Chapter 3

separate report on internal control over financial reporting

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

combined report on financial statements and internal control over financial reporting

audit report on the financial statements and the effectives of internal control over financial reporting for larger public companies under section 404 of the sarbanes oxley act

What four circumstances are required for a standard unmodified opinion audit report to be issued?

1. All statements - balance sheet, income statement, statement of changes in stockholders' equity, and statement of cash flows - are included in the financial statements 2. Sufficient appropriate evidence has been accumulated, and auditor has conducted engagement in a manner to conclude that the audit was performed in accordance with auditing standards 3. Financial statements are presented in accordance with GAAP 4. No circumstances requiring the addition of an emphasis-of-matter paragraph or modification of the wording of auditor's opinion in the report.

the date of the CPA's opinion on the financial statements of the client should be the date of the 1. completion of all important audit procedures 2. closing of the clients books 3. finalization of the terms of the audit engagement 4. submission of the report to the client

1. completion of all important audit procedures

An entity changed from the straight-line method to the declining-balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements but is reasonably certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements the auditor should issue a report with a(n): 1. unmodified opinion 2. qualified opinion 3. unmodified opinion with explanatory paragraph 4. qualified opinion with explanatory paragraph regarding consistency

1. unmodified opinion

the auditors report contains the following: "we did not audit the financial statements of EX inc, a wholly owned subsidiary, which statements reflect total assets and revenues constituting 27 percent and 29 percent, respectively, of the 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 in EZ inc, is based solely on the report of the other auditors." these sentences 1. assume responsibility for the other auditor 2. indicate a division of responsibility 3. require a departure from an unmodified opinion 4. are an improper form of reporting

2. indicate a division of responsibility

If a principal auditor decides to refer in his or her report to the audit of another auditor, he or she is required to disclose the 1. name of the other auditor 2. nature of the inquiry into the other auditors professional standing and extent of the review of the other auditors work 3. reasons for being unwilling to assume responsibility for the other auditors work 4. portion of the financial statements audited by the other auditor

4. portion of the financial statements audited by the other auditor

which of the following is not a required element of a standard unmodified opinion audit report issued in accordance with AICPA auditing standards 1. a title that emphasizes the report is from an independent auditor 2. the city and state of the audit firm issuing the report 3. a statement explaining mangments responsibilities for the financial statements 4. the name of the engagement partner

4. the name of the engagement partner

when the financial statements are fairly stated but the auditor concludes there is substantial doubt whether the client can continue in existence, the auditor should issue a(n) 1. adverse opinion 2. qualified opinion only 3. unmodified opinion 4. unmodified opinion with explanatory paragraph

4. unmodified opinion with explanatory paragraph

explain why auditors reports are important to users of financial statements and why it is desirable to have standard wording

Auditors' reports are important to users of financial statements because they inform users of the auditor's opinion as to whether or not the financial statements are fairly stated or whether no conclusion can be made with regard to the fairness of their presentation. Users especially look for any deviation from the wording of the standard unmodified report and the reasons and implications of such deviations. Having standard wording improves communications for the benefit of users of the auditor's report. When there are departures from the standard wording, users are more likely to recognize and consider situations requiring a modification or qualification to the auditor's report or opinion.

compare the wording in the standard unmodified opinion audit report for a nonpublic entity under AICPA auditing standards with the wording for a public company audit under PCAOB auditing standards

Difference: cross reference paragraph, heading, PCAOB, signed off

Describe the information included in the opinion and basis for opinion sections in a separate audit report on the effectiveness of internal control over financial reporting. What is the nature of the additional paragraphs in the audit report

Intro: states it was audited, states COSO, management takes control and makes assertion, we make opinion based on audit Scope: tells what audit of internal control is, but we decide in accordance PCAOB standards Opinion: management maintained effective internal control in all material respect

What is the rationale for the PCAOB requirement to include a discussion of critical audit matters in the audit report? Provide two examples of areas that might be considered critical audit matters in the audit of a public company in the hotel and lodging industry

Revisions to the PCAOB audit report, including the requirement to include a discussion of critical audit matters, are intended to provide more information to users of financial statements. In particular, the disclosure of critical audit matters provides information to users about areas considered high risk by the auditor, and areas requiring significant auditor judgment. This makes a financial statement user aware that not all account balances or related disclosures may have the same level of assurance. For each critical audit matter (CAM) communicated in the audit report, the auditor must identify the CAM, describe the considerations that led the auditor to identify the area as a CAM, describe how the matter was addressed in the audit, and refer a reader to the relevant accounts or related disclosures in the financial statements.

What are the purposes of the opinion section in the auditors report? Identify the most important information included in the opinion section

State the auditor's conclusions based on upon the results of the audit evidence. Most important information: • The words "in our opinion" - indicate conclusions are based on professional judgment • Restatement of audited financial statements and the dates • Statement about whether the financial statements were presented fairly and in accordance with GAAP

What are the purposes of the auditors responsibilities section in the auditors report? Identify the most important information included in the auditors responsibility section

The purposes of the auditor's responsibility section of the report are to inform the financial statement users of the objective of the audit and the nature of the audit procedures performed. The information in the auditor's responsibility section includes: 1. Stating that the objective of the audit is to obtain evidence about whether the financial statements are free of material misstatements whether due to error or fraud, and to issue an audit opinion. 2. Define reasonable assurance as a high level of assurance, but not absolute assurance. 3. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. 4. The audit procedures selected depend on the auditor's judgment, and consider the auditor's assessment of the risks of material misstatement, whether due to fraud or error. 5. As part of this risk assessment, the auditor considers internal control over financial reporting in the design of the audit procedures. The assessment is not for the purpose of expressing an opinion on internal control over financial reporting, and the auditor does not express such an opinion.An audit includes evaluating the appropriateness of the accounting policies used, the reasonableness of significant estimates, the overall presentation of the financial statements, and the entity's ability to continue as a going concern.

standard unmodified opinion audit report

The report a CPA issues when all ordering conditions have been met, no significant miss statements have been discovered and left and corrected, and it is the auditors opinion that the financial statements are clearly stated in accordance with applicable financial reporting framework

critical audit matters (CAMs)

Those matters during the audit of a public company that bought difficult, subjective, or complex auditor judgments or that pose difficulty to the auditor in obtaining sufficient appropriate evidence or informing the opinion on the financial statements

key audit matters (KAMs)

Those matters that, in the auditors professional judgment, most significant in the audit of financial statements of the current period of a non-public entity, and they are selected for matters communicate with those charged with governance

material misstatement

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