AUDIT 409 Ch.1A
Reliability
Financial statement users make important financial decisions based upon information in company financial statements. Thus, they are concerned with the reliability of the information contained therein
Complexity
Financial statements are complex, the dollar amounts reported are often affected by significant estimates, and the disclosures often require significant knowledge and experience to evaluate. Most financial statement users do not have the accounting and legal knowledge to assess the reasonableness of complex accounting and disclosure choices being made by the company
Unqualified Issuer Report on F/S: Opinion Section
First sentence explains audit was conducted and identifies the FSs and dates of FSs. Second sentence is auditor's opinion.
Unmodified Non-Issuer Report on F/S: Opinion Section
Identifies the financial statements that were audited and clearly states the auditor's opinion that the financial statements were fairly presented, in all material respects, in accordance with the applicable financial reporting framework.
Unmodified Audit Report
In a private company audit, if auditors determine the financial statements are presented fairly in accordance with the applicable financial reporting framework, then auditors issue the standard unmodified audit report
Unqualified audit report
In a public company audit, if auditors determine the financial statements are presented fairly in accordance with the applicable financial reporting framework, then they issue the standard unqualified audit report.
Auditing Standards Board (ASB)
Standing committee of the AICPA Issues audit standards for the audits of private and nonprofit organizations.
Unmodified Non-Issuer Report on F/S: Responsibilities of Management Section
States management's responsibility for the preparation and fair presentation of the financial statements; the design, implementation, and maintenance of internal control; and the evaluation of conditions or events that raise substantial doubt about the company's ability to continue as a going concern.
Unmodified Non-Issuer Report on F/S: Basis for Opinion Section
States that the auditor conducted the audit in accordance with auditing standards and is required to be independent of the company.
Unmodified Non-Issuer Report on F/S: Auditor's Responsibilities Section
States the auditor's objective is to obtain reasonable assurance about if the fnan stmts are free from material misstatements due to fraud or error. Lists specific actions auditor takes in performing audit in accordance with GAAS.
Unqualified Issuer Report on F/S: Basis for Opinion Section
States the differing responsibilities of auditors and management. References registration with the PCAOB and the independence requirements of the SEC and other federal securities laws.
Unqualified Issuer Report on F/S: Auditor Tenure
States the year in which the firm began serving consecutively as the company's auditor.
Auditor Responsibility
•provide an opinion on whether the financial statements are presented fairly in accordance with the applicable financial reporting framework, are free of material misstatements, and are prepared in a manner consistent with prior years. 1.Conducting the audit in accordance with the appropriate auditing standards. 2.Planning and performing the audit with professional skepticism 3. Planning and performing the audit with professional judgment.
Unqualified Issuer Report on F/S: Title
"independent" in the title to emphasize auditors are external and unbiased and therefore can provide an unbiased opinion. "registered" is included to indicate the firm is registered with the PCAOB.
The Audit Expectation Gap can be Reduced by:
1.Auditors performing their duties appropriately, complying with auditing standards, and meeting the minimum standards of performance that should be expected of all auditors. 2.Supervision and inspections of audits ensuring that auditing standards have been applied correctly. 3.Auditing standards being reviewed and updated on a regular basis to enhance the work being done by auditors. 4.Financial statement users being educated as to the responsibilities of preparers and auditors of financial statements. 5.Assurance providers reporting accurately the level of assurance being provided.
Management Responsibility
1.Preparing the financial statements fairly and in compliance with the applicable financial reporting framework. 2.Designing, implementing, maintaining and certifying that internal controls provide reasonable assurance that the financial statements are fairly presented in accordance with the applicable framework, are free of material misstatements, and are prepared in a manner consistent to prior years. 3.Providing the auditors with access to all records, documentation, and personnel relevant to the preparation and fair presentation of the financial statements, and any additional information the auditors may consider relevant to complete the audit.
Unrealistic Expectations the cause the Audit Expectation Gap
1.The auditor is providing complete assurance. 2.The auditor is guaranteeing the future viability of the entity. 3.An unmodified audit opinion is an indicator of complete accuracy of the financial statements. 4.The auditor will definitely find any and all fraud. 5.The auditor has checked all transactions.
Integrated Audit
An audit of both financial statements and internal control over financial reporting, provided by the external auditor. Required for public companies.
GAAS (Generally Accepted Auditing Standards)
Applies to audits of PRIVATE companies.
Statements on Auditing Standards (SASs)
Audit standards issued by the ASB, they explain the nature and extent of an auditor's responsibility & offer guidance to auditors performing audits of private companies. Compliance is mandatory for AICPA members.
Material Weakness
Auditor concludes the company did not maintain effective ICFR. A deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected, on a timely basis.
Unqualified Issuer Report on F/S: Paragraph referencing the audit of internal control.
Auditor's opinion on the internal controls audit.
Limitations of Financial Statement Audits
Caused by: 1. The nature of financial reporting 2. The nature of audit procedures 3. the need for the audit to be conducted within a reasonable period of time at a reasonable cost.
Competing incentives
Company managers have natural incentives to disclose the information contained in the financial statements in a way that presents their performance in the best possible light and to maximize their pay and bonuses. Users may find it difficult or impossible to identify when management is presenting biased information
Internal Audits
Conducted by employees within the company. The function of which is determined by those charged with governance and management within the organization. Often conduct operational audits, compliance audits, internal control assessments, and reviews.
Securities act of 1934
Created and empowered the SEC Regulates disclosure of annual financial statements by companies traded on public stock exchanges and requires annual financial statement audits.
Unqualified Issuer Report on F/S: Critical Audit Matters section
Defines critical audit matters, provides a description of the critical audit matters, and details how the critical audit matter was addressed in the audit.
Situation: Auditor is not Independent
Disclaimer of Opinion: Auditor is not independent and cannot express an opinion.
Why is an Audit of Internal Controls Required?
Effective ICFR provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes. When internal controls are effective, the more likely it is that financial statements will be free of material misstatements and errors.
Unmodified Non-Issuer Report on F/S: Date
End of fieldwork, conclusion of gathering and evaluating evidence, and drawing all conclusions for the audit.
Financial Accounting Standards Board (FASB)
Establish accounting and reporting standards for nongovernmental entities with the goal of providing information.
Unqualified Issuer Report on F/S: Scope Paragraph
Explains process of conducting an audit. Mentions concept of reasonable assurance about whether the financial statements are free of material misstatement. Includes explicit statement that the PCAOB auditing standards were followed. Includes brief discussion about the professional judgments made during the audit. Concludes with statement that the audit firm believes that its audit provides reasonable basis for its opinion.
State Boards of Accountancy
Issue CPA licenses Adopt and enforce rules of conduct for CPAs •Adopting and enforcing rules regarding continuing professional education requirements •Investigating complaints, conducting hearings, and taking appropriate disciplinary actions, such as suspension or revocation of the C P A license
Standards for Attestation Engagements (SSAE)
Issued by ASB
Statements on Quality Control Standards (SQCS)
Issued by ASB
Statements on Standards for Accounting and Review Services (SSARS)
Issued by the Accounting and Review Services Committee. Provides guidance for services provided on historical financial statements that are less extensive than an audit.
Remoteness
Most FS users don't have access to company under review. This makes it difficult for those users to determine whether the information contained in the FSs is a fair representation of the entity and its activities for the relevant period.
Unqualified Audit Report of ICFR: Definition and Inherent Limitations Section
Provides definition of ICFR The final sentence cautions not to use the current-year opinion to assume that future internal controls will be effective. Circumstances may change in the future that could render controls ineffective if the controls are not modified appropriately.
Audit of ICFR
Public companies must have their ICFR audited annually by an independent auditor. The reason for requiring an audit of internal controls is because effective internal control provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes. If auditors have determined the company has maintained effective ICFR, then they issue the standard unqualified audit report on ICFR.
Suppliers
Read financial statements to determine if companies can pay for goods & services & if company will remain a going concern to continue to pay their debts when they come due.
Securities Act of 1933
Regulates disclosure of financial information in a company's initial public offering of stocks and requires that the financial disclosures for the IPO be audited.
Professional Judgment
Relates to the application of relevant training, knowledge, and experience that the auditors use while making informed audit decisions in conducting an audit.
Sources of Demand for Audit and Assurance Services
Remoteness, Complexity, Competing Incentives, and Reliability.
Unqualified Report of ICFR
Report issued when auditor determines the company has maintained effective ICFR for the period uner audit.
Unqualified Audit Report of ICFR: Date
Same as financial statement audit report
Assurance Providers
The big 4, mid-teir, regional, and local accounting firms.
Materiality
The degree to which information impacts decision making.
Unqualified Audit Report of ICFR: Opinion Section
The first sentence explains that an audit of ICFR was conducted and references the COSO Internal Control—Integrated Framework as the criteria used as the basis for determining if ICFR are effective. The second sentence states the auditor's opinion.
Unmodified Non-Issuer Report on F/S: Address
The report is addressed to the owners or shareholders of the company and to the board of directors, if applicable.
Unqualified Audit Report of ICFR: Title
The term independent is also in the title of this report to emphasize the auditors are external to the company, unbiased, and therefore can provide an objective opinion. In addition, the term registered is required to indicate that the firm is registered with the PCAOB.
Unqualified Audit Report of ICFR: Scope Paragraph
This paragraph explains that auditors conducted their audit in accordance with the standards of the PCAOB. In brief terms, it explains the process of conducting an audit of the effectiveness of ICFR. It mentions that auditors are only required to obtain reasonable assurance about whether the company maintained, in all material respects, effective ICFR. It concludes with a statement that the audit firm believes its audit provides a reasonable basis for its opinion.
Unqualified Audit Report of ICFR: Basis for Opinion Section
This section states the different responsibilities of management and auditors. Like the audit report on the financial statements, this section references registration with the PCAOB and independence requirements of the SEC and other federal securities laws.
Situation: Material limitation on the auditor's ability to gather sufficient appropriate evidence, aka SCOPE LIMITATION
Type of Modified Opinion: Qualified: Financial statements are presented fairly except for the auditor's inability to gather evidence for a material item Disclaimer of Opinion: auditor was not able to gather sufficient appropriate evidence and cannot express an opinion on the financial statements (pervasively material scope limitations)
Situation: Material departure from the applicable financial framework and the client refuses to make corrections
Type of Modified Opinion: 1. Qualified - financial statements are presented fairly except for uncorrected departure 2. Adverse - financial statements are not presented fairly and should not be relied upon (pervasively material departures)
Adverse Opinion on Effectiveness of ICFR
When one or more material weaknesses are discovered during the audit. Explicitly states company didn't maintain effective ICFR.
SEC
a federal government agency whose mission is to protect investors, maintain fair and efficient markets, and facilitate capital formation. Primary task is to enforce and interpret securities laws.
Unqualified Audit Report of ICFR: Paragraph referencing financial statement audit
a reference to the financial statement audit report and states the type of opinion that was given on the financial statements.
Operational Audit
an assessment of the economy, efficiency and effectiveness of an organization's operations. Generally conducted by an org's internal auditors.
Professional Skepticism
an attitude adopted by auditors when conducting an audit. It means auditors remain independent of the entity, its management, and its staff when completing the audit work. In a practical sense, it means auditors maintain a questioning mind and thoroughly investigate all evidence presented by their client. Auditors must seek independent evidence to corroborate, or confirm, information provided by their client. Auditors must be suspicious when evidence contradicts documents held by their client or inquiries made of client personnel, including management and those charged with governance.
Compliance Audit
an audit to determine whether the entity has conformed with regulations, rules, laws, or processes. The Internal Revenue Service (I R S) may conduct an audit of an individual or a company to determine if tax laws have been followed and the correct amount of tax is paid.
Assurance services
are independent professional services that improve the quality of information, or its context, for decision makers. Risk Inventory Services, Website Security, and Data Integrity.
Assurance Services
include financial statement audits, audits of effectiveness over internal control of financial reporting, compliance audits, operational/performance audits, and internal audits
Unmodified Non-Issuer Report on F/S: Title
independent is in the title of the report to emphasize the auditors are external to the company, unbiased, and therefore can provide an objective opinion
Assurance Engagement
involves an assurance provider arriving at an opinion about some information being provided by their clients to a 3rd party. Attestation and auditing services are types of assurance services
PCAOB
is a non-profit corporation established through the SOX legislation in 2002. Its mission is to oversee the audits of public companies to protect the interests of investors.
Large Accelerated Filer
issuer with a worldwide market value held by non-affiliates of $700 million
Accelerated Filer
issuer with a worldwide market value of outstanding common equity by non-affiliates of $75 million or more but less than $700 million
Non-accelerated filer
issuer with less than $75 Million worth of worldwide outstanding common equity
Strong Internal Controls
it is more likely those internal controls will prevent, or detect and correct, material misstatements, which decreases audit risk.
AICPA
kay activities: representing the profession before rule-making bodies, advocating for the profession before legislative bodies, providing educational materials to its members, and setting ethical standards for the profession creates and grades the CPA exam
Financial Statement Reviews
less extensive and, therefore, a less expensive service that can be very useful for smaller private companies. Because the practitioner performs less extensive procedures, he/she only expresses **limited assurance** that no material modifications need to be made to the financial statements
SOX 2002
mandated reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud. created the PCAOB to oversee auditing profession.
Adverse Opinion
material and pervasive departures; auditor believes financial statements are not presented fairly and should not be relied upon
Attestation Services
performed when an independent practitioner, or C P A, is engaged to issue a report on subject matter that is the responsibility of another party; encompass more than just the audit of historical financial statements and internal controls. Ex: Review of historical financial statements, agreed-upon procedures, examination of financial forecasts.
Financial Statement Audit
purpose of an audit of financial statements is to provide financial statement users with an opinion by an independent auditor as to whether the financial statements are: (1) presently fairly in accordance with an applicable financial reporting framework, (2) free of material misstatement, and (3) prepared in a consistent manner from prior years
Investors
read financial statements to determine if they should invest. Interested in their ROI & if company will remain a going concern.
Customers
read financial statements to determine whether a company they rely on will remain a going concern.
Audit Expectation Gap
significant differences between auditors and financial statement users as to their understanding of what an audit is and their expectations as to what an audit does and does not do. Consists of (1) the expectation gap, which is the difference between a financial statement user's expectations and professional standards and regulations (2)a performance gap, which occurs when assurance providers do not follow professional standards
Auditing Standards (AS)
standards issued by the PCAOB that provide minimum requirements and guidance for auditing services
Committee of Sponsoring Organizations of the Treadway Commission (COSO)
that focuses on providing guidance to management and expertise in the areas of internal control, enterprise risk management, and fraud deterrence