Chapter 3 AUDIT
Wording in disclaimer
"unable to render an opinion"
What are 2 causes of scope restriction
1. restrictions imposed by the client and 2. those caused by circumstances beyond either the client's or auditor's control.
The signature identifies the _____ or ____ who performed the audit. This shows that there is the legal and professional responsibility to ensure that the quality of the audit meets professional standards. The ______ of the ____ should also be indicated.
CPA firm, practitioner, city state, firm
____are used to draw the reader's attention to information presented or disclosed in the financial statements, such as a footnote disclosure.
Emphasis-of-matter paragraphs
The relevant financial reporting framework typically refers to
GAAP
Why is the auditor report date (day when auditor competed the auditing procedures) important?
This date is important to users because it indicates the last day of the auditor's responsibility for the review of significant events that occurred after the date of the financial statements.
If The balance sheet is dated December 31, 2019, and the audit report is dated February 15, 2020. Knowing the importance of the audit date what does it mean
This indicates that the auditor searched for material unrecorded transactions and events that occurred up to February 15, 2020.
If there is GAAP departure in material amounts of information what opinion
adverse
The 2nd part of the audit report includes
audit report address
Appropriate titles for the audit report include
independent auditors report, the independent accountants opinion, report of independent auditor
___ and ___ require key audit matters or critical audit matters in the standard unmodified audit report
international auditing standards, PCAOB
An auditor found FS to be inconsistent with GAAP what will he do
issue an unmodified opinion audit report with an addition of an emphasis of matter paragraph
A misstatement in the financial statements can be considered more if knowledge of the misstatement will affect a decision of a reasonable user of the statements.
materiality
If the qualification is due to a departure from GAAP, the auditor would state in the ____ section"except for the effects of the matters described in the Basis for Qualified Opinion section, the accompanying financial statements present fairly."
opinion
In a qualified report, the modification in a PCAOB report is slightly different in that a separate paragraph explaining the qualification follows the _____ paragraph rather than modifying the Basis for Opinion section.
opinion
The second paragraph in the auditors responsibility indicates 1. Procedures depend on the auditor's ____ ____and 2. includes an assessment of risk of ___ ___in the FS, 3. also considers policies relevant to the preparation and fair presentation of the FS in designing the audit performed (not sufficient to express an opinion on effectiveness) 4. That the audit includes evaluating the appropriateness of ___ ___ selected, the reasonableness of accounting policies, the overall FS presentation and the ability of the co ______ .
professional judgement material misstatements internal controls to continue as a going concern
Where are key audit matters discloses
section following basis for opinion
When an additional paragraph is needed what would that entail
standard report paragraph including the opinion paragraph (no changes in wording) & separate explanatory paragraph is added
Regardless of the amount involved, a disclaimer of opinion must be issued if what
the auditor is deemed to lack independence under the rules of the AICPA
The 8th step of the audit report is
the date
Immaterial would call for what kind of opinion
unmodified
Is this ex considered pervasive? failure to record a material sale is highly pervasive because it affects sales, accounts receivable, income tax expense, accrued income taxes, and retained earnings, which in turn affect current assets, total assets, current liabilities, total liabilities, owners' equity, gross margin, and operating income.
yes
What are the 4 conditions that must be met to issue a standard unmodified audit report?
1. All statements & disclosures are included in the financial statements 2. Sufficient appropriate evidence has been accumulated & auditor has conducted the engagement allowing them to conclude that the audit was performed with applicable auditing standards 3. Financial statements are presented fairly in respect with GAAP or other framework & that adequate disclosures have been included in the footnotes 4. There are no circumstances requiring the addition of an emphasis of matter paragraph or medication of the wording or auditors opinion in the report
A standard unmodified opinion is issued when? 4 conditions are met which are
1. All statements and disclosures are in the FS 2. Appropriate and sufficient evidence accumulated - audit performed with audit standards 3. No departure from GAAP 4. No emphasis is needed
Changes that affect consistency (3)
1. Changes in accounting principles, such as a change from FIFO to LIFO inventory valuation 2. Changes in reporting entities, such as the inclusion of an additional company in combined financial statements 3. Corrections of errors involving principles, by changing from an accounting principle that is not generally acceptable to one that is generally acceptable, including correction of the resulting error
Changes that affect comparability and therefore don't need need to be included in the audit report (4)
1. Changes in an estimate, such as a decrease in the life of an asset for depreciation purpose 2. Error corrections not involving principles, such as a previous year's mathematical errors 3.Variations in format and presentation of financial information 4. Changes because of substantially different transactions or events, such as new endeavors in research and development or the sale of a subsidiary
The 8 parts of the audit report include
1. Report title 2. Audit report address 3. Auditor's opinion 4. Auditor's basis for opinion 5. Managements responsibility 6. Auditors responsibility 7. Audit firm's signature and location 8. Audit report date
What are the 3 factors/ closely related topics regarding issuing a modified opinion
1. Scope of the audit has been restricted [scope limitation] 2.the financial statements have not been prepared with GAAP [ GAAP departure] 3. The auditor is not independent
The necessity for disclaiming an opinion may arise from what situations (2)
1. Severe limitation on the scope of the audit 2. nonindependent relationship under the AICPA Code between the auditor and the client.
The existence of 1+ following factors causes uncertainty about the ability of a company to continue as a going concern
1. Significant recurring operating losses or working capital deficiencies 2. Inability of the company to pay its obligations as they come due 3. Loss of major customers, the occurrence of uninsured catastrophes such as an earthquake or flood, or unusual labor difficulties 4. Legal proceedings, legislation, or similar matters that have occurred that might jeopardize the entity's ability to operate
The basis for opinion includes (4)
1. audit conducted in accordance with GAAS, 2. Reference to additional responsibilities in auditors responsibilities section 3.. independent of the co and that they have fulfilled ethical obligations 4. Final sentence - indicating auditor believes that sufficient evidence to supports auditor's opinion
A CPA has knowledge of a large misstatement in fixed assets might affect a user's willingness to loan money to a company if the assets were the collateral. A misstatement of inventory did not affect cash, accounts receivable, and other elements of the financial statements, or the financial statements as a whole, they are materially correct, what must the CPA do
1. auditor must evaluate all effects on financial statements 2.qualified opinion if the misstatement is material
Examples of explanatory information the auditor may report as an emphasis of a matter include the following
1. material related party transactions 2. Important events subsequent to the balance sheet date 3. Accounting matters affecting the comparability of the financial statements with those of the preceding year 4. Material uncertainties disclosed in the footnotes such as unusually important litigation or regulatory action 5. A major catastrophe that has had or continues to have a significant effect on the entity's financial position
In the 1st paragraph of the opinion section indicates what 2 things
1. which CPA firm has performed the audit 2.the financial statements that were audited, including notes, balance sheet dates, accounting periods in the income statement and statement of cash flows
What are common causes for the addition of an emphasis of matter paragraph or modification
1.Inconsistent with GAAP 2. Auditor agrees with departure from promulgated accounting principles 3. Substantial doubt about going concern 4. Emphasis of other matters 5. Reports involving other auditors (first 4 require additional paragraph, 5th use different wording in opinion and basis for opinion paragraphs
The standard unmodified opinion audit report is issued when what has been met?
4 conditions are met
When the CPA makes reference in the report, this type of report is called a
A shared unmodified opinion audit report
Don't require the communication of key audit matters but do provide guidance for how to communicate these matters if the terms of the audit engagement require the disclosure
AICPA
The 6th section of the audit report is __ ___ this section must include the heading __ ___ for the audit of financial statements followed by 3 paragraphs which are
Auditor's responsibility x2 1. Obtain reasonable assurance 2. The scope of the audit and evidence accumulated 3. Auditors communicated to those in governance regarding the scope and timing of the audit
What date is used for the audit report
Day when auditor completed the auditing procedures needed to obtain sufficient appropriate audit evidence.
For example, if the client insists on using replacement costs for fixed assets or values inventory at selling price rather than historical cost as required, this would probably cause the CPA to issue what report? And why
a departure from the unmodified opinion audit report is required, departure from GAAP
The opinion section of the report if on comparative financial statements would require
a report on both year's statements
When the financial statements are not fairly presented what audit
adverse
a report issued when the auditor believes the financial statements are so materially misstated or misleading as a whole that they do not present fairly the entity's financial position or the results of its operations and cash flows in conformity with GAAP
adverse
As misstatements become more pervasive, the likelihood of issuing an ____ opinion rather than a ____ opinion increases.
adverse, qualified
How is the opinion paragraph stated, why
as an opinion rather than on absolute fact, intent is to indicate that the conclusions are based on professional judgments
The managements responsibility section references management's responsibility under accounting standards to ____the ability of the company to continue as a going concern and also references the responsibility of those charged with _____ (e.g., the board of directors) to oversee the financial reporting process.
assess, governance
An unmodified opinion with emphasis of matter explanatory paragraph or nonstandard wording is issued when?
audit has satisfactory results, FS are fairly presented but auditor believes that its important to provide additional information *** that is already in the FS somewhere it is basically pointing it out
When is a disclaimer audit issued? (2)
auditor is unable to form an opinion as to whether the financial statements are fairly presented - scope restriction or auditor is not independent
The 4th part of the audit report is
basis for opinion
The 3rd paragraph indicates that the auditor communicates to ____ ___ the planned scope and timing of the audit as well as any significant ___ including significant deficiencies and material weaknesses in __ __
charged with governance, findings, internal control
The standard unmodified opinion audit report is sometimes called ___ __ bc there no need requiring a modification of the auditor's opinion - this is the most common audit opinion (bc most companies make changes to their acc records to avoid a qualification or modification by the auditor)
clean opinion
Changes that affect ____ and therefore don't need need to be included in the audit report
comparability *if material change disclose in footnotes
Auditing standards require the auditor to call attention to circumstances in which accounting principles have not been ____ observed in the current period in relation to the preceding period.
consistently
Unmodified opinion refers to the fact that the auditor's opinion
contains no material exceptions or qualifications, clean report, in accordance with GAAP, clean report
When conducting the audit the auditor found that the FS are fairly presented and that the audit has satisfactory results however there are other reports involving other auditors this requires what
different wording in the opinion and basis for opinion paragraphs
If its a scope limitation, and lack of independence what opinion will most likely be used
disclaimer
If the qualification is due to a scope limitation, the auditor would issue what report
disclaimer
Limitation on scope and lack of independence prevents the auditor from expressing an opinion on the financial statements as a whole causing what opinion
disclaimer
This report is issued when the auditor has been unable to satisfy himself or herself that the overall financial statements are fairly presented.
disclaimer
What audit is used when auditor is unable to form an opinion as to whether the financial statements are fairly presented or auditor is not independent - scope restriction
disclaimer
Highly material would call for what kind of opinion
disclaimer or adverse
When the highest level of materiality exists and FS cannot be considered fairly stated, the auditor must issue either a ____ of opinion or an ___ opinion, depending on which conditions exist.
disclaimer, adverse
Wording in qualified
except for
Changes that affect consistency require
explanatory paragraph if material
When is an adverse audit issued
financial statements not fairly presented as a whole
The wording of the opinion and the nature of the paragraphs explaining the reason for a modified opinion are similar under PCAOB auditing standards, although the explanation for the modification will ....
follow the opinion paragraph in a PCAOB report rather than be included in the Basis for Opinion section.
Both disclaimers and adverse opinions are used only when the condition is
highly material.
When a misstatement in the financial statements exists but is unlikely to affect the decisions of a reasonable user, it is considered to be _____
immaterial.
What is the difference between a disclaimer opinion from an adverse opinion
in that a disclaimer can arise only from a lack of knowledge by the auditor, whereas to express an adverse opinion, the auditor must have knowledge that the financial statements are not fairly stated.
In the audit, the Auditor agrees with departure from promulgated accounting principles what will he issue
issue an unmodified opinion audit report with an addition of an emphasis of matter paragraph
When conducting the audit the auditor found that the FS are fairly presented , but the auditor believes there should be emphasis of other matters
issue an unmodified opinion audit report with an addition of an emphasis of matter paragraph
When conducting the audit the auditor found that the FS are fairly presented but has substantial doubt about going concern what will be issued
issue an unmodified opinion audit report with an addition of an emphasis of matter paragraph
This type of approach is appropriate when the portion of the financial statements audited by the other CPA is material in relation to the whole
make reference in the report, shared unmodified opinion audit report
The 5th part of the audit report includes __ ___ which describes this group's responsibility for the financial statements, this includes selecting the appropriate accounting principles and maintaining internal control over financial reporting sufficient for preparation of financial statements that are free of material misstatements due to __ or ___
managements responsibility, fraud, error
Assume that the auditor is unable to satisfy himself or herself whether inventory is fairly stated in deciding on the appropriate type of opinion. Because of the effect of a misstatement in inventory on other accounts and on totals in the statements, the auditor needs to consider the materiality of the combined effect on inventory, total current assets, total working capital, total assets, income taxes, income taxes payable, total current liabilities, cost of goods sold, net income before taxes, and net income after taxes. When the auditor concludes that a misstatement is ____ but does _____, a qualified opinion (using "except for") is appropriate.
material not overshadow the financial statements as a whole
If inventory is the largest balance on the financial statements, a large misstatement would probably be so _____ that the auditor's report should indicate the financial statements taken as a whole cannot be considered __ ____
material, fairly stated
____ is an essential consideration in determining the appropriate type of report for a given set of circumstances.
materiality
An adverse opinion is used only when the auditor believes that the overall financial statements are so ___ _____ or misleading that they do not present fairly the ___ ___ or results of operations and cash flows in conformity with.
materially misstated, financial position
What approach is typically followed when the other auditor audited an immaterial portion of the statements, the other auditor is well known or closely supervised by the group engagement partner, or the group engagement partner has thoroughly reviewed the other auditor's work.
no reference made to other auditor, unmodified opinion audit report
This section states the auditors conclusions based on the results of the audit, it is presented first due to its importance and includes a header describing it.
opinion
The new proposed report presents ___ first and provides __ ___related to the responsibilities of management for preparing financial statements and responsibilities of the auditor in conducting the audit.
opinion, additional information
A qualified report contains modifications to both the _____ paragraph and the _____ section.
opinion, basis for opinion
A qualified opinion report can be used only when the auditor concludes that what
overall financial statements are fairly stated.
When determining whether an exception is highly material, the extent to which the exception affects different parts of the financial statements must be considered this is called
pervasiveness.
A controversial part of the auditors report is the meaning of the term _ __ the courts believe that auditors are responsible for looking beyond GAAP to determine if users may be misled or that the statements are in accordance with GAAP but it may be necessary to examine the substance of transactions and balances for possible misinformation
presented fairly
In situations of lesser materiality, a ____ opinion is appropriate.
qualified
Materiality would call for what kind of opinion
qualified
The phrase "except for" is only used with this type of audit opinion
qualified
When the auditor concludes that the overall FS are fairly presented but 1. Applicable acc standards not followed what audit
qualified
a report issued when the auditor believes that the overall financial statements are fairly stated but financial data indicated a failure to follow GAAP
qualified opinion
A ____ opinion or _____ depending on_____ , is required if the group engagement partner is not willing to assume any responsibility for the work of the other auditor.
qualified, disclaimer, materiality
This term indicates that an audit cannot be expected to completely eliminate the possibility that a material misstatement will exist in the financial statements - meaning no guarantee
reasonable assurance
The first paragraph of the auditor's responsibility explains the audit is designed to obtain ___ __ about whether the financial statements are free of __ whether due to fraud or error
reasonable assurance, material misstatements
The 7th step of the audit report is
signature and address of CPA firm (city and state of where it was completed)
The 3rd part of the audit report includes what
the opinion section
The phrase in the opinion report "in our opinion" indicates what
there may be some risk associated with the finical statements even tho they have been audited
Similarities between internal control over financial reporting and audit reporting over financial reporting
they are very similar
The audit report is typically addressed to whom?
those the report is prepared for typically the board of directors and stockholders
Auditing standards require that the report be ___ and include the word ____ to convey to users that the audit was unbiased
titled independent
If a misstatement is immaterial __ ___ is therefore appropriate.
unmodified opinion
For example, if a misstatement is immaterial relative to the financial statements of the entity for the current period, it is appropriate to issue an
unmodified opinion audit report.
When audit has satisfactory results, FS are fairly presented but auditor believes that its important to provide additional information
unmodified opinion w/ emphasis of matter paragraph or nonstandard wording
2 types of opinion for internal control report
unqualified (so unmodified) and Internal Controls are ineffective (adverse)
In the opinion paragraph of a qualified report what 2 things must the auditor do
use the term "except for" and then modify the Basis for Qualified Opinion section accordingly.
The highest level of materiality exist when?
users are likely to make incorrect decisions if they rely on the overall FS
When is a qualified audit issued? For what situations
when the auditor concludes that the overall FS are fairly presented but we have something to say such as: GAAP departure regarding consistency or going concern