Chapter 17- Auditing

the title of an audit report for a public company must include

"Report of Independent Registered Public Accounting Firm"

the Basis for Opinion section will change how for a scope limitation for a public company concerning a modified opinion?

"except for as discussed above" added to standard second paragraph

the Opinion section for a modified opinion will contain what wording for both public and nonpublic companies?

"in our opinion.." "except for the effects of"

disclaimer of opinion

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

emphasis of matter paragraph

A paragraph inserted in an audit report issued under PCAOB standards to describe certain circumstances that the auditors believe should be emphasized (e.g., uncertainties, unusually important subsequent events, a major catastrophe, a division of responsibility for the total audit). See also explanatory paragraph.

reasonable period of time

A period of time not to exceed one year beyond the date of the financial statements being audited.

scope limitation

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

significant risk

A risk of material misstatement that is important enough to require special audit consideration.

there is no __ or ___ section included in a report for public and nonpublic companies

CAM; KAM

change in accounting principles

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

when there is a disclaimer of opinion regarding scope limitations is present, a nonpublic company's Opinion title will change to what?

Disclaimer of Opinion

when there is a disclaimer of opinion regarding scope limitations is present, a public company's Opinion title will change to what?

Disclaimer of Opinion on the Financial Statements

comparative financial statements

Financial statements that provide information for multiple fiscal periods.

group auditors

For nonpublic companies, the firm responsible for issuing the audit report on a group of companies (e.g., a parent and its subsidiaries). See footnote 13, page 761. The term "principal auditors" is used in the PCAOB standards.

when, after considering management's plans, the auditors conclude that a substantial doubt still exists, for a public or nonpublic company, they should add a ___ ___ section to their report, the opinion will remain ___, unless the auditors decide to __ __ ___ due the significance of their uncertainty

Going Concern; unmodified; disclaim their opion

for a nonpublic company, when KAMs are being reported on, a matter leading to a qualified opinion is by nature a ___

KAM

are KAMs or CAMs included in reports with adverse or disclaimer of opinions?

NO

the Basis for Opinion section will ___ change for a GAAP departure for a public company

NOT

a shared responsibility report indicates the portion of the engagement performed by the component auditors in terms of dollars or percentages in the ___ section of the report

Opinion

the ____ section for a public company explains the reasoning for the adverse opinion, not the ___ ___ __ section

Opinion; Basis for Opinion

when the opinion is modified what is the title of the Opinion and Basis for Opinion sections for a nonpublic company?

Qualified Opinion and Basis for Qualified Opinion

uncertainties

Situations in which the outcome of some matter cannot be determined as of the end of the audit fieldwork, such as the results of pending litigation.

component auditors

Under AICPA standards, auditors who perform work on the financial information of a component that will be used as audit evidence for the group audit. The term "other auditors" is used in the PCAOB standards.

Substantial doubt about going concern

When relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued).

unmodified opinion on group financial statements

When two or more CPA firms are involved in the audit of components that make up a set of group financial statements

the audit report ordinarily only presents KAMs for the ___ period

current

when management has properly disclosed the situation and indicates that the substantial doubt does not exist due to its plans, an __ __ __ section may at the auditors discretion, be added

emphasis of matter

AICPA standards use ___ __ __ paragraph or __ __ paragraph

emphasis of matter; other matters

what is the most frequently performed attestation service in the accounting practice?

expressing an independent and expert opinion on the fairness of financial statements

Other information

financial and non-financial information, other than the financial statements and the auditor's report, included in the entity's annual report

a consistency modification is not appropriate if the company is in its ___ year of operations

first

in the auditor's report, the Opinion is __ and Basis for Opinion ____, the rest of the order of the report is up to the auditor's judgement

first; second

for public companies, the 1. substantial doubt about going concern 2. GAAP not consistently applied between years 3. correction of a material misstatement in previously issued financial statements are presented where in the audit report?

immediately following the Opinion section

where does a nonpublic company include their reasoning for a qualified opinion on an audit report?

in the Basis of Qualified Opinion section

where does a public company include their reasoning for a qualified opinion on an audit report?

in the Opinion section in a separate paragraph

which word should be included in the title of the auditor's report?

independent

qualified opinions mean that the departures from GAAP are ____ but not _____

material; pervasive

examples of situations that may raise substantial doubt about going concern

negative cash flows from operations, defaults on loan agreements, arrearages on dividends, adverse financial ratios, work stoppage, loss of key franchise, customer, or supplier, uninsured catastrophe, legal proceedings

reporting of KAMs is not required for ___ companies, they are included in the report based on the client's desire for their disclosure or when inclusion is required by law or regulation

nonpublic

when management's plan to alleviate substantial doubt regarding a going concern involve financial support from third parties, the auditors should

obtain written evidence of the supporting parties intent and assess the ability of that party to provide such support

the distinction between the effects of the departures from GAAP that are material but not pervasive are a matter of ___ ___

professional judgement

the purpose of notes to financial statements is to

properly disclose information required by GAAP that cannot be adequately displayed in the financial statements

if management and the auditor disagree on substantial doubt of a going concern, a ____ opinion or ___ opinion will be issued

qualified; adverse

Determining what is material involves both ___ and ___ criteria.

quantitative; qualitative

Forms SB-1 and SB-2

registration for small businesses

Forms S-1 through S-11

registration statements

the PCAOB allows but does not ___ the name of the partner on the audit report

require

a disclaimer of opinion most frequently results from ___ ____

scope limitations

disclosures are meant to ___ information on the financial statements, not ____ improper financial statement presentation

supplement; correct

Form 8-K

the "current events" report filed periodically at the occurrence of major events, such as earnings releases, major asset sales, acquisitions, and auditor changes

PCAOB Form AP

the PCAOB form that requires 1. the name of the engagement partner 2. the names, locations, and extent of participation of other accounting firms that took part in the audit if their work constituted 5% or more of total audit hours 3. the number and aggregate extent of participation of other accounting firms that took part in the audit whose work was less than 5%

what are some examples of subjective matters that may be considered a CAM or KAM?

the allowance for sales returns, loan loss provisions, goodwill impairment, accounting for acquisitions, going concern assessments, hard to value financial instruments, and income taxes

Form 10-K

the annual report that publicly traded companies must file with the SEC

what happens when the audit firm that does the majority of the work does not wish to take responsibility of the component auditors?

the audit report is modified to divide responsibility between the audit firms

when comparative financial statements are presented by the client company, the auditors report should cover

the current year's financial statements as well as those for prior periods that were audited by the firm

what is the tenure date for public companies in an audit report?

the earlier of when the CPA firms signed its first engagement letter with the client or when it first began performing audits procedures for the client

Critical Audit Matters (CAMs)

those matters during the audit of a public company that involved difficult, subjective, or complex auditor judgments or that posed difficulty to the auditor in obtaining sufficient appropriate evidence or in forming the opinion on the financial statements

T/F: a disclaimer cannot be issued when the auditors have formed an opinion on the financial statements

true

in making a determination for KAMs, AU-C 701 states auditors should consider which three things?

1. areas of higher assessed risk of material misstatement, or significant risk 2. matters that relate to significant management judgement, like accounting estimates that have been identified with high estimation uncertainty 3. the effect on the audit of significant events or transactions that have occurred during the period

the description of how a KAM was addressed should include

1. auditor's response or approach to the matter 2. a brief overview of the procedures performed 3. an indication of the outcome of the audit procedures 4. key observations on the matter

Scope limitations may exist due to

1. circumstances beyond the control of the client (accounting records destroyed) 2. circumstances relating to nature and timing of the auditors work (auditor was hired too late to observe beginning inventory) 3. client imposed limitations

qualified opinions are issued when

1. financial statements are materially misstated (departure from GAAP) 2. when the auditors are unable to obtain sufficient appropriate audit evidence on which to base the opinion because of a scope limitation

for each CAM disclosed, auditors must include the following in the report

1. identification of the matter 2. description of the principal considerations that led the auditors to determine that the matter is a CAM 3. description of how the CAM was addressed 4. reference to the relevant financial statement accounts and disclosures that relate to the CAM

when a scope limitation is encountered the auditor should do what?

1. if its client imposed, auditor should communicate that to those charged with governance 2. attempt to obtain sufficient appropriate audit evidence by performing alternative procedures

Under GAAS and PCAOB standards, the group auditors have two basic reporting alternatives

1. make reference to the component auditors (shared responsibility opinion) 2. make no reference to the component auditors, assuming responsibility for the entire audit

modified opinions are required in which two circumstances?

1. materially misstated financial statements 2. inability to obtain sufficient audit evidence

additional audit related information examples include

1. reporting on comparative statements when there are predecessor auditors 2. alerting readers about the intended use of an audit report when it is not for general use

in identifying CAMs, the auditor should consider factors like

1. risks of material misstatements and significant risks 2. areas of the financial statements subject to significant management judgement like accounting estimates 3. nature and timing of significant unusual transactions and the extent of auditor effort and judgement in relation to 4. nature and extent of audit effort required to address the matter, including specialized skill or outside consultations 5. nature of audit evidence obtained regarding the matter

an additional financial statement-related matter is included in an audit report when

1. situations when there is substantial doubt about a company's ability to continue as a going concern 2. situation in which a company makes a change in accounting principle that has material effect on financial statements 3. uncertainty related to future litigation, significant transactions with related parties, or unusually important subsequent events

the primary situations that result in an audit report with an unmodified opinion but with additional financial statement-related information include

1. substantial doubt about a company's going concern status 2. GAAP inconsistently applied 3. other circumstances that the auditor believes could be emphasized

if management's plan results in alleviation of substantial doubt, the financial statement footnote describes

1. the conditions or events 2. managements evaluation of the significance of the conditions or events 3. its plans that alleviated the substantial doubt

the auditors should evaluate the change in accounting principle determining whether it meets what four requirements?

1. the newly adopted principle is generally accepted 2. the method of accounting for the effect of the change is in conformity with GAAP 3. the disclosures related to the change are adequate 4. management has justified that the new accounting principle is preferable

publicly owned companies are required to include in their annual reports balance sheets for the past __ years, and income statements, retained earnings and cash flow statements for the past ___ years

2; 3

Form AP must be filed within __ days of the date of the audit report is first included in a document filed with the SEC

35

pervasive

A 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 sufficient appropriate audit evidence.

shared responsibility opinion

An auditors' report in which the principal auditors decide to share responsibility with other auditors who have audited some segment of the client's business. The sharing of responsibility is done by making reference to the other auditors. Making reference is not, in itself, a qualification of the auditors' report.

The auditors who wish to draw reader attention to a financial statement note disclosure on significant transactions with related parties should disclose this fact in:

An emphasis-of-matter paragraph to the auditors' report.

component

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

adverse opinion

An opinion that the financial statements do not fairly present financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. This situation occurs when the auditors believe that departures from GAAP are both material and pervasive.

Key Audit Matters (KAMs)

As included in the AICPA and international auditing standards, matters that, in the auditor's professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated to those charged with governance.

An audit report for a public client indicates that the audit was performed in accordance with: A. Generally accepted auditing standards (United States). B. Standards of the Public Company Accounting Oversight Board (United States). C. Generally accepted accounting principles (United States). D. Generally accepted accounting principles (Public Company Accounting Oversight Board).

B. Standards of the Public Company Accounting Oversight Board (United States).

when there is a disclaimer of opinion regarding scope limitations is present, a and nonpublic public company's Basis for Opinion title will change to what?

Basis for Disclaimer of Opinion

material

Being of substantial importance. Significant enough to affect evaluations or decisions by users of financial statements. Information that should be disclosed in order for the financial statements to constitute a fair presentation.

qualified opinion

The appropriate form of audit report when there is a limitation in the scope of the audit or when the financial statements depart from GAAP significantly enough to require mention in the auditors' report, but not so significantly as to necessitate disclaiming an opinion or expressing an adverse opinion.

general purpose financial reporting framework

a financial reporting framework designed to meet the common financial needs of a wide range of users

a scope limitation may result in either

a qualified opinion or disclaimer of opinion

the SEC usually does not accept filings with ___ or ___ opinions

adverse; qualified

sufficient and appropriate audit evidence has been obtained when

all audit documentation has been reviewed the financial statements and notes have been prepared management has asserted that it takes responsibility for these financial statements

unmodified opinion- additional audit related information included in an audit report

auditors add an additional section to the audit report to include an audit related matter

what are examples of situations where an Emphasis of Matter section on consistency are not applied?

changes in accounting estimates, changes in principles with an immaterial effect on financial statements (even if they are expected to be material in the future)

if an uncertainty is not adequately disclosed on the financial statements, a ___ ___ ___ exists, meaning a qualified or adverse opinion is appropriate

departure from GAAP

if the prior year financial statements are unaudited, the firm should

disclose a disclaimer of opinion on those statements

a nonpublic company auditor report is signed with

the name of the CPA firm

Form 10-Q

the quarterly report that publicly traded companies must file with the SEC

when management's plan to alleviate substantial doubt regarding a going concern involve a cash flow forecast, the auditors should evaluate

the reliability of the underlying data and determine whether there is adequate support for the assumptions of the forecast

where is the additional financial statement-related information (emphasis of matter) section placed for a nonpublic company audit report?

the sections are included at a point following the Basis for Opinion section

when the opinion is modified what is the title of the Opinion and Basis for Opinion sections for a public company?

they remain the same

when the component auditors modify the opinion of their report on the component are the group auditors required to modify their opinion on the consolidated financial statements?

this depends on the materiality of the matter. must evaluate in relation to materiality amounts of the consolidated financial statements

when an auditor believes that the new accounting principle meets the four requirements, an additional section is added to the report to highlight lack of consistent application of accounting principles, however the opinion is ____

unmodified

an uncertainty may result in either

unmodified opinion and an emphasis of matter paragraph

in regard to past financial statements, the auditor should ___ their opinion

update

are CAMs required in auditor reports for public companies?

yes, for most public companies not including broker dealers, investment funds, or benefit plans

Pervasive effects on the financial statements are those that, in the auditors' judgment

• Are not confined to specific elements, accounts, or items of the financial statements. • If confined, represent or could represent a substantial proportion of the financial statements. • In relation to disclosures, are fundamental to users' understanding of the financial statements.