Audit Reports
What basic responsibility does the Reporting Principle under the AICPA's clarified auditing standards impose on an auditor?
Based on an evaluation of the audit evidence obtained, the auditor expresses, in the form of a written report, an opinion in accordance with the auditor's findings or states that an opinion cannot be expressed.
What are the auditor's responsibilities with respect to opening balances and whether they contain misstatements affecting the current-period financial statements?
Determine whether the prior closing balances have been properly brought forward. Determine whether the opening balances reflect the application of appropriate accounting policies. Evaluate whether audit procedures provide evidence relevant to the opening balances (e.g., by reviewing the predecessor's audit documentation).
What type of report should the auditor express when a scope limitation is viewed as material and pervasive?
Disclaimer of opinion
What is meant by the term "interim financial information"?
Financial information or statements covering a period less than a full year or for a 12-month period ending on a date other than the entity's fiscal year-end. It may be condensed or in the form of a complete set of financial statements.
What is meant by the term "group financial statements"?
Financial statements that include the financial information of more than one component. This term also refers to combined financial statements aggregating the financial information prepared by components that are under common control.
Identify a few examples of "other information."
Financial summaries or highlights, management reports on operations, employment data, financial ratios, and selected quarterly data, etc. ("Other information" does not include press releases, information in analyst briefings, or information posted to the entity's Web site.)
What is meant by the term "summary financial statements"?
Historical financial information that is derived from financial statements but that contains less detail than the financial statements while still providing a structured representation consistent with that provided by the financial statements
What is meant by the term "other information"?
Information other than the financial statements and the auditor's report that is included in a document containing audited financial statements and the auditor's report (can be financial and nonfinancial information but excludes "required supplementary information")
What is meant by the term "required supplementary information"?
Information that a designated accounting standard setter requires to accompany an entity's basic financial statements (Although the information is not part of the basic financial statements, authoritative guidelines for measurement and presentation have been established)
When the group engagement partner decides to reference the component auditor's work, what is the effect on the auditor's report?
Introductory paragraph and management responsibility section: No effect. Auditor's responsibility section: First sentence is modified to identify the component audited by other auditors and the magnitude of the financial statements involved. Opinion paragraph: Modified to say "In our opinion, based on our audit and the report of the other auditors . . ."
What does the term "readily available" mean?
It means that no further action by the entity is required. Being available through the entity's Web site would be considered readily available, but being available upon request would not be considered readily available.
What type of assurance does the auditor's report provide on the required supplementary information presented along with the audited financial statements?
No assurance is given on the required supplementary information. The other-matter paragraph commenting on the required supplementary information specifically includes a disclaimer of opinion (or any other assurance) on such supplementary information.
What conclusion is expressed by a disclaimer of opinion?
No conclusion (no assurance) is expressed, since sufficient appropriate audit evidence has not been obtained.
What effect would it have on the auditor's report in an initial audit if the auditor bases conclusions about the opening balances of an entity's financial statements on a review of the predecessor's audit documentation?
None. The auditor should not refer to the predecessor auditor as providing a partial basis for the auditor's opinion.
Identify the only two opinion choices for the auditor's report on summary financial statements.
Only an unmodified or adverse opinion is permitted. That is, the summary financial statements are either consistent or not consistent with the audited financial statements.
What is meant by the term "inconsistency" in connection with other information?
Other information that conflicts with information contained in audited financial statements
What is meant by the term "misstatement of fact" in connection with other information?
Other information that is unrelated to matters appearing in audited financial statements that is incorrectly presented
What type of report should the auditor express when a misstatement is viewed as material but not pervasive?
Qualified opinion
What type of report should the auditor express when a scope limitation is viewed as material but not pervasive?
Qualified opinion
Identify the evidence-gathering procedures normally associated with a review of interim financial information.
Read the interim financial information and read the minutes of meetings (board, etc.). Perform analytical procedures. Determine that interim information agrees (or reconciles) to accounting records. Make inquiries of management and other persons responsible for financial and accounting matters and obtain a management representations letter.
Give an example of the language used for a disclaimer of opinion.
"Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on these financial statements."
Give an example of the language used for an adverse opinion.
"In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion paragraph, the financial statements referred to above do not present fairly..."
How is the audit report affected when an audit has been conducted in accordance with Public Company Accounting Oversight Board (PCAOB) standards, but the audit is not within the jurisdiction of the PCAOB?
The audit report should follow the PCAOB's format, amended to state that the audit was also conducted in accordance with generally accepted accounting standards.
State the opinion paragraph of the unmodified audit report on one year's financial statements under the AICPA's clarified auditing standards.
"In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Company at December 31, 20X2 and 20X1, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America."
What is the one underlying cause for an adverse opinion?
The auditor concludes that misstatements are material and pervasive to the financial statements.
If the auditor's report includes a section after the opinion paragraph labeled "Report on Other Legal and Regulatory Requirements," how should the introductory paragraph be labeled?
"Report on the Financial Statements"—ordinarily, the introductory paragraph does not have a label, but, in this case, it would.
Give an example of the language typically used to restrict the distribution of the auditor's report or other written communication.
"This (report, letter, presentation, or communication) is intended solely for the information and use of (list or refer to the specified parties) and is not intended to be and should not be used by anyone other than these specified parties."
What conclusion is expressed by an adverse opinion?
The auditor expresses a conclusion that the financial statements taken as a whole are not fairly stated. That is, taken as a whole, they are misleading.
State the typical introductory sentence/paragraph of the auditor's unmodified audit report on one year's financial statements under the AICPA's clarified auditing standards.
"We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as of December 31, 20X1, and the related statements of income, changes in stockholders' equity and cash flows for the year then ended, and the related notes to the financial statements."
Give an example of the language used in an auditor's report for a "qualified opinion" for inadequate disclosure.
- "In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements referred to above present fairly. . ." - The qualification (i.e., reservation) is the phrase "except for . . .."
Give an example of the language used in an auditor's report for a qualified opinion for a scope limitation when audited financial statements are unavailable for an investment accounted for by the equity method.
- "In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements referred to above present fairly . . ." - The qualification (reservation) is the phrase "except for the possible effects of . . ."
What is meant by the term "pervasive" in connection with audit reporting issues?
- Effects that are not confined to specific elements, accounts or items of the financial statements - Effects that, if so confined, represent or could represent a substantial proportion of the financial statements - Regarding disclosures, those that are fundamental to users' understanding of the financial statements
What is meant by the word "pervasive" in connection with audit reporting issues?
- Effects that are not confined to specific elements, accounts or items of the financial statements - Effects that, if so confined, represent or could represent a substantial proportion of the financial statements - Regarding disclosures, those that are fundamental to users' understanding of the financial statements
What is the effect of a disclaimer of opinion on the auditor's report?
- Minor change to introductory paragraph; no effect on management's responsibility section. - Modify the auditor's responsibility section to consist of two sentences, including reference to the Basis for Disclaimer of Opinion paragraph. - Add a Basis for Disclaimer of Opinion paragraph before the opinion paragraph. - Express a disclaimer of opinion.
What is the effect of an adverse opinion on the auditor's report?
- No effect on introductory paragraph or management's responsibility section. - Modify last sentence of auditor's responsibility section to refer to "...basis for our adverse audit opinion." - Add a Basis for Adverse Opinion paragraph before the opinion paragraph to describe the effects of the misstatement. - Modify the opinion paragraph to express the adverse opinion.
If the prior period's financial statements have been audited by a predecessor auditor whose report is not issued, the auditor should add an other-matter paragraph. What specific matters should that other-matter paragraph address?
- That the prior period financial statements were audited by a predecessor auditor - The type of opinion expressed (and the reason for any modification) - The nature of any emphasis-of-matter or other-matter paragraph - The date of the predecessor's report
What four specific matters should the auditor evaluate when the entity's financial statements include a material change in accounting principle?
- Whether the adopted principle is in accordance with the applicable reporting framework - Whether the method of accounting for the effect of the change is in accordance with the applicable reporting framework - Whether the disclosures about the change are adequate - Whether the entity has justified that the alternative adopted is preferable
What is meant by a qualified opinion for a scope limitation?
The auditor is expressing one or more reservations (specifically about a scope limitation where the auditor was unable to perform a desired audit procedure) while still concluding that the financial statements, taken as a whole, are fairly stated and that, except for the specific matter referenced, the auditor has obtained sufficient, appropriate audit evidence as a reasonable basis for the auditor's conclusions.
What is the meaning of a qualified opinion for a misstatement relative to GAAP or other applicable financial reporting framework?
The auditor is expressing one or more reservations (specifically about the financial statement presentation; for example, a "GAAP departure") while still concluding that, except for the specific matter referenced, the financial statements, taken as a whole, are fairly stated and the auditor has obtained sufficient, appropriate audit evidence as a reasonable basis for the auditor's conclusions.
What is the auditor's responsibility to enforce the distribution of the auditor's written communication having an alert to restrict the use of it?
The auditor is not responsible for enforcing such distribution. The purpose of the alert is to communicate appropriately the restricted distribution.
What is the fundamental reason for a disclaimer of opinion?
The auditor is unable to obtain sufficient appropriate audit evidence, and the auditor concludes that the possible effect on the financial statements could be material and pervasive.
When engaged to report on whether supplementary information is fairly stated in relation to the financial statements, must the auditor issue a separate report on the supplementary information?
The auditor may either issue a separate report on the supplementary information or combine the report on the supplementary information with the report on the financial statements. If using a combined report, the auditor should add an other-matter paragraph to report specifically on the supplementary information.
What should the auditor consider in deciding whether to accept an engagement to report on an entity's summary financial statements (specifically, to report whether they are consistent with the audited financial statements from which they have been derived)?
The auditor must have been engaged to audit the financial statements as a whole. The auditor should determine whether the applied criteria are acceptable. The auditor should obtain a written agreement from management acknowledging their responsibilities and accepting the expected form and content of the auditor's report.
What two general circumstances may affect the comparability of an entity's financial statements between periods?
1. A change in accounting principle 2. A material restatement of the financial statements (to correct a previous material misstatement)
The AICPA replaced the former 10 criteria known as "GAAS" with 7 non-authoritative principles to be used as a framework for audit standard setting. What specific topics did the 4 "Reporting Standards" under the now-superseded GAAS address?
1. GAAP -- the report should identify whether the financial statements comply with GAAP. 2. Consistency -- the report should identify when accounting principles were not consistent. 3. Disclosure -- the report should identify when disclosure is inadequate. 4. Opinion -- the auditor should express an opinion on the financial statements as a whole.
Identify the four paragraphs normally associated with an auditor's review report on interim financial statements.
1. Identify the nature of the engagement and the interim financial statements 2. Identify management's responsibility 3. Identify the auditor's responsibility (refer to AICPA standards, describe the procedures for a review, and include a disclaimer of opinion) 4. Express negative assurance as to whether any material modifications should be made
Describe the procedures to be performed by the auditor when required supplementary information is associated with an entity's audited financial statements.
1. Inquire of management about the methods used to prepare the information (and whether it is presented in accordance with prescribed guidelines on a consistent basis). 2. Compare the information for consistency with the basic financial statements and with the knowledge obtained during the audit.
What two topics of responsibility are addressed in the "Management's Responsibility" section of the auditor's report?
1. Management's responsibility for the fair presentation of the financial statements 2. Management's responsibility for the design, implementation, and maintenance of internal controls related to financial reporting
List the three alternatives to the unmodified audit report.
1. Qualified, 2. Adverse 3. Disclaimer of opinion
When the auditor of the group financial statements assumes responsibility for the component auditor's work on a significant component, what is the responsibility of the group engagement team to be involved in the work of the component auditor?
The auditor should (1) discuss with the component auditor the significance of the component to the group and the susceptibility of the component to material misstatement; and (2) review the component auditor's documentation of identified significant risks of material misstatement to the group financial statements.
To what extent must the auditor comply with GAAS when auditing financial statements intended for use solely outside of the U.S.,?
The auditor should comply with GAAS, except for requirements related to the form and content of the auditor's report. (In this case, the auditor may report either using a U.S. form of report or using the report form and content associated with the other country.)
What should the auditor do when a material misstatement of fact has been identified?
The auditor should discuss the matter with management. If a material misstatement of fact is found to exist, the auditor should request management to consult with a qualified third party (such as the entity's legal counsel) to address the issue.
What is the auditor's responsibility with respect to consistency on audited financial statements presented on a comparative basis?
The auditor should evaluate the consistency between all such periods presented as well as the consistency of the earliest period covered by the auditor's opinion with the previous period.
How does required supplementary information affect the auditor's report on the entity's financial statements?
The auditor should include an other-matter paragraph in the audit report to comment on required supplementary information (whether it is presented at all, and whether it is presented in accordance with the prescribed guidelines).
If management is unwilling to make changes to correct material inconsistencies identified prior to the report release date, how should the auditor's report address the issue?
The auditor should include an other-matter paragraph to the auditor's report. (Other possibilities would be to withhold the auditor's report or withdraw from the engagement.)
What effects would identified material misstatements have on the auditor's disclaimer of opinion?
The auditor should modify the report, while still expressing a disclaimer of opinion, to identify the effects of any identified material misstatements.
Describe the two primary responsibilities of the group engagement partner.
1. Supervision and performance of the group audit engagement in compliance with professional standards and applicable regulatory requirements 2. Determining whether the auditor's report is appropriate in the circumstances
Identify the three requirements that determine whether a reference to component auditors is permitted.
1. The component's financial statements must use the same framework as the group. 2. The component auditor has complied with generally acceptable auditing standards (GAAS) (or Public Company Accounting Oversight Board standards, as applicable). 3. The component auditor has issued an audit report on the component's financial statements (and that report is not restricted as to use).
Where should an emphasis-of-matter or other-matter paragraph be presented in the auditor's report?
1. The emphasis-of-matter paragraph should be presented after the opinion paragraph. 2. The other-matter paragraph should be presented after the opinion paragraph (and after any emphasis-of-matter paragraph(s)).
When deciding whether to accept an engagement to report on financial statements prepared in accordance with a financial reporting framework generally accepted in another country, what three matters should the auditor consider?
1. The purpose for which the financial statements are prepared 2. The intended users of the financial statements 3. The steps taken by management to determine that the framework is acceptable in the circumstances
What are the requirements for an auditor to accept an engagement to report on whether supplementary information is fairly stated in relationship to the financial statements?
1. The supplementary information must relate to the same period as the financial statements. 2. The auditor must have audited the financial statements. 3. The auditor must have expressed an unmodified or qualified opinion on the financials. 4. The supplementary information will either accompany the financial statements or be made readily available by the entity.
List the items comprising (i.e., the structure) of an unmodified audit report under the AICPA's clarified auditing standards.
1. Title 2. Addressee 3. Introductory paragraph 4. Management responsibility section 5. Auditor's responsibility section 6. Opinion paragraph 7. Signature (with the city and state of the office responsible for the engagement) 8. Date
What is the auditor's responsibility to obtain an understanding of an entity's internal control for an engagement to review the entity's interim financial information?
The auditor should obtain an understanding of the entity and its environment, including internal control related to the preparation of annual and interim financial information. This should be sufficient to identify the types (and likelihood) of potential misstatements and to select the inquiries and analytical procedures for the auditor's basis for conclusions.
Identify two general circumstances that would require an alert to restrict the use of the auditor's report.
1. When the subject matter is based on criteria that are only suitable for (or available to) a limited number of users 2. The matters are presented in a by-product report that is not the primary objective of the engagement.
Identify the three issues for which an emphasis-of-matter paragraph is required.
1. When there is substantial doubt about the entity's ability to continue as a going concern 2. When there is an inconsistency in accounting principles used 3. When the financial statements are prepared in accordance with special purpose frameworks (such as cash basis, tax basis, regulatory basis, or contractual basis)
When financial statements are prepared in accordance with a financial reporting framework generally accepted in another country and are intended for use both outside and inside of the U.S., what effect does that have on the auditor's report?
The auditor should report using the U.S. form of report, including an emphasis-of-matter paragraph that (1) identifies the financial reporting framework used; (2) refers to the note to the financial statements describing that framework; and (3) indicates that such a framework differs from U.S. GAAP.
If the auditor has expressed an adverse opinion or disclaimer of opinion on the financial statements taken as a whole, how would that affect the engagement to report on whether supplementary information is fairly stated in relation to the financial statements?
The auditor would be prohibited from reporting on the supplementary information if the auditor's report on the financial statements contained an adverse opinion or disclaimer of opinion.
What do AICPA professional standards identify as the auditor's objectives when auditing group financial statements?
The auditor's objectives are to determine (1) whether to act as the auditor of the group financial statements and, if so, whether to reference the component auditor(s); (2) to communicate clearly with the component auditor(s); and (3) to obtain sufficient appropriate audit evidence about the financial statements of the component(s) and the consolidation process.
When a material change in accounting principle has been properly accounted for by the entity's financial statements (with adequate disclosure and justification that the adopted principle is preferable), what is the effect on the auditor's report?
The auditor's report should include an emphasis-of-matter paragraph to describe the change and reference the footnote that discusses the change. The auditor should also state that the auditor's opinion is not modified with respect to the matter.
What is the effect on the auditor's report when an entity's financial statements have been restated to correct a prior material misstatement (assuming that disclosure related to the restatement is adequate)?
The auditor's report should include an emphasis-of-matter paragraph to describe the restatement and reference the footnote that discusses the correction. The auditor should also state that the auditor's opinion is not modified with respect to the matter.
What is meant by the term "applied criteria" in connection with summary financial statements?
The criteria applied by management in the preparation of the summary financial statements
What is meant by the term "significant component"?
A component identified by the group engagement team that (1) is of individual financial significance to the group; or (2) due to its specific nature, is likely to include significant risks of material misstatement of the group financial statements.
What is meant by the term "consent and acknowledgement letter"?
A letter that the predecessor auditor may request from an entity to document the entity's authorization regarding the predecessor auditor's communication with the (successor) auditor. Such a letter is not required, however.
What is meant by the term "successor auditor acknowledgment letter"?
A letter that the predecessor auditor may request from the (successor) auditor to document the auditor's agreement regarding the use of the predecessor auditor's documentation as a precondition for allowing access to it. Such a letter is not required, however.
What is meant by the term "emphasis-of-matter paragraph" in an auditor's report?
A paragraph that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's judgment, is of such importance that it is fundamental to users' understanding of the financial statements
What is meant by the term "other-matter paragraph" in an auditor's report?
A paragraph that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor's judgment, is relevant to users' understanding of the audit, the auditor's responsibilities, or the auditor's report
What type of report should the auditor express when a misstatement is viewed as material and pervasive?
Adverse opinion
What is meant by the term "component auditor"?
An auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit. A component auditor may be (1) part of the group engagement partner's firm, (2) a network-affiliated firm, or (3) another unrelated firm.
What is meant by the term "initial audit engagement"?
An engagement in which (1) the financial statements for the prior period were not audited; or (2) the financial statements for the prior period were audited by a predecessor auditor
What is meant by the term "component" in connection with group financial statements?
An entity for which group or component management prepares financial information that is required by the applicable financial reporting framework to be included in the group financial statements
What is the meaning of an unmodified audit report?
The financial statements are fairly stated according to generally accepted accounting principles (GAAP) (or other applicable accounting framework), and the auditor expresses no reservations.
The agreement on engagement terms for an auditor's review of interim financial information should normally address what specific matters?
The objectives and scope of the engagement The responsibilities of management The responsibilities of the auditor The limitations of a review engagement Identification of the applicable financial reporting framework
When engaged to audit financial statements that are prepared in accordance with a financial reporting framework generally accepted in another country for use solely outside the U.S., how is the opinion paragraph of the auditor's report affected?
The opinion would be changed as follows: "In our opinion, the financial statements referred to above present fairly, in all material respects, . . . in accordance with (specify the financial reporting framework generally accepted) in (name of country)."
When engaged to audit financial statements that are prepared in accordance with a financial reporting framework generally accepted in another country for use solely outside the U.S., how is the Auditor's Responsibility section of the auditor's report affected?
The second sentence in the section on the auditor's responsibility would be changed as follows: "We conducted our audit in accordance with auditing standards generally accepted in the United States of America (and [in name of country])."
When engaged to audit financial statements that are prepared in accordance with a financial reporting framework generally accepted in another country for use solely outside the U.S., how is the Management's Responsibility section of the auditor's report affected?
The sentence describing management's responsibilities would be changed as follows: "Management is responsible for the preparation and fair presentation of these financial statements in accordance with (specify the financial reporting framework generally accepted) in (name of country); . . ."
Describe the responsibilities of the group engagement partner and the group engagement team to obtain an understanding of the component auditor(s).
They should obtain an understanding of (1) the component auditor's independence and professional competence; (2) the extent to which the group engagement team will be involved in the work of the component auditor; and (3) whether the group engagement team will be able to obtain information about the consolidation process from the component auditor(s).
What is meant by the term "opening balances"?
Those account balances that exist at the beginning of the period (This also includes matters requiring disclosure that existed at the beginning of the period, such as contingencies and commitments.)
What is the purpose of the review of interim financial information?
To provide the CPA with a basis for communicating an awareness of any material modifications that should be made to conform with the applicable financial reporting framework, such as GAAP or other applicable financial reporting framework
When the group engagement partner decides to assume responsibility for the component auditor's work, what is the effect on the auditor's report?
Under these circumstances, there should be no reference to the component auditor in the auditor's report.
What is the purpose of an alert to restrict the use of the auditor's written communication?
What is the purpose of an alert to restrict the use of the auditor's written communication?