Auditing Chapter 17

date of the audit report:

important because the auditors have the responsibility to perform procedures through the date to search for any subsequent events that may affect the fairness of the clients financial statements.

basis for modification paragraph:

explanatory paragraph under PCAOB standards that precedes the opinion paragraph

Assurance services:

facilitate decision making. -services tend to be more customized, aimed as specific purposes or users, and therefore resemble consulting services. -not required -independence is required

Attestation:

facilitated decision making by enhancing the quality of information; always a 3rd party user of the attestation report -required by Standards of Attestation Engagements (SSAE) -independence is required

adverse opinion:

is the opposite of an unmodified opinion; it states that the financial statements DO NOT present fairly the financial position, results from operations, and cash flows - auditor should incude a basis for modification paragraph

If the auditor determines that other information contained with the audited financial statements is incorrect and the client refuses to correct the other information, what actions can the auditor take?

If the auditor determines that other information contained with audited financial statements is incorrect, the auditor should request that the client correct the other information. If the other information is not revised, the auditor should include an explanatory paragraph in the audit report, withhold the report, or withdraw from the engagement

Uncertainties:

are situations in which conclusive audit evidence concerning the ultimate outcome cannot be expected to exist at the time of the audit since that outcome will occur in the future - usually add an emphasis-of-matter paragraph

emphasis-of-matter paragraph:

follows the opinion paragraph and is included to refer to a matter that is appropriately presented or disclosed in the financial statements but is being emphasized through an audit report

other-matter paragraph

follows the opinion paragraph and refers to a matter other than those presented or disclosed in the audited financial statement -added when financial statements are prepared with in acordance with special-purpose frameowrks

disclaimer of opinion:

is the result of a scope limitation that creates a situation in which the auditors are unable to obtain sufficient appropriate audit evidence on which to base an opinion. -this is NOT an opinion -all reasons for a disclaimer should be set forth in a basis for modification paragraph the precedes the opinion paragraph.

Opinion Section:

presents the auditors' opinion on whether the financial statements are presented fairly

adverse opinion:

states that the financial statements are NOT presented fairly in conformity with GAAP. - auditors issue this opinion when the deficiencies in the financial statement are both material and pervasive.

qualified opinion:

states that the financial statements are presented fairly in conformity with GAAP "except for" the effects of some matter ex: unable to obtain sufficient appropriate audit evidence on which to base the opinion

the heading of "Management's Responsibilities for the financial statement" indicates...

that management is responsible for the preparation and fair presentation of the financial statements

When the auditors believe that the new principle does not meet one or more of the 4 requirements...

the auditor should issue either a qualified or an adverse opinion

the introductory paragraph of the auditors report identifies...

the financial statements that have been audited

unmodified opinion

this report may be issued only when the auditors have obtained sufficient appropriate audit evidence that the financial statement taken as a whole are not materially misstated and there is no need to add an emphasis-of-matter paragraph, an other-matter paragraph or to indicate the group audit situation

MODIFIED OPINIONS:

•Materially misstated •Inability to obtain

Attestation engagements:

compliance audits, operational audits, reviews and agreed-upon procedures.

Limitations may occur due to:

-circumstances beyond the control of the client ex: important accounting records were destroyed -circumstances relating to the nature and timing of the auditors' work ex: auditors are hired too late to observe clients beginning inventory -the client ex: the client's refusal to allow the auditors to send confirmations to customers

differences in PCAOB audit reports and reports for private companies. The PCAOB report:

-includes the words "registered" in the title -references standards of the PCAOB rather than GAAP -includes less detailed discussions of management and auditor responsibilities -includes additional paragraph about clients internal control over financial statements

conditions that may cause the auditors to question the going-concern assumption include:

-negative cash flows from operations -defaults on loan agreements -adverse financial ratios -work stoppages -legal proceedings

modified opinion include:

-qualified opinion -adverse opinion -disclaimer of opinion

CHANGES NOT AFFECTING CONSISTENCY:

1. Change in accounting estimate 2. Correction of an error 3. Changes in classification and reclassification 4. Change expected to have a material future effect 5. New business activity requiring application of accounting principles never used in the past

The Auditors responsibility section includes:

1. indicate that it is the auditor's responsibility to express an opinion on the financial statements 2. outline the nature of the audit 3. conclude that the auditors believe that sufficient appropriate audit evidence has been obtained to provide a basis for the audit opinion

modified opinions are required in two circumstances:

1. materially misstated F/S 2. inability to obtain sufficient appropriate audit evidence

primary circumstances that result in a unmodified opinion, but with an emphasis of matter paragraph:

1. substancial doubt about the company's going-concern status 2. GAAP is not consistently applied 3. Uncertainties 4. Other circumstances that auditors believe should be emphasized ex: major catastrophe, related party transactions, or subsequent events 5. Group audits

Auditors should evaluate change in accounting principles by determining if it meets the following 4 accounting requirements

1. the newly adopted principle is generally accepted 2. the method of accounting for the effect of the change is in conformity with GAAP 3. the disclosures related to the change are adequate 4. management has justified that the new accounting principle is preferable

Auditors cannot issue the standard report if:

1. there are conditions, although not departures from GAAP, about which the readers of the financial statements should be informed 2. there are material departures from GAAP, in the clients financial statements 3. the auditors are unable to obtain sufficient appropriate audit evidence

Distinguish between accounting changes that affect consistency and changes that do not. How is it possible for and accounting change to affect comparability but not consistency?

Accounting changes can be categorized into changes that affect consistency and those that do not affect consistency. If the change in accounting principle or in the method of its application has a material effect on the comparability and consistency of the financial statements and the auditor concurs with the change, the auditor should refer to the change in an explanatory paragraph. Accounting changes that affect comparability but do not affect consistency, such as a change in an estimate or the correction of an error that does not involve a change in accounting principle, are normally disclosed in the footnotes to the financial statements but do not require an explanatory paragraph in the auditor's report

Give examples of client-imposed and condition-imposed scope limitations. Why does a client-imposed limitation generally have a more significant impact on the conduct of the audit?

An example of a client-imposed scope limitation is where a client requests that the auditor not confirm accounts receivable because of concerns about creating conflicts with customers over amounts owed. An example of a circumstances-imposed scope limitation is when the auditor is not engaged to conduct the audit until after year-end for reasons outside the control of the client, e.g., the external parties requesting the audit did not make the request until after year end. Under such circumstances, the auditor may not be able to observe inventory. Auditors should be particularly cautious when a client places a limit on the scope of the engagement because the client may be trying to prevent the auditor from discovering material misstatements. Auditing standards suggest that when restrictions imposed by the client significantly limit the scope of the engagement, the auditor should disclaim an opinion on the financial statements.

Security and Exchange Commission (SEC) granted authority to Public Company Accounting Oversight Board (PCAOB)

Audits of financial statements of public companies. Public companies are defined as companies whose securities are traded on U.S. securities exchanges, and therefore those companies are registered "issuers" under the Security Exchange Act of 1934.

American Institute of CPAs (AICPA):

Financial statement audits of nonpublic companies (nonissuers)

An accounting change involving a change in an accounting estimate. Should Auditors' Report be Modified?

No

Not an accounting change but rather a change in classification Should Auditors' Report be Modified?

No

How does the materiality of a departure from GAAP affect the auditor's choice of financial statement audit reports?

The concept of materiality plays a major role in the auditor's choice of audit reports. Conditions that may lead to a departure from GAAP include circumstances where a departure from GAAP is evident or where an auditor is not able to gather sufficient, competent evidence to become reasonably assured that there is no material misstatement with respect to a particular management assertion. If the condition (e.g., scope limitation or departure from GAAP) that might lead to the departure is judged by the auditor to be immaterial, then a standard unqualified audit report can be issued. As the materiality of the condition increases, the auditor must judge the effect of the item on the overall financial statements. If the condition is material but the overall financial statements still present fairly, the auditor should issue a qualified opinion. If the effect of the condition is so significant that the overall financial statements are affected, the auditor should issue a disclaimer or an adverse opinion as appropriate, or may consider withdrawing from the engagement.

A change in estimate effected by a change in accounting principle. Should Auditors' Report be Modified?

Yes

An accounting change from one generally accepted accounting principle to another generally accepted accounting principle. Should Auditors' Report be Modified?

Yes

An accounting change involving a change from one generally accepted accounting principle to another generally accepted accounting principle. Should Auditors' Report be Modified?

Yes

An accounting change involving a correction of an error in principle that is accounted for as a correction of an error. Should Auditors' Report be Modified?

Yes

An error correction not involving an accounting principle. Should Auditors' Report be Modified?

Yes

when there is a change in accounting principle and it follows the 4 accouting requirements...

an emphasis-of-matter paragraph is added to the audit report, but the opinion remains unmodified