Chapter 16-18 Audit Review
The main purpose of the representation letter is
Is to have the client's principal officers acknowledge that they are primarily responsible for the fairness of FS
When current auditors make reference to the work of the component auditors, does this result in expression of a qualified opinion?
No, it divides responsibility
Loss contingencies are disclosed in notes to the financial statements whenever
there is a reasonable possibility that a loss has occurred
A walk-through involves literally __________ a transaction though ________ information systems
tracing entire
Internal control audit reports are modified for material __________ that exists at year _________
weakness end
If an adverse IC report is issued by the auditors, may an unqualified report be issued on the financial statements?
yes, because FS may still follow GAAP
Can a client change a set of FS to receive an unmodified opinion instead of an opinion qualified as to the adequacy of disclosure?
yes, by making the appropriate disclosures
An integrated audit includes audit reports on both the company's ___________ _________ and ________ _________
internal control financial statements
Is existence of loss contingencies occurs arising due to litigation, claims, or assessment you do the following:
1) Ask management about controls for identifying LCA 2) Obtain from management written descriptions and evaluations about LCA 3) Obtain from management all of LCA's that have been disclosed 4) Examine client's documents (including letters from lawyers) 5) Review minutes of board meeting
List the types of Modified opinion
1) Qualified "except for" (are materially misstated or can't obtain sufficient audit evidence) 2) Adverse- do not present fairly (both material and pervasive) 3) Disclaimer- do not express opinion
There are 9 audit procedures that are completed near the end of field work
1) Search for unrecorded liabilities 2) Review the minutes of meetings 3) Perform final analytical procedures 4) Perform procedures to identify lost contingencies 5) Perform the review for subsequent events 6) Obtain the representation letter
Identify the circumstances that result in audit reports with emphasis of-matter paragraphs and unmodified opinions (17-3)
1) Substantial doubt about the company's going-concern status 2) Generally accepted accounting principals not consistently applied 3) Uncertainties 4) Other circumstances that auditors believe should be emphasized 5) Group audits
what factors determine whether a misstatement is considered pervasive? meet one or more of the following
1) They are not confined to specific elements or certain accounts 2) If confined they represent substantial portion of FS 3) In relation to disclosure they are fundamental to the user understanding of FS
If inconsistencies are identified in "other information" and the client refuses to revise any incorrect information, the auditor should
1) an other- matter paragraph being added to a report 2) withholding the auditors report 3) withdrawing from the engagement
Provide examples of anti-fraud programs
1) management accountable 2) audit committee 3) code of ethics 4) whistle blower program 5) hiring/promotion procedures 6) corrective measures for weaknesses and fraud
Auditors are required to read "other information" for inconsistencies. List 6 types
1) management discussing the years operating results 2) financial summaries 3) employment data 4) planned capital expenditures 5) financial ratios 6) names of officers and directors
Identify the circumstances that result in modified audit opinions (17-4)
1) materially misstated financial statements 2) inability to obtain sufficient appropriate audit evidence- "scope limitation"
Loss contingencies should be recognized as actual losses in the financial statements whenever
1) that there is a probable lost 2) that the loss can be reasonably estimated
List the types of unmodified opinion
1) unmodified standard: no need to add anything, FS not materially misstated 2) unmodified with emphasis-of-matter paragraph: emphasized through report in disclosures, includes litigation, significant transactions, and subsequent events 3) unmodified with an other-matter paragraph: other than those disclosed, includes comparative statements and audit report not for general use 4) unmodified with divided opinion: different CPA firms audit different parts of a company
Describe the auditors' responsibilities for reporting on comparative financial statements A CPA can express differing opinions on the sets of FS of two successive years (T/F) CPA can change their reports on the prior year's statement. CPA should update their report on prior years to determine it it is still a proper report. (T/F)
A CPA can express differing opinions on the sets of FS of two successive years. TRUE CPA can change their reports on the prior year's statement. CPA should update their report on prior years to determine it it is still a proper report. TRUE
What are loss contingencies?
A possible lost, due from past events that will be resolved as to existence and by some future event
Explain the term "commitment" Give 2 examples
Contractual obligations to enter into the future 1) Inventory purchase commitments 2) Pension or profit sharing plans
Do supplementary information result in a qualified or adverse opinion?
Either because SI is considered unaudited and you would add emphasis of matter paragraph
Discuss the auditors' post-audit responsibilities (16-9)
If a CPA firm encounters evidence that the FS were materially misstated at the date of the audit report, the CPA firm needs to tell the client immediately, if the client refuses to change the FS then the CPA needs to tell the board of directors
Explain how a loss contingency exists with respect to an unasserted claim. Should unasserted claims be disclosed in the financial statements?
If legal counsel has devoted substantive attention to it 1) reasonably possible that the loss as required 2) Probable that claim will be asserted
Describe the standard audit report for public entity (issuer) audits (17-2)
Report of Independent Registered Accounting Firm
Explain the term general risk contingencies Give 4 examples
Represents a loss that might occur in the future 1) Strike 2) risk of price increase in essential raw materials 3) risk of natural catastrophe 4) consumer boycott
The purpose of disclosure checklist is
To list all of the specific disclosures required by FASB, GASB, the FASAC, and the SEC
What is the function of the notes to the FS?
To provide adequate disclosure when information in the FS is insufficient to obtain this objective
Describe the nature of a integrated audit (18-1)
While a integrated audit involves an enhance consideration of internal control, the FS audit's various planning, evidence gathering, and reporting procedures remain largely unchanged.
Section 404(a) of the Sarbanes-oxley Act require management to
acknowledge its responsibility for establishing and maintaining IC
The IC report issued includes an ___________ opinion indicating that effective __________ ______ does not exists
adverse internal control
Why are adverse opinions rare?
because they do the client no good
Describe type 2 subsequent events
conditions that arose after the date of the financial statements They do not require dollar adjustments but should be included in FS notes
Describe type 1 subsequent events
conditions that existed at the date of the financial statements the FS must be adjusted to reflect changes in the estimates resulting from the additional evidence
GAAP and GAAS represent two frequently used financial reporting frameworks. Do you agree? WHY?
disagree: GAAP is reporting framework GAAS is auditing standards
What type of report on IC is likely to be issued when management imposes a scope limitation? What type of report on IC is likely to be issued when one or more material weakness is found in FS? (18-6)
disclaimer of opinion or maybe withdraw from program adverse opinion
"Subsequent events" are
events occurring after the date of the balance sheet but prior to the date of the auditor's report after B/S but before auditor's report
What makes an account significant?
it their is a reasonable possibility that an account contains misstatements individual or when aggregated with others could have material effect on FS
"As of date" ordinary the ______ day of client's fiscal year
last
How to independent auditors normally obtain evidence regarding pending and threatened litigation?
lawyer letter
A compensating control ________ the exposure to misstates that exist due to __________ in other controls
limits deficiencies
Significant deficiencies are less severe than material weaknesses, important enough to
merit attention by those responsible for oversight of financial reporting
Describe the requirements involved when auditors are engaged to report on whether a previously reported material weakness continues to exists
plan and perform engagement that focuses on control that are relevant to the particular weakness
To issue an integrated auditors report, the auditors perform ________ that tests __________ over all __________ accounting as well as ___________ tests to support their opinion on the fairness of FS
procedures controls significant substantive
Section 404(b) of the Sarbanes-oxley Act require auditors to
report on the assessment made by management as well as provide its own opinion on IC
Which types of deficiencies must be communicated to the audit committee?
significant deficiencies and material weaknesses
A control deficiency exists when
the design or operation of a control does not allow management or employees in the normal course to prevent or detect misstatements
Material weakness involve a reasonable possibility
that a material misstatement will not be prevented or detected