Final: Chapter 17 Auditors' Reports

(a) 10-K (b) S-1 through S-11 (c) 10-Q

(a) Annual filing of audited financial statements (b) Registration statements for companies planning to issue securities to the public (c) Quarterly filing of financial information unaudited but reviewed by auditors

(a) make reference to component auditors (b) make no reference to component auditors

(a) Shared responsibility opinion between the group auditor and the component auditor: ______________ (b) Group auditor takes full responsibility for the entire audit: _________________

Comparative financial statements

A complete set of financial statements for one or more prior periods included for comparison with the financial statements of the current period.

(1) should include any and all reservations auditors have about the statements (2) cannot be issued when the auditors have formed an opinion on the financial statements

A disclaimer of opinion:

Disclaimer of opinion

A form of report in which the auditors state that they do not express an opinion on the financial statements.

the matter is adequately disclosed in the notes

A major assumption underlying the inclusion of an emphasis-of-matter paragraph for an uncertainty is:

adverse opinion

A material and pervasive departure from GAAP requires a basis for modification paragraph and a(n):

Qualified opinion

A modification of the auditors' standard report, employing a clause such as except for to limit the auditors' opinion on the financial statements. A qualified opinion indicates that, except for the effects of some limitation on the scope of the audit or some departure from generally accepted accounting principles, the financial statements are fairly presented.

Emphasis-of-matter paragraph

A paragraph included in the auditors' report that is required by GAAS or is included at the auditors' discretion, and that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditors' judgment, is of such importance that it is fundamental to users' understanding of the financial statements (e.g. a lack of consistent application of GAAP, substantial doubt that an entity's ability to continue as a going concern).

Other-matter paragraph

A paragraph included in the auditors' report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditors' judgment, is relevant to users' understanding of the audit, the auditors' responsibilities, or the auditors' report.

Explanatory paragraph

A paragraph inserted in an auditors' report issued under PCAOB standards to describe a matter relating to the financial statements or to the audit. Also see emphasis of a matter paragraph. AICPA Auditing Standards Board (and international) standards use the term "emphasis-of-matter paragraph" and "other-matter paragraph."

scope

A qualified opinion is issued when auditors are unable to obtain sufficient appropriate audit evidence on which to base the opinion because of a(n) ___________ limitation.

Scope limitation

A restriction that prevents the auditors from being able to apply all of the audit procedures that they consider necessary in the circumstances. Scope limitations may be client imposed or may be imposed by other circumstances.

disclaimer

An audit report that states the auditors do not express an opinion on the financial statements is called a(n) __________ opinion.

Standard report

An audit report with (1) an unmodified (unqualified) opinion and (2) no additional matters emphasized (e.g., a change in accounting principles) beyond the information required in all audit reports. Note that while this term is frequently used in practice, the AICPA no longer formally uses it in its standards.

a report is filed with comparative statements when there are predecessor auditors

An unmodified opinion with additional audit-related information included in the audit report is appropriate when:

Critical audit matter (CAM)

As included in the PCAOB auditing standards, a matter arising from the audit of the financial statements 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, subject, or complex auditor judgment.

(1) determining whether or not to withdraw from the engagement (2) the assessment of fraud risk

Audit considerations for client-imposed limitations include:

standard

Auditors cannot issue the ___________ report for an audit if there are material departures from GAAP in the financial statements.

unmodified opinion with an emphasis-of-matter paragraph

Auditors who want to emphasize significant client transactions with related parties can issue a(n):

Change in accounting principle

Changes in accounting principles and reporting entities result in an emphasis-of-matter paragraph being added to the auditors' report.

Changes in accounting principle

Changes in accounting principles and reporting entities result in an emphasis-of-matter paragraph being added to the auditors' report.

(1) work stoppages (2) adverse financial ratios

Conditions that may raise substantial doubt about the going-concern assumption include:

Includes: pertinent conditions and events giving rise to substantial doubt possible discontinuance of operations management's evaluation and plan for dealing with the conditions Except: audit procedures performed to identify and review going concern status

Financial statement disclosures regarding the firm's going concern status include all of the following except:

comparative

Financial statements are generally presented in _____________ form for the current year and one or more preceding years.

All of the following: Justification for the change effect of the change and nature of the change Except : it doesn't report on the auditor's approval of the change, since that's implicit.

For a change in accounting principle, the client must report in the note to the financial statements all of the following except the ____________ the change.

an unmodified opinion with an emphasis-of-matter paragraph

For a client who corrects a material misstatement in the prior year's financial statements and discloses the correction in the notes, auditors should issue a(n):

the prior year was audited by the firm

For comparative financial statements, the auditor can issue an opinion that covers both years if:

component

Group auditors need to obtain an understanding of whether _______________ auditors are competent.

standard unmodified report

Group auditors that make no reference to the component auditors should issue a(n):

component

Group financial statements are those of a company that consists of more than one ______________ (e.g. subsidiary).

unmodified opinion

If a client changes depreciation methods but the change is immaterial, the auditor should issue a(n):

(1) qualified opinion (2) adverse opinion

If auditors have substantial doubt about a company's ability to continue as a going concern and management's disclosures are materially inadequate, the appropriate audit report is a(n):

key

International Auditing Standards require disclosure of ___________ audit matters in public company audit reports.

All of the following: (1) circumstances beyond the control of the client (2) circumstances related to the nature and timing of the auditor's work (3) client refusal to allow confirmations to be sent to customers EXCEPT: (4) auditor-imposed limitation

Limitations on the scope of the audit may occur due to all of the following except:

disclaimer of

Multiple uncertainties that cause the auditor to conclude it's not possible to form an opinion on the financial statements may make a(n) __________ opinion appropriate.

Material

Of substantial importance. Significant enough to affect evaluations or decisions by users of financial statements. Information that should be disclosed so that financial statements constitute a fair presentation. Involves both qualitative and quantitative considerations.

balance sheets for each of the last two years

Publicly owned companies are required to include in their annual reports:

reasonable

Substantial doubt exists when conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations before they are due for a(n) _____________ period of time.

(1) the financial statements are prepared (2) all audit documentation has been reviewed.

Sufficient appropriate audit evidence is obtained when:

auditors also have issued a report on the client's internal control over financial reporting

The PCAOB audit report includes an additional paragraph indicating:

Form AP

The PCAOB form that requires (1) the name of the engagement partner, (2) the names, locations, and extend of participation of other accounting firms that took part of the audit if their work constituted 5% or more of the total audit hours; and (3) the number and aggregate extent of participation of other accounting firms that took part in the audit.

only be reported for the period being audited

The PCAOB requires that critical audit matters (CAM's):

Group audit

The audit of the financial statements of a company composed of more than one component.

properly disclose information required by GAAP

The purpose of notes to financial statements is to:

True

True or False: A situation involving an uncertainty may also involve a scope limitation.

False it should be GAAP, like it says in the question!!!

True or False: The distinction between the effects of departures from generally accepted accounting principles that are material but not pervasive and those that are material and pervasive is based on AICPA and PCAOB audit standards.

False

True or false: An auditor is required to add an emphasis-of-matter paragraph for all uncertainties.

an emphasis of matter paragraph may be added to a public company audit report auditors may still issue a report with an unmodified opinion

When a company has unusually important subsequent events:

disclaimer of

When auditors are unable to obtain sufficient appropriate audit evidence that has a possible material and pervasive effect on the financial statements, auditors should issue a(n) ____________ opinion.

(1) qualified opinion (2) adverse opinion

When auditors determine a change in accounting principle is not appropriate, the auditors can issue a(n):

adding an additional untitled paragraph after the opinion paragraph

When the report on a public company is qualified for a departure from GAAP, the modification involves:

everververeevefvevevever

alone fam you can do this. wait i mean not alone, you're not alone therefore you can do this hooray

you are

never alone

(1) the newly adopted principle is generally accepted (2) management has justified that the new accounting principle is preferable (3) the method of accounting for the effect of the change is in conformity with GAAP.

Auditors evaluate changes in accounting principles to determine if:

updating

Re-expressing or revising an audit opinion that was previously issued is referred to as ______________ the report.

disclaimer of

A scope limitation that does not allow the auditors to obtain sufficient appropriate audit evidence for a substantial portion of the financial statements should result in a(n) __________ opinion.

Adverse opinion

An opinion that the financial statements do not fairly present financial position, results of operations, and cash flows in conformity with GAAP. This situation occurs when the auditors believe that departures from GAAP are both material and pervasive.

paragraphs

Auditors should use separate ____________ to describe emphasis-of-matter items and basis for modifications of the audit report.

group auditors

Auditors that are responsible for issuing the audit report on a group of companies (e.g. a parent and its subsidiaries) are known as:

adverse

Auditors that have formed an opinion that the financial statements are materially and pervasively misstated must issue a(n) _____________ opinion.

adverse opinion

Audits that involve a modification for both a departure from GAAP and a scope limitation that together result in material and pervasive misstatements should result in a(n):

basis ; opinion

For a nonpublic company, a qualified departure from GAAP requires a(n) ___________ for modification paragraph and changes to the __________ paragraph.

two periods

For auditors that are reporting on two periods, consistency of GAAP application should be evaluated between the current period and the preceding:

adverse

For departures from GAAP due to the omission of information that is material and pervasive, auditors should issue a(n) __________ opinion.

(1) description of how the matter was addressed in the audit (2) identification of the matter (3) principal considerations that led the auditor to determine it is a CAM (4) reference to the accounts and disclosures affected

For each critical audit matter (CAM), the auditors must include in the audit report:

(1) opinion section (2) auditor's responsibility section

In a shared responsibility report, the sections of the audit report that should be modified are the:

component

In group financial statements, issues arise when one or more subsidiaries are audited by ____________ auditors other than the group auditors.

GAAP

In the United States, financial statements are most frequently prepared following this general-purpose framework.

(1) substantial doubt about the company's going concern status (2) important subsequent events (3) inconsistent application of generally accepted accounting principles

Primary circumstances that result in an audit report with an unmodified opinion but with additional financial statement-related information include:

Reasonable period of time

The period of time required by the applicable financial reporting framework or, if no requirement exists, within one year after the date the financial statements are issued (or available to be issued).

the standards of the PCAOB

The standard audit report for audits of public companies should reference:

all of the following: (1) opinion (2) auditor's responsibility (3) managment's responsibility for the financial statement EXCEPT: introduction

The standard unmodified report is divided into sections with headings that include all of the following except:

independent

The title for a standard unmodified report for a nonpublic company must include the word _____________ to describe the auditors' relationship with the client.

(1) a major catastrophe with significant effects (2) unusually important subsequent events (3) significant transactions with related parties

Additional circumstances that may result in an unmodified opinion with an emphasis-of-matter paragraph include:

Group auditors

For nonpublic companies, the firm responsible for issuing the audit report on a group of companies (e.g., a parent and its subsidiaries).

significant events for a company

Form 8-K's are used to report:

35

Form AP must be filed with the PCAOB within _________ days of the date the audit report is first included in a document filed with the SEC.

(1) an income statement (2) a statement of cash flows (3) a balance sheet

The complete set of financial statements generally include:

auditors have a responsibility to perform procedures through that date

The date of the audit report is significant because:

auditor's responsibility

The nature of an audit is outlined in the section called:

consider results of audit procedures performed during the audit.

To evaluate whether there is substantial doubt about a client's ability to continue as a going concern, auditors should:

Qualified

Type of opinion that states the financial statements are presented in conformity with GAAP "except for" the effects of some matter.

Component auditors

Under AICPA standards, auditors who perform work on the financial information of a component that will be used as audit evidence for the group audit. The term "other auditors" is used in the PCAOB standards.

always cover all years presented

When comparative financial statements are presented by the client company, the auditors' report should:

include an other-matter paragraph to the current audit report

When predecessor auditors have audited the prior-period financial statements for a comparative period, the current auditor may have the predecessor auditor reissue their audit report for the prior period or they can:

uncertainty

A situation in which conclusive audit evidence concerning the ultimate outcome cannot be gathered because the outcome will occur in the future is called a(n) _________________.

independent registered

A standard audit report for a public company must include "Report of ________ ________ Public Accounting Firm" in the title.

critical audit matters

According to the PCAOB, any issues arising from the audit were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures material to the financial statements and (2) involved especially challenging, subjective, or complex audit judgments are:

Shared responsibility opinion

An auditors' report in which the principal auditors decide to share responsibility with other auditors who have audited some segment of the client's business. The sharing of responsibility is done by making reference to the other auditors. Making reference is not, in itself, a qualification of the auditors' report.

period (just one period)

To evaluate consistent application of GAAP when reporting on only the current period, auditors should consider the current period under audit and the preceding:

going concern

When auditors have concern about a company's ability to continue as a(n) _____________ _____________, they should consider whether management's plans for dealing with the conditions are likely to mitigate the problem.

unmodified ; standard

When the auditors have obtained sufficient appropriate audit evidence to conclude that the financial statements, taken as a whole, are not materially misstated and there is no need to disclose additional information, they will issue a(n) ___________ opinion using a(n) ____________ report.

Component (of a financial statement)

An entity or business activity for which group or component management prepare financial information that is required by the applicable financial reporting framework to be included in group financial statements.

Pervasive

A term used, in the context of misstatements, to describe the effects on the financial statements of misstatements or the possible effects on the financial statements of misstatements, if any, that are undetected due to an inability to obtain sufficient appropriate audit evidence. Pervasive effects on the financial statements are those that, in the auditors' judgment, are (1) not confined to specific elements, accounts, or items of the financial statements. (2) If confined, represent or could represent a substantial proportion of the financial statements. (3) In relation to disclosures, are fundamental to users' understanding of the financial statements.

the CPA firm

The audit report should be signed with the name of:

there is a lack of consistency in the application of GAAP The auditors are unable to obtain sufficient appropriate audit evidence there are material departures from GAAP

The auditors cannot issue a standard report if: