2023-AUD A1: Audit Reports
What should be included in the management's responsibility paragraph of the unmodified audit opinion (nonissuer)?
-An explanation that management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework -A statement that this responsibility includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error - When required, the evaluation of whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern.
Where in the standard unmodified opinion (nonissuer) does the auditor refer to (1) the applicable financial reporting framework (i.e., GAAP or IFRS) 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 three inherent limitations of an audit.
1. The nature of financial reporting 2. The nature of audit procedures 3. Timeliness of financial reporting and the balance between cost and benefit
What should be included in the opinion section of the unqualified audit opinion (issuer)
Heading "Opinion on the Financial Statements" and: - The name of the company whose financial statements have been audited - A statement identifying each financial statement and any related schedule that has been audited. - Date or period covered by each financial statement and related schedule. - A statement indicating the financial statements were audited. - An opinion that the financial statements present fairly, in all material respects, the financial position of the company as of the balance sheet date and the results of its operations and its cash flows for the period then ended in conformity with the applicable financial reporting framework (e.g GAAP)
What should be included in the Opinion paragraph of the unmodified audit opinion (nonissuer)?
Heading "Opinion" that includes: - The entity whose financial statements have been audited - A statement that the financial statements have been audited - The title of each financial statement and reference to the notes - Dates or periods covered by each financial statement - A statement that the financial statements are fairly presented, in all material respects, in accordance with the applicable financial reporting framework - The applicable financial reporting framework and its origin.
Identify some examples of scope limitations.
Restrictions on the auditor's ability to perform auditing procedures may be caused by: Time constraints Inability to observe inventory Inability to confirm receivables Inability to obtain audited financial statements of a consolidate investee Restrictions on the use of auditing procedures Inadequacy of accounting records Refusal of the client's attorney to respond to inquiry Refusal of management to provide a representation letter
When an auditor is engaged to communicate key audit matters in the auditor's report, what information should be included?
When the auditor is engaged to communicate key audit matters, the auditor's report should include a separate section with the heading "Key Audit Matters" and the following information should be included: 1- A description of each matter 2- A description of why it was of most significance to the audit 3- How the matter was addressed in the audit of the financial statements
When would an auditor use professional judgment to determine whether to issue a qualified opinion or a disclaimer of opinion?
When 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 material but not pervasive. A disclaimer of opinion is expressed when the 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 both material and pervasive.
Consistency
helps accountants record the accounting transactions and work with the accounts. It helps the auditors compare the financial statements and provides the basis for the reliability of financial statements.
Going Concern
the audit team needs to ask themselves whether there are any red flags that may cause the company to not operate in the future
List in order the primary sections of an unqualified audit opinion (issuer).
01-Title: 02-Addressee: 03-Opinion section 04-Basic for Opinion Section: 05-Critical Audit Matters 06-Signature, Tenure, Location 07-Report date:
Where in the standard unqualified opinion (issuer) does the auditor refer to (1) the applicable financial reporting framework (i.e., GAAP) and (2) the standards of the Public Company Accounting Oversight Board (PCAOB)?
1- The applicable financial reporting framework is referred to in the opinion paragraph. 2- The standards of the PCAOB are referred to in the second paragraph under the Basis for Opinion section.
What is the definition of a critical audit matter (CAM)? (issuer)
A critical audit matter is defined as a matter that was communicated or required to be communicated to the audit committee and that: 1. relates to accounts or disclosures that are material to the financial statements; and 2. involved especially challenging, subjective, or complex auditor judgment. Note: Audit reports for issuers must include any CAMs or state that the auditor determined there were no CAMs.
When should an auditor's opinion be modified?
A modification to the auditor's report is necessary when: -The auditor determines that financial statements as a whole are materially misstated (GAAP issue) -The auditor is unable to obtain sufficient audit evidence to conclude that the financial statements as a whole are free from material misstatement (GAAS issue)
If an opinion is qualified due to material misstatement of financial statements on an issuer audit report, where does the paragraph explaining the qualification appear?
A paragraph should be placed immediately following the opinion paragraph. There is no heading for this paragraph. The paragraph should include: All of the substantive reasons that lead the auditor to conclude that there has been a departure from generally accepted accounting principles. Disclosure of the principal effects of the subject matter of the qualification on financial position, results of operations, and cash flows, if practicable. If the effects are not reasonably determinable, the report should so state. If such disclosures are made in a note to the financial statements, the explanatory paragraph(s) may be shortened by referring to it.
In what circumstances would an auditor be prohibited from communicating key audit matters in the auditor's report?
An auditor is prohibited from communicating key audit matters in the auditor's report when the auditor expresses an adverse opinion or disclaims an opinion on the financial statements, unless such reporting is required by law or regulation.
The auditor's report should not be dated earlier than the date on which the auditor has obtained sufficient appropriate 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
For each CAM identified, what should the audit report of an issuer include? (issuer)
For each CAM identified, the audit report should include: 1-Identification of the CAM; 2-description of the Principal considerations that led the author to determine the matter was a CAM; 3-description of how the CAM was Addressed in the audit; and 4-reference to the relevant financial statement accounts or Disclosures
In most audits of issuers, how many critical audit matters (CAMs) will an auditor normally identify?
It is expected that, in most audits, the auditor would identify at least one CAM.
What is the definition of a key audit matter (KAM)? (nonissuers)
Key audit matters are those matters that were of most significance in the audit of the financial statements of the current period and are selected from the matters communicated to those charged with governance. Key audit matters relate to the audits of nonissuers only and entities have the option of whether or not to engage the auditor to communicate such matters in the auditor's report
Describe the circumstances in which a material misstatement of the financial statements may arise.
Misstatements may arise in relation to: 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
Is an auditor required to report on critical audit matters (CAMs) when issuing an adverse opinion?
No, the auditor is not required to report CAMs when an adverse opinion is expressed.
Which standards provide the most authoritative US Auditing Guidance for Nonissues and Issuers, 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 Public Company Accounting Oversight Board (PCAOB) plus all SAS Adopted by the PCAOB.
Compared to a standard unqualified opinion for an issuer, determine the paragraphs that are modified in an audit report when the following opinions are issued due to financial statement issues (misstatement): - Qualified - Adverse
Opinion Section - Additional Paragraph - Basis for Opinion Section* Qualified: Except for - Yes - Standard Adverse: Do not present fairly - Yes - Standard *Note: The section headings ("Opinion on the Financial Statements" and "Basis for Opinion") are the same as the standard unqualified report when a qualified or adverse opinion is issued.
What are the five general GAAS requirements related to the conduct of an audit?
S - Professional Skepticism E - Ethical Requirements J - Professional Judgement E - Sufficient and Appropriate Audit Evidence C - Compliance with GAAS
In determining critical audit matters (CAMs), what factors should the auditor consider? (issuer)
The auditor should consider 1-the auditor's assessment of the risks of material misstatement, 2-areas of significant judgment or estimation by management, 3-nature and timing of unusual transactions, 4- the degree of subjectivity in applying audit procedures, and 5- the extent of specialized skill or knowledge regarding a matter.
adequately discloses future event
The auditor should issue an "unmodified opinion" when management adequately discloses future events, the outcome of which are not susceptible of reasonable estimation. Under U.S. auditing standards an emphasis-of-matter paragraph may be added by the auditor if the matter is of such importance that it is fundamental to the users' understanding of the financial statements. International Standards on Auditing recommend the addition of a paragraph describing the significant uncertainty.
What should be included in the second paragraph under the Basis for Opinion section in the unqualified audit opinion (issuer)?
The second paragraph under the Basis for Opinion section contains the following: - A statement that the audit was conducted in accordance with the standards of the PCAOB; - A statement that PCAOB standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud; - A statement that the audit included: + performing procedures to assess the risks of material misstatement; + examining, on a test basis, evidence regarding the amounts and disclosures; + evaluating the accounting principles used and significant estimates made by management; and + evaluating the overall presentation of the financial statements; and - A statement that the auditor believes that the audit provides a reasonable basis for the auditor's opinion.
What should be included in the first paragraph under the Basis for Opinion section in the unqualified audit opinion (issuer)?
The second section of the auditor's report must include the section heading "Basis for Opinion" and the following elements: - A statement that the financial statements are the responsibility of the company's management; - A statement that the auditor's responsibility is to express an opinion on the financial statements based on the audit; and - A statement that the auditor is a public accounting firm registered with the PCAOB (United States) and is required to be independent with respect to the company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB.
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
List in order the primary sections of an unmodified audit opinion (nonissuer)
Unmodified audit opinion (nonissuer) 01- Title: 02- Addressee: 03- Auditor's Opinion 04- Basis for Opinion 05- Going-Concern (when relevant) 06- Key Audit Matters (when engaged) 07- Management's Responsibility for the Financial -Statements: 08- Auditor's Responsibility 09- Other Information (when relevant) 10- Other Reporting Responsibilities. 11- Signature of the Auditor 12- Auditor's Address 13- Date of the Auditor's Report
When would an auditor use professional judgment to determine whether to issue a qualified opinion or 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 the aggregate, are material but not pervasive to the financial statements. An adverse opinion is issued when the auditor concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.
What should the auditor of an issuer do if the auditor determines there are no CAMs?
When the auditor determines that there are no CAMs, the audit report should state: We determined that there are no critical audit matters.
Can an auditor that has been engaged to communicate key audit matters in the auditor's report conclude that there are no key audit matters to communicate?
Yes, an auditor may determine, based on the facts and circumstances of the audit, that there are no key audit matters to communicate. In this circumstance, a statement to this effect should be added to the "Key Audit Matters" section of the auditor's report.