Auditing Chapter 17
Misstated Financial Statements - Material and Pervasive
Adverse
Inability to Obtain Sufficient Appropriate Audit Evidence - Material and Pervasive
Disclaimer
Consistency
GAAP not consistently applied
Qualified "Except For" (GAAP)
Non GAAP change, inadequate disclosure, unjustified departure from GAAP, unreasonable accounting estimate
Group Audit Effect on Audit Reports if Improperly Presented
Not applicable because it is an auditor reporting concern
Inability to Obtain Sufficient Appropriate Audit Evidence - Material but Not Pervasive
Qualified
Misstated Financial Statements - Material but Not Pervasive
Qualified
Inability to Obtain Sufficient Appropriate Audit Evidence - Not Material
Unmodified
Misstated Financial Statements - Not Material
Unmodified
Group Audit Effect on Audit Reports if Properly Presented
Unmodified opinion; component auditors are referred to when the group auditors do not take responsibility for the component auditors' work; If group auditors take responsibility, no modification is necesary
updating
___ the report means either re-expressing opinion originally issued or revising opinion from original
Basis for Modification Paragraph
added to report with a modified opinion (qualified, adverse, or disclaimer) that provides a description of the matter giving rise to the modification; placed before opinion paragraph
GAAS
audit report on nonpublic companies can be restricted use/ only for use by specified users identified in an other-matter paragraph
SEC
audit reports on public companies' financial statements are not restricted as to use or users by who
Component Auditors
auditors that audit one or more components of a group of entities that provide consolidated financial statements; PCAOB refers to them as other auditors
Shared Responsibility Opinion
auditors' report in which the principal auditors decide to share responsibility with other auditors who have audited some segment of the client's business
Material
being of substantial importance; significant to affect evaluations or decisions by users of financial statements; should be disclosed
emphasis-of-matter paragraph
changes in accounting estimates and changes in principles with immaterial effect are situations that do NOT result in adding to audit report
Change in Accounting Principle
changes in accounting principles and reporting entities result in an emphasis-of-matter paragraph being added to the auditors' report
Auditor Discretionary
circumstances in which the auditors may add an emphasis-of-matter paragraph
liquidation is imminent
company is NOT a going concern; should use emphasis-of-matter paragraph states company changes basis of accounting from going-concern basis
Comparative Financial Statements
complete set of financial statements for one or more prior periods included for comparison with the financial statements of the current period
Unmodified Opinion
conclude that the financial statements are prepared, in all material aspects, in accordance with framework (GAAP)
adverse opinion
deficiencies are both material and pervasive; stmts are NOT presented in conformity with GAAP
qualified opinion
deficiencies are material, but NOT pervasive; stmts materially misstated- departure from GAAP or unable to obtain sufficient appropriate audit evidence- scope limitation
disclaimer of opinion
deficiencies could be both material and pervasive; result of a scope of limitation
Going-Concern, Consistency, Auditor Discretionary Effect if Improperly Presented
departure from GAAP is involved and the auditors modify the opinion paragraph to either a qualified or adverse opinion and add a basis for modification paragraph preceding the opinion paragraph
General-Purpose Framework
designed to meet the common financial information needs of a wide range of users (GAAP, IFRS)
omission of information
disclosures required by GAAP for fair presentation may have been omitted; issue qualified or adverse opinion based upon pervasiveness of misstatement
pervasive
effects of misstatements meet one or more of following three criteria: (1) not confined to specific elements, accounts, or items of financial statements (2) if confined, they represent (or could) a substantial proportion of financial statements (3) if disclosures, they are fundamental to users' understanding of financial statements
Component (of a financial statement)
entity or business activity for which group of component management prepare financial information that is required by the applicable financial reporting framework to be included in group financial statements
pervasive
examples of when misstatement is _____ "substantial proportion of financial statements" or "fundamental to users' understanding"
Withdraw
false, fraudulent, deceptive, or misleading
Rule 203
financial statements are not GAAP because it would be misleading otherwise; shows up in emphasis-of-matter paragraph
Disclaimer of Opinion
form of report in which the auditors state that they do not express an opinion of the financial statements
Applicable Financial Reporting Framework
framework adopted by management of the company being audited in a particular situation
Regulations S-X of SEC
governs the form and content of the corporation's financial statements; auditors of publicly held corporations should understand these various reporting requirements of the SEC
"Basis for ___ Opinion"
heading for a basis for modification paragraph; complete with qualified, adverse, or disclaimer
reference to component auditors
if group auditors don't do this, they assume responsibility for entire audit
predecessor auditors
if prior periods of comparative periods were audited by ___, those reports can be reissued or have successor auditors refer to the report of predecessor auditors
unaudited
if statements of prior periods comparative periods are ____, the auditors' report should include disclaimer of opinion
going-concern
if substantial doubt exists about what leads to auditors adding emphasis-of-matter paragraph to unmodified opinion OR issue disclaimer of opinion
financial statement disclosures
if this is materially inadequate regarding going-concern issue, departure from GAAP exists; qualified or adverse opinion is needed
Other-Matter Paragraph
included in report required by GAAS or included at auditors' discretion; refers to matter other than those presented or disclosed and that is relevant to understanding the audit
Emphasis-of-Matter Paragraph
included in the auditors' report that is required by GAAS or is included at the auditors' discretion, and that refers to a matter appropriately presented or disclosed in the statements that is of such importance that it is fundamental to users' understanding of statements
Explanatory Paragraph
inserted in an auditors' report to explain a matter or to describe the reasons for giving an opinion that is other than modified; AICPA calls it emphasis-of-matter
practicable
means information is reasonably obtainable from accounts and records and that when providing auditor report, auditors do not assume position of preparer of statements
Financial Statement Disclosures
meant to supplement the information on the face of the financial statements, not to correct improper financial statement presentation
Qualified Opinion
modification of the auditors' standard report, employing a clause such as EXCEPT FOR to limit the auditors' opinion on the financial statements; indicates that except for some scope limitation or some departure from GAAP, the financial statements are fairly limited
Adverse (GAAP)
non-GAAP change, inadequate disclosure, unjustified departure from GAAP, unreasonable accounting estimate
Pervasive Effects on Financial Statements
not confined to specific elements, accounts, or items of the financial statements; if confined, they represent or could represent a substantial proportion of the financial statements; in relation to disclosures, are fundamental to users' understanding of the financial statements
unmodified opinion
obtained evidence to conclude that stmts are NOT misstated; no need for emphasis-of-matter paragraph/other-matter paragraph or indicate group audit
significant component
one identified by group engagement team as having financial significance to group or due to nature
Adverse Opinion
opinion that the financial statements DO NOT fairly present financial position, results of operations, and cash flows in conformity with GAAP; departures are material and pervasive
Modified Opinion
qualified, adverse, or disclaimer
unmodified opinion with emphasis-of-matter
refer to matter that is appropriately presented & disclosed in stmts, but is being emphasized thru audit report
unmodified opinion with other-matter
refers to matter other than those presented/disclosed in stmts; auditors believe matter is relevant to users' understanding
Publicly Owned Companies
required to include balance sheet for last 2 yrs, income statements, retained earnings, and cash flows for last 3 yrs
Group Auditors
responsible for issuing the audit report on a group of companies (parent & subsidiaries); PCAOB calls them principal auditors
Scope Limitation
restriction that prevents the auditors from being able to apply all of the audit procedures that they consider necessary in the circumstances; may be client imposed, or imposed by other circumstances
Financial Reporting Framework
set of criteria used to determine measurement, recognition, presentation, and disclosure of all material items appearing in the financial statements
opinion section
should have heading that includes phrase except for the effects of the matter(s) described in the Basis of Qualified Opinion paragraph
Related Party Transactions
significant involvement in another company; included in emphasis-of-matter paragraph described in footnote
Different Opinions on Different Statements
situation involving auditors being retained AFTER the client has taken its BEGINNING inventory count (unable to obtain sufficient appropriate audit evidence relating to that beginning inventory); unable to satisfy on statements of income, retained earnings, and cash flows
uncertainties
situation which conclusive audit evidence concerning outcome cannot be expected to exist at time of audit, since outcome will occur in future
uncertainties
situations like unusually important ongoing litigation or regulatory action in process against client unusually important outcomes so auditors consider adding emphasis-of-matter paragraph
Going-Concern
substantial doubt about ability to remain a going concern
going-concern
substantial doubt about company's ability to continue what? not to exceed one year beyond date of stmts being audited; assets/liabilities recorded and classified on assumption company will continue to operate
unmodified opinion and emphasis-of-matter paragraph
substantial doubt about going-concern, GAAP not consistently applied, uncertainties, other circumstances that should be emphasized, group audits
Principal Auditors
term previously used by AICPA to describe group auditors; still used by PCAOB
Pervasive
term used, in the context of misstatements, to describe the effects on the financial statements of misstatements or the possible effects on the financial statements of misstatements, if any, that are undetected due to an inability to obtain significant appropriate auditing evidence
correction of material misstatement
this in previously issued stmts results in emphasis-of-matter paragraph to audit report
unmodified opinion on group financial statements
two or more CPA firms are involved in audit of component auditors may audit one subsidiary of organization with 5 subsidiaries
Qualified "Except For" (GAAS)
uncertainty, scope limitation
Disclaimer (GAAS)
uncertainty, scope limitation, lack of independence, unaudited
Standard Report
unmodified (unqualified) opinion and no additional matters emphasized beyond the info required in all audit reports; AICPA no longer uses it
Going-Concern, Consistency, Auditor Discretionary Effect if Properly Presented
unmodified opinion with an emphasis-of-matter paragraph added after opinion paragraph (going concern and uncertainties may also lead to disclaimers of opinion)
Standard Form
unmodified opinion with intro paragraph, sections describing management and auditor responsibilities, and an opinion section; includes "independent" in title, addressed to company who hired you; this is for Non-Public (AICPA)
change in accounting principles
when client does this and does NOT meet one or more of 4 requirements, departure from GAAP exists; issue qualified or adverse opinion
change in accounting principles
when client does this and meets 4 requirements, emphasis-of-matter paragraph is added to audit report, but opinion remains unmodified
liquidation is imminent
when client financial statements follow going-concern basis of accounting when this basis should be followed instead, a department from GAAP exists
make reference to component auditors
when group auditors do this they are in essence diving responsibility for engagement among group and component auditors
discretionary emphasis paragraph
with other emphasis-of-matter paragraphs, a what follows the opinion paragraph