Module 5 Notes

GAAP departure results in what kind of opinion

"Except for" Qualified Opinion or Adverse Opinion depending on Materiality

An auditor who qualifies an opinion because of an insufficiency of audit evidence should describe the limitations in a basis for modification paragraph. The auditor should also refer to the limitation in the

- Basis for Modification paragraph: yes - refer to it in Auditor's responsibility section bc you have to say "we were held up from X that we were supposed to do" Opinion paragraph yes Notes NO. Notes belong to F/S which belong to mgmt

Inconsistency in Application of GAAP Correction of Error EMPHASIS OF MATTER PARAGRAPH IS REQUIRED

1. Error in principle 2. Error not involving application of a principle EMPHASIS OF MATTER PARAGRAPH IS REQUIRED

Attestation Definition

A declaration about whether the subject matter is presented in accordance with certain criteria.

Attestations FORECASTS AND PROJECTIONS DIFFERENCES

A forecast is NOT hypothetical assumptions. A forecast is based on conditions EXPECTED to exist. CAN BE GENERAL USE A projection is hypothetical assumptions. MUST BE LIMITED USE!!!!

145. The auditor who audits the processing of transactions by a service organization may issue a report on controls I. Implemented II. Operating effectiveness A. Both I and II B. I only C. II only D. Neither I nor II

A. Both I and II Implemented = Type 1 Operating Effectiveness = Type 2 (you have to have tested the controls)

152. The framework most likely to be used by management in its internal control assessment under requirements of the Sarbanes-Oxley Act of 2002 is the A. COSO internal framework. B. COSO enterprise risk management framework. C. FASB 37 internal control definitional framework. D. AICPA internal control analysis manager.

A. COSO internal framework. Committee of Sponsoring Organizations

118. When performing an attestation engagement, which of the following is least likely to be present? A. Practitioner's written assertion. B. Responsible party. C. Subject matter. D. Suitable criteria.

A. Practitioner's written assertion. The written assertion is by MANAGEMENT not the practitioner.

When an accountant examines a financial forecast that fails to disclose several significant assumptions used to prepare the forecast, the accountant should describe the assumptions in the accountant's report and issue a(n)

Adverse opinion.

Other Circumstances at the Discretion of the Auditor

Auditor MAY include Emphasis-of-Matter paragraph -- Major catastrophe that affects the entity's financial position -- Significant transactions with related parties -- Unusually important subsequent events

Audit Report Other Matter Paragraph Circumstances that might result in OM paragraph ALERTS AS TO REPORT INTENDED USE

Auditor may be required to or may choose to alert readers of F/S that report is intended for only CERTAIN USERS. Distribution restriction. Can be put on ANY report. (legal bearing is questionable). Other-Matter paragraph indicates the details.

204. In auditing compliance with requirements governing major federal financial assistance programs under the Single Audit Act, the auditor's consideration of materiality differs from materiality under generally accepted auditing standards. Under the Single Audit Act, materiality is A. Calculated in relation to the financial statements taken as a whole. B. Determined separately for each major federal financial assistance program. C. Decided in conjunction with the auditor's risk assessment. D. Ignored, because all account balances, regardless of size, are fully tested.

B. Determined separately for each major federal financial assistance program.

GAAP departure results in what kind of Report modification

Basis for Modification paragraph

Scope Limitation results in what kind of Report modification

Basis for Modification paragraph

76 If an auditor is asked to provide an opinion relating to information accompanying the financial statements in a document, the opinion will ordinarily be upon whether the information is fairly stated in A. Accordance with US generally accepted auditing standards. B. Conformity with US generally accepted accounting principles. C. All material respects in relation to the basic financial statements taken as a whole. D. Accordance with attestation standards expressing a conclusion about management's assertions.

C. All material respects in relation to the basic financial statements taken as a whole. This is ALWAYS your focus

120 Which of the following is least likely to be included in an agreed-upon procedures attestation engagement report? A. The specified party takes responsibility for the sufficiency of procedures. B. Use of the report is restricted. C. Limited assurance on the information presented. D. A summary of procedures performed.

C. Limited assurance on the information presented. You don't provide ANY assurance in AUP. You show what you did and what you found.

An accountant's compilation report on a financial forecast should include a statement that A. The forecast should be read only in conjunction with the audited historical financial statements. B. The accountant expresses only limited assurance on the forecasted statements and their assumptions. C. There will usually be differences between the forecasted and actual results. D. The hypothetical assumptions used in the forecast are reasonable in the circumstances.

C. There will usually be differences between the forecasted and actual results. Compilation = NO assurance Hypothetical assumptions are for a PROJECTION not a forecast

Auditor asked for Report Rendering Opinion on application of accounting principles to a specific transaction by an entity that is audited by another CPA. Auditor should

Consult with the continuing CPA to obtain information relevant to the transaction.

65 Jewel, CPA, audited Infinite Co.'s prior year financial statements. These statements are presented with those of the current year for comparative purposes without Jewel's auditor's report, which expressed a qualified opinion. In drafting the current year's auditor's report, Crain, CPA, the successor auditor, should I. Not name Jewel as the predecessor auditor. II. Indicate the type of report issued by Jewel. III. Indicate the substantive reasons for Jewel's qualification. A. I only. B. I and II only. C. II and III only. D. I, II, and III.

D. I, II, and III. So you are NOT presenting the prior year's audit report You DON'T name the prior year auditor You DO indicate the type of report issued You do Indicate the substantive reasons.

105. Comfort letters ordinarily are addressed to A. Creditor financial institutions. B. The client's audit committee. C. The Securities and Exchange Commission. D. Underwriters of securities.

D. Underwriters of securities. from the auditor

Component

Entity or business activity for which group or component management prepares financial information to be included in the group financial statements.

Emphasis of Matter & Other Matter paragraphs corresponding terms for Private Companies

Explanatory Paragraphs

Inconsistency in Application of GAAP Change in Accounting PRINCIPLE EMPHASIS OF MATTER PARAGRAPH IS NOT REQUIRED

For a new class of asset (whether 1,2,or 3 above) EMPHASIS OF MATTER PARAGRAPH IS NOT REQUIRED

Group Financial Statements Group Audit

Group consists of more than one component

Scope Limitation Inability to Obtain Sufficient Appropriate Audit Evidence 1) Qualified Opinion Wording

In our opinion, EXCEPT FOR THE POSSIBLE EFFECTS OF THE MATTER DESCRIBED in the Basis for Qualified Opinion paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of 12.31.20X1, and the results of its operations and cash flows for the year then ended in accordance with GAAP. this is material, not pervasive it's possible the F/S are still fairly presented!!!! We don't know because we couldn't gather appropriate evidence.

EXAMPLES of Departures from GAAP

Inadequate Disclosure Publicly held company omits Cash Flow Statement from F/S Financial statements are not in conformity with a FASB requirement regarding the capitalization of leases. Qualified Opinion

Group Financial Statements

Include financial information of more than one component, including consolidated or combined financial statements

Nonpublic entity

May have controls "EXAMINED" under Attestation standards.

Would auditor issue Unmodified Opinion with Emphasis of Matter paragraph for an Unjustified Accounting Change?

No. GAAP Departure. Qualified or Adverse Opinion.

Would auditor issue Unmodified Opinion with Emphasis of Matter paragraph for a material weakness in Internal Control?

No. Internal Control leads you to what audit test you will do. No Report Modification

Audit Report Publicly Traded Company EXPLANATORY PARAGRAPH (PCAOB term)

Not called Emphasis-of-Matter paragraph Not called Other-Matter paragraph

Component Auditor

Performs work on the financial information of a component to be used as audit evidence for the group audit. A component auditor may be part of the group engagement partner's firm, a network firm of the group engagements partner's firm, or an unrelated firm.

When is a Disclaimer Appropriate?

Pervasive Scope limitation e.g. auditor unable to determine amounts associated with an employee fraud scheme Client refuses to permit auditor to confirm certain A/R or apply alternative procedures to verify balances CEO unwilling to sign management representation letter

Comfort Letters for Underwriters

Positive Assurance that they are independent Negative Assurance or summary of findings on other accounting related matters Typically give negative assurance on: unaudited interim financial information.

Predecessor Audit vs Group Audit

Predecessor Audit: 2 years of F/S with different CPA firm for each year Group Audit: 1 year of FS with 2 different CPA firms for the 1 audit

Service Organizations

Provide processing services to customers who outsource data processing. e.g. payroll, information security etc.

PUBLICLY TRADED / ISSUER Registered with PCAOB SOX 404 paragraph

Publicly traded company: When F/S audited, Internal Control must also be audited. Either: 1) Separate Internal Control Report that is cross-referenced inthe SOX 404 paragraph or 2) Internal Control report is incorporated in main report

Differences between report for NonPublicly traded and Publicly traded

Publicly traded has: ---- 1 sentence "These financial statements are responsibility of company's management" -----1 sentence "Our responsibility is to express an opinion on these financial statements based on our audits". -----Nonpublicly traded blows these sentences up into paragraphs. SCOPE PARAGRAPH:

For purposes of an audit of internal control performed under Public Company Accounting Oversight Board requirements, an account is significant if there is more than a

Remote likelihood that it could contain material misstatements.

Service Organizations SOC 2 Reports

Restricted Use Reports on controls at a service organization related to SECURITY, AVAILABILITY, PROCESSING INTEGRITY, CONFIDENTIALITY, and/or PRIVACY. Meant for: Management of service organizations, user entities, and certain other specified entities. 2 Types of Detailed Reports: Type 1: Report only on the controls Type 2: Report of testing of controls

Departures from GAAP

Result in Qualified or Adverse Opinion

NONPUBLIC ENTITY / NONISSUERS Headings in DISCLAIMER OPINION REPORT

SAME AS ADVERSE EXCEPT: paragraph is called "Basis for Disclaimer Opinion" if there is a report on other legal and regulatory requirements, goes in at end.

NONPUBLIC ENTITY / NONISSUERS Headings in ADVERSE OPINION REPORT

SAME AS QUALIFED EXCEPT: paragraph is called "Basis for Adverse Opinion" and you would say "DO NOT present fairly" if there is a report on other legal and regulatory requirements, goes in at end.

EXAMPLES of Scope Limitations

The auditor is unable to obtain audited financial statements of a consolidated investee.

A client is presenting comparative (two-year) financial statements. How many reports are issued?

The auditor should issue one audit report that is on both presented years. You cannot issue one report on only the current year. Both years must be reported on. Two audit reports can't be issued in this case.

Example of Type of Opinion and how to modify report F/S do not disclose certain long-term lease obligations. Omitted disclosures required by FASB.

This is a GAAP departure. GAAP Departure = "Except for" Qualified Opinion or Adverse Opinion depending on Materiality. Basis for modification paragraph

Example of Type of Opinion and how to modify report Corp has N/R where notemaker filed bankruptcy and Corp did not reduce recorded value to NRV, which is 20% of recorded amount

This is an overstated asset this is a GAAP departure GAAP Departure = "Except for" Qualified Opinion or Adverse Opinion depending on Materiality A Basis for Modification paragraph will be included*

Example of Type of Opinion and how to modify report due to losses and adverse key financial rations, auditor has doubts about going concern for a reasonable period. Client has adequately disclosed financial difficulties in a note to F/S. Auditor has ruled out disclaimer.

Unmodified Opinion Emphasis of Matter paragraph citing potential going concern problem

Can a Parent use a different method of inventory costing for a sub and have an unmodified opinion be expressed?

Yes. You just add the inventory together in a consolidation. Footnote will describe the different costing. We don't try to convert.

Know! Circumstance where it is not appropriate to refer a reader of an auditor's report to a financial statement note for details is

a scope limitation because details of audit scope are not presented in the financial statement notes

NONPUBLIC ENTITY / NONISSUERS address of firm

if many offices, use the address of the office that ran THIS engagement

Personal Financial Statement Statement of Financial Condition

market value is GAAP (house/residence) BC market value is GAAP: You say what if we sold all the assets at FV, estimate tax liability on the difference between FV and cost. Net Worth (not called equity) can be audited, reviewed, or compiled. High political office might have to release audited, but audited personal F/S is rare.

Inconsistency in Application of GAAP means an accounting change that has a material effect on the comparability of a company's F/S

this is fine if properly footnoted = Emphasis-of-matter paragraph

Government Auditing Standards GAGAS

Generally Accepted Government Auditing Standards. Yellow book (book is yellow) Issued by Governmental Accountability Office Audit arm of Congress e.g. you might audit an organization that gets grant money, could be a small nonprofit. Prime focus: F/S of entity Assess whether management has identified laws and regulations that have a direct and material effect on the entity's financial statements. Required: 1. must follow all of GAAS and issue report on F/S 2. must issue written report on internal controls 3. Must issue written report on compliance with laws and regulations 4. must issue additional reports for A-I 33 Audits (the single audit act) #2 & #3 may be combined into a single report.

61A client follows US GAAP for its domestic operations and foreign GAAP for a foreign subsidiary. The foreign subsidiary is audited by a component auditor, while the group auditor audits the remainder of the corporation and issues an audit report on consolidated operations. Which auditor(s) is (are) responsible for evaluating the appropriateness of the adjustment of the foreign GAAP statements to US GAAP? Group Auditor? Component Auditor?

Group Auditor would always be responsible Component Auditor: No.

21. Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity's ability to continue as a going concern? A. Review compliance with the terms of debt agreements. B. Confirmation of accounts receivable from principal customers. C. Reconciliation of interest expense with debt outstanding. D. Confirmation of bank balances.

If you don't comply, the loan can be immediately due and callable and if you can't pay you could be out of business B) not serious, normal.

171. A control deficiency that is more than a significant deficiency is most likely to result in what form of audit opinion relating to internal control? A. Adverse. B. Qualified. C. Unqualified. D. Unqualified with explanatory language.

A. Adverse.

Scope Limitation Inability to Obtain Sufficient Appropriate Audit Evidence

EIther: 1) Qualified Opinion 2) Disclaimer of Opinion

Government Auditing Standards GAGAS additional reports for A-I 33 Audits (the Single Audit Act)

Entity might get different money for different programs in 1 single Audit, you audit the F/S and look at the various program. Issue report on entity as a whole, a report on Internal Control and Compliance, and a report on Internal control and compliance for every MAJOR PROGRAM!! FIndings and Question Costs: If you see they charged disallowed costs you must cite. If mgmt doesn't correct it, they may lose the grant money. These audits are more extensive than GAAS or GAS audits. implemented by OMB through circular A-133 etc. Audit reports can be combined or separate, MUST INCLUDE: 1. opinion on F/S 2. opinion on schedule of expenditures for federal awards. Includes an opinion as to whether info is presented fairly, in relation to F/S taken as a whole 3. Report on internal control related to F/S and major programs magic dollar amount $500,000

Going Concern FASB Draft Changes

FASB issued draft with changes but not on exam yet Change 1: Current: Going concern look forward period is 1 year from date of F/S NEW: Going concern look forward period will be 1 year from date F/S are ISSUED or AVAILABLE to be issued Change 2: NEW: It will be Mgmt's responsibitility to assess and footnote

Audit Report Other Matter Paragraph Circumstances that might result in OM paragraph OTHER INFORMATION IN DOCUMENTS CONTAINING AUDITED F/S

Financial and Nonfinancial Information other than Required Supplementary Information (RSI). Auditor is required to read information in the annual report for inconsistencies with the F/S. If none found, no OM Paragraph heeded. If inconsistencies found, auditor requests client to correct. If client refuses to correct this means: either a) F/S or b) Other Information is incorrect. a) If F/S incorrect = Departure from GAAP = Qualified or Adverse Opinion. b)If Other Information Incorrect = Other-Matter Paragraph, withhold Audit Report, or withdraw from engagement.

Compliance Audits

Governments frequently require entities to undergo complaince audits for various regs, laws, contracts, and grants. You are still doing a F/S audit and everything relates back to the F/S

Inconsistency in Application of GAAP Change in Accounting Estimate EMPHASIS OF MATTER PARAGRAPH IS REQUIRED

Inseparable estimate and principle change EMPHASIS OF MATTER PARAGRAPH IS REQUIRED

PUBLICLY TRADED / ISSUER Registered with PCAOB UNQUALIFIED REPORT paragraphs

Introductory paragraph Scope paragraph Opinion paragraph SOX 404 paragraph

Inconsistency in Application of GAAP Change in Accounting Estimate EMPHASIS OF MATTER PARAGRAPH IS NOT REQUIRED

Judgmental adjustments EMPHASIS OF MATTER PARAGRAPH IS NOT REQUIRED

Management Discussion and Analysis Objective of a CPA's Examination of a client's management discussion and analysis (MD&A) prepared pursuant to Securities and Exchange Commission rules and regulations?

--- The historical amounts have been accurately derived, in all material respects, from the entity's financial statements. --- The underlying information, determinations, estimates and assumptions of the entity provide a reasonable basis for the disclosures contained herein. ---The presentation includes the required elements of MD&A.

If a different auditor performed the prior year and you issue the current year report with prior year's statements included for comparative purposes but the other auditor's Qualified Opinion Report is not included, what does the auditor include in the Current Year Audit Report

.... Don't name the predecessor auditor..... .... Do indicate the type of report issued .... Do Indicate the substantive reasons for the qualification.

Inconsistency in Application of GAAP Change in Accounting Principles Four Tests to evaluate a change

1) Is newly adopted principle generally accepted 2) Is method of accounting for the effect of the change in conformity with GAAP 3) Are Disclosures related to the change adequate 4) Has Mgmt justified that the new accounting principle is preferable If the change meets the tests, an EMPHASIS-OF-MATTER paragraph is used

Service Organizations Guidance for Service Auditors 3 Types of Examination Services that result in 3 types of CPA reports on Service Organization Controls

1) SOC 1 Restricted use reports on Controls at a service organization relevant to user entity's internal control over financial reporting 2) SOC 2 Restricted use reports on controls at a service organization related to security, availability, processing integrity, confidentiality, and/or privacy. (details about the controls in SOC 1 report) 3) SOC 3: General use!! SysTrust reports related to security, availability, processing integrity, confidentiality, and/or privacy.

Attestations FUTURES AND PROJECTIONS WARNINGS REQUIRED

1) There will usually be differences between the forecasted and actual results bc events and circumstances frequently do not occur as expected and those differences may be material 2) We have no responsibility to update this report for events and circumstances occurring after the date of the report

64 When reporting on comparative financial statements, an auditor ordinarily should change the previously issued opinion on the prior year's financial statements if the A. Prior year's financial statements are restated to conform with generally accepted accounting principles. B. Auditor is a predecessor auditor who has been requested by a former client to reissue the previously issued report. C. Prior year's opinion was unmodified and the opinion on the current year's financial statements is modified due to a lack of consistency. D. Prior year's financial statements are restated following a pooling of interests in the current year.

A. Prior year's financial statements are restated to conform with generally accepted accounting principles. e.g. last year they were not GAAP and they were restated and are now GAAP. You are presenting comparative. You can modify your opinion! b) a predessor auditor who is reissuing would normally issue the exact same report c) prior year's opinion will remain unmodified if current year's report is modified due to lack of consistency d) restatement of prior years F/S following a pooling of interests will not lead to a change in the previously issued opinion

4. Which of the following statements is a basic element of the auditor's standard report on financial statements? A. The disclosures provide reasonable assurance that the financial statements are free of material misstatement. B. The auditor evaluated the overall internal control and provides limited assurance on it. C. An audit includes assessing significant estimates made by management. D. The financial statements are consistent with those of the prior period.

An audit includes assessing significant estimates made by management. NOTE: You don't say that the F/S are consistent with the prior period. You don't even have to cite if they are inconsistent, although you could.

Know! Adverse Opinion and Disclaimer

Auditor may not include a "Piecemeal Opinion" that identifies certain accounts that are properly stated.

93 When an independent CPA has reviewed the interim financial statements of a public client, which procedure is least likely to have been performed? A. Obtaining written representations from management for all interim financial information presented. B. Observing the interim count of inventory. C. Reading the financial statements for obvious material misstatements. D. Performing analytical procedures related to sales.

B. Observing the interim count of inventory. The ONLY time a Review can be done is Quarterly under PCAOB standards

81 An auditor of a nonpublic company should disclose the substantive reasons for expressing an adverse opinion in a basis for modification paragraph A. Preceding the auditor's responsibility section. B. Preceding the opinion section. C. Following the opinion section. D. Within the notes to the financial statements.

B. Preceding the opinion section.

Scope Limitation Inability to Obtain Sufficient Appropriate Audit Evidence 2) Disclaimer of Opinion Wording

Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient audit evidence to provide a basis for an audit opinion. Accordingly, we do NOT express an opinion on these financial statements. This is pervasive, not material it's possible the F/S are still fairly presented!!!! We don't know!

126 Accepting an engagement to examine an entity's financial projection most likely would be appropriate if the projection were to be distributed to A. All employees who work for the entity. B. Potential stockholders who request a prospectus or a registration statement. C. A bank with which the entity is negotiating for a loan. D. All stockholders of record as of the report date.

C. A bank with which the entity is negotiating for a loan. Projections can ONLY be Limited Use. They CANNOT be GENERAL USE>

200. Wolf is auditing an entity's compliance with requirements governing a major federal financial assistance program in accordance with Government Auditing Standards. Wolf detected noncompliance with requirements that have a material effect on the program. Wolf's report on compliance should express A. No assurance on the compliance tests. B. Reasonable assurance on the compliance tests. C. A qualified or adverse opinion. D. An adverse or disclaimer of opinion.

C. A qualified or adverse opinion.

Inconsistency in Application of GAAP Change in Accounting Entity EMPHASIS OF MATTER PARAGRAPH IS REQUIRED

Changes NOT involving a transaction EMPHASIS OF MATTER PARAGRAPH IS REQUIRED

Attestation presented in accordance with certain criteria

Criteria are standards or benchmarks used to evaluate the subject matter of the engagements. Criteria must be suitable and available to the public. Or criteria specifically listed in agreement. Must be objective, measurable, complete, and relevant.

When an accountant examines a financial forecast that fails to disclose several significant assumptions used to prepare the forecast, the accountant should describe the assumptions in the accountant's report and issue a(n) A. "Except for" qualified opinion. B. "Subject to" qualified opinion. C. Unmodified opinion with a separate emphasis-of-matter paragraph. D. Adverse opinion.

D. Adverse opinion. Because mgmt did NOT describe their assumptions

If Conditions exist that result in a material deviation from the criteria against which the subject matter was evaluated during an examination. The CPA's conclusion may be on

I. Subject matter only. It can only be on BOTH subject matter and a Written assertion if the report is unmodified.

Adverse (Public) or Modified (Private) Opinion Paragraph Adverse Opinion based on a PERVASIVE GAAP departure

In our opinion, because of the significance of the matter discussed in the BASIS FOR ADVERSE OPINION paragraph, the consolidated financial statements referred to above DO NOT PRESENT FAIRLY the financial position of ABC company and its subsidiaries as of 12.31.20X1, or the results of their operations or their cashflows for the year then ended.

Public Company Quarterly Statements - Quarterly Review Have to be reviewed quarterly PCAOB Standards

Likely to include: - CPA reads F/S for obvious material misstatements - Primary procedures would be analytical procedures and inquiries Would NOT be likely to include: Substantive tests of Balances such as Observation of inventory count

Know! Distinction between Scope Limitation and Limited Reporting Objective

Limited Reporting Objective: Auditor reports on only one statement e.g. Balance Sheet etc. If access to information is not limited, this is NOT a scope limitation.

NONPUBLIC ENTITY / NONISSUERS Headings in an UNMODIFIED OPINION REPORT

Management's Responsibility for the F/S Auditor's Responsibility Opinion *Emphasis of Matter *Other Matter *one or both might NOT be there if there is a report on other legal and regulatory requirements, goes in at end.

Internal Control Reports Required Paragraph

Must include a paragraph describing inherent limitations on internal control

Public Company Quarterly Statements Objective of a Review

Objective of a review of interim information is to provide the accountant with a basis for communicating whether he or she is are of any material modifications that should be made to the interim financial information for it to conform with the applicable financial reporting framework (e.g. GAAP).

Group Audit Requirements when component auditor is involved

Obtain understanding of: 1) Whether component auditor is competent and ethical (particularly independent) 2) Extent to which group engagement team will be involved with component auditor 3) Whether group engagement team will obtain necessary info on consolidation process 4) Whether component auditor is in regulatory environment that actively oversees auditors

ATTESTATIONS

On a subject matter OR an Assertion about a subject matter ATTESTATION IS for ANYTHING OTHER THAN "HISTORICAL F/S TAKEN AS A WHOLE" = Audit, Review, Compile If you have historical F/S taken as a whole IS NOT ATTESTATION Tax and Consulting are NOT ATTEST SERVICES

Differences in Internal Control reporting between PCAOB (issuer, public) and AICPA (AT 501, private, nonissuer)

PCAOB: Audit AICPA: Examination Report is at a point in time/ "as of" date AICPA: Allows an exam for a "period of time" Both allow reporting on subject matter (Internal control) AICPA: Also allows reporting on Mgmts' assertions. If a Material weakness exists, auditor should report on subject matter. Both prohibit auditor from issuing a report stating "no significant deficiencies exist". AICPA: Allows a report stating no material weaknesses identified. PCAOB: Wrap-up stage AICPA: "Concluding procedures" PCAOB: requires stating that audit was conducted in accordance with PBAOB standards AICPA: requires stating that audit was conducted in accordance with AICPA standards

PRO FORMA REPORTS

Pro Forma = "As If" you adjust historical statements as if the anticipated event had already happened

Audit Report Other Matter Paragraph Circumstances that might result in OM paragraph REQUIRED SUPPLEMENTARY INFORMATION

Rare for FASB GASB has this. Something required by a standard setting body like FASB or GASB that HAS to be in the F/S but not a GAAP requirement so not really F/S or Footnotes. You inquire is there RSI, is it there, is it properly presented. The auditor should apply certain limited procedures to the required supplementary information, and report deficiencies in, or omissions of, such information. If the RSI is omitted or not properly presented, you use Other Matter paragraph to indicate it's missing or not properly presented. If auditor does not identify likely misstatements, PROPER reporting varies between public and nonpublic audits PCAOB (public) has no standards Auditing Standards Board (nonpublic entities) have specific wording to address when no misstatements are identifies.

Audit Report Other Matter Paragraph

Report Emphasizes something NOT NECESSARILY in the F/S or footnotes different from Emphasis-of-Matter paragraphs which refer to matters included in F/S or footnotes

When Dual Dating is used, auditor responsibility for events subsequent to the completion of fieldwork is limited to the specific event referred to in the notes to the F/S. If the auditor chooses to date report as of date of subsequent event, his/her responsibility for other subsequent events extends to the date of the audit report

Report Release date = when auditor is ready to release and satisifed everything is done. That is the date of the F/S. Dual dating: Report release date of 3.28 something footnoted about a later event e.g. 4.1 we are past report date but event happened and F/S not released. make the change and dual date: 3.28 except for Footnote 7. entire set of F/s = earlier date the 1 event is the later date.

Group Engagement Partner

Responsible for the direction, supervision and performance of the group audit

NONPUBLIC ENTITY / NONISSUERS Headings in an QUALIFIED OPINION REPORT

SAME AS UNMODIFIED EXCEPT: throw in "Basis for Qualified Opinion" before Opinion paragraph e.g. Mgmt elected to write fixed assets up to higher appraised value (departure from GAAP) then you lead into Qualified Opinion, which says, everything is ok except what we cited in the prior paragraph if there is a report on other legal and regulatory requirements, goes in at end.

Sarbanes Oxley Act of 2002 Section 404

SEC Registrants: Requires integrated audit about fairness of F/S and effectiveness of Internal Control over financial reporting 404a: Mgmt required to include assessment of its internal control in annual report filed with SEC 404b: Companies with market cap of $75,000,000 or greater. CPA firm required to audit internal control and express opinion on effectiveness Internal Control report can be part of the Audit Report, or a separate report that is cross-referenced.

Example of Type of Opinion and how to modify report Audit of F/S after annual physical inventory count. Accounting records not reliable to allow auditor to be satisfied with year end inventory balances.

Scope Limitation = Either Disclaimer or "Except for" qualified opinion = Basis for modification paragraph

Audit Reports UNMODIFIED OPINION WITH EMPHASIS-OF-MATTER PARAGRAPHS

Sometimes you have to have an EMPHASIS-OF-MATTER paragraph e.g. substantial doubt or inconsistency appears AFTER Opinion paragraph with title: "Emphasis of Matter" MUST HAVE: Inconsistency such as accounting change MAY HAVE: Uncertainty

Audit Report Other Matter Paragraph Circumstances that might result in OM paragraph OTHER CIRCUMSTANCES

Special Purpose F/S prepared in accordance with Contractual or Regulatory basis of accounting When auditor cannot legally withdraw even though there is a pervasive limitation of scope Entity prepares sets of F/S with more than one general purpose framework e.g. GAAP and IFRS

Attestation / Attest Services what services are NOT Attest Services

Tax and Consulting are NOT ATTEST SERVICES

Example of Type of Opinion and how to modify report When auditor does not take responsibility for another auditors work to audit a subsidiary

Unmodified Opinion this is "shared responsibility" No additional paragraph BUT: each paragraph has to be modified to indicate the shared responsibility

Audit Report Modification INCONSISTENCY IN APPLICATION OF ACCOUNTING PRINCIPLES

Unmodified Opinion with emphasis-of-matter PARAGRAPH

Audit Report Modification SUBSTANTIAL DOUBT about going concern for next year

Unmodified Opinion with emphasis-of-matter PARAGRAPH or Disclaimer of Opinion

Audit Report Modification UNCERTAINTIES

Unmodified Opinion with emphasis-of-matter PARAGRAPH or disclaimer (multiple uncertainties may lead to disclaimer)

Audit Report Modification Other circumstances at discretion of the auditor

Unmodified opinion with emphasis-of-matter paragraph

Trust Services Engagement Two Types: Difference between WebTrust and Systrust

WebTrust: assurance on electronic commerce --CPA examines that client COMPLIED with the Trust Services criteria and that it MAINTAINED EFFECTIVE CONTROLS over the system based on the Trust Services criteria --Includes Websites SysTrust: assurance on any defined electronic system CPA engaged to examine ONLY that a client MAINTAINED EFFECTIVE CONTROLS over the system based on the Trust Services criteria

Uncertainties Emphasis-of-Matter paragraph or Disclaimer

e.g. litigation or regulatory action conclusive audit evidence concerning ultimate outcome cannot be expected to exist at time of audit since outcome will occur in the future Emphasis-of-matter paragraph will refer to the footnote, state that the outcome is uncertain, and indicate that the auditors' opinion is not qualified with respect to the matter If properly shown in a footnote, the Auditor does not HAVE to include an emphasis-of-matter paragraph but they may want to multiple uncertainties can lead to a disclaimer if is not possible to form an opinion on the F/S as a whole

Top down approach to integrated audit

if the entity level controls are strong you might be able to limit further testing.

ATTESTATIONS COMPILATION REPORT

limited to presenting in the form of a FORECAST information that is the representation of management and DOES NOT INCLUDE EVALUATION OF THE SUPPORT FOR THE ASSUMPTIONS underlying the forecast must include the Warnings (must be in ANY REPORT on a Forecast / Projections: 1) There will usually be differences between the forecasted and actual results bc events and circumstances frequently do not occur as expected and those differences may be material 2) We have no responsibility to update this report for events and circumstances occurring after the date of the report

Attestations FORECASTS AND PROJECTIONS

no such thing as a review for Forecasts and Projections a) Examination b) Compilation c) Agreed Upon Procedures A CPA in public practice is required to comply with the provisions of the Statements on Standards for Attestation Engagements (SSAE) when Compiling a client's Financial Projection or a Forecast; In MOST areas, Compilations are NOT included in Attestation standard coverage. BUT: Included in Prospective financial statements (forecasts AND projections)

Memorize Standard Audit Report

one for public one for private

Example of Type of Opinion and how to modify report Corp changed method of accounting for cost of inventories from FIFO to LIFO. Auditor agrees with change but there is material effect on F/S

this is inconsistency / accounting change Auditor agrees with change so it is properly disclosed. Unmodified Opinion Emphasis of Matter Paragraph

Audit Report Other Matter Paragraph Circumstances that might result in OM paragraph COMPARATIVE F/S

1. Comparative F/S A) Current Year Audited but Prior period F/S not audited (reviews, compiled, or no CPA) ---you issue official report for current year and add OTHER MATTER PARAGRAPH indicating the nature of the CPA association or if there was no association B) Opinion on Prior Period statements different from opinion previously issued ---e.g. last year there was a qualified opinion due to a departure from GAAP that was corrected in Year 2. ---you add an Other Matter Paragraph with the details C) Prior period F/S audited by a Predecessor Auditor ---Successor auditor has choice to ask predecessor to reissue the audit report. If reissued, the report will have two audit reports. If the predecessor auditor's report is NOT reissued, an Other Matter paragraph with details.

Inconsistency in Application of GAAP Change in Accounting PRINCIPLE EMPHASIS OF MATTER PARAGRAPH IS REQUIRED

1. GAAP to GAAP 2 nonGAAP to GAAP 3 GAAP to nonGAAP For newly acquired assets in an existing class of assets (whether 1,2,or 3 above) EMPHASIS OF MATTER PARAGRAPH IS REQUIRED

Options when the Group Engagement Team depends on the work of Component Auditors

1. Make NO reference to the component auditors. -----group auditors assume full responsibility for the audit -----used when 4 requirements can't be achieved -----used when group auditors hired the component auditors 2. Make reference to component auditors ---Making reference divides responsibility for engagement among participating CPA firms ---sometimes called "shared responsibility opinion" but signed only by the group auditors ---usually this type of report issued when signed only by the other auditors were engaged by the client with no guidance from group auditors --- you give appropriate $$ audited by other auditor (total assets, revenues, etc)

Audits Conducted in accordance with Single Audit Act Structure

1st Paragraph: --Mgmt responsible for internal control over compliance with laws --we considered internal control over compliance that could have direct material effect on a MAJOR FEDERAL PROGRAM 2nd Paragraph: --don't necessarily disclose all material weakness --define material weakness --material weaknesses noted or state none noted 3rd Paragraph: --Other matters (less than material weaknesses) noted 4th paragraph --Report is for informatino of audit committee, mgmt, and federal awarding agencies --Report is matter of public record and distribution is NOT limited Opinion Paragraph: --entity complied with types of requirements -- Auditing procedures disclosed immaterial instances of noncompliance....described in accompanying SCHEDULE OF FINDINGS AND QUESTIONED COSTS

172. Which of the following is most likely to be considered a material weakness in internal control for purposes of an internal control audit of an issuer (public) company? A. An ineffective oversight of financial reporting by the audit committee. B. Restatement of previously issued financial statements due to a change in accounting principles. C. Inadequate segregation of recordkeeping from accounting. D. Weaknesses in control activities.

A. An ineffective oversight of financial reporting by the audit committee. This is a huge weakness. B) That is not as serious as a restatement bc of mistake C) Weakness in Internal Control but not likely to be a material weakness D) general comment, could be overcome by compensating controls

101. An auditor is engaged to report on selected financial data that are included in a document containing audited financial statements. Under these circumstances, the report on the selected data should A. Be limited to data derived from the audited financial statements. B. Be distributed only to senior management and the board of directors. C. State that the presentation is a financial reporting framework other than GAAP. D. Indicate that the data are not fairly stated in all material respects.

A. Be limited to data derived from the audited financial statements.

14 In the first audit of a client, an auditor was not able to gather sufficient evidence about the consistent application of accounting principles between the current and the prior year, as well as the amounts of assets or liabilities at the beginning of the current year. This was due to the client's record retention policies. If the amounts in question could materially affect current operating results, the auditor would A. Be unable to express an opinion on the current year's results of operations and cash flows. B. Express a qualified opinion on the financial statements because of a client-imposed scope limitation. C. Withdraw from the engagement and refuse to be associated with the financial statements. D. Specifically state that the financial statements are not comparable to the prior year due to an uncertainty.

A. Be unable to express an opinion on the current year's results of operations and cash flows. If you are satisfied with YE balances, could issue unmodified opinion on the B/S, and issue disclaimer on the other F/S. Even though Ending R/E comes from I/S current year activity, you are satisfied with the assets and liabilities fair presentation, you slide into equity, so we assume equity is fairly presented but we just don't know how we got there

167. For an issuer (public) company audit of internal control, walkthroughs provide the auditor with primary evidence to I. Evaluate the effectiveness of the design of controls II. Confirm whether controls have been implemented A. Both I and II B. I only C. II only D. Neither I nor II

A. Both I and II walkthrough a procedure: helps you evaluate if it was designed effectibely. Confirm whether controls have been implemented. Note: doesn't test operating effectiveness.

19. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern? A. Cash flows from operating activities are negative. B. Research and development projects are postponed. C. Significant related-party transactions are pervasive. D. Stock dividends replace annual cash dividends.

A. Cash flows from operating activities are negative.

161. Assume that a company has a control deficiency regarding the processing of cash receipts. Reconciliation of cash accounts by a competent individual otherwise independent of the cash function might make the likelihood of a significant misstatement due to the control deficiency remote. In this situation, reconciliation may be referred to as what type of control? A. Compensating. B. Preventive. C. Adjustive. D. Nonroutine.

A. Compensating. Supplements a basic underlying control. something is bad in internal control. Something else is done to mitigate the bad. Preventative: Prevents errors / fraud adjustive: meaningless nonroutine: a transaction, not a control

112. Blue, CPA, has been asked to render an opinion on the application of accounting principles to a specific transaction by an entity that is audited by another CPA. Blue, who previously has provided no services to the entity, may accept this engagement, but should A. Consult with the continuing CPA to obtain information relevant to the transaction. B. Report the engagement's findings to the entity's audit committee, the continuing CPA, and management. C. Disclaim any opinion that the hypothetical application of accounting principles conforms with generally accepted accounting principles. D. Notify the entity that the report is for the restricted use of management and outside parties who are aware of all relevant facts.

A. Consult with the continuing CPA to obtain information relevant to the transaction. example: company doesnt like what its accountant told them so they consult with another CPA Blue should still consult with continuing CPA real world: this is done when CPA shopping / end run around CPA

88 Delta Life Insurance Co. prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission. If Wall, CPA, Delta's auditor, discovers that the statements are not suitably titled, Wall should A. Disclose any reservations in an emphasis-of-matter paragraph and qualify the opinion. B. Apply to the state insurance commission for an advisory opinion. C. Issue a special statutory basis report that clearly disclaims any opinion. D. Explain in the notes to the financial statements the terminology used.

A. Disclose any reservations in an emphasis-of-matter paragraph and qualify the opinion. Likely a Qualified (or adverse opionion) should be issued if they are not suitably titled, that is a departure from the basis they are using.

181. Which of the following is correct when applying a top-down approach to identify controls to test in an integrated audit? A. For certain assertions, strong entity-level controls may allow the auditor to omit additional testing beyond those controls. B. Starting at the top—controls over specific assertions—the auditor should link to major accounts and reporting items. C. The goal is to focus on details of accounting controls, while avoiding consideration of overall entity-level controls. D. The goal is to focus on all controls related to assertions, omitting consideration of controls related to the financial statements.

A. For certain assertions, strong entity-level controls may allow the auditor to omit additional testing beyond those controls. Entity level. Then break it down after that. But if the entity level controls are strong you might be able to limit further testing.

9. A financial statement audit report issued for the audit of an issuer (public) company concludes that the financial statements follow A. Generally accepted accounting principles. B. Public Company Accounting Oversight Board standards. C. Generally accepted auditing standards. D. International accounting standards.

A. Generally accepted accounting principles. F/S are based on GAAP b) wrong bc PCAOB standards governs DOING THE AUDIT ON THE F/S c) wrong bc F/S don't follow auditing standards. The audit does. d) wrong bc F/S don't follow International Acctg Standards

90 Field is an employee of Gold Enterprises. Hardy, CPA, is asked to express an opinion on Field's profit participation in Gold's net income. Hardy may accept this engagement only if A. Hardy also audits Gold's complete financial statements. B. Gold's financial statements are prepared in conformity with GAAP. C. Hardy's report is available for distribution to Gold's other employees. D. Field owns controlling interest in Gold.

A. Hardy also audits Gold's complete financial statements. Because you are reporting on their PROFIT PARTICIPATION IN NET INCOME you have to be satisfied that the NET INCOME is fairly presented, so you have to audit the complete set of F/S.

58 The auditor's responsibility section of a nonpublic company's auditor's report contains the following sentences: We did not audit the financial statements of EZ Inc., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 27% and 29%, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ Inc., is based solely on the report of the other auditors. These sentences A. Indicate a division of responsibility. B. Assume responsibility for the other auditor. C. Require a departure from an unmodified opinion. D. Are an improper form of reporting.

A. Indicate a division of responsibility. Tells the reader, other auditor has repsonsibility for 27 and 29 % of the total.

48. Due to a scope limitation, an auditor disclaimed an opinion on the financial statements taken as a whole, but the auditor's report included a statement that the current asset portion of the entity's balance sheet was fairly stated. The inclusion of this statement is A. Not appropriate because it may tend to overshadow the auditor's disclaimer of opinion. B. Not appropriate because the auditor is prohibited from reporting on only one basic financial statement. C. Appropriate provided the auditor's scope paragraph adequately describes the scope limitation. D. Appropriate provided the statement is in a separate paragraph preceding the disclaimer of opinion paragraph.

A. Not appropriate because it may tend to overshadow the auditor's disclaimer of opinion.

An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. If the auditor concludes that the financial statements do not require revision, but the client refuses to revise or eliminate the material inconsistency, the auditor may A. Revise the auditor's report to include a separate emphasis-of-matter paragraph describing the material inconsistency. B. Issue an "except for" qualified opinion after discussing the matter with the client's board of directors. C. Consider the matter closed since the other information is not in the audited financial statements. D. Disclaim an opinion on the financial statements after explaining the material inconsistency in a separate basis for disclaimer paragraph.

A. Revise the auditor's report to include a separate emphasis-of-matter paragraph describing the material inconsistency. An Other Matter paragraph is a better answer but A is the best answer here.

198. Although the scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies, these audits generally have which of the following elements in common? A. The auditor is to determine whether the federal financial assistance has been administered in accordance with applicable laws and regulations. B. The materiality levels are lower and are determined by the government entities that provided the federal financial assistance to the recipient. C. The auditor should obtain written management representations that the recipient's internal auditors will report their findings objectively without fear of political repercussion. D. The auditor is required to express both positive and negative assurance that illegal acts that could have a material effect on the recipient's financial statements are disclosed to the inspector general.

A. The auditor is to determine whether the federal financial assistance has been administered in accordance with applicable laws and regulations.

68 A client is presenting comparative (two-year) financial statements. Which of the following is correct concerning reporting responsibilities of a continuing auditor? A. The auditor should issue one audit report that is on both presented years. B. The auditor should issue two audit reports, one on each year. C. The auditor should issue one audit report, but only on the most recent year. D. The auditor may issue either one audit report on both presented years, or two audit reports, one on each year.

A. The auditor should issue one audit report that is on both presented years.

Which of the following best describes the reference to the expression "taken as a whole" in the PCAOB's audit reporting standards? A. They apply equally to a complete set of financial statements and to each individual financial statement. B. They apply only to a complete set of financial statements. C. They apply equally to each item in each financial statement. D. They apply equally to each material item in each financial statement.

A. They apply equally to a complete set of financial statements and to each individual financial statement.

81 Before reporting on the financial statements of a US entity that have been prepared in conformity with another country's accounting principles, an auditor practicing in the US should A. Understand the accounting principles generally accepted in the other country. B. Be certified by the appropriate auditing or accountancy board of the other country. C. Notify management that the auditor is required to disclaim an opinion on the financial statements. D. Receive a waiver from the auditor's state board of accountancy to perform the engagement.

A. Understand the accounting principles generally accepted in the other country.

49. Park, CPA, was engaged to audit the financial statements of Tech Co., a new client, for the year ended December 31, 2009. Park obtained sufficient audit evidence for all of Tech's financial statement items except Tech's opening inventory. Due to inadequate financial records, Park could not verify Tech's January 1, 2009 inventory balances. Park's opinion on Tech's 2009 financial statements most likely will be

Auditor could not observe client's taking of beginning physical inventory and was unable to become satisfied about its accuracy by using other auditing procedures. Answer: An unmodified opinion on the B/S and a Disclaimer on the I/S. The scope limitation will not affect YE B/S account balances. However, because evidence with respect to the beginning inventory is lacking, verification of CGS, an I/S element, is impossible. Although YE R/E will not be affected, both the current and prior years' retained earning will be affected by an offsetting amount by the CGS misstatement. If no other problems arise, the auditor can issue an unmodified opinion on the B/S and a Disclaimer on the I/S.

Audits of Single Financial Statements, and Specific Elements, Accounts or Items of F/S

Auditor's Report should include an Emphasis-of-Matter paragraph stating the purpose of the presentation, referring to the information describe the basis of presentation and state that the presentation is not intended to be a complete presentation of the organization's assets, liabilities, revenues or expenses

Difference between consolidated and combined

Consolidated = parent/sub relationship: Inter-entity ownership Combined is a person owns 100% of more than 1 company - but there is no inter-entity ownership. May but do not have to issue combined F/S

190. In auditing a not-for-profit entity that receives governmental financial assistance, the auditor has a responsibility to A. Issue a separate report that describes the expected benefits and related costs of the auditor's suggested changes to the entity's internal control. B. Assess whether management has identified laws and regulations that have a direct and material effect on the entity's financial statements. C. Notify the governmental agency providing the financial assistance that the audit is not designed to provide any assurance of detecting misstatements and fraud. D. Render an opinion concerning the entity's continued eligibility for the governmental financial assistance.

B. Assess whether management has identified laws and regulations that have a direct and material effect on the entity's financial statements. if problem says GOVERNMENT AUDITING STANDARDS, YELLOW BOOK, or GOVERNMENT FINANCIAL ASSISTANCE you know this is your starting point

13. When an auditor concludes there is substantial doubt about a continuing audit client's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to A. Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements. B. Consider the adequacy of disclosure about the client's possible inability to continue as a going concern. C. Report to the client's audit committee that management's accounting estimates may need to be adjusted. D. Reissue the prior year's auditor's report and add an emphasis-of-matter paragraph that specifically refers to "substantial doubt" and "going concern."

B. Consider the adequacy of disclosure about the client's possible inability to continue as a going concern. If not disclosed = GAAP departure

29. When management does not provide reasonable justification that a change in accounting principle is preferable and it presents comparative financial statements, the auditor should express a qualified opinion A. Only in the year of the accounting principle change. B. Each year that the financial statements initially reflecting the change are presented. C. Each year until management changes back to the accounting principle formerly used. D. Only if the change is to an accounting principle that is not generally accepted.

B. Each year that the financial statements initially reflecting the change are presented.

117. Conditions exist that result in a material deviation from the criteria against which the subject matter was evaluated during an examination. The CPA's conclusion may be on I. Subject matter II. Written assertion A. Both I and II B. I only C. II only D. Neither I nor II

B. I only The conclusion should be DIRECTLY on the subject matter. It cannot be on a written assertion when there is a deviation. If it is an UNMODIFIED report, it can be on either one.

193. When auditing an entity's financial statements in accordance with Government Auditing Standards (the "Yellow Book"), an auditor is required to report on I. Noteworthy accomplishments of the program. II. The scope of the auditor's testing of internal controls. A. I only B. II only C. Both I and II D. Neither I nor II

B. II only

103. Which of the following statements is correct concerning letters for underwriters, commonly referred to as comfort letters? A. Letters for underwriters are required by the Securities Act of 1933 for the initial public sale of registered securities. B. Letters for underwriters typically give negative assurance on unaudited interim financial information. C. Letters for underwriters usually are included in the registration statement accompanying a prospectus. D. Letters for underwriters ordinarily update auditors' opinions on the prior year's financial statements.

B. Letters for underwriters typically give negative assurance on unaudited interim financial information.

187. Mill, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to financial data supplied by Modern Co. regarding Modern's written assertion about its compliance with contractual requirements to pay royalties. Mill's report on these agreed-upon procedures should contain a(n) A. Disclaimer of opinion about the fair presentation of Modern's financial statements. B. List of the procedures performed (or reference thereto) and Mill's findings. C. Opinion about the effectiveness of Modern's internal control activities concerning royalty payments. D. Acknowledgment that the sufficiency of the procedures is solely Mill's responsibility.

B. List of the procedures performed (or reference thereto) and Mill's findings. a) wrong bc no disclaimer of opinion is provided in an AUP report c) no opinion is included in an AUP report d) AUP report has statement DISCLAIMING OPINION

If a publicly held company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, which of the following types of opinion is most likely to be appropriate? A. Disclaimer of opinion. B. Qualified opinion. C. Review report with negative assurance. D. Unmodified opinion with a separate emphasis-of-matter paragraph.

B. Qualified opinion. Departure from GAAP

97. Which of the following procedures ordinarily should be applied when an independent accountant conducts a review of interim financial information of a publicly held entity? A. Verify changes in key account balances. B. Read the minutes of the board of directors' meetings. C. Inspect the open purchase order file. D. Perform cut-off tests for cash receipts and disbursements.

B. Read the minutes of the board of directors' meetings.

6. For a nonpublic company audit report, a statement that the auditor has audited the financial statements followed by the titles of the financial statements is included in the A. Management's responsibility section of the audit report. B. The opening paragraph of the auditor's standard report. C. The auditor's responsibility section of the audit report. D. The opinion paragraph of the auditor's standard report.

B. The opening paragraph of the auditor's standard report.

135. Which of the following is not an objective of a CPA's examination of a client's management discussion and analysis (MD&A) prepared pursuant to Securities and Exchange Commission rules and regulations? A. The historical amounts have been accurately derived, in all material respects, from the entity's financial statements. B. The presentation is in conformity with rules and regulations adopted by the Securities and Exchange Commission. C. The underlying information, determinations, estimates and assumptions of the entity provide a reasonable basis for the disclosures contained herein. D. The presentation includes the required elements of MD&A.

B. The presentation is in conformity with rules and regulations adopted by the Securities and Exchange Commission. You don't have to say this. Your objective is A,C,D.

17. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern? A. Significant related-party transactions are pervasive. B. Usual trade credit from suppliers is denied. C. Arrearages in preferred stock dividends are paid. D. Restrictions on the disposal of principal assets are present.

B. Usual trade credit from suppliers is denied.

Going Concern Type of Audit Report

Can lead to ANY type of audit report Usually -- Unmodified Emphasis-of-Matter -- Disclaimer (I don't know) -- QUALIFIED OR ADVERSE: Depending on materiality or pervasiveness (you think it's not properly disclosed in footnote which is GAAP departure

49 Harris, CPA, has been asked to audit and report on the balance sheet of Fox Co. but not on the statements of income, retained earnings, or cash flows. Harris will have access to all information underlying the basic financial statements. Under these circumstances, Harris may A. Not accept the engagement because it would constitute a violation of the profession's ethical standards. B. Not accept the engagement because it would be tantamount to rendering a piecemeal opinion. C. Accept the engagement because such engagements merely involve limited reporting objectives. D. Accept the engagement but should disclaim an opinion because of an inability to apply the procedures considered necessary.

C. Accept the engagement because such engagements merely involve limited reporting objectives.

114. Which of the following services would be most likely to be structured as an attest engagement in which assurance is provided? A. Advocating a client's position in tax matter. B. A consulting engagement to develop a new data base system for the revenue cycle. C. An engagement to issue a report addressing an entity's compliance with requirements of specified laws. D. The compilation of a client's forecast information.

C. An engagement to issue a report addressing an entity's compliance with requirements of specified laws. Best answer Tax and Consulting are NOT ATTEST SERVICES. COMPILATION: this is tricky. Based on current standard, It's an attest engagement but you aren't attesting. But C is the best answer.

5. For a nonpublic company, which section (paragraph) of the audit report includes a statement that the auditor believes that the audit evidence obtained is sufficient? A. Introductory. B. Opinion. C. Auditor's responsibility. D. Management's responsibility.

C. Auditor's responsibility.

Inconsistency in Application of GAAP Change in Accounting Entity EMPHASIS OF MATTER PARAGRAPH IS NOT REQUIRED

Changes involving a transaction EMPHASIS OF MATTER PARAGRAPH IS NOT REQUIRED

207. A CPA has performed an examination of the general-purpose financial statements of Big City. The examination scope included the additional requirements of the Single Audit Act. When reporting on Big City's internal accounting and administrative controls used in administering a federal financial assistance program, the CPA should A. Communicate those weaknesses that are material in relation to the general-purpose financial statements. B. Express an opinion on the systems used to administer major federal financial assistance programs and express negative assurance on the systems used to administer nonmajor federal financial assistance programs. C. Communicate those weaknesses that are material in relation to the federal financial assistance program. D. Express negative assurance on the systems used to administer major federal financial assistance programs and express no opinion on the systems used to administer nonmajor federal financial assistance programs.

C. Communicate those weaknesses that are material in relation to the federal financial assistance program. The AICPA Accounting and AUdit Guide, Audits of State and Local Governmental Units requires the communication of weaknesses that are material in relation to the federal financial assistance program.

55 An auditor concludes that extreme doubt exists about the integrity of management and the representations obtained from management relating to the fairness of the financial statements and the completeness of the record of transactions. If the auditor retains the client, which audit report is most likely to be appropriate? A. Unmodified with emphasis-of-matter paragraph. B. Standard unmodified. C. Disclaimer. D. Adverse.

C. Disclaimer.

115. An unmodified attestation report ordinarily may refer to A. Only the assertion. B. Only the subject matter to which the assertion relates. C. Either the assertion or the subject matter to which the assertion relates. D. Neither the assertion nor the subject matter to which the assertion relates.

C. Either the assertion or the subject matter to which the assertion relates.

40. Which of the following phrases would an auditor most likely include in the auditor's report when expressing a qualified opinion because of inadequate disclosure? A. Subject to the departure from US generally accepted accounting principles, as described above. B. With the foregoing explanation of these omitted disclosures. C. Except for the omission of the information discussed in the preceding paragraph. D. Does not present fairly in all material respects.

C. Except for the omission of the information discussed in the preceding paragraph. A), B), C) are all phrases not allowed in reports with Qualified Opinions.

11. An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's financial statements adequately disclose its financial difficulties, the auditor's report is required to include an emphasis-of-matter paragraph that specifically uses the phrase(s) I. "Reasonable period of time, not to exceed 1 year" II. "Going concern" A. Both I and II B. I only C. II only D. Neither I nor II

C. II only Going Concern The phrase "Reasonable period of time, not to exceed 1 year" is not required

34. An auditor issued an audit report that was dual dated for a subsequent event occurring after the completion of fieldwork but before issuance of the auditor's report. The auditor's responsibility for events occurring subsequent to the completion of fieldwork was A. Extended to subsequent events occurring through the date of issuance of the report. B. Extended to include all events occurring since the completion of fieldwork. C. Limited to the specific event referenced. D. Limited to include only events occurring up to the date of the last subsequent event referenced.

C. Limited to the specific event referenced. When dual dating is used, auditor responsibility for events subsequent to the completion of fieldwork is limited to the speicific event

155. Which of the following is correct concerning the level of assistance auditors may provide in assisting management with its assessment of internal control? A. No assistance of any type may be provided. B. No limitations on assistance exist. C. Only very limited assistance may be provided. D. As less risk is assumed by the auditors, a higher level of assistance is appropriate.

C. Only very limited assistance may be provided. if you go beyond limited, you lose independence.

170. For purposes of an audit of internal control performed under Public Company Accounting Oversight Board requirements, an account is significant if there is more than a A. Reasonably possible likelihood that it could contain immaterial or material misstatements. B. Reasonably possible likelihood that it could contain material misstatements. C. Remote likelihood that it could contain material misstatements. D. Remote likelihood that it could contain more than inconsequential misstatements.

C. Remote likelihood that it could contain material misstatements.

Inconsistency in Application of GAAP Change in Statement Format

Classifications and Reclassifications EMPHASIS OF MATTER PARAGRAPH IS NOT REQUIRED

74 In an audit of a nonissuer company, which statement is correct concerning required supplementary information by a designated accounting standards setter? A. The auditor has no responsibility for required supplementary information as long as it is outside the basic financial statements. B. The auditor's only responsibility for required supplementary information is to determine that such information has not been omitted. C. The auditor should apply certain limited procedures to the required supplementary information, and report deficiencies in, or omissions of, such information. D. The auditor should apply tests of details of transactions and balances to the required supplementary information, and report any material misstatements in such information.

C. The auditor should apply certain limited procedures to the required supplementary information, and report deficiencies in, or omissions of, such information.

In which manner are significant deficiencies communicated by the auditors to the audit committee under Public Company Accounting Oversight Board requirements? A. The communication may either be orally or in written form. B. The communication must be oral, and not in written form. C. The communication must be in written form. D. No such communication is required as only material weaknesses must be communicated.

C. The communication must be in written form.

41. In which of the following circumstances would an auditor be most likely to express an adverse opinion? A. The chief executive officer refuses the auditor access to minutes of board of directors' meetings. B. Tests of controls show that the entity's internal control is so poor that it cannot be relied upon. C. The financial statements are not in conformity with a FASB requirement regarding the capitalization of leases. D. Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue as a going concern.

C. The financial statements are not in conformity with a FASB requirement regarding the capitalization of leases. Adverse = Pervasive GAAP departure A), B), C) Not describing a GAAP departure A) client refusal to provide access to minutes = scope limitation B) weak internal control will not generally result in adverse opinion; if so weak audit can't be completed, disclaimer of opinion or withdrawal may be appropriate D) Substantial doubt about Going Concern = Unmodified Opinion with Emphasis of matter paragraph or Disclaimer of opinion

53 An auditor decides to issue a qualified opinion on an entity's financial statements because a major inadequacy in its computerized accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the auditor's report should state that the qualification pertains to A. A client-imposed scope limitation. B. A departure from generally accepted auditing standards. C. The possible effects on the financial statements. D. Inadequate disclosure of necessary information.

C. The possible effects on the financial statements. Reasoning: F/S could be fairly presented but we don't know. A) The OPINION PARAGRAPH will NOT refer to client-imposed scope limitation. b) No indication of a departure from GAAS is provided in the Opinion paragraph and this situation is not a departure from GAAP D( There is no indication that there is inadequate disclosure of necessary information

Which of the following statements is correct concerning an auditor's responsibility for controlling the distribution by the client of a restricted-use report? A. An auditor must make clear to the client that it is illegal to distribute such a report beyond to specified parties. B. When an auditor is aware that a client has distributed a restricted-use report to inappropriate third parties, the auditor should immediately inform the client to cease and desist. C. An auditor controls distribution through insisting that the client not duplicate the restricted-use report for any purposes. D. An auditor is not responsible for controlling the distribution of such reports.

D. An auditor is not responsible for controlling the distribution of such reports. Not practical to control it once you have given it to the client.

197. In reporting under Government Auditing Standards, an auditor most likely would be required to report a falsification of accounting records directly to a federal inspector general when the falsification is A. Discovered after the auditor's report has been made available to the federal inspector general and to the public. B. Reported by the auditor to the audit committee as a significant deficiency in internal control. C. Voluntarily disclosed to the auditor by low-level personnel as a result of the auditor's inquiries. D. Communicated by the auditor to the auditee and the auditee fails to make a required report of the matter.

D. Communicated by the auditor to the auditee and the auditee fails to make a required report of the matter.

7. How does an auditor make the following representations when issuing the standard public company auditor's report on comparative financial statements? I. Examination of evidence on a test basis II. Consistent application of accounting principles A. I. Explicitly ; II. Explicitly B. I. Implicitly ; II. Implicitly C. I. Implicitly ; II. Explicitly D. I. Explicitly ; II. Implicitly

D. I. Explicitly ; II. Implicitly if you say : followed GAAP or followed framework, that is implicit.

183. In reporting on an entity's internal control over financial reporting, a practitioner should include a paragraph that describes the A. Documentary evidence regarding the control environment factors. B. Changes in internal control since the prior report. C. Potential benefits from the practitioner's suggested improvements. D. Inherent limitations of any internal control.

D. Inherent limitations of any internal control. No matter how good, never perfect. Just because good today doesn't mean it will be good tomorrow.

147. Lake, CPA, is auditing the financial statements of Gill Co. Gill uses the EDP Service Center, Inc. to process its payroll transactions. EDP's financial statements are audited by Cope, CPA, who recently issued a report on EDP's internal control. Lake is considering Cope's report on EDP's internal control in assessing control risk on the Gill engagement. What is Lake's responsibility concerning making reference to Cope as a basis, in part, for Lake's own opinion? A. Lake may refer to Cope only if Lake is satisfied as to Cope's professional reputation and independence. B. Lake may refer to Cope only if Lake relies on Cope's report in restricting the extent of substantive tests. C. Lake may refer to Cope only if Lake's report indicates the division of responsibility. D. Lake may not refer to Cope under the circumstances above.

D. Lake may not refer to Cope under the circumstances above. Gil is user organization. The user auditor should not make reference to the report of the service auditor. This is not shared responsbility. They are not dealing with the same entity

The predecessor auditor, who is satisfied after properly communicating with the successor auditor, has reissued a report because the audit client desires comparative financial statements. The predecessor auditor's report for a nonpublic company should make A. Reference to the report of the successor auditor only in another matter paragraph. B. Reference to the work of the successor auditor in an other matter paragraph and in the opinion paragraph. C. Reference to both the work and the report of the successor auditor only in the opinion paragraph. D. No reference to the report or the work of the successor auditor.

D. No reference to the report or the work of the successor auditor.

57 A group engagement partner decides not to refer to the audit of another CPA who audited a component of the overall group financial statements. After making inquiries about the other CPA's professional reputation and independence, the principal auditor most likely would A. Add an emphasis-of-matter paragraph to the auditor's report indicating that the subsidiary's financial statements are not material to the consolidated financial statements. B. Document in the engagement letter that the principal auditor assumes no responsibility for the other CPA's work and opinion. C. Obtain written permission from the other CPA to omit the reference in the principal auditor's report. D. Perform additional audit procedures based on the significance of the subsidiary.

D. Perform additional audit procedures based on the significance of the subsidiary. If you are a group auditor and you are NOT referring to a component auditor, that means YOU are taking responsibility.

134. An accountant's report on a review of pro forma financial information should include a A. Statement that the entity's internal control was not relied on in the review. B. Disclaimer of opinion on the financial statements from which the pro forma financial information is derived. C. Caveat that it is uncertain whether the transaction or event reflected in the pro forma financial information will ever occur. D. Reference to the financial statements from which the historical financial information is derived.

D. Reference to the financial statements from which the historical financial information is derived. You have to have historical F/S that are either Audited or Reviewed. There MUST be a reference to the F/S from which the historical financial information is derived AND a statement as to whether such financial statements were audited or reviewed. The adjustments are made to get to pro forma as if those adjustments had happened.

An auditor may express an opinion on an entity's accounts receivable balance even if the auditor has disclaimed an opinion on the financial statements taken as a whole provided the A. Report on the accounts receivable discloses the reason for the disclaimer of opinion on the financial statements. B. Distribution of the report on the accounts receivable is restricted to internal use only. C. Auditor also reports on the current asset portion of the entity's balance sheet. D. Report on the accounts receivable is presented separately from the disclaimer of opinion on the financial statements.

D. Report on the accounts receivable is presented separately from the disclaimer of opinion on the financial statements. You can issue a separate report on the A/R but you cannot include that comment with the main disclaimer

163. How do the scope, procedures, and purpose of an examination of internal control compare to those for obtaining an understanding of internal control and assessing control risk as part of an audit? A. Scope: Similar ; Procedures: Different ; Purpose: Similar B. Scope: Different ; Procedures: Similar ; Purpose: Similar C. Scope: Different ; Procedures: Different ; Purpose: Different D. Scope: Different ; Procedures: Similar ; Purpose: Different

D. Scope: Different ; Procedures: Similar ; Purpose: Different identify relationship between examination of internal control and obtaining an understanding of internal control and assessing control risk as part of an audit. scope and purpose differ between the two types of engagements, but the procedures followed are similar Audit: Scope is the F/S audit Internal Control" Scope is Internal control Procedures: Similar: testing controls Purpose: different.

158. In an integrated audit, which of the following is defined as a weakness in internal control that is less severe than a material weakness but important enough to warrant attention by those responsible for oversight of the financial reporting function? A. Control deficiency. B. Unusual weakness. C. Unusual deficiency. D. Significant deficiency.

D. Significant deficiency.

84 When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should A. Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards. B. Not express an opinion on whether the statements are presented in conformity with the financial reporting framework used. C. Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting. D. State that the basis of presentation is a financial reporting framework other than GAAP.

D. State that the basis of presentation is a financial reporting framework other than GAAP. Tax Basis/Cash Basis used to be called OCBOA. A) wrong bc: Audit has to be in accordance with Auditing standards b) makes no sense c) no, you don't do this.

45 In which of the following circumstances would an auditor not express an unmodified opinion? A. There has been a material change between periods in accounting principles. B. Quarterly financial data required by the SEC has been omitted. C. The auditor wishes to emphasize an unusually important subsequent event. D. The auditor is unable to obtain audited financial statements of a consolidated investee.

D. The auditor is unable to obtain audited financial statements of a consolidated investee. This would not be an Unmodified Opinion. This is a scope limitation. A) Unmodified Opinion. This is an inconsistency you could but don't have to cite in an emphasis of matter paragraph B) You don't have to address this c) Ok, fine.

148. Which of the following is correct relating to service organization control (SOC) reports referred to as "SOC 2" reports? A. They are primarily to assist financial statement auditors when processing services have been outsourced to a service provider. B. They are generally available to anyone. C. They relate most directly to internal control over financial reporting. D. They are meant for management of service organizations, user entities and certain other specified entities.

D. They are meant for management of service organizations, user entities and certain other specified entities. Limited use.

139. The WebTrust seal of assurance relates most directly to A. Financial statements maintained on the Internet. B. Health care facilities. C. Risk assurance procedures. D. Websites.

D. Websites. Security, availability, processing integrity, online privacy and confidentiality.

Scope Limitation results in what kind of opinion

EITHER Disclaimer or "Except for" qualified opinion

Forms of Attestation Engagements "Independent Practitioner's Report" these are NOT audits so don't say AUDITOR you have to be independent

Examinations: Highest Level of Assurance (similar to audit for F/S) Reviews: "We do not express an opinion. Nothing Came to Our Attention". This is Negative Assurance. performance of AGREED UPON PROCEDURES: ---Report says what the procedures are (which is unique, you don't say what the procedures are in an audit). ---Report must say "Sufficiency of these procedures is solely the responsibility of those parties specified in this report. We make NO representation regarding the sufficiency of the procedures described". --We were not engaged to and did not perform an examination...we do not express an opinion....had we performed additional procedures....other matters may have come to our attention. You don't provide ANY assurance in AUP. You show what you did and what you found. Theoretically the 3rd parties are responsible. --MUST INCLUDE: distribution limitation at end of report

Qualified (Public) or Modified (Private) Opinion Paragraph Qualified Opinion based on a MATERIAL GAAP departure

In our opinion, EXCEPT for the effects of the matter described in the BASIS FOR QUALIFIED OPINION PARAGRAPH, the financial statements referred to above present fairly, in all material respects, the financial position of ABS Comapny as of 12/31/20X1, and the results of its operations and its cash flows for the year then ended in accordance with GAAP ...this means that "everything is ok except the one item cited in the prior paragraph"

Audit Report Other Matter Paragraph Circumstances that might result in OM paragraph SUPPLEMENTARY INFORMATION IN RELATION TO THE F/S AS A WHOLE

Info derived from and related directly to underlying accounting and other records used to prepare the F/S. Service where auditors are engaged to perform procesures to allow the to provide ASSURANCE that the supplementary info is fairly stated in all material respects, in relation to the F/S as a WHOLE. If fairly stated: Other Matter paragraph If NOT fairly stated: Other Matter paragraph. Opinion paragraph NOT modified because supplementary information is NOT part of audited information.

Trust Services Engagement Two Types: WebTrust: assurance on electronic commerce SysTrust: assurance on any defined electronic system Designed to incorporate a seal management process by which a seal )logo) may be included on a cleint's website as an electronic representation of the practitioner's unqualified WebTrust report. If client wishes to use the seal (logo) the engagement should be updated at LEAST annually.

Mgmt prepares and communicates a system description that can be included on the company's website, attahced to practitioners' report, communicated to users in some other way clearly articulates boundaries of system to allow individuals to understand the mgmt assertions and the CPA report CPA evaluates Principles: 1) Security 2) Availability 3) Processing Integrity 4) Online Privacy 5) Confidentiality Each Principle above evaluated: a) Policies b) Communications c) Procedures d) Confidentiality

When an auditor qualifies an opinion because of inadequate disclosure, the auditor should describe the nature of the omission in a basis for qualification paragraph and modify which paragraphs?

Modify: Opinion Paragraph (the except for) NOT: Introductory, Auditor Responsibility

NOT departures from GAAP

NOT a Departure from GAAP: major inadequacy in its computerized accounting records prevents the auditor from applying necessary procedures.

SIMS / QUESTIONS ASKING YOU TO DETERMINE WHAT TYPE OF OPINION AND how report is modified

NOTE: "Adverse or Disclaimer" can't be a choice. "except for" qualified opinion or adverse = generated by GAAP departure EITHER Disclaimer or "Except for" qualified opinion = generated by Scope limitation

Service Organizations SOC 1 Reports

Restricted Use Reports on controls at a service organization related to internal control over financial reporting and the USER ENTITY includes the report in their workpapers These reports are primarily for Auditors of companies that outsource processing to a service organization. 2 Types of Detailed Reports: Type 1: Report only on the controls Type 2: Report of testing of controls

When an accountant performs more than one level of service (for example, a compilation and a review, or a compilation and an audit) concerning the financial statements of a nonissuer (nonpublic) entity, the accountant generally should issue the report that is appropriate for A. The lowest level of service rendered. B. The highest level of service rendered. C. A compilation engagement. D. A review engagement.

The highest level of service rendered.

Service Organization Audit Reports

The user auditor should not make reference to the report of the service auditor.

127 A CPA in public practice is required to comply with the provisions of the Statements on Standards for Attestation Engagements (SSAE) when

WHEN COMPILING A CLIENT'S FINANCIAL PROJECTION In MOST areas, Compilations are NOT included in Attestation standard coverage. BUT: Included in Prospective financial statements (forecasts AND projections) NOT WHEN TESTIFYING AS EXPERT WITNESS. this is explicitly excluded.

ATTESTATIONS EXAMINATION REPORT

We have examined.... Our responsibility is to express an opinion..... included procedures we considered necessary...to EVALUATE BOTH THE ASSUMPTIONS USED BY MGMT and the PREPARATION AND PRESENTATION of the forecast. Must include the Warnings (must be in ANY REPORT on a Forecast / Projections: 1) There will usually be differences between the forecasted and actual results bc events and circumstances frequently do not occur as expected and those differences may be material 2) We have no responsibility to update this report for events and circumstances occurring after the date of the report

Audit Report Release Date

When F/S are prepared and reviewed and auditor satisfied and ready to release **Report release date may not be the same as the ACTUAL release date. May ACTUALLY be released a week later or so.

3. March, CPA, is engaged by Monday Corp., a client, to audit the financial statements of Wall Corp., a company that is not March's client. Monday expects to present Wall's audited financial statements with March's auditor's report to 1st Federal Bank to obtain financing in Monday's attempt to purchase Wall. In these circumstances, March's auditor's report would usually be addressed to A. Monday Corp., the client that engaged March. B. Wall Corp., the entity audited by March. C. 1st Federal Bank. D. Both Monday Corp. and 1st Federal Bank.

Who is paying? Who is the client? A. Monday Corp., the client that engaged March.

Management Discussion and Analysis

publicly traded company MUST have this section included in reports filed with the SEC This service allows a CPA to procide assurance: negative assurance: for a review reasonable assurance: for an examination