of mathematical errors or changes in estimates do =3T affect the auditor>s report
onsistenc%;When e$aluating the acceptabilit% of an accounting principle what should the auditor consider? $! %! ! .!
If the new principle is in accordance with the applicable financial reporting framework If the method of accounting for the change is acceptable The disclosures related to the change are appropriate and ade-uate The entity has 1ustified that the new principle is preferable
onsistenc%;What t%pe of opinions can occur in relations to a lack of consistenc%? 7
AUD - Notes Chapter 1 If all . criteria are met, then the opinion can be unmodified with an )838/ paragraph =ote< the auditor will not say that they concur e*plicitly with the change If not all . are met, then consider the change in principle is un1ustified and the auditor should issue an adverse or -ualified opinion (not disclaimer o 5hen management does not provide reasonable 1ustification that a change in accounting principle is preferable and it presents comparative F#, the auditor should e*press a -ualified opinion each year that the f's initially reflecting the change are presented If the change has an immaterial impact, then you do not need to mention it at all in the auditor>s report
GAAP Issues< Kualified or Adverse 3pinion What are the 4 t%pes of GAAP issue opinions and what would cause that t%pe of opinion for each? $! Kualified ; material issue w' accounting policy, presentation, disclosures, and'or estimates %! Adverse ; material and pervasive issue w' accounting policy, presentation, disclosures, and'or estimate o The type of opinion is determined by 1udgement o "n1ustified'unreasonable estimates, un1ustified policies, departures, and violations< Policies don>t follow GAAP or there is an error in the application F'# do not fairly present transactions and events that achieves fair presentation F'# are missing disclosures (e*ample ; related party transactions or they don>t follow GAAP :e-uired info (cash flow, etc! has not been included If there are no GAAP issues or they are immaterial ; unmodified opinion GAAP allows different methods for inventory as long as disclosed ; unmodified 5eak internal controls doesn>t necessarily mean adverse opinion R A
What changes in the auditor’s report when a ,ualified or ad$erse opinion is gi$en? − The Auditor>s :esponsibility paragraph is modified<
Amend to audit evidence obtained is sufficient and appropriate for a -ualified or adverse opinion The report will include a 4asis for CKualified or AdverseE 3pinion paragraph which goes immediately before the opinion paragraph< o +ave a description and -uantification of the financial effects of any misstatement that relates to specific amounts in the f's An e*planation of how disclosures are misstated (if any o o A description of the nature of omitted info (if any 3pinion paragraph is modified to say C-ualified or adverse opinionE paragraph< o Kualified opinion ; #tate that in the auditor>s opinion, e*cept for effects of the matter(s described in the basis for a -ualified paragraph, the f's are presented fairly in accordance with the applicable financial reporting framework (operationsDcash flowsD Adverse opinion ; #tate that in the auditor>s opinion, because of the s ignificance of the matter(s o described in the basis for an adverse paragraph, the f's are not presented fairly in accordance with the applicable financial reporting framework (operationsDcash flowsD o
GAA# Issues< Kualified or 2isclaimer 3pinion What are the 4 t%pes of GAA& issue opinions and what would cause that t%pe of opinion for each? $! Kualified ; material issue with insufficient evidence (scope limitation %! 2isclaimer ; material and pervasive issue with insufficient evidence (scope limitation, significant going concern uncertainty, and'or lack of independence o #cope limitations8 circumstances< 5hen an auditor wasn>t engaged at the beginning of the year when opening inventory should have been observed (disclaimer The PA was not independent (disclaimer 88 They read the f's for obvious material misstatements! The f's were unaudited (disclaimer 5hen certain circumstances prevent the auditor from performing a specific procedure (unless an auditor can obtain sufficient evidence by performing alternative procedures! There is also no need for an )838/ paragraph in this situation If alternative procedures cannot be applied, but satisfactory evidence for all other items in the f's is present ; disclaimer o #cope limitations8 management< (all disclaimer 8
AUD - Notes Chapter 1 onfirming A': was denied onsolidated subsidiary info denied or is unable to be obtained Audit restrictions Inade-uate accounting records =o management representation letter signed lient lawyers denied If there are no GAA# issues or they are immaterial ; unmodified opinion
When management causes a scope limitation what t%pe of opinion should be gi$en? − A -ualified'disclaimer opinion or they should withdraw from the engagement (=)M): adverse If an auditor cannot obtain appropriate audit e$idence due to management9imposed limitations and the possible effects of an% undetected misstatements could be material and per$asi$e the auditor should withdraw from the engagement! What would cause an auditor from being able to withdraw? − If the auditor has substantially completed the audit 3: the audit is re-uired by law or regulation R A
What changes in the auditor’s report when a ,ualified or disclaimer opinion is gi$en? − The Auditor>s :esponsibility paragraph is modified<
Kualified ; Amend to say audit evidence obtained is sufficient and appropriate for a -ualified opinion o 2isclaimer ; #tate that their responsibility is to e*press an opinion on the f's based on conducting the audit in accordance with auditing standards generally accepted in the "!#! 4ecause of the matter(s described in the basis for a disclaimer paragraph, however, we were not able to obtain s ufficient appropriate audit evidence to provide a basis for an audit opinion! The report will include a 4asis for CKualified or 2isclaimerE 3pinion paragraph which goes immediately before the opinion paragraph< o 2escribe the reasons for the inability to obtain sufficient appropriate audit evidence 3pinion paragraph is modified to say C-ualified or disclaimer opinionE paragraph< Kualified opinion ; #tate that in the auditor>s opinion, e*cept for effects of the matter(s described in the o basis for a -ualified paragraph, the f's are presented fairly in accordance with the applicable financial reporting framework (operationsDcash flowsD 5hen an auditor -ualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the -ualification pertains to Cthe possible effects on the financial statementsE and not to the scope limitation itself! o 2isclaimer opinion ; #tate that in the auditor>s opinion, because of the significance of the matter(s described in the basis for a disclaimer paragraph, we have not been able to obtain sufficient appropriate evidence to provide an opinion! Therefore, we do not e*press an audit opinion A disclaimer of opinion will also re-uire modification in the introduction paragraph< Amend to state that the auditor Cwere engaged to auditE instead of Chave auditedE the f'sD o o
If an auditor is not independent but is re,uired b% law to report on f#s what t%pe of opinion should be gi$en? − A disclaimer If an auditor has no audit work what t%pe of opinion should be gi$en? − There should be no audit opinion &ummar% < What t%pe of opinion relates to a group audit and what are a few traits? − "nmodified o o
=o emphasis8of8matter paragraph =o basis for opinion paragraph
&ummar% < What t%pe of opinion relates to a going concern and what are a few traits? − Ade-uate disclosures ; unmodified es emphasis8of8matter paragraph o =o basis for opinion paragraph Inade-uate disclosures (GAAP ; -ualified or adverse es emphasis8of8matter paragraph o o es basis for opinion paragraph #ignificant going concern uncertainty (GAA# ; disclaimer o
AUD - Notes Chapter 1 =o emphasis8of8matter paragraph es basis for opinion paragraph
&ummar% < What t%pe of opinion relates to a lack of consistenc% and what are a few traits? − ustified ; unmodified es emphasis8of8matter paragraph o =o basis for opinion paragraph "n1ustified ; adverse or -ualified es emphasis8of8matter paragraph o es basis for opinion paragraph o Immaterial ; do not mention it in the report o
&ummar% < What t%pe of opinion relates to a misstatement (GAAP) and what are a few traits? − Immaterial ; unmodified =o emphasis8of8matter paragraph =o basis for opinion paragraph o /aterial ; -ualified o =o emphasis8of8matter paragraph es basis for opinion paragraph o /aterial and pervasive ; adverse o =o emphasis8of8matter paragraph o es basis for opinion paragraph o
&ummar% < What t%pe of opinion relates to a scope limitation (GAA&) and what are a few traits? − Immaterial ; unmodified =o emphasis8of8matter paragraph =o basis for opinion paragraph o /aterial ; -ualified o =o emphasis8of8matter paragraph o es basis for opinion paragraph /aterial and pervasive ; disclaimer =o emphasis8of8matter paragraph o o es basis for opinion paragraph o
&ummar% < What t%pe of opinion relates to an uncertaint% (GAAP and GAA&) and what are a few traits? − =o material misstatement & there is sufficient evidence ; unmodified /aybe emphasis8of8matter paragraph =o basis for opinion paragraph o /aterial misstatement (GAAP ; -ualified or adverse o =o emphasis8of8matter paragraph es basis for opinion paragraph o Insufficient evidence (scope limitationNGAA# ; -ualified or disclaimer o =o emphasis8of8matter paragraph o es basis for opinion paragraph o
Reports on Comparative Statements :eporting with 2ifferent 3pinions What is the main difference on the auditor’s report when going from an unmodified opinion in the prior %ear to R A a ,ualified opinion for the current %ear? − 3pinion Paragraph o
#tate, in our opinion, e*cept for the effects on the %9$O f's of matter(s described in the basis for a -ualified paragraph, the f's are presented fairly!
"pdating'hanging Prior 3pinions
AUD - Notes Chapter 1
When reporting on comparati$e financial statements (prior %ear and current %ear are presented) an auditor should change the pre$iousl% issued opinion (for example an ad$erse or ,ualified) on the prior %ear=s financial statements if what happens? − The prior year7s f's are restated to conform with generally accepted accounting principles! o
Indicate that the f's have been restated and should e*press an unmodified opinion with respect to the restated f's!
If during the current examination the auditor becomes aware of e$idence that affects the prior statements and opinion that was expressed what should the auditor do? − "pdate the opinion in the current year>s report − ou only update'change an opinion when the entity is not in conformity with GAAP If the updated#changed opinion differs from the pre$ious opinion the auditor should disclose the reason(s) in R A the auditor’s report! What items should be disclosed? − 3nly 23:# change their mind − In the emphasis8of8matter or the other8matter paragraph discloseD 2 J 2ate of the auditor>s previous report 3 J 3pinion type previously issued : J :eason for prior opinion J hanges that have occurred # J #tatement that the CopinionDis differentE
Prior Period F'# audited by a Predecessor Auditor What should the prior#old (predecessor) PA do when the% are deciding to present (reissue) their audit report? − :ead the current period statements − ompare the statements audited with the current period statements
− 3btain a letter of representation from the successor auditor − 3btain a letter of representation from management o
If the report is unrevised use the original report date in any reissue If the report is revised use the dual date
What should the current#new (successor) PA do when the% do not present (don’t reissue) the predecessor’s R A audit report? − They should e*press an opinion on the current period f's only − In the other8matter paragraph they should indicateD o o
The f's of the prior period were audited by a predecessor auditor (do not name them The type of opinion e*pressed by the predecessor auditor If it was modified, give the reasons The nature of any emphasis8of8matter or other8matter paragraph included in the predecessor audit>s report The date of the predecessor auditor>s report
Prior Period F'# =ot Audited If the prior period financial statements were not audited re$iewed or compiled what needs to be shown? − The f's should be clearly marked and − The auditor>s report should include an other8matter paragraph to indicate that the auditor did not audit the prior period f's and the auditor assumes no responsibility for them!
When the prior %ear’s f#s were not audited and the current %ear’s f#s are being audited what t%pe of opinion should be issued? − 2isclaimer (like a scope limitation may be re-uired on items
Events Occurring After ear!End #ubse-uent )vents &ubse,uent e$ents are e$ents or transactions that occur after the balance sheet date but before the f#s are issued! What are the 4 t%pes of subse,uent e$ents?(describe them) 11
AUD - Notes Chapter 1 Type I events ; conditions on or before the balance sheet date These are recognied events o o :e-uires a F'# ad1ustment
A large A': was included in the f's, but before the f's was issued, it was written off due to the customer filing bankruptcy
Type II events ; conditions e*isting after the balance sheet date These are nonrecognied events o o /ay re-uire footnote disclosure The company closed the purchase of a competitor after the 4'# date, but before f's were issued
What is the auditor’s responsibilit% (t%pe of procedures do the% need to perform) for subse,uent e$ents? − P:I/) is included in year8end fieldwork Post
balance sheet transactions ; review for proper cutoff and to better evaluate year8end balances R epresentation letter should be obtained from mgmt ; about events that need ad1ustmnts'disclosures In-uiry of mgmt ; if sub! events have occurred that could effect f'sD e* litigation, claims, new info Minutes of stockholders, directors, and other committee meetings should be read during sub! period E*amine latest available interim F'# and compare them with the F'# under audit
What is the auditor’s responsibilit% after the original date of the auditor’s report? − The auditor has no active responsibility! − +owever, if the auditor becomes aware of a subse-uent event, the auditor must use professional 1udgement to
decide whether to ad1ust the F'# or disclosures if the information e*isted at the report date If the auditor believes the f's need to be revised to reflect the sub! event and mgmt! doesn>t make the revision, a -ualified or adverse opinion should be issued If ad1usts are made after the original date of the auditors report, the auditor may dual date the report o which e*tends their responsibility on that specific sub! event )*! Can, %$, %9$0, e*cept for =ote %, as to which the date is Feb , %9$0E If they decide not to dual date, the auditor takes responsibility for all sub! events up to that later date
#ubse-uent 2iscovery of Facts after the :eport :elease 2ate< (we missed something :suall% an auditor has no obligation to make continuing in,uiries after the date of the report! /owe$er if the auditor becomes aware of material information (something the auditor missed) that would ha$e affected the report the auditor should take appropriate action! What actions should the auditor take? − First ; 2etermine whether there are persons currently relying on, or likely to rely on, the f's and whether those persons would attach importance to the information! − Advise the client to issue revised f's describing the reasons for the revision − Advise the client to make the necessary disclosures and revisions to the f's − Provide notification that the f's cannot be relied upon if the effects on the f's cannot be determined on a timely basis
If the client refuses to follow procedures what should the auditor do? − =otify the board of the directors of the refusal and that they will take additional steps to prevent further reliance
on the auditor>s report and f's C2A:E them to fi* it o Dissociate with the client ; notify the client t hat the auditor>s report must no longer be associated with the f's o Alert agencies ; notify any regulatory agencies that the auditor>s report should no longer be relied on o R elying parties ; notify any relying parties that the auditor>s report is no longer to be relied on
3mitted Audit Procedures 2iscovered after #ubmission of the Audit Program< (we forgot to do it mitted audit procedures ma% be disco$ered after the audit report has been submitted during a firm’s internal inspection program or during peer re$iew! What actions should the auditor take? − Auditor should determine whether other audit procedures were ade-uate to compensate for the omitted audit procedures o If so, no further action is necessary 12
AUD - Notes Chapter 1 If not, apply the omitted procedures (or alternative procedures =ote< If the auditor did not perform the omitted or alternative procedures, this would impair the auditor>s ability to support the previously issued option
Reporting on Other "nformation 3ther Information in 2ocuments ontaining Audited Financial #tatements >re,uentl% audited f#s are incorporated into other documents such as annual reports to the shareholders or reports b% charitable orgs! to the general public! Generall% an auditor is not responsible for determining whether other info in the documents is properl% stated but the auditor should read the other info because of the credibilit% of the audited f#s ma% be undermined if there are material inconsistencies or material misstatement of fact between the audited f#s and the other info! What should the auditor do if the% identif% a material inconsistenc% or misstatement of fact? − The auditor should determine whether the audited f's or the other info! need to be revised! o
If the material inconsistency relates to the audited f's and management refuses to change'eliminate the issue then modify the opinion If the material inconsistency relates to other info and management refuses to change'eliminate the issue then the auditor should communicate this matter to those charged w' governance andD Include in the auditor>s report an other8matter paragraph describing the material inconsistencies 5ithhold the use of the report 5ithdraw from the engagement and consult with legal counsel if it was false, fraudulent, deceptive, or misleading
:eporting on #upplementary Information &upplementar% information is info presented outside the basis f#s that ma% be presented in a document containing the audited f#s or separate from the f#s! An auditor ma% be engaged to report on the supplementar% info! What are the ob.ecti$es in this t%pe of engagement? $! )valuate the presentation of the sup! info in relation to the f's as a whole 2. To report on whether the sup! info! is fairly stated, in all material respects in relation to the f's as a whole − In order to report on this information though, an auditor must perform sufficient audit procedures
When reporting on supplementar% information what are the auditor’s responsibilities when re,uired b% GA&* or >A&*? − Apply certain limited procedures to the re-uired supplementary information, and In-uire of management about methods used to prepare the sup! info o 2etermine if the sup! info is consistent with management>s responses and audited f's o 3btain an understanding of the methods used to prepare the info )valuate the appropriateness and completeness of the info o 3btain written management representations regarding the re-uired sup! info o Add an other8matter paragraph to the financial statement audit report! o #tate that the re-uired sup! info is included and the re-uired procedures has been applied or o #tate that the re-uired sup! info has some deficiencies and'or omissions and disclai m an opinion o
:eports on Application of the :e-uirements of an Applicable Financial :eporting Framework A reporting accountant is an accountant who prepares a written report on 3) the application of the re,uirements of an applicable financial reporting framework to a specific transaction or 4) the t%pe of report that ma% be rendered on a specific entit%’s f#s! What are some other traits about the reporting accountant? − They may =3T report on hypothetical transactions! A proposed transaction is okay as long as the transaction involves the facts and circumstances of a specific entity They are =3T re-uired to be independent If they are not independent they must state that in the accountant>s report o If the transaction is audited by another PA, the reporting accountant should consult with the continuing accountant to ascertain all the available relevant facts o
AUD - Notes Chapter 1 The accountants report should be restricted only to management, 432, or specific parties
What items should be included in the accountant’s report? $! 2escribe the nature of the engagement %! )ngagement was performed in accordance with AIPA standards ! Identification of the specific entity, the specific transaction, statement of relevant facts, circumstances, and source of info .! #tatement saying management is responsible for proper accounting treatment 0! #tatement saying that any difference in facts, circumstances, etc! may change the report ?! If the accountant is not independent, a statement stating their lack of independence @! A separate paragraph restricting the use of the report to specific parties only
:eporting on F'# Prepared in Accordance with a Financial :eporting Framework Generally Accepted in another ountry *efore reporting on the financial statements of a :!&! entit% that ha$e been prepared in accordance with a financial reporting framework generall% accepted in another countr% an auditor practicing in the :!&! should do what? − "nderstand the purpose for which the f's are prepared 2one by obtaining a written representation letter from management "nderstand whether the financial reporting framework is a fair presentation framework "nderstand the intended users of the f's "nderstand the applicable legal responsibilities involved if the auditor plans to use the form and content of the auditor7s report of another country! o
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