Auditing Ch. 3

each; neutralizing

Auditors may encounter situations involving more than one of the conditions requiring a departure from an unmodified opinion audit report or revisions to the standard report wording. In these circumstances, the auditor should modify his or her opinion for ____ condition unless one has the effect of _______ the others

disclaimer of opinion; adverse opinion; disclaimer of opinion

Conditions Requiring a Modification of Opinion: 1) Auditor's scope has been restricted; qualified (material) or _______ _____ _______ (highly material), depending on materiality 2) Statements are not in conformity with GAAP: qualified (material) or an _______ ______ (highly material), depending on the materiality of the item in question 3) Auditor is not independent: _____ ___ _____ (regardless of materiality); Overrides any other scope limitations

statements; disclosures; evidence; fairly; GAAP; emphasis-of-matter

Conditions for Standard Unmodified Opinion Audit Report: 1) All _____ and required _______ are included in the financial statements 2) Sufficient appropriate _______ has been accumulated 3) Financial statements are presented ______ in accordance with ____ or other appropriate accounting framework 4) No circumstances requiring the addition of an _____-_____-_____ paragraph or modification of the wording or auditor's opinion in the report

communicated; audit committee; material; challenging; judgement

Critical Audit Matters: The PCAOB auditing standards define a critical audit matter as: 1) Any matter arising from the audit of the financial statements that was _______ or required to be communicated to the _____ _____ and that: (a) relates to accounts or disclosures that are _____ to the financial statements and (b) involved especially ______, subjective, or complex auditor _______

require; unmodified; do not; basis for opinion

Disclosure of KAM's: 1) International auditing standards and PCAOB auditing standards _____ communication of "key audit matters" or "critical audit matters" in the standard _______ audit report 2) The AICPA reporting standards _____ _____ require the communication of key audit matters 3) Key audit matters, if disclosed, are included in a section following the ____ ____ ____ section

transactions; events; comparability; uncertainties; catastrophe

Emphasis of Other Matters (cause #4): Auditor may want to emphasize specific matters regarding the financial statements under certain circumstances: 1) Material related party _______ 2) Subsequent ______ 3) _________ of the financial statements 4) Material _________ disclosed in the footnotes 5) A major ________ that has had or continues to have a significant effect on the entity's financial position

unmodified standard; non-standard; qualified

Reports involving other auditors (cause #5) 1) willing to take full responsibility -> ______ _____ wording ("audited by us") 2) willing to share responsibility -> ___-______ wording (audited by firm 1 and firm 2") 3) not wiling to take responsibility/other auditor's report includes a material qualification -> _______

internal control; financial statements; separate; combined; both

Reports on Internal Control over Financial Reporting: 1) PCAOB auditing standards require the audit of _____ _____ to be integrated with the audit of the _____ _____ 2) Auditor may choose to issue _____ reports or a _____ report; The combined report addresses ____ the financial statements and management's report on internal control over financial reporting

unmodified; immaterial

a standard _____ opinion can be provided for any of the 3 conditions requiring modification, assuming that the conditions are ______

auditor's opinion; matters

an emphasis of matter paragraph will immediately follow the ________ ________; the number of paragraphs depends on how many ______ they have

Unmodified opinion audit report with emphasis-of-matter paragraph or nonstandard report wording

an unmodified opinion audit report in which the financial statements are fairly presented, but the auditor believes it is important or is required, to provide additional information or the wording of other paragraphs of the report require revision

management; governance; financial statements; responsibilities; internal control; material misstatement; going concern

management's responsibility: 1) must include the heading "responsibilities of _______ and those charged with _____ for the _____ ______" and a paragraph that describes management's _________ 2) responsibilities include maintaining ____ ____ to provide F/S that are free from _____ ______ 3) establishes _____ _____

conclusions; first; opinion; audit; notes; professional judgement; information risk

opinion section: 1) states auditor's ______ based on results from audit 2) presented _____ due to importance 3) must include the heading "____" 4) 1st paragraph indicates performance of the ____ (distinguishes between a compilation or review) and it includes ____ to financial statements audited 5) the intent is to indicate that the conclusions are based on ____ ____ 6) the phrase, "our opinion" indicates there may be some _____ _____ 5)

independence; prepared; BOD; stockholders

report title: must state ______ (include the word) audit report address: addressed to those for whom the report is ______, including the company, stockholders, or the BOD; it has become customary to address the _____ and ______ (signifies independence form company)

firm; city; state; last

signature and address of CPA firm: uses the _____ name to ensure the quality of the audit meets professional standards. the ___ and _____ of the audit firm should be indicated audit report date: date of ____ day of field work (i.e. auditing procedures) is used

CAMs and internal control reporting

the biggest differences between AICPA and PCAOB reports (besides tenure) are _______ and ____ _____ ____

Standard unmodified opinion audit report

the report a CPA issues when all auditing conditions have been met, no significant misstatements have been discovered and left uncorrected, and it is the auditor's opinion that the financial statements are fairly stated in accordance with the applicable financial reporting framework

auditor's opinion; basis for opinion

when the matter involves reports involving other auditors, the matter may not have a separate paragraph. instead, it may be included in the ______ _____ or _____ ___ _____

uniformity; comparison

why a standard format? provides _____ for _____ purposes (allows investors to make more educated/informed decisions)

unlikely; unmodified; specific; overall; qualified; all; significantly; disclaimer; adverse

1) Immaterial: Users' decisions are _____ to be affected; ______ opinion 2) Material: Users' decisions are likely to be affected only if the information in question is important to the ______ decisions being made. The effect of the misstatement(s) is not pervasive to the financial statements and the ______ financial statements are presented fairly; _______ opinion 3) Highly material: Most or ____ Users' decisions based on the financial statements are likely to be ________ affected. The effect of the misstatement(s) is pervasive to the financial statements; ________ or ________

title; address; opinion; basis; management's; auditor's; signature; address; date

8 parts of the standard unmodified opinion: 1) report ______ 2) audit report ______ 3) _____ section 4) ____ for opinion 5) ______ responsibility 6) _____ responsibility 7) _____ and _____ of CPA firm 8) audit report _____

material; decision; reasonable

A misstatement in the financial statements can be considered _____ if knowledge of the misstatement will affect a _____ of a ______ user of the statements

registered; independent; reasonable assurance; critical audit matters; tenure; date

Standard Unmodified Opinion Audit Report for Public Companies: PCAOB refer to the standard unmodified opinion audit report as an "unqualified opinion" audit report, which requires: 1) The audit firm is ______ with the PCAOB standards and is ________ of the company 2) A statement indicating that an audit is designed to provide ______ ______ 3) The disclosure of _____ _____ _____ 4) The signature, ______, and city and state of the audit firm and the audit report ______

standard; unmodified opinion; opinion; information; responsibilities; management; auditor

Standard Unmodified Opinion Audit Reports for Nonpublic Companies: 1) _____ refers to the uniform wording typically used in audit reports, while ______ ______ refers to the fact that the auditor's opinion about the financial statements contains no material exceptions or qualifications 2) the proposed report presents the ______ first and provides additional ______ pertaining to the ________ of _______ for preparing the F/S and the responsibilities of the ____ in conducting the audit

GAAP; agrees; going concern; matters; auditors

The most important causes of the addition of an emphasis-of-matter paragraph/nonstandard report wording: 1) Lack of consistent application of ______ (changing of principles; not necessarily incorrect application) 2) Auditor _____ with a departure from promulgated accounting principles (ex: if GAAP was followed, results would be misleading) 3) Substantial doubt about _____ ______ (unsure if company will make it beyond the next year of business) 4) Emphasis of other ______ (separate slide/question) 5) Reports involving other _______

criteria; audit; attention; matters; required

The unmodified opinion audit report with emphasis-of-matter paragraph or nonstandard report wording: 1) Meets the ______ of a complete _____ with satisfactory results and financial statements that are fairly presented 2) But the auditor believes it is important to draw the reader's ______ to certain ______ or the auditor is _____ to provide additional information

scope; GAAP; independent

Three conditions requiring a modification to the opinion: 1) The _____ of the audit has been restricted (scope limitation) (a reason outside your control you were unable to obtain sufficient evidence) 2) The financial statements have not been prepared in accordance with ____ (GAAP Departure) (auditors disagree with departure) 3) The auditor is not _______

lack; knowledge

a disclaimer means a ______ of knowledge, while adverse means that there was ______ of the condition

material misstatement

a misstatement in the financial statements, knowledge of which would affect a decision of a reasonable user of the statements

pervasive misstatement

a misstatement that affects multiple elements of the financial statements, or an account that is a significant portion of the financial statements, or a disclosure that is fundamental to understanding the financial statements

scope; GAAP; material; except for

a qualified opinion can be administered if the condition needing modified is either a ______ limitation or a ______ departure and is only ______ in nature; however, it will include an "____ ____" paragraph

qualified opinion

a report issued when the auditor believes that the overall financial statements are fairly stated but that either the scope of the audit was limited or the financial data indicated a failure to follow GAAP

adverse opinion

a report issued when the auditor believes the financial statements are so materially misstated or misleading as a whole that they do not present fairly the entity's financial position or the results of its operations and cash flows in conformity with GAAP

disclaimer of opinion

a report issued when the auditor is not able to become satisfied that the overall financial statements are fairly presented or the auditor is not independent

unmodified; explanatory; explanatory; explanatory; explanatory; nonstandard wording

assuming the condition requiring nonstandard wording an explanatory paragraph is material (because if immaterial, it would be a standard _______ opinion), the type of explanation is as follows: 1) Lack of consistent application of GAAP -> ______ 2) Auditor agrees with a departure from promulgated accounting principles -> ________ paragraph 3) Substantial doubt about going concern -> _________ paragraph 4) Emphasis of other matters -> ___________ paragraph 5) Reports involving other auditors -> ________ _________

separate report on internal control over financial reporting

audit report on the effectiveness of internal control over financial reporting required for larger public companies under Section 404 of the Sarbanes-Oxley Act that cross-references the separate audit report on the financial statements

Combined report on financial statements and internal control over financial reporting

audit reports on the financial statements and the effectiveness of internal control over financial reporting for larger public companies under section 404 of the Sarbanes-Oxley Act

audit; financial statements; responsibilities; reasonable assurance; scope; communicates; significant; internal control

auditor's responsibility: 1) must include the heading "auditor's responsibilities for the _____ of the _____ ____" followed by _______ paragraphs describing said _______ 2) first paragraph establishes _____ _____ that F/S are free from material misstatement 3) second paragraph establishes the _____ of the audit and the evidence accumulated about the amounts and disclosures in the F/S 4) third paragraph indicates the auditor _____ to those in charge of governance the planned scope and timing of audit, as well as _____ findings, deficiencies, and material weaknesses in _____ ____

generally accepted auditing standards; responsibilities; sufficient; appropriate evidence

basis for opinion: 1) state the audit was conducted in accordance with ______ ______ ____ _____ and references additional ________ as detailed in the auditor's responsibilities section of the report 2) last sentence indicates that the auditor believe that _____ and ______ _____ was been obtained to support the auditor's opinion

critical audit matters (CAMs)

those matters during the audit of a public company that involved difficult, subjective, or complex auditor judgements or that posed difficulty to the auditor in obtaining sufficient appropriate evidence or in forming the opinion on the financial statements

key audit matters (KAMs)

those matters that, in the auditor's professional judgement, were of most significance in the audit of financial statements of the current period of a nonpublic entity, and they are selected from matters communicated with those charged with governance