State the primary purpose of an audit
To provide financial statement users with an opinion on whether the financial statements are fairly presented, in all material respects, in accordance with the applicable financial reporting framework
Identify 3 inherent limitations of an audit
The nature of financial reporting
The nature of audit procedures
Timeliness reporting and the balance between benefit and cost
Which standards provide the most authoritative U.S. auditing guidance for nonissuers, and who issues those standards?
Nonissuers: Statements on Auditing Standards (SASs), issued by the AICPA Auditing Standards Board.
Issuers: Auditing Standards (ASs), issued by the PCAOB plus all SAS adopted by the PCAOB
Describe the role of the IAASB and the use of ISAs.
IAASB is a standard-setting board of the IFAC that established ISAs.
Currently, over 100 countries are using or are in the process of adopting ISAs
ISAs do not override local laws/regulations or national standards that govern the audits of financial state
What are the 5 general GAAS requirements related to the conduct of an audit?
SEJEC
Professional Skepticism
Ethical Requirements
Professional Judgment
Sufficient and Appropriate Audit Evidence
Compliance with GAAS
List in order the primary sections of an unmodified audit opinion
Title
: Independent Auditor's Report
Addressee
: Based on the circumstances of the engagement
Introduction
: We have audited the accompanying financial statements of....
Management's Responsibility for the Financial Statements
: Management is responsible
What should be included in the introductory paragraph of the unmodified audit opinion?
The entity whose financial statements have been audited
A statement that the financial statements were audited
The title of each financial statement audited
Dates or period covered by each financial statement
What should be included in the Management's Responsibility paragraph of the unmodified audit opinion?
An explanation that management s responsible for the preparation and fair presentation of the financial statements
A statement that this responsibility includes the design, implementation, and maintenance of internal control
What should be included in the Auditor's Responsibility paragraph of the unmodified audit opinion?
A statement that it is the auditor's responsibility to express an opinion on the financial statements based on the audit
A statement that the audit was conducted in accordance with auditing standards generally accepted in the US
A statement that standards
What should be included in the opinion paragraph of the unmodified audit opinion?
A statement 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 operations and its cash flows for the period then ended, in accordance with the applic
Where is the standard unmodified opinion does the auditor refer to
1. the applicable financial reporting framework and
2. generally accepted auditing standards
1. the applicable financial reporting framework is referred to in the management's responsibility paragraph and opinion paragraph
2. GAAS is referred to in the auditor's responsibility paragraph
Identify the key differences in the auditor's report under US GAAS and the ISAs.
Under ISAs, not GAAS:
The introductory paragraph refers to the summary of significant accounting policies and other explanatory information
The report may refer to "the preparation and fair presentation of the financial statements" (consistent with GAAS)
Define a component auditor.
A component auditor is an auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit. The component auditor may be part of the group engagement partner's firm, a network firm, or another f
Identify the two requirements that are necessary to reference a component auditor in the auditors report.
Reference to the component auditor in the auditor's report can be made if the following requirements are net:
The component auditor has performed an audit in accordance with GAAS, or when required, the PCAOB
The component auditor's report is not restricte
What are the responsibilities f a group engagement partner (team) when it assumes responsibility for the work of a component auditor?
No reference to the component auditor is made in the auditor's report
If the component is a significant component due to its individual financial significance, it should be audited by a group engagement team or the component auditor
When a component is de
When should an auditor's opinion be modified?
A modification to the auditor's report is necessary when:
the auditor determines that the financial statements as a whole are materially misstated (GAAP issue); or
the auditor is unable to obtain appropriate audit evidence to conclude that the financial s
What is the purpose of an emphasis-of-matter paragraph?
The purpose of an emphasis-of-matter paragraph is to reference a matter that is appropriately presented in the financial statements, but is of such importance that it is fundamental to the user's understanding of the financial statements.
What are the reporting requirements for an emphasis-of-matter paragraph?
Reporting requirements for an emphasis-of-matter paragraph include:
Placing the paragraph immediately after the opinion paragraph
Using the heading "emphasis-of-matter" or another appropriate heading
Describe the matter being emphasized and the location o
What what circumstances would an emphasis-of-matter paragraph be required in an auditor's report?
the auditor determines there is substantial doubt regarding the entity's ability to continue as a going caner for a reasonable time period;
there is a need to describe a justified change in accounting principle that has a material effect of the entity's f
What are the reporting requirements for an other-matter paragraph?
Placing the paragraph immediately after the opinion paragraph and after any emphasis-of-matter paragraph
Using the heading "Other matter" of another appropriated heading
Describing the matter being emphasized and the location of relevant disclosures, if a
Under what circumstances would an auditor use an other-matte paragraph in the auditor's report?
the auditor includes an alert in the audit report that restricts its use;
facts are subsequently discovered that lead to a change in auditor's opinion;
prior period financial statements were audited by the predecessor auditor and the predecessor's audit r
Evidence from wha auditing procedures may lead the auditor to conclude that there is a significant doubt about an entity's ability to continue as a going concern?
ADMITS
Analytical procedures
Debt compliance
Minutes
Inquiry of client's legal counsel
Third parties
Subsequent events review
What conditions and events may indicate substantial doubt about an entity's ability to continue as a going concern?
FINE
Financial difficulties
Internal matters, such as labor difficulties, substantial dependence on a particular matter, etc.
Negative trends
External matters, such as legal proceedings, loss of a principle customer, natural disasters, etc.
According to US Auditing Standards, what phrases must be included in a going concern emphasis-of-matter paragraph?
Substantial doubt"
and
"Going concern
What is the going concern period for
1. US GAAS and
2. ISA
1. The going concern period should not exceed one year
2. The going concern period may be greater than or equal to one year
When there is a year-to-year lack of comparability (consistency) in an entity's financial statements due to an acceptable change in accounting principle, how does the auditor reflect this in the current year's auditor's report?
When the auditor concludes that a change in accounting principle is acceptable, the auditor should include an emphasis-of-matter paragraph in the auditor's report describing the change in accounting principle and provide a reference to the entity's disclo
How is an alert that restricts the use of the auditor's written communication reflected in the auditor's report and what times should be included in the alert?
An other-matter paragraph is used to restrict the use of the auditor's report when required by GAAS or when the auditor deems it necessary.
The alert that restricts the use of the auditor's written communication included:
A statement that the auditor's wr
When would an auditor use professional judgment to determine whether to issue a qualified opinion of an adverse opinion?
When audit evidence indicates that there is material misstatement of the financial statements
A qualified opinion is issued when the auditor concludes that misstatements, individually or in aggregate, are material but not pervasive to the financial statem
Describe the circumstances in which a material misstatement of the financial statements may arise.
The appropriateness of accounting policies
The application of accounting policies
The appropriateness of the financial statement presentation
The appropriateness or adequacy of disclosures in the financial statements
When would an auditor use professional judgment to determine whether to issue a qualified opinion or a disclaimer of opinion?
Where there is a limitation on the scope of the audit
A qualified opinion is issued when an auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion and the auditor determines that the possible effects could be materia
If an opinion is modified, where does the paragraph explaining the modification appear?
The paragraph explaining the modification would appear PRIOR to the opinion paragraph. The "basis for modification" paragraph should use the appropriate heading
Identify some causes of scope limitations.
Restrictions on the auditor's ability to perform auditing procedures may be caused by:
Circumstances
Management
Inability to observe inventory
Inability to confirm receivables
Refusal of the client's attorney to respond to inquiry
Refusal of management to
The auditor's report should not be dated earlier than the date on which the auditor has obtained sufficient audit evidence. This should include evidence that what three things have occurred?
Evidence that:
1. audit documentation has been reviewed
2. financial statements have been prepared; and
3. management has taken responsibility for the financial statements
What situations may result in a disclaimer of opinion in an audit report?
Pervasive inability to obtain sufficient appropriate audit evidence
Lack of independence (always results in disclaimer)
going concern uncertainty (Note: If adequate disclosure of going concern exists, the auditor may choose between an unmodified opinion w
Compared to a standard unmodified opinion, determine the paragraphs that are modified in an audit report when the following opinions are issued:
Qualified
Adverse
Disclaimer
Qualified
Intro: Standards
Mgt. Responsibility: Standard
Auditor Responsibility: Name type of modified opinion
Basis for Opinion: Add
Opinion: Except for
Adverse
Intro: Standard
Mgt. Responsibility: Standard
Auditor Responsibility: Name type of modified o
How do uncertainties affect the auditor's report?
Uncertainty: Management's analysis of uncertainty is supported and properly reported or disclosed
Opinion: Unmodified opinion with no reference to uncertainty
(Note: The auditor may add an emphasis matter paragraph if the auditor determines that further e
According to US GAAP, when are contingencies (such as pending litigation) required to be:
accrued and disclosed?
disclosed only?
Probably
Can estimate loss amount: accrue and disclose; disclose
Cannot estimate loss amount: disclose
Reasonably possible
Can estimate loss amount: Disclose
Cannot estimate loss amount: Disclose
Remote
May ignore. (Should disclose if a "guarantee type" c
If, during the current examination of comparative financial statements, the auditor discovers evidence that affects the prior statements and the opinion that was expressed, what action should be taken?
Only
DOCRS
change their mind!
The auditor should update the opinion in the current year's report. If the opinion differs from the previous opinion, the reasons should be disclosed in a separate emphasis-of-matter or other-matter paragraph following the opinion paragraph.
The explanato
The predecessor auditor should take what steps before reissuing an audit report on prior period financial statements?
Read the statements for the current period
Compare the previous audited statements with the current period statements
Obtain a letter of representation from the successor auditor
Obtain a letter of representation from management at or near the date of res
What statements should be included in the auditor's report in an other-matter paragraph when comparative financial statements are presented and the prior auditor's report is not reissued?
The other-matter paragraph should include the following:
1. A statement that the financial statements of the prior period were audited by the predecessor auditor
2. The type of opinion by the predecessor auditor. If the opinion was modified, include the r
What is the effect on the audit report when the current period financial statements are audited and presented in comparative format with prior period financial statements that were not audited?
If the prior period statements were reviewed or complied, an other-matter paragraph is added that includes:
A describe of the service performed in the prior period;
the date of the prior period report;
a description of any material modifications in the re
Define the two types of subsequent events
A recognized subsequent events related to a condition that existed on or before the balance sheet date. Recognize subsequent events require financial statement adjustment
A non-recognized subsequent event occurs after the balance sheet date. Non-recognize
What procedures should the auditor perform during the subsequent period?
PRIME
Between the date of the financial statements and the date of the auditor's report (subsequent period), the auditor should:
Review post balance sheet transactions
Obtain a rep letter from management describing events that occurred during the subsequent per
After the date of the auditor's report, what actions should an auditor take regarding subsequent events?
None. Although the auditor is responsible for investigations subsequent events until the date of the auditor's report, the auditor has no active responsibility to make inquiries or perform auditing procedures after the date.
When and why is dual dating used?
Dual dating is used when subsequent events requiring financial statement adjustment or disclosure come to the auditor's attention after the original date of the audit report. Dual dating extends the auditor's responsibility only for the particular subsequ
After issuance of the report, what actions should an auditor take upon discovering information that materially affects the report?
Determine whether there are persons relying or likely to rely on the financial statements
Advise the client to immediately disclose the new information to persons currently relying or likely to rely on the financial statements. This disclosure may take th
What actions should an auditor take upon discovering committed audit procedures?
The auditor should:
1. Determine whether other procedures were adequate to compensate for the omitted procedures
2. If not, and if there are people likely to be relying on the report, apply the omitted (or alternative) procedures
3. If facts emerge that s
What is the auditor's responsibility with respect to information accompanying the basic financial statements in a client-prepared document?
The auditor should read the other information to determine that it is consistent with the audited financial statements and that there are no material inconsistencies or material misstatements of fact.
The auditor may (but is not required to) report on the
What are the two objectives of engagements to report on supplementary information?
1. To evaluate the presentation of the supplementary information in relation to the financial statements as a whole
2. To report on whether the supplementary information is fairly states, in all material respects, in relation to the financial statements a
What procedures would an auditor perform related to supplementary information that accompanies the financial statements and is required by a designated accounting standards setter, such as the FASB?
Apply limited procedures, which includes:
Inquiry regarding how the supplementary information was prepared, including changes from prior years and significant assumptions used.
Determining whether the methods used are consistent with management's response
List several features of a report on the application of the requirements of an applicable financial reporting framework
Description of engagement, entity, and transaction
Reference to AICPA standards
Description of the appropriate application of the requirements of the applicable financial reporting framework to the specific translation or type of report
Prepares are respo
When accepting an engagement to audit financial statements prepared in accordance with a financial framework generally accepted in another country, the auditor should obtain an understanding of:
The purpose for which the financial statements are prepared.
Whether the financial reporting framework is a fair presentation framework
The intended users of the financial statements
The steps taken by management to ensure that the applicable financial re
What are the reporting option for the financial statements prepared in accordance with a financial reporting framework generally accepted in another country when the financial statements will be distributed outside the US only?
What if the financial state
Distributed outside the US only
Report form or the other country or the report sent out in the ISAs (if applicable); OR
US style report modified to refer to the financial reporting framework generally accepted in another country
Distributed within the US