Audit Reports & Other Reports

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..."

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.

Define "explanatory material" as outlined in AICPA Professional Standards.

Explanatory material is intended to be descriptive and does not impose a professional requirement; Explanatory material is identified by the terms "may," "might," or "could."

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 - 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. (It does not include press releases, information in analyst briefings, or information posted to the entity's Web site.)

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 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 are the requirements of the Single Audit Act?

It requires a single coordinated audit of the aggregate federal financial assistance provided to the state and local governmental entity with emphasis on defined "major" assistance programs), including: *An audit of the entity's financial statements *Additional reporting on compliance with applicable laws and regulations; *Additional reporting on internal control.

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 type of report should the auditor express when a scope limitation is viewed as material, and pervasive?

Disclaimer of opinion.

What 3 specific matters does the auditor express an opinion on when issuing a type 2 report?

(1) That the description fairly presents the system that was designed and implemented as of the specific date; (2) that the controls related to the stated control objectives were suitably designed to provide reasonable assurance that the control objectives would be achieved if the controls operated effectively as of the specific date; and (3) that the controls tested operated effectively throughout the period.

What 2 specific matters does the auditor express an opinion on when issuing a type 1 report?

(1) That the description fairly presents the system that was designed and implemented as of the specific date; and (2) that the controls related to the stated control objectives were suitably designed to provide reasonable assurance that the control objectives would be achieved if the controls operated effectively as of the specific date.

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 (that is, reservation) is the phrase "except for ..."

Describe 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...

When do the general and specific requirements of the Government Auditing Standards apply?

*General requirements - apply to all federal financial programs; and *Specific requirements - apply by statutory (legislative) requirement to a particular program.

What is the responsibility of the accountant when the accountant helps develop personal financial statements related to an individual's personal financial plans?

*If the financial statements will not be used for any other purpose, a "compilation" report is not required; *The accountant should prepare a report stating that the purpose of the financial statements is intended solely to help develop the financial plan, and note that the financial statements have not been audited, reviewed, or compiled.

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 2 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.

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; and *Make inquiries of management and other persons responsible for financial and accounting matters and obtain a management representations letter.

How does an independent accountant's "letter for underwriters and certain other requesting parties" (comfort letter) assist an underwriter or others?

*Such a letter from an independent accountant may help underwriters or others having a statutory due diligence defense under Section 11 of the 1933 Securities Act establish a "reasonable investigation" - that is, meet their "due diligence" requirements. *(Note: Comfort letters are not required by, and are not filed with, the SEC.)

What are the objectives of the "compliance audit"?

*To express an opinion on whether the entity complied with applicable compliance requirements, at the level specified in the governmental audit requirements; and *To identify audit/reporting requirements in the governmental audit requirement that are supplementary to GAAS and GAGAS and to evaluate those requirements.

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 2 general circumstances may affect the comparability of an entity's financial statements between periods?

1.) A change in accounting principle; or 2.) A material restatement of the financial statements (to correct a previous material misstatement).

What are the auditor's responsibilities with respect to opening balances, and whether they contain misstatements affecting the current period financial statements?

1.) Determine whether the prior closing balances have been properly brought forward. 2.) Determine whether the opening balances reflect the application of appropriate accounting policies. 3.) Evaluate whether audit procedures provide evidence relevant to the opening balances (for example, by reviewing the predecessor's audit documentation).

What is meant by the term pervasive in connection with audit reporting issues?

1.) Effects that are not confined to specific elements, accounts or items of the financial statements; 2.) Effects that, if so confined, represent or could represent a substantial proportion of the financial statements; or 3.) Regarding disclosures, are fundamental to users' understanding of the financial statements.

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.

List the three main differences in Government Auditing Standards relative to the AICPA's Statements on Auditing Standards.

1.) Government Auditing Standards require a written report on internal control; 2.) Government Auditing Standards require a written report on compliance with applicable laws and regulations; and 3.) Government Auditing Standards require the auditor to report any known instances of illegal acts that could result in criminal prosecution.

Identify the 5 sections of the auditor's report normally associated with an entity's financial statements prepared in accordance with a special purpose framework.

1.) Identify the nature of the engagement and financial statements involved; 2.) Management's responsibility; 3.) Auditor's responsibility; 4.) Express the opinion (reference footnote that describes basis of presentation); and 5.) "Basis of accounting"--reference footnote describing basis of presentation.

Identify the five paragraphs normally associated with a reporting accountant's report when engaged to report on the application of the requirements of an applicable financial reporting framework to a specific transaction.

1.) Identify the nature of the engagement and subject matter involved; 2.) Describe the specific transaction(s) involved; 3.) Describe the appropriate accounting principles involved; 4.) Provide concluding comments and reference continuing accountant; and 5.) Restrict the distribution of the report to the specified users.

Identify the 4 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); and 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 2 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; and 2.) Management's responsibility for the design, implementation, and maintenance of internal control related to financial reporting.

Identify the procedures an auditor should perform when engaged to report on the application of accounting principles to a specific transaction.

1.) Obtain an understanding of the form and substance of the transaction involved; 2.) Consult with the "continuing accountant" (which requires the client's permission); and 3.) Review applicable accounting requirements and consult with others, as necessary.

List the alternatives to the unmodified audit report.

1.) Qualified 2.) Adverse 3.) Disclaimer of opinion

Identify the 3 paragraphs normally associated with a report on compliance with specified aspects of a contractual agreement or regulatory requirements in connection with a financial statement audit (when no instances of noncompliance were identified).

1.) Refer to the audit of the financial statements and identify the date of the auditor's report; 2.) Provide negative assurance about relevant compliance; and 3.) Restrict the distribution to appropriate specified parties, including management and those charged with governance.

What two types of reports on internal controls at the service organization may the service auditor be engaged to issue?

1.) Report on management's description of a service organization's system and the suitability of the design of controls (type 1 report). 2.) Report on management's description of a service organization's system and the suitability of the design and operating effectiveness of controls (type 2 report).

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?

1.) That the prior period financial statements were audited by a predecessor auditor; 2.) The type of opinion expressed (and the reason for any modification); 3.) The nature of any emphasis-of-matter or other-matter paragraph; and 4.) The date of the predecessor's report.

Identify the 3 requirements before the auditor can provide negative assurance about an entity's compliance with specified aspects of a contractual agreement or regulatory requirements in connection with a financial statement audit.

1.) The auditor did not identify any instances of noncompliance; 2.) The auditor expressed an unmodified or qualified opinion on the financial statements; and 3.) The covenants or regulatory requirements involved were subject to audit procedures.

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)?

1.) The auditor must have been engaged to audit the financial statements as a whole; 2.) The auditor should determine whether the applied criteria are acceptable; and 3.) The auditor should obtain a written agreement from management acknowledging their responsibilities and accepting the expected form and content of the auditor's report.

Identify the 3 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 GAAS (or PCAOB 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)).

The agreement on engagement terms for an auditor's review of interim financial information should normally address what specific matters?

1.) The objectives and scope of the engagement; 2.) The responsibilities of management; 3.) The responsibilities of the auditor; 4.) The limitations of a review engagement; and 5.) Identification of the applicable financial reporting framework

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 3 matters should the auditor consider?

1.) The purpose for which the financial statements are prepared; 2.) The intended users of the financial statements; and 3.) The steps taken by management to determine that the framework is acceptable in the circumstances.

When deciding whether to accept an engagement to report on financial statements prepared in accordance with a special purpose framework, what 3 matters should the auditor consider?

1.) The purpose for which the financial statements are prepared; 2.) The intended users of the financial statements; and 3.) The steps taken by management to determine that the framework is acceptable in the circumstances.

When deciding whether to accept an engagement to report on financial statements prepared in accordance with a special purpose framework, what 3 matters should the auditor consider?

1.) The purpose for which the single financial statement or specific element is prepared; 2.) The intended users; and 3.) The steps taken by management to determine that the financial reporting framework is acceptable and that disclosure is adequate.

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 (that is, 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

List two categories of "requirements" under the AICPA's "Framework for Compilation and Review Engagements."

1.) Unconditional requirements; and 2.) Presumptively mandatory requirements.

Identify 2 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; or 2.) The matters are presented in a by-product report that is not the primary objective of the engagement.

Identify the 3 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).

What 4 specific matters should the auditor evaluate when the entity's financial statements include a material change in accounting principle?

1.) Whether the adopted principle is in accordance with the applicable reporting framework; 2.) Whether the method of accounting for the effect of the change is in accordance with the applicable reporting framework; 3.) Whether the disclosures about the change are adequate; and 4.) Whether the entity has justified that the alternative adopted is preferable.

What is the purpose of a compilation as defined in the Statements on Standards for Accounting and Review Services?

A "compilation" assists management in presenting financial information in the form of financial statements without providing any assurance on that information.

When is a comfort letter usually dated?

A comfort letter is usually dated on or shortly before the effective date of the registration statement.

What is the effect on a compilation report if the accountant is not independent?

A compilation does not require independence, since no assurance is provided - but the compilation report must point out that fact when independence is lacking. The auditor may choose to add a single sentence to the end of the compilation report without any further explanation as to the reason(s) for the impairment of independence; or may instead choose to disclose the reason(s) for the impairment of independence.

What is meant by the term specific transaction?

A completed or proposed transaction or group of related transaction or a financial reporting issue involving facts and circumstances of a specific entity.

What is meant by the term special purpose framework?

A financial reporting framework other than GAAP that is one of the following bases of accounting: 1.) Cash basis; 2.) Tax basis; 3.) Regulatory basis; 4.) Contractual basis; or 5.) Other basis that uses a "definite set of logical, reasonable criteria."

Define "governmental audit requirement."

A governmental requirement established by law, regulation, rule, or provision of contracts or grant agreements requiring that an entity undergo an audit of its compliance with applicable compliance requirements related to one or more government programs.

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 is meant by the term service auditor?

A practitioner who reports on controls at a service organization.

What is meant by the term advisory accountant?

A reporting accountant who is also engaged to provide accounting advice to a specific entity on a recurring basis is commonly referred to as an advisory accountant.

What is meant by the term hypothetical transaction?

A transaction or financial reporting issue that does not involve facts or circumstances of a specific entity.

What is meant by the term reporting accountant?

An accountant, other than a continuing accountant, who prepares a written report or provides oral advice on the application of the requirements of an applicable financial reporting framework to a specific transaction or on the type of report that may be issued on a specific entity's financial statements.

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 user auditor?

An auditor who audits and reports on the financial statements of a user entity.

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 (a) the financial statements for the prior period were not audited; or (b) 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 meant by the term user entity?

An entity that uses a service organization and whose financial statements are being audited.

The auditor expresses positive assurance (an opinion) on what specific matter(s) in a "letter for underwriters and certain other requesting parties"?

An opinion is only expressed on whether the audited financial statements and schedules, included in the registration statement, comply as to form with SEC requirements.

What is meant by the term service organization?

An organization or segment of an organization that provides services to user entities that are relevant to those user entities' internal control over financial reporting.

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 is meant by the term complementary user entity controls?

Controls that management of the service organization assumes, in the design of its service, will be implemented by user entities, and which, if necessary to achieve the control objectives stated in management's description of the service organization's system, are identified as such in that description.

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.

Is an auditor permitted to comment on an entity's compliance with specified aspects of a contractual agreement or regulatory requirements in connection with a financial statement audit, if the auditor expressed an adverse opinion or disclaimer of opinion on the financial statements?

If the auditor expressed an adverse opinion or disclaimer of opinion on the financial statements, the auditor is permitted to issue a report on compliance only when instances of noncompliance were identified.

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.

When can an auditor depart from a "presumptively mandatory requirements"?

In rare circumstances, the accountant may depart from a "presumptively mandatory requirement." The auditor must document the justification for the departure and how the alternative procedures performed in the circumstances were sufficient to achieve the objectives of the presumptively mandatory requirement (requirement indicated by the word "should").

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 2 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.

What AICPA standards are applicable to reviews and compilations for nonissuers?

Statements on Standards for Accounting and Review Services (SSARSs) are issued by the AICPA's "Accounting and Review Services Committee" (ARSC).

When should the auditor's report on an entity's financial statements prepared in accordance with a special purpose framework include a description of the "purpose for which the financial statements are prepared"?

Such a description would be required when the financial statements have been prepared on (1) the contractual basis; or (2) the regulatory basis (whether intended for general use or not).

Which special purpose frameworks require an emphasis of matter paragraph (labeled "Basis of Accounting") in the auditor's report pointing out the special purpose framework to readers?

The cash basis, tax basis, contractual basis, and regulatory basis (only if restricted). Such a paragraph is not required if prepared on a regulatory basis intended for general use.

Who is the issuer of Government Auditing Standards, also known as Generally Accepted Government Auditing Standards?

The U.S. Government Accountability Office (GAO) under the authority of the U.S. Comptroller General, through the GAO's "Yellow Book."

When an accountant submits unaudited financial statements to the client that are not expected to be used by a third party, what actions must the accountant take?

The accountant must either: *Issue a compilation report; or *Document an understanding with the client by an engagement letter and a management representation letter in which, among other things, management states that the financial statements are for internal use only and are not to be used by third parties.

What is the accountant's responsibility when compiled financial information is presented in a prescribed form that differs from Generally Accepted Accounting Principles (GAAP)?

The accountant should add an explanatory paragraph to the compilation report to indicate that the prescribed form differs from GAAP.

Describe the documentation requirements for compilation engagement.

The accountant should document the work performed in accordance with Statements on Standards for Accounting and Review Services (SSARS) including the engagement letter; any findings or issues that are considered "significant;" and any communications, whether oral or written, to the appropriate level of management about fraud or illegal acts.

What is the accountant's responsibility to establish an understanding for an engagement to compile a nonissuer's financial statements?

The accountant should establish an understanding about the engagement's objectives, management's responsibilities, the accountant's responsibilities, and the limitations of the engagement, among other matters with management and document that in writing with an engagement letter.

What is the accountant's responsibility to establish an understanding for an engagement to review a nonissuer's financial statements?

The accountant should establish an understanding about the engagement's objectives, management's responsibilities, the accountant's responsibilities, and the limitations of the engagement, among other matters with management and document that in writing with an engagement letter.

What is the accountant's responsibility to establish an understanding for an engagement to compile an entity's pro forma financial information?

The accountant should establish an understanding about the services to be performed, the nature and limitations of those services, the parties' respective responsibilities, and the nature of the report to be issued. It is preferable, but not technically required, to get that understanding in writing.

What is the accountant's responsibility to establish an understanding for an engagement to compile specified elements of an entity's financial statements?

The accountant should establish an understanding about the services to be performed, the nature and limitations of those services, the parties' respective responsibilities, and the nature of the report to be issued. It is preferable, but not technically required, to get that understanding in writing.

What are the accountant's performance requirements regarding an engagement to compile specified elements of the financial statements?

The accountant should read the compiled elements, accounts, or items and consider whether that information appears to be free of obvious material errors.

What are the accountant's performance requirements regarding an engagement to compile pro forma financial information?

The accountant should read the compiled pro forma financial information, including the summary of significant assumptions, and consider whether that information appears to be free of obvious material errors. Note: To compile the pro forma financial information, the accountant must have compiled, reviewed, or audited the historical financial statements on which the pro forma information is based.

What are the auditor's performance requirements for a compilation engagement?

The accountant should understand the industry and the entity itself, including accounting principles and practices used; read the entity's financial statements to see if they are appropriate in form and free of obvious material errors. Other compilation procedures - the accountant is not required to verify the information supplied by the entity, but should obtain additional or revised information when the accountant believes the financial statements are materially misstated.

What is the one underlying cause for an adverse opinion?

The auditor concludes that misstatements are material and pervasive to the financial statements.

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.

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 that 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 appropriately communication 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 relationship 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 types of reports can an auditor issue when the focus of the report is on compliance?

The auditor may issue: 1.) A separate report on compliance only; 2.) A combined report on compliance and on internal control over compliance; or 3.) A separate report on internal control over compliance.

When the auditor of the group financial statements assumes responsibility for the component auditor's work on a significant component, what is the group engagement team's responsibility 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.

What is meant by the term consent and acknowledgement letter?

The predecessor auditor may request such a letter 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 are the reporting requirements when the auditor has been engaged to audit a specific element of a financial statement in connection with an audit of the complete set of financial statements?

The auditor should (1) issue a separate report and express a separate opinion for each engagement; and (2) indicate in the report on a specific element of a financial statement the date and nature of the auditor's report on the complete set of financial statements. (These separate reports may be published in the same document, if sufficiently differentiated.)

Describe the auditor's responsibility for communicating various matters relating to a compliance audit.

The auditor should communicate the following matters with those charged with governance: *The auditor's responsibilities under GAAS; *The auditor's responsibilities under GAGAS and the governmental audit requirements; *An overview of the planned scope and timing of the compliance audit; and *Any significant findings.

To what extent must the auditor comply with GAAS when auditing financial statements intended for use solely outside of the U.S.A.?

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 indeed 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.

List the documentation requirements of an auditor for a compliance audit.

The auditor should document: *The risk assessment procedures performed; *The responses to the assessed risks of material noncompliance; *The basis for materiality levels; and *The compliance with applicable "supplementary audit requirements."

If a modified opinion on the set of financial statements is material and pervasive to the specific element, what is the effect on the separate report on the specific element?

The auditor should either (1) express an adverse opinion on the specific element when the modification involves a misstatement; or (2) disclaim an opinion on the specific element when the modification involves a scope limitation.

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.

What is the impact on the auditor's report when reporting on an incomplete presentation that is otherwise presented in accordance with GAAP?

The auditor should include an emphasis-of-matter paragraph that (1) states the purpose for which the presentation is prepared (and refers to a note in the financial statements that describes the basis of presentation) and (2) indicates that the presentation is not intended to be a complete presentation.

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 or not it is presented at all, and whether or not 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 auditor's responsibility regarding communications of "significant deficiencies" under Government Auditing Standards.

The auditor should obtain a response from officials of the entity as to their views about those findings and include a copy of any written response in the auditor's report.

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.

What is required when the auditor is engaged to report on a specific element that is based on (or derived from) the entity's net income?

The auditor should obtain sufficient appropriate audit evidence to enable the auditor to express an opinion about both financial position and results of operations. (Effectively, this means that the auditor must audit the complete set of financial statements, too.)

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.A., 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.

What is meant by the term successor auditor acknowledgment letter?

The predecessor auditor may request such a letter 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.

List the procedures that an auditor should undertake regarding risk assessments as it relates to the performing a compliance audit.

The auditor should: Perform risk assessment procedures to obtain an understanding of applicable compliance requirements and internal controls over compliance; Assess risks of material noncompliance for each applicable compliance requirement and consider whether any are "pervasive" to compliance; and Perform further audit procedures in response to assessed risks and develop an overall response to any risks that are "pervasive" to the entity's compliance.

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 relationship 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 whether to act as the auditor of the group financial statements and, if so, (1) whether to reference the component auditor(s); (2) to communicate clearly with the component auditor(s); and to obtain sufficient appropriate audit evidence about the financial statements of the component(s) and the consolidation process.

How is the auditor's report on compliance affected when there are instances of noncompliance, but the entity has obtained a waiver for such noncompliance?

The auditor's report on compliance may include a statement that a waiver has been obtained, but all instances of noncompliance should be described in the report, including those for which a waiver has been obtained.

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.

To whom should a comfort letter be addressed?

The comfort letter should be addressed to the client, named underwriters, broker-dealer, or the financial intermediary related to the securities involved.

Which special purpose frameworks require a paragraph in the auditor's report to restrict the distribution of the report to specified users?

The contractual basis and regulatory basis (not intended for general distribution) require such a restriction. The cash basis, tax basis, and regulatory basis intended for general use do not require such restricted distribution.

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 the meaning of an unmodified audit report?

The financial statements are fairly stated according to GAAP (or other applicable accounting framework), and the auditor expresses no reservations.

Describe the two primary responsibilities of the group engagement partner.

The group engagement partner is responsible for (1) the supervision and performance of the group audit engagement in compliance with professional standards and applicable regulatory requirements; and (2) determining whether the auditor's report is appropriate in the circumstances.

What are the meeting requirements of an auditor as it pertains to underwriters and certain other requesting parties?

The independent accountant should meet with the underwriters and other parties requesting the "comfort letter" to establish their specific needs and to give them a draft of the comfort letter in advance to avoid any misunderstandings as to the letter's content.

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.A., 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)."

What is the purpose of an alert to restrict the use of the auditor's written communication?

The purpose is to restrict the use of the auditor's written communication due to potential for misunderstanding if taken out of the context for which the written communication is intended.

What is the purpose of a "pro forma" financial statement?

The purpose is to show the significant effects on historical financial information associated with a transaction (actual or proposed) had the transaction occurred at an earlier date.

What is the purpose of a "review" as prescribed under in Statements on Standards for Accounting and Review Services?

The purpose of a "review" is to obtain limited assurance, sometimes called negative assurance, that there are no material modifications that should be made to the financial statements.

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.A., 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.A., 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); ...."

To whom should the distribution of the service auditor's type 1 and type 2 reports be restricted?

The service organization, user entities, and the user entities independent auditors.

Why is the user auditor obligated to obtain an understanding of the services provided to a user entity by a service organization, including its internal controls?

The services of the service organization may be relevant to the audit of a user entity when those services (and the controls over those services) affect the user entity's information system related to financial reporting and safeguarding of assets.

What is the effect on the successor accountant's compilation or review report when the predecessor accountant's compilation or review report is not presented on the prior year's financial statements?

The successor accountant's report should include an explanatory paragraph that identifies the nature and date of the predecessor's report and states that the current accountant takes no responsibility for the prior year's financial statements.

Under the Statements on Standards for Accounting and Review Services, what is the successor-predecessor communications requirement?

The successor is not required to communicate with the predecessor, but may choose to do so after obtaining the permission of management to initiate such a communication.

When might the user auditor's report appropriately refer to the service auditor's report?

The user auditor may refer to the service auditor in the user auditor's report containing a modified opinion, if that reference would be helpful to understanding the user auditor's modification. (There should be no reference to the service auditor in the user auditor's report containing an unmodified opinion.)

When the user auditor has relied on the report of a service auditor to support the user auditor's understanding of the services provided by a service organization, including internal controls, what matters should the user auditor evaluate regarding the service auditor's report?

The user auditor should (1) evaluate whether the report provides sufficient appropriate evidence for understanding the user entity's relevant internal controls; and (2) determine whether any complementary user entity controls identified by the service organization are relevant in assessing the risks of material misstatement.

When the user auditor has relied on the report of a service auditor to support the user auditor's understanding of the services provided by a service organization, including internal controls, what matters should the user auditor evaluate regarding the service auditor?

The user auditor should be satisfied about (1) the service auditor's professional competence and independence; and (2) the standards that the service auditor followed in issuing the report.

According to AICPA professional standards, what are the user auditor's objectives when the user entity uses the services of a service organization?

The user auditor's objectives are (1) to obtain an understanding of the nature and significance of the services provided and their effect on the user entity's internal control relevant to the audit sufficient to assess the risks of material misstatement; and (2) to design and perform audit procedures that are responsive to those risks.

When the group engagement partner decides to assume responsibility for the component auditor's work, what is the effect on the auditor's report?

There should be no reference to the component auditor in the auditor's report under those circumstances.

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).

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 is meant by the term type 2 report for a service auditor?

This refers to a report on management's description of a service organization's system and the suitability of the design and operating effectiveness of internal controls at the service organization -- whether the policies and procedures are suitably designed and working effectively to provide reasonable assurance of achieving the stated control objectives.

What is meant by the term type 1 report for a service auditor?

This refers to a report on management's description of a service organization's system and the suitability of the design of internal controls at the service organization -- whether the control policies and procedures are suitably designed and placed in operation.

What is the objective of a "review" engagement under the Statements on Standards for Accounting and Review Services?

To obtain limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework.

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.

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.

Under what circumstances would a reporting accountant, who is engaged to provide a written report or provide oral advice on a specific transaction, not be expected to consult with the continuing accountant?

When (1) the reporting accountant is engaged to provide recurring accounting and reporting advice and does not believe that a second opinion is being requested, (2) has full access to management, and (3) believes that the relevant information has been obtained.

When must a state or local governmental entity be audited according to the Single Audit Act of 1984, as amended?

When a state or local governmental entity spends federal assistance aggregating at least $750,000 in a fiscal year.

Under what two circumstances would the Applicability of Statement on Auditing Standard No. 117, "Compliance Audits," apply?

When an auditor is engaged to perform a "compliance audit" in accordance with Generally Accepted Auditing Standards (GAAS); Government Auditing Standards, also called "Generally Accepted Government Auditing Standards" (GAGAS); and when there is a governmental audit requirement requiring an expression of opinion on compliance with applicable compliance requirements.

When is the AICPA pronouncement, "Reports on Application of Requirements of an Applicable Financial Reporting Framework" applicable?

When providing a written report or verbal advice on: 1.) The application of accounting principles to specific transactions; or 2.) The type of opinion that might be issued on specific financial statements.