Auditing Chapter 17

Misstated Financial Statements - Material and Pervasive

Adverse

Inability to Obtain Sufficient Appropriate Audit Evidence - Material and Pervasive

Disclaimer

Consistency

GAAP not consistently applied

Qualified "Except For" (GAAP)

Non GAAP change, inadequate disclosure, unjustified departure from GAAP, unreasonable accounting estimate

Group Audit Effect on Audit Reports if Improperly Presented

Not applicable because it is an auditor reporting concern

Inability to Obtain Sufficient Appropriate Audit Evidence - Material but Not Pervasive

Qualified

Misstated Financial Statements - Material but Not Pervasive

Qualified

Inability to Obtain Sufficient Appropriate Audit Evidence - Not Material

Unmodified

Misstated Financial Statements - Not Material

Unmodified

Group Audit Effect on Audit Reports if Properly Presented

Unmodified opinion; component auditors are referred to when the group auditors do not take responsibility for the component auditors' work; If group auditors take responsibility, no modification is necesary

updating

___ the report means either re-expressing opinion originally issued or revising opinion from original

Basis for Modification Paragraph

added to report with a modified opinion (qualified, adverse, or disclaimer) that provides a description of the matter giving rise to the modification; placed before opinion paragraph

GAAS

audit report on nonpublic companies can be restricted use/ only for use by specified users identified in an other-matter paragraph

SEC

audit reports on public companies' financial statements are not restricted as to use or users by who

Component Auditors

auditors that audit one or more components of a group of entities that provide consolidated financial statements; PCAOB refers to them as other auditors

Shared Responsibility Opinion

auditors' report in which the principal auditors decide to share responsibility with other auditors who have audited some segment of the client's business

Material

being of substantial importance; significant to affect evaluations or decisions by users of financial statements; should be disclosed

emphasis-of-matter paragraph

changes in accounting estimates and changes in principles with immaterial effect are situations that do NOT result in adding to audit report

Change in Accounting Principle

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

Auditor Discretionary

circumstances in which the auditors may add an emphasis-of-matter paragraph

liquidation is imminent

company is NOT a going concern; should use emphasis-of-matter paragraph states company changes basis of accounting from going-concern basis

Comparative Financial Statements

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

Unmodified Opinion

conclude that the financial statements are prepared, in all material aspects, in accordance with framework (GAAP)

adverse opinion

deficiencies are both material and pervasive; stmts are NOT presented in conformity with GAAP

qualified opinion

deficiencies are material, but NOT pervasive; stmts materially misstated- departure from GAAP or unable to obtain sufficient appropriate audit evidence- scope limitation

disclaimer of opinion

deficiencies could be both material and pervasive; result of a scope of limitation

Going-Concern, Consistency, Auditor Discretionary Effect if Improperly Presented

departure from GAAP is involved and the auditors modify the opinion paragraph to either a qualified or adverse opinion and add a basis for modification paragraph preceding the opinion paragraph

General-Purpose Framework

designed to meet the common financial information needs of a wide range of users (GAAP, IFRS)

omission of information

disclosures required by GAAP for fair presentation may have been omitted; issue qualified or adverse opinion based upon pervasiveness of misstatement

pervasive

effects of misstatements meet one or more of following three criteria: (1) not confined to specific elements, accounts, or items of financial statements (2) if confined, they represent (or could) a substantial proportion of financial statements (3) if disclosures, they are fundamental to users' understanding of financial statements

Component (of a financial statement)

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

pervasive

examples of when misstatement is _____ "substantial proportion of financial statements" or "fundamental to users' understanding"

Withdraw

false, fraudulent, deceptive, or misleading

Rule 203

financial statements are not GAAP because it would be misleading otherwise; shows up in emphasis-of-matter paragraph

Disclaimer of Opinion

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

Applicable Financial Reporting Framework

framework adopted by management of the company being audited in a particular situation

Regulations S-X of SEC

governs the form and content of the corporation's financial statements; auditors of publicly held corporations should understand these various reporting requirements of the SEC

"Basis for ___ Opinion"

heading for a basis for modification paragraph; complete with qualified, adverse, or disclaimer

reference to component auditors

if group auditors don't do this, they assume responsibility for entire audit

predecessor auditors

if prior periods of comparative periods were audited by ___, those reports can be reissued or have successor auditors refer to the report of predecessor auditors

unaudited

if statements of prior periods comparative periods are ____, the auditors' report should include disclaimer of opinion

going-concern

if substantial doubt exists about what leads to auditors adding emphasis-of-matter paragraph to unmodified opinion OR issue disclaimer of opinion

financial statement disclosures

if this is materially inadequate regarding going-concern issue, departure from GAAP exists; qualified or adverse opinion is needed

Other-Matter Paragraph

included in report required by GAAS or included at auditors' discretion; refers to matter other than those presented or disclosed and that is relevant to understanding the audit

Emphasis-of-Matter Paragraph

included in the auditors' report that is required by GAAS or is included at the auditors' discretion, and that refers to a matter appropriately presented or disclosed in the statements that is of such importance that it is fundamental to users' understanding of statements

Explanatory Paragraph

inserted in an auditors' report to explain a matter or to describe the reasons for giving an opinion that is other than modified; AICPA calls it emphasis-of-matter

practicable

means information is reasonably obtainable from accounts and records and that when providing auditor report, auditors do not assume position of preparer of statements

Financial Statement Disclosures

meant to supplement the information on the face of the financial statements, not to correct improper financial statement presentation

Qualified Opinion

modification of the auditors' standard report, employing a clause such as EXCEPT FOR to limit the auditors' opinion on the financial statements; indicates that except for some scope limitation or some departure from GAAP, the financial statements are fairly limited

Adverse (GAAP)

non-GAAP change, inadequate disclosure, unjustified departure from GAAP, unreasonable accounting estimate

Pervasive Effects on Financial Statements

not confined to specific elements, accounts, or items of the financial statements; if confined, they represent or could represent a substantial proportion of the financial statements; in relation to disclosures, are fundamental to users' understanding of the financial statements

unmodified opinion

obtained evidence to conclude that stmts are NOT misstated; no need for emphasis-of-matter paragraph/other-matter paragraph or indicate group audit

significant component

one identified by group engagement team as having financial significance to group or due to nature

Adverse Opinion

opinion that the financial statements DO NOT fairly present financial position, results of operations, and cash flows in conformity with GAAP; departures are material and pervasive

Modified Opinion

qualified, adverse, or disclaimer

unmodified opinion with emphasis-of-matter

refer to matter that is appropriately presented & disclosed in stmts, but is being emphasized thru audit report

unmodified opinion with other-matter

refers to matter other than those presented/disclosed in stmts; auditors believe matter is relevant to users' understanding

Publicly Owned Companies

required to include balance sheet for last 2 yrs, income statements, retained earnings, and cash flows for last 3 yrs

Group Auditors

responsible for issuing the audit report on a group of companies (parent & subsidiaries); PCAOB calls them principal auditors

Scope Limitation

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

Financial Reporting Framework

set of criteria used to determine measurement, recognition, presentation, and disclosure of all material items appearing in the financial statements

opinion section

should have heading that includes phrase except for the effects of the matter(s) described in the Basis of Qualified Opinion paragraph

Related Party Transactions

significant involvement in another company; included in emphasis-of-matter paragraph described in footnote

Different Opinions on Different Statements

situation involving auditors being retained AFTER the client has taken its BEGINNING inventory count (unable to obtain sufficient appropriate audit evidence relating to that beginning inventory); unable to satisfy on statements of income, retained earnings, and cash flows

uncertainties

situation which conclusive audit evidence concerning outcome cannot be expected to exist at time of audit, since outcome will occur in future

uncertainties

situations like unusually important ongoing litigation or regulatory action in process against client unusually important outcomes so auditors consider adding emphasis-of-matter paragraph

Going-Concern

substantial doubt about ability to remain a going concern

going-concern

substantial doubt about company's ability to continue what? not to exceed one year beyond date of stmts being audited; assets/liabilities recorded and classified on assumption company will continue to operate

unmodified opinion and emphasis-of-matter paragraph

substantial doubt about going-concern, GAAP not consistently applied, uncertainties, other circumstances that should be emphasized, group audits

Principal Auditors

term previously used by AICPA to describe group auditors; still used by PCAOB

Pervasive

term used, in the context of misstatements, to describe the effects on the financial statements of misstatements or the possible effects on the financial statements of misstatements, if any, that are undetected due to an inability to obtain significant appropriate auditing evidence

correction of material misstatement

this in previously issued stmts results in emphasis-of-matter paragraph to audit report

unmodified opinion on group financial statements

two or more CPA firms are involved in audit of component auditors may audit one subsidiary of organization with 5 subsidiaries

Qualified "Except For" (GAAS)

uncertainty, scope limitation

Disclaimer (GAAS)

uncertainty, scope limitation, lack of independence, unaudited

Standard Report

unmodified (unqualified) opinion and no additional matters emphasized beyond the info required in all audit reports; AICPA no longer uses it

Going-Concern, Consistency, Auditor Discretionary Effect if Properly Presented

unmodified opinion with an emphasis-of-matter paragraph added after opinion paragraph (going concern and uncertainties may also lead to disclaimers of opinion)

Standard Form

unmodified opinion with intro paragraph, sections describing management and auditor responsibilities, and an opinion section; includes "independent" in title, addressed to company who hired you; this is for Non-Public (AICPA)

change in accounting principles

when client does this and does NOT meet one or more of 4 requirements, departure from GAAP exists; issue qualified or adverse opinion

change in accounting principles

when client does this and meets 4 requirements, emphasis-of-matter paragraph is added to audit report, but opinion remains unmodified

liquidation is imminent

when client financial statements follow going-concern basis of accounting when this basis should be followed instead, a department from GAAP exists

make reference to component auditors

when group auditors do this they are in essence diving responsibility for engagement among group and component auditors

discretionary emphasis paragraph

with other emphasis-of-matter paragraphs, a what follows the opinion paragraph