Audit Exam 3 (final chapters)
What are auditors' responsibilities with respect to subsequent events both for the financial statement and internal control audits?
Auditors responsible for reporting any changes of FS or ICFR that might affect the reporting between BS date and auditors report.
The auditor's "formal subsequent event period" is from the current year B/S date to what date?
B/S date to the Audit Report date. (2/15 usually)
What audit procedures do auditors normally perform/evidence gathered when searching for contingent liabilities?
Board minutes, contracts/agreements, tax liability/returns, confirm guarantees & letters of credit w/ banks & lenders, talk w/ mgmt, Legal letters, representation letter
What are the primary assertions of concern to the auditor when searching for contingent liabilities?
Completeness Valuation/Allocation Cutoff
What is a representation letter?
Contract stating mgmt has shared any contingent liabilities they are aware of.
What is the significance of the auditor report (opinion) date in terms of evidence gathered to support the audit?
Date the auditor claims to have collected sufficient & appropriate evidence
What is the "dual-date" period?
Dates between the Audit Report date and the FS Issue date.
What are legal letters and what type of audit evidence are legal letters?
Def: letter of audit inquiry sent to attorney to obtain or corroboration info about litigation, claims, and assessments. Audit Evidence: Confirmation
What is the importance of analyzing a client's legal expenses with respect to evaluating pending litigation?
Determine if there are litigations company has not disclosed
which types of opinions the auditor may need to issue instead: (1) Lack of independence
Disclaimer
which types of opinions the auditor may need to issue instead:(4) In some instances going-concern issues.
Disclaimer if extreme
In the case of a scope limitation, know when auditors should issue an IC opinion that departs from the standard unqualified opinion.
Disclaimer if mgmt imposed and/or more than minor effect (not letting auditor test IC somewhere). Adverse if 1 MW exists.
How should the auditor handle a subsequent event that is discovered during this dual-date period?
Dual-date the report ("except for" - limits liability) OR change the date of the auditors report to the date of the subsequent event (extends liability)
Auditor performs integrated audit makes what changes to the audit opinion?
Explanatory paragraph added to standard unqualified Opinion section referring to the audit of IC or FS.
Lack of comparability makes what changes to the audit opinion?
Explanatory paragraph in Opinion section
Going concern makes what changes to the audit opinion?
Explanatory paragraph in Opinion section & reference additional paragraph in CAM section.
In general, how do you account for unrealized gains and losses at year-end?
FN disclosure & recognize G/L in OCI
What an adverse opinion say about (1) the fairness of the FS or (2) effectiveness of internal controls? In other words, what does each type of opinion convey to users of the FS, including IC effectiveness for publicly-traded companies?
FS - FS are not fairly presented IC - Company has not maintained effective IC over financial reporting
What a qualified opinion say about (1) the fairness of the FS or (2) effectiveness of internal controls? In other words, what does each type of opinion convey to users of the FS, including IC effectiveness for publicly-traded companies?
FS - FS are presented fairly in all material respects, EXCEPT FOR IC - NOT A THING
What a disclaimer opinion say about (1) the fairness of the FS or (2) effectiveness of internal controls? In other words, what does each type of opinion convey to users of the FS, including IC effectiveness for publicly-traded companies?
FS - No opinion can be expressed regarding fairness of FS IC - Did not express an opinion
What an unqualified opinion say about (1) the fairness of the FS or (2) effectiveness of internal controls? In other words, what does each type of opinion convey to users of the FS, including IC effectiveness for publicly-traded companies?
FS are fairly stated in all material respects. IC - the company maintained effective IC over financial reporting in all material respects.
What information should be communicated to the audit committee by the auditor for the f/s and IC audits?
FS: Significant adjustments, judgement on quality of client's acct principles, disagreement w/ mgmt (difficulties during audit), fraud discovered IC: all significant deficiencies and MW in writing
Know the procedures auditors should perform at the end of the audit before issuing the audit report
Final analytical procedures, obtain rep letter, review WP, Final evaluation of results, Evaluate FS presentation & disclosure, obtain ind review of engagement, evaluate going concern.
What is auditor tenure?
How long the auditor has been giving the audit opinion. Yr auditor began auditing company.
We discussed in class that it is possible for a company to receive an unqualified financial statement opinion, but receive an adverse internal control opinion. Be able to explain the reasons why this is possible.
If the FS is adjusted by management below PJM, then an unqualified opinion may be issued.
Know when accounting changes are considered lack of consistency AND comparability and when accounting changes are only considered lack of comparability.
Lack consistency & comparability - correction of a misstatement in FS OR change in acct. principle. Only lack of comparability - change in estimate, change in classification & reclassification, change expected to have material future effect.
What are the contents of a typical legal letter.
List of pending/threatening litigation, list of unasserted claims, evaluate outcome of each litigation, statement by mgmt acknowledging attorney's responsibility
What are critical audit matters?
Matters communicated to audit committee that: 1. Relate to accts/disclosures material to FS 2. Involve especially challenging, subjective, or complex audit judgement
For an Adverse opinion, how the standard unqualified FS report should be modified?
Modify Opinion paragraph, add explanatory paragraph (after opinion) to describe violation of GAAP.
Know the major new changes to the PCAOB auditor's financial statements opinion.
Opinion section presented first, Basis for Opinion follows. Responsibilities for mgmt Auditor Independence Key feature (audit tenure/other auditors) Critical audit matters (CAM's)
Know the primary differences between the financial statement audit report of a public company (PCAOB) and private company (ASB).
PCAOB - accordance w/ PCAOB, addresses IC, CAM's are mandatory, Unqualified = clean opinion ASB - accordance w/ GAAS, no IC opinion, KAM are voluntary, Unmodified = clean opinion
Understand the history/background surrounding the PCAOB's new auditing standard on the auditor's report/opinion.
PCAOB's response to interest of investors for enhanced communication to audit. Unchanged since 1940's Retains pass/fail opinion. Reduced information asymmetry (invest/auditors & investors/mgmt) Adopted June 1, 2017 SEC approved Oct 23, 2017
When is it necessary to record the contingent liability?
Probable & estimated = Accrual (record)
which types of opinions the auditor may need to issue instead: (3) Departure from GAAP (includes disclosures)
Qualified if material but not pervasive OR Adverse is pervasively material
which types of opinions the auditor may need to issue instead: (2) Scope limitation
Qualified if material but not pervasive OR Disclaimer is pervasively material
When is footnote (FN) disclosure required?
Reasonable possible = FN disclosure Probable, but not estimated = FN disclosure
What is the purpose of a management letter?
Recommendations auditor makes for the client.
Opinion based in part on the report of another auditor makes what changes to the audit opinion?
Refer to work of other auditors in the Opinion & Basis for Opinion paragraphs. Additional paragraph optional: - How much FS audited by another company? - Form AP
For a Qualified opinion, how the standard unqualified FS report should be modified?
Scope limitation - "except for" in opinion section and explanatory paragraph in Basis for Opinion sections GAAP Departure - "except for" in opinion section and explanatory paragraph in Opinion section. Refer to scope limitation in Basis for Opinion section.
For a Disclaimer opinion, how the standard unqualified FS report should be modified?
Scope limitation - disclaim in Opinion sec, add explanatory paragraph (after opinion), delete standard scope paragraph in Basis of Opinion. Lack of Independence - only states we are not independent of company, not required to disclose why they aren't independent.
What audit procedures should the auditor perform/evidence gathered to gain knowledge regarding subsequent events (both for the financial statement and IC audits)?
Search for unrecorded liabilities (sub. cash disbursement journal) & review subsequent events (Ask mgmt, read post yr end interim FS & BOD minutes, acct records for unusual trans, ask legal counsel.)
In other words, what type of control deficiency would result in an adverse internal control opinion?
1 MW
Know the instances when the auditor should issue a modified unqualified financial statement opinion.
1. Opinion based in part of another auditor (division of responsibility) 2. Integrated audit 3. Going Concern 4. Lack of consistency 5. Additional emphasis
What steps should the auditor take if the client refuses to make corrections to previously issued financial statements?
1. disassociation between auditors report & client FS (taken of FS) 2. Notify appropriate agencies (SEC) auditors report is invalid & unreliable 3. Notify other reliable parties (lenders, creditors, etc.)
How does examination of subsequent cash disbursements help the auditor identify unrecorded liabilities at year- end?
? May bring attention to unrealized subsequent events mgmt did not inform the auditor of?
Why is it important for the auditor to obtain a rep letter from management?
??? Auditor is not blamed?
For each type of internal control opinion that departs from a standard unqualified opinion, know how the standard unqualified internal control report should be modified. Again, you need to know the specific changes required.
Adverse: modify Opinion paragraph, add explanatory paragraph describing MW discovered. Disclaimer: Delete standard scope paragraph, add explanatory paragraph to describe scope limitation.
What is Form AP and what's reported on this form?
Audit Participants. Includes name of Partner and acct firms assisting in audit.
Know what the auditor should do if s/he discovers a subsequent event after the audit report/financial statement issue date that may pertain to the auditor's previously issued audit report.
Auditor contacts legal counsel to determine if they are responsible & if misstatement is material, FS restatement is necessary.
If the auditor does not want to dual-date, what does this mean for the auditor in terms of testing for subsequent events and responsibilities/liabilities?
Auditor is then responsible for all subsequent events up to the date it's changed to so they need sufficient testing up to that date.
Know the components of a standard unqualified (unmodified) financial statement audit report (opinion) and standard unqualified internal control report (opinion).
Title Addressee Opinon Basis (IC-definition of limitations) Critical Audit Matters (CAM) Name/signature of firm Tenure (Not for IC) Location & Date If necessary: explanatory/emphasis paragraphs
With respect to the financial statement audit or the internal control audit, what is the primary difference between a Type I vs. Type II subsequent event?
Type 1 sub event - FN disclosure and adjustment, happened prior to yr end Type 2 sub event - Only FN disclosure, occurred post yr end
Emphasis paragraph makes what changes to the audit opinion?
Voluntary, add explanation paragraph to Opinion section
Know the definition of "going-concern."
Will the company exist for at least 1 yr after the BS date?
Is it required by auditing standards to obtain a signed rep letter from management?
Yes