AUD Section 4 - Forming Conclusions and Reporting

Correction of Error

Change from accounting principle not in accordance with the applicable framework to one that is

Required Top-Down Approach

First, apply a top-down approach for the selection of controls for testing. Begin at financial statement level and entity-level controls. Second, consider internal control over significant accounts, classes of transactions and disclosures that present reasonable possibility of material misstatement

Performing Integrated Audit—Results of Audit Procedures

If a low control risk assessment is supported through audit of internal control, risk of material misstatement is also lower. Evaluate impact of findings on other audit objective

Other Reporting Responsibilities

If the auditor addresses other reporting responsibilities, they should be addressed in a separate section in the auditor's report titled "Report on Other Legal and Regulatory Requirements" or, as appropriate, to the content of the section. PICTURE

Clearly Define Responsibilities

Management's and auditor's responsibilities are clearly described in separate paragraphs - The standard GAAS report contains section headings

Qualified or Adverse Opinion

Material misstatement of the financial statements may arise in relation to the following: 1. Inappropriate accounting policies selected and/or applied 2. Inappropriate financial statement presentation and/or inadequacy of disclosures in the financial statements

Emphasis-of-Matter Paragraph

1. A matter appropriately presented or disclosed in the financial statements 2. Matter is of such importance that it is fundamental to users' understanding of the financial statements 3. Not a substitute for a qualified or adverse opinion

Emphasis-of-Matter Paragraph for Material Uncertainties

1. Auditors are not required to modify audit opinion for uncertainties 2. Auditors may add emphasis-of-matter paragraph for particularly significant uncertainties (e.g., unusually important litigation or regulatory proceedings) 3. Disclaimer of opinion may be appropriate when multiple uncertainties exist

Change in Accounting Principle Requirements

1. Auditors evaluate the change by determining that the newly adopted principle: a. Is in accordance with applicable framework (e.g., GAAP) b. Is accounted for properly c. Is adequately disclosed d. Is justified and preferable 2. If criteria not met, may be a material misstatement due to noncompliance with accounting framework

How Long to Emphasize in Report

1. Change in accounting principle a. Emphasis made in period of change b. Also make in all subsequent periods until new principle applied to all periods presented 2. Correction of an error a. Emphasis made in period of correction b. Does not require repetition in subsequent periods

Controls to Evaluate

1. Controls over significant, unusual transactions 2. Controls that mitigate incentives for, and pressures on, management to falsify or manage financial results

Opening Paragraph

1. Does not make reference to either management's or the auditor's responsibility 2. Identify the entity audited 3. State that financial statements have been audited 4. Identify titles of the statements audited 5. Specify the date or period covered by the financial statements

Objective of PCAOB AS (Public Company Accounting Oversight Board Auditing Standard) No. 5

1. Establishes requirements for performing an examination of the design and operating effectiveness of an entity's internal control over financial reporting 2. Objective is to form an opinion - Obtain sufficient evidence providing reasonable assurance about whether material weakness(es) exist as of the date specified in management's assessment 3. Integrated into a financial statement audit to achieve both engagement objectives simultaneously

Importance of Entity-Level Controls

1. Evaluation of entity-level controls can result in changes in testing of other controls 2. Must evaluate the control environment 3. Must evaluate period-end financial reporting process 4. Only test relevant controls to audit objective

Examination of Internal Control

1. Examination of internal control over financial reporting (ICFR) performed in conjunction with an audit of the financial statements 2. Objective: to express an opinion of effectiveness of internal control 3. Performed under SSAE (Statement on Standards for Attestation Engagements) No. 15 for nonissuers

Reports on Audited Financial Statements

1. Express an opinion on the financial statements taken as a whole - Or state that an opinion cannot be expressed and reasons 2. May withdraw from engagements, as appropriate - May be limited by law or regulation to do so 3. When associated with financial statements , describe character of the auditor's work and degree of responsibility taken

Change in Reporting Entity

1. If not the result of transaction or event, then add an emphasis-of-matter paragraph a. Presenting consolidated financial statements instead of individual entity financial statements b. Changing specific subsidiaries that make up a group 2. If the result of a transaction or event, then no addition of an emphasis-of-matter paragraph a. Complete or partial purchase of a subsidiary b. Disposition of subsidiary c. Creation of subsidiary

Example Internal Controls Over Financial Reporting

1. Maintain records accurately and fairly reflect the transactions and dispositions of assets in reasonable detail 2. Provide reasonable assurance that transactions are recorded, as necessary, to permit financial statement preparation in accordance with the applicable framework. Receipts and expenditures made only in accordance with authorizations of management and governance 3. Reasonable assurance regarding prevention, or timely detection and correction, of unauthorized acquisition, use, or disposition of assets that could have material effect on the financial statements

Management Responsibilities

1. Management accepts responsibility for the effectiveness of internal control 2. Management evaluates the effectiveness of internal control using suitable and available criteria 3. Management supports its assertion with sufficient appropriate evidence 4. Management provides a written assertion in the report

Examples of Limitations Imposed by Management

1. Management prevents the auditor from observing the counting of the physical inventory 2. Management prevents the auditor from requesting external confirmation of specific account balances 3. Note: Inability to perform a specific procedure does not constitute a limitation on the scope of the audit if the auditor is able to obtain sufficient appropriate audit evidence by performing alternative procedures

Sarbanes-Oxley Act of 2002: Section 404a Annual Report

1. Management responsibilities 2. Framework used, such as the COSO Internal Control - Integrated Framework (2013) 3. Assessment results 4. Refer to auditor's attestation report, if applicable

Conditions for Engagement Performance

1. Management's refusal to provide a written representation will result in either disclaiming an opinion or withdrawing from the engagement 2. Must determine whether nonattest services impair auditor's ability to provide attest services 3. May not accept engagement to "review" internal control

Lack of Consistency—Emphasis-of-Matter Paragraphs

1. Material inconsistency in the application of the applicable financial reporting framework (e.g., change in accounting principle, change in estimate, change in reporting entity, etc.) 2. Management must include the justification for and effect of the change in the footnote

Modified Opinion Report Requirements

1. Must include a "Basis for Modification" paragraph that describes the circumstances causing the modification 2. The paragraph is placed before the Opinion paragraph and must have an appropriate heading: Basis for Qualified Opinion, Basis for Adverse Opinion, Basis for Disclaimer of Opinion 3. The title of the Opinion paragraph also must be modified to reflect the type of opinion expressed: Qualified Opinion, Adverse Opinion, Disclaimer of Opinion

Report on Internal Control Over Financial Reporting

1. Must make assertions about internal control, including whether or not ICFR is effective 2. Include disclosure of any material weaknesses 3. May not conclude that ICFR is effective if one or more material weaknesses exist

Other-Matter Paragraphs

1. Necessary to report a matter other than those that are presented or disclosed in the financial statements 2. Paragraph included after the opinion paragraph and any emphasis-of-matter paragraph

Objectives of Integrated Audit

1. Obtain sufficient evidence to support auditor's opinion on ICFR as of year-end 2. Obtain sufficient evidence to support auditor's control risk assessments for purposes of F/S audit

Unmodified Opinions With Emphasis-of-Matter Paragraphs

1. Place paragraph after the opinion paragraph - Before "Report on Other Legal and Regulatory Requirements," if applicable 2. Use "Emphasis-of-Matter" heading 3. Clearly reference the matter emphasized and where identified in the financial statements 4. State auditor's opinion is not modified

Examples of Other-Matter Paragraphs

1. Prior period financial statements not audited 2. Prior period financial statements were audited by a predecessor 3. Opinion on prior period statements different from opinion previously issued 4. Other information in documents containing financial statements 5. Supplementary information 6. Required supplementary information 7. Alerts as to report intended (e.g., restrictions in use)

PCAOB

1. Public Company Accounting Oversight Board (PCAOB) 2. Public accounting firms register with the PCAOB to perform audits of issuers 3. PCAOB AS No. 5 relates to the auditor's responsibility when performing an integrated audit of ICFR and F/S (financial statements)

Management's Responsibility

1. Relates to audits of issuers (publicly traded companies) 2. Regulation S-K requires management to provide an annual report on internal control over financial reporting (ICFR)

Basis for Forming Opinion

1. Results of auditor's control tests 2. Misstatements detected during the financial statement audit 3. Any identified control deficiencies from other sources (including internal audit reports that address relevant controls) 4. Evaluate presentation of the elements that management is required to present in annual report

Performing Integrated Audit—Risk Assessment Process

1. Same risk assessment process supports both audits (including fraud risk assessment) 2. Apply more audit effort in areas where higher risk that a material misstatement may exist 3. Not necessary to test controls where material misstatement would not result from deficient design or operation

Modification of Opinion

The auditor should modify the opinion in the auditor's report, if the auditor: - Concludes, based on the audit evidence obtained, the financial statements as a whole are materially misstated - Is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement

Internal Control Reporting Requirements—Sarbanes-Oxley Act (SOX)

1. Section 404(a)—Management's Annual Report on the Effectiveness of Internal Control Over Financial Reporting. Management must evaluate and disclose any change during a fiscal quarter that materially affected, or is reasonably likely to materially affect, internal control over financial reporting 2. Section 404(b)—Attestation Report of the Registered Public Accounting Firm Permanent Attestation Requirement Exemption for Non-Accelerated Filers SOX Section 404(c)—Permanently exempts "non-accelerated" filers from Section 404(b), which generally have < $75 million market capitalization worldwide.

Other Required Audit Procedures in PCAOB AS No. 5

1. Should consider using work performed by, or receive assistance from, internal audit and other third parties 2. Must obtain adequate written management representations relevant to both audits

Content of Annual Report Filed With SEC Schedule 10-K

1. Statement of management's responsibility 2. Identification of framework used 3. Statement of conclusion regarding effectiveness as of end of fiscal year 4. Disclosure of any "material weaknesses" - If one or more exists, cannot assert that internal controls are effective 5. Statement of auditor's attestation, or lack of such

Examples of Emphasis-of-Matter Paragraphs

1. Substantial doubt about the entity's ability to continue as a going concern - May lead to a disclaimer of opinion as alternative 2. Inconsistency in application of accounting principles 3. Uncertainties 4. Other matters at the discretion of the auditor (e.g., subsequent events, related parties, catastrophe, significant uncertainty, etc.)

Other-Matter Paragraph—Prior Period Predecessor Auditor

1. Successor can ask predecessor to reissue report 2. If predecessor report not reissued, add other-matter paragraph a. Financial statements were audited by a predecessor auditor b. Type of opinion c. Give reasons if modified opinion, and state nature of matter d. The date of predecessor's report

Qualified or Disclaimer of Opinion

1. The auditor's inability to obtain sufficient appropriate audit evidence may arise from the following: a. Circumstances beyond the control of the entity b. The entity's accounting records have been destroyed c. The accounting records of a significant component have been seized d. Circumstances relating to the nature or timing of the auditor's work e. Limitations imposed by management 2. Also referred to as "limitation on the scope" of the audit

Unmodified Opinion—Signing and Dating

1. The manual or printed signature of the auditor or auditor's firm 2. The name the city and state where the auditor practices 3. Be dated that date when the auditor obtained sufficient appropriate audit evidence

Elements of Report on Internal Control

1. Title that includes "independent" 2. Statement of management's responsibility 3. Identification of management's report on internal control 4. Statements of auditor's responsibility 5. Definition of internal control over financial reporting 6. Statement that performed under PCAOB standards 7. Obtaining reasonable assurance whether material weakness(es) exist 8. Summary of procedures performed 9. Statement that auditor believes procedures provide a reasonable basis for opinion 10. Statement of inherent limitations in projecting conclusion to future periods 11. Opinion (express an adverse opinion if material weakness exists) 12. Signature of audit firm 13. City and state of issuing office 14. Date of audit report (same as F/S audit report date)

Auditor's Responsibility

1. To express an opinion on the effectiveness of the company's ICFR a. As of a point in time b. Taken as a whole 2. The auditor cannot audit ICFR without also auditing the financial statements 3. Express adverse opinion for material weaknesses 4. Express disclaimer or withdraw for scope limitations

Key Elements of Auditors' Report

Title and Addressing Parties 1. Title that includes the word "independent" 2. Appropriately addressed (stockholders, board of directors, not management) 3. "Report on the Financial Statements" heading required when the "Report on Other Legal and Regulatory Requirements" section is also presented