Audit Chapter 3

Auditors responsibility

Contains 3 paragraphs. 1. States that the audit was conducted in accordance with auditing standards generally accepted in the U.S. This paragraph also noted that the audit is designed to obtain reasonable assurance about whether the financial statements are free of material misstatement. 2. This paragraph describes the scope of the audit and the evidence accumulated. Indicates that the procedures depend on the auditor's judgment and include an assessment of the risk of material misstatements in the financial statements. Also indicates that the auditor considers internal control relevant to the preparation and fair presentation of the financial statements in designing the audit procedures performed, but this assessment of the internal control is not for the purpose and is not sufficient to express an opinion on the effectiveness of the entity's internal control. Last sentence indicates that the audit includes evaluating the accounting policies selected, the reasonableness of the accounting estimates, and the overall financial statement presentation. 3. Indicates the auditor believes that sufficient appropriate evidence has been obtained to support the auditor's opinion.

Opinion paragraph

Final paragraph on the standard report. It is the auditor's conclusions based on the results of the audit. The part is so important that often the entire audit report is referred simply as the auditor's opinion. Not absolute fact or guarantee. Intent is to indicate that the conclusions are based on professional judgment.

Adverse opinion

Financial statements are not presented fairly, not in accordance with GAAP

Name and address of CPA firm

Identified the CPA firm or practitioner who performed the audit. Typically, this is used because the entire CPA firm has the legal and professional responsibility to ensure that the quality of the audit meets professional standards. City and state of the firm should also be indicated.

Scope limitation - alternative procedure

If there is a scope limitation but you can work around it you may be able to give an unqualified opinion (for material or highly material)

D. All of the above

In an audit of publicly-held company that is considered an "accelerated filer," the audit report(s) must: A. Provide an opinion on both the financial statements AND on the client's internal controls over financial reporting. B. Indicate that the audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB) C. Indicate, in the report title, that the auditor is independent of the client. D. All of the above.

Introductory paragraph

Indicates that the CPA firm has performed an audit, which distinguishes the report from a compilation or review report. Also lists the financial statements that were audited, including the notes to the financial statements as well as the balance sheet dates and the accounting periods for the income statement and statement of cash flows.

Materiality

Information is material if omitting it or misstating it could influence decisions that users make on the basis of the financial information of a separate reporting entity. Quantitative measure (how much). Relative measure (not absolute). Qualitative factors must be considered (ex. Nothing under 100,000 is material but manager stole 10,000 - that matters and is material)

Reasonable assurance

Intended to indicate that an audit cannot be expected to completely eliminate the possibility that a material misstatement will exist in the financial statements.

Make reference - report involving other auditors

Modified wording report. Called shared opinion. Appropriate when the portion of the financial statements audited by other CPA is material in relation to the whole.

Qualify the opinion - reports involving other auditors

Qualified opinion or disclaimer, depending on materiality, is required of the principle auditor is not willing to assume any responsibility for the work of the other auditor. Principle auditor may also decide that a qualification is required in the overall report if the other auditor qualified his or her portion of the audit.

Justified departure from GAAP

Rule 203 of the AICPA Code of ProfessionalConduct states that in unusual situations, a departure from a generally accepted accounting principle may not require a qualified or adverse opinion. To justify an unqualified opinion, the auditor must be satisfied and must explain, in a separate paragraph or paragraphs in the audit report, that adhering to the principle would produce a misleading result in that situation.

Qualified "except for" opinion

The auditor concludes that the overall financial statements are fairly presented, but the scope of the audit has been materially restricted or applicable accounting standards were not followed in preparing the financial statements.

Inconsistent GAAP application

1. Changes in accounting principles, such as a changed from LIFO to FIFO 2. Changes in reporting entities, such as the inclusion of an additional company in combined financial statements 3. Corrections of errors involving principles, by changing from an accounting principle that is not generally acceptable to one that is generally acceptable, including correction of the resulting error.

Changes that affect comparability but not consistency

1. Changes in an estimate, such as a decrease in the life of an asset for depreciation proposes 2. Error corrections not involving principles, such as a previous year's mathematical error 3. Variations in format and presentation of financial information 4. Changes because of substantially different transactions or events, such as new endeavors in research and development or sale of a subsidiary.

Non-standard unqualified opinion with explanatory paragraph or modified wording

1. Inconsistent with GAAP 2. Going concern uncertainty -time frame "not to exceed one year from date of financial statements" 3. Justified departure from GAAP (rule 203) 4. Emphasis of other matters 5. Reports involving other auditors - "shared responsibility opinion"

Standard unqualified audit report parts

1. Report Title 2. Audit Report 3. Intoductory paragraph 4. Management's responsibility 5. Auditor's responsibility 6. Opinion paragraph 7. Name and address of CPA firm 8. Audit report date

Reasons for an "other than qualified opinion"

1. Scope limitation 2. Departure from GAAP 3. Auditor is not independent

Going concern uncertainty

1. Significant recurring operating losses or working capital deficiencies 2. Inability of the company to pay its obligations as they come due 3. Loss of major customers, the occurrence of uninsured catastrophes such as an earthquake or flood, or unusual labor difficulties. 4. Legal proceedings, legislation, or similar matters that have occurred that might jeopardize the entity's ability to operate

Emphasis of other matters

1. The existence of material related party transactions 2. Important events occurring subsequent to the balance sheet date 3. The description of accounting matters affecting the comparability of the financial statements with those of the preceding year 4. Material uncertainties disclosed in the footnotes

Categories of audit reports

1. Unqualified opinion -standard 2. Unqualified opinion - nonstandard 3. Qualified - "except for" opinion 4. Adverse 5. Disclaimer of opinion

Reports involving other auditors

3 options 1. Make no reference in the audit report 2. Make reference in the report (modified wording report) 3. Qualify the opinion

Non-standard unqualified opinion

A complete audit took place with satisfactory results and financial statements that are fairly presented, but the auditor believes that it is important or is required to proved additional information.

Audit report date

Appropriate date for the report is the one one which the auditor completed the auditing procedures in the fields important to users because it indicates the last day of the auditor's responsibility for the review of significant events that occurred after the date of the financial statements.

A. Unqualified

Assume that the audit report contains an explanatory paragraph indicating that the auditor has substantial doubt the client's ability to continue as a going concern. What type of opinion should this report be considered? A. Unqualified B. Qualified C. Adverse D. Disclaimer

Report title

Auditing standards require this and that it include the word independent. "Independent" conveys to users that the audit was unbiased.

Disclaimer

Auditor is unable to form an opinion as to whether the financial statements are fairly presented or he or she is not independent. Scope limitation

Scope limitation

Auditor was unable to perform all audit procedures that he/she considered necessary

A. Qualified

The financial statements contain a departure from GAAP that has a material (but not highly material) effect on the financial statements. The client has refused to make the changes necessary to bring the financial statements into compliance with GAAP. What type of audit opinion should be issued? A. Qualified B. Adverse C. Disclaimer D. Either adverse or disclaimer, at the auditor's option

Standard unqualified opinion

The four conditions have been met. 1. All statements are included in the financial statements. 2. Sufficient appropriate evidence has been accumulated, and the auditor has conducted the engagement in a manner that enables him or her to conclude that the audit was performed in accordance with auditing standards. 3. The financial statements are presented in accordance with U.S. generally accepted accounting principles of other appropriate accounting framework. This also means that adequate disclosures have been included in the footnotes and other parts of the financial statements. 4. There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report.

Managements responsibility

This heading and paragraph state that the statements are the responsibility of management. This responsibility includes selecting appropriate accounting principles and maintaining internal control over financial reporting sufficient for preparation of financial statements that are free of material misstatements due to fraud or error.

Audit report address

Usually to the company, its stockholders, or board of directors. In recent years, it has become customary for it to be to the board of directors and the stockholders to indicate the auditor is independent of the company.

Make no reference- report involving other auditos

When no reference is made, standard unqualified report is given unless other circumstances require a departure. Usually used when other auditor audits immaterial portion of the statements, other auditor is well known or closely supervised by principle auditor, or principle auditor has thoroughly reviewed other auditor's work.

C. Believes the statements are not presented fairly

Whenever an auditor issues an adverse opinion, the implication is that the auditor A. Is satisfied that the statements are presented fairly B. Is satisfied that the statements are presented fairly except for a specific aspect of them. C. Believes the statements are not presented fairly D. Does not know if the statements are presented fairly.

B. To the Management of Advent Corp

Which of the following alternatives would be the least desirable manner of addressing an audit. A. To the Stockholders of Advent Corp B. To the Management of Advent Corp C. To the Board of Directors of Advent Corp D. To the Board of Directors and Stockholders of Advent Corp

D. The auditor's responsibility is to express and opinion on the financial statements based in their audit.

Which of the following statements best reflects the auditor's responsibility in an audit of financial statements of a non-public company? A. The auditor is responsible for the preparation and fair presentation of the financial statements in accordance with GAAP. B. The auditor must plan and per from the audit to obtain complete assurance about whether the financial statements are free of material misstatements. C. The auditor is responsible for the design, implementation, and maintenance of the client's internal controls. D. The auditor's responsibility is to express an opinion on the financial statements based on their audit.