Auditing: Chs. 1-6
Generally Accepted Government Auditing Standards
(GAGAS)--audits of government organizations/programs/activities/entities that receive government funds.
International Auditing and Assurance Standards Board
(IAASB) -- standard setting board of the International Federation of Accountants (IFAC) -establishes International Standards on Auditing (ISA)
IFAC Code of Ethics for Professional Accountants
--(IESBA) International Ethics Standards Board for Accountants --Standard setting board of the IFAC --Establishes the IFAC Code of Ethics for accountants
Qualified/Adverse Opinion--Omission--GAAP PROBLEM
-->If omission makes F/S: False/Fraudulant/Deceptive/Misleading--WITHDRAW!!!
Requirements for Referencing Component Auditor
1. The C.A. has performed an audit in accordance with the relevant GAAS/PCAOB requirements. 2. The component auditor's report is NOT restricted use.
Audits of Group F/S
When Auditor Acts as the auditor of group f/s the auditor must determine whether to make reference to any component auditors in the auditor's report on the group f/s.
Special Case (OK departure from GAAP)
When circumstances indicate that a financial presentation in accordance with U.S. GAAP would be misleading, a departure from U.S. GAAP is permissible. In such cases, the auditor should issue an unmodified opinion because the financial statements are not materially misstated.
Auditor's Report--Unmodified Opinion
1. Title 2. Appropriate Addressee Introductory Paragraph--Report on the Financial Statements 3. Management Responsibility for the F/S 4. Auditor's Responsibility 5. Opinion 6. Report on Other Legal Regulatory Requirements 7.Auditor's Signature 8. Auditor's City/State/adress 9.Date on Auditor's Report
Reference To Auditing Standards in the Auditor's Report
1.Audits of Issuers=Public Company=PCAOB (SEC) 2. Audits of Nonissuers = Private Company=GAAP (*If two sets of standards were used, you can say so)
Consistency--Auditor's Report w/ Evidence
The auditor's standard report implies that the auditor is satisfied that the comparability of financial statements between periods has not been materially affected by changes in accounting principles and that such principles have been consistently applied between or among periods. Since the auditor has gathered sufficient evidence about consistency, no reference need be made in the report. ***HOWEVER NOTE==>If an accounting change has no material effect on the comparability of the financial statements, the auditor does not need to recognize the change in the current year's audit report.
Auditing Standards Board
ASB retains the authority to establish standards for the audits of non-issuers
Going Concern--Emphasis of Matter Vs. Disclaimer
Auditor is not precluded from choosing to disclaim an opinion due to a going concern uncertainty. Auditor can choose unmodified opinion with an emphasis of matter paragraph OR a disclaimer of opinion based on judgment of auditor.
Audits of Group F/S--Group Engagement Partner
The group engagement partner is the partner or other person in the firm who is responsible for the group audit engagement and for the auditor's report on the group f/s.
Audits of Group F/S--Group F/S
Group F/S are financial statements that include the financial info of more than one component.
GAAS ISSUES--Qualified/Disclaimer Opinion
The Auditor uses professional judgement to determine if opinion is qualified/disclaimer: (problems may include uncertainty/scope limitation/independence (unaudited) --Client won't let you audit an account
Auditor's Report-Reference to U.S.A.
The auditor's report should include reference to the United States as the country of origin of both the accounting principles used to prepare the financial statements (GAAP) and the auditing standards the auditor followed in performing the audit (GAAS).
Reference to Component Auditor
Under U.S. GAAS, the group engagement partner makes reference in the audit report to the work of the component auditor when the group engagement partner is unable to review the component auditor's audit documentation. This is because the group engagement partner will be unable to be satisfied concerning the work performed by the component auditor. Even though the component auditor has an excellent reputation, the group engagement partner must see the work to be able to assume responsibility for it. Note that under ISAs, no reference is made to the component auditor unless required by law or regulation.
EXAM TRICK
Weak Internal Control DOES NOT equal Adverse Opinion **This only means you can't rely on internal controls
Limited Scope--Opinion on F/S
** If the auditor is unable to form an opinion on a new client's opening inventory balances, the auditor will issue an opinion on the closing balance sheet only and will issue a disclaimer of opinion on the statements of income, retained earnings and cash flows. COGS = Income Statement (Opening Inventory Balance Needed) **The auditor should issue a disclaimer of opinion on these financial statements if the auditor is unable to form an opinion regarding opening inventory balances.
Qualified/Adverse Opinion--Opinion Paragraph
****Qualified Opinion = Material GAAP --paragraph should state that "except for the effects of the matters described in the basis for qualified opinion paragraph, the f/s are presented fairly, in all material respects, in accordance with the applicable financial reporting framework" ****Adverse Opinion Paragraph = Very Material/Pervasive GAAP --paragraph should state that, because of the significance of the matter(s) described in the basis for adverse opinion paragraph, the f/s are not presented fairly in accordance with the applicable financial reporting framework.
Change of Accounting Policy
**A change in accounting principle results in the use of an emphasis-of-matter paragraph following the opinion paragraph in an unmodified report, as long as the change was accounted for properly. -->Doesn't call for Qualified/Adverse Opinions
Going Concern--Procedures (ADMITS)
**Auditor Examines evidence obtained during the audit to determine whether there is information that is contrary to the principle of going concern by performing: A--Analytical Procedures D--Debt Compliance (the auditor should review minutes from stockholder and BOD meetings) M--Minutes (auditor should review minutes from stockholder and BOD meetings I--Inquiry of client's legal counsel T--third parties (auditor should confirm the details of financial support arrangements S--Subsequent events review
Auditor's Report--Date of Auditor's Report (Dual Dating)
**Auditor's report should be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence. --Shows the final date of Auditor Responsibility. For comparative f.s., the audit report date for the most recent audit should be used.
Other-Matters Paragraphs (this is placed after Aud. Opinion and Emph. of Matters Paragraphs)
**Other-matter paragraphs refer to matters other than those presented or disclosed in the f/s that are relevant to the user's understanding of the audit. When used, other-matter paragraph needs: a. to be placed after the opinion paragraph and after any emphasis of matter paragraphs b. use the heading "Other-Matter" or other appropriate heading c. describe the matter being emphasized and the location of relevant disclosures about the matter in the f/s. USE REQUIRED WHEN:: -Restricts the use of Auditors report -change in audit opinion -f/s of prior period were audited by a predecessor auditor and the predecessor's audit report is not reissued. -Current period f/s are audited and presented in comparative form with compiled or reviewed f/s for the prior period. -Prior to the report date, the auditor identifies material inconsistency in other information -When auditor chooses to report on supplementary information presented with the f/s in the auditor's report, rather than in a a separate report. -To refer to required sup info that a designated acctg standards setter requires to accompany an entity's basic f/s. -To restrict the use of the auditor's report when special purpose f/s are prepared USE MAY BE NECESSARY: -to describe the reasons why the auditor can't withdraw from an engagement when unable to obtain S.A.A.Evidence due to mngmt imposed scope limitation. -law regulation or generally accepted practice require or permit the auditor to provide further explanation of the auditor's responsibilities. I.E. ===> Omission of selected quarterly data required by SEC regulations is disclosed in an other-matter paragraph added to an otherwise unmodified opinion.
Component Auditor--Use of Different Fin. Reporting Framework (GAAP Vs. IFRS)
**Reference to component auditor should not be made unless: 1. Frameworks are similar 2. engagement team has obtained sufficient appropriate audit evidence to evaluate the appropriateness of the adjustment needed to convert.
Alternative Audit Procedures
**The inability to perform a specific procedure is not a limitation on the scope of the audit if the auditor is able to obtain SAAE by performing alternative procedures. **If AAP are unperformable, express a qualified opinion or a disclaimer of opinion. --Confirming Receivables--check if they paid after January COGS = Income Statement --Time Constraint
Going Concern--Substantial Doubt
**Whether substantial doubt remains or is alleviated is a judgment call made by the auditor, and there is no requirement to document management's opinion on the matter under U.S. auditing standards. Under International Standards on Auditing, management must assess the entity's ability to continue as a going concern and the auditor must evaluate this assessment and document the evaluation in the audit work papers. **When an auditor believes there is substantial doubt about the ability of an entity to continue as a going concern, the conditions that gave rise to the substantial doubt, the auditor's conclusion about whether substantial doubt remains or is alleviated, and the effect of the auditor's conclusion on the auditor's report should all be documented.
Qual/Discl Opinion--Form and Content of Auditor's Report--Qualified Opinion
*Material GAAS Problem --"Auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the auditor's qualified audit opinion..
Emphasis-Of-Matter
*Used to emphasize something E.O.M - included in Aud Report when required by GAAS or at the Auditor's discretion. Used when referring to a matter that is APPROPRIATELY PRESENTED OR DISCLOSED IN F/S and is of such importance that it is fundamental to understanding the f/s--doesn't effect auditor's opinion. REQUIRED WHEN: 1. Auditor concludes there is substantial doubt of the entities ability to continue as going concern. 2. To describe a justified change in accounting principle that has a material effect on the entity's f/s. 3. Subsequently discovered facts lead to a change in audit opinion 4. F/S prepared in accordance w/ an applicable special purpose framework. **Comes AFTER auditor opinion **Comes BEFORE other matters MAY BE NECESSARY WHEN: 1. An uncertainty related to the outcome of unusually important litigation or regulatory action 2.A major catastrophe 3. Significant Related Party Transactions 4. Unusually important Subsequent Events
Qual/Discl Opinion--Form and Content of Auditor's Report--Disclaimer of Opinion
*Very Material/Pervasive/Significant GAAS PROBLEM *Because of the matters described in the basis for disclaimer of opinion paragraph, however, we were not able to obtain SAAE to provide a basis for an audit opinion.
DON'T USE EMPHASIS OF MATTER WHEN
--An unjustified accounting change may cause the auditor to issue a qualified or adverse opinion. A material weakness must be reported to management and those charged with governance, but would not be disclosed in an emphasis-of-matter paragraph added to an otherwise unmodified opinion. --An auditor would generally issue an unmodified audit opinion WITHOUT an emphasis-of-matter paragraph when the auditor decides to make reference to the audit of a component auditor as a basis, in part, for the auditor's opinion. The auditor would modify his/her report, but would not add an emphasis-of-matter paragraph.
Going Concern (Valuation/Classification)
--Auditor is responsible for evaluating audit evidence to determine whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, NOT TO EXCEED ONE YEAR BEYOND THE DATE OF THE F/S being audited.
GAAS Problem-Scope limits
--Auditor was not engaged at beginning of the year, when inventory should have been observed. **When circumstances prevent the auditor from performing a specific procedure, the auditor should determine whether it is possible to perform alternative procedures. --Time Constraints
Making Reference to Component Auditor Work
--Auditor's report on the group f/s should clearly state that the component was not audited by the auditor of the group f/s but by the component auditor --note the magnitude of the portion of f/s audited by component auditor --must note when f/s are prepared using different reporting framework (must note which is used by component auditor AND that group auditor is responsible for adjustments)
Generally Accepted Auditing Standards (GAAS)
--Compliance with GAAS is required for all audits --
ISA (International Standards of Auditing)
--Discuss both Compliance Frameworks (CF) and Fair Representation Frameworks (FRF) when discussing AFRF --GAAS makes no reference to compliance frameworks because all financial reporting frameworks in the U.S. are Fair Presentation Frameworks (FPF)
Management Reponsibilities
--F/S & --Internal Control **Preparation and fair presentation of F/S in accordance with AFRF
Qual/Discl Opinion--Form and Content of Auditor's Report--Opinon Paragraph
--Heading "Qualified Opinion" or "Disclaimer of Opinion" -Qualified Opinion:"in the auditor's opinion, except for the possible effects of the matters described in the basis for qualified opinion paragraph, the F/S are presented fairly , in all material respects, in accordance with the applicable financial reporting framework. -Disclaier Opinion: "Because of the significance of the matters descry ed in the basis for disclaimer of opinion paragraph, the auditor has not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. " AND "accordingly, the auditor does not express an opinion on the F/S. **When auditor is not independent, disclaim an opinion. needs to specifically state that the auditor is not independent.
AICPA
--Includes Auditing Standards Board (ASB), which issues Statements on Auditing Standards
Qual/Discl Opinion--Form and Content of Auditor's Report
--Modify "Auditor's Responsibility" paragraph --Include "Basis for Modification Paragraph" --include "Qualified/Disclaimer" of opinion paragraph **For disclaimer, intro reads "Auditor was Engaged to Audit"
Qual/Discl Opinion--Form and Content of Auditor's Report--Basis for Modification Paragraph
--Should be placed immediately before the opinion
Audit Evidence (requirements)
--The auditor must obtain sufficient appropriate audit evidence to afford a reasonable basis for the opinion.
Auditor's Report--Unmodified Audit Opinion (non issuers) M.R. D.I.M. R.E.P.P.O.R.T.S. C.R.A.M.E.
--When the auditor concludes that the financial statements are presented fairly in all material respects, in accordance with the applicable financial reporting framework. **Title--independent auditor's report should be included. **Adressee--Shareholder/stakeholder/3rd party **Introductory paragraph--Identify entity/state f.s. have been audited/identify the title of each f.s./identify periods covered by each f.s. **Management Resp. over F.S. (M.R. D.I.M.) Includes design/implementation/maintenance of internal control **Auditors responsibility (REPPORTS) -RESPONSIBILITY OF AUDITOR -EXPRESS AN OPINION -PLAN AND PERFORM AUDIT -PERFORM PROCEDURES AND -OBTAIN AUDIT EVIDENCE -RISKS OF MATERIAL MISSTATEMENT OF THE F.S. HAVE BEEN ASSESSED -TESTS/CONSIDERS INTERNAL CONTROL RELEVANT TO THE -STATEMENTS IN ORDER TO DESIGH AUDIT PROCEDURES -CONTROLS AREN'T OPINIONATED ON -REASONABLENESS OF -ACCOUNTING ESTIMATES MADE BY -MANAGEMENT AS WELL AS -EVALUATING THE OVERALL F.S.
Conduct of the Audit (Audit Requirements)
--allos auditor to achieve overall objectives 1. Professional Skepticism 2. Ethical Requirements 3. Professional Judgement 4. Sufficient/Appropriate Audit Evidence 5. Compliance with GAAS
Quality Control System
--consists of policies and procedures designed, implemented, and maintained to ensure that the firm complies with professional standards (i.e. AICPA standards) and appropriate legal and regulatory requirements, and that any reports issued are appropriate in the circumstances.
U.S. generally accepted accounting principles (GAAP)
--encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. U.S. GAAP is one of the financial reporting frameworks acceptable for preparation of financial statements (so is IFRS). --
Qualified/Adverse Opinion--Basis for Modification Paragraph
--must be placed immediately before the opinion paragraph and should use the heading "Basis for Qualified Opinion" or "Basis for Adverse Opinion". --Must Include: a. A description of the quantification of the financial effects of any misstatement b. An explanation of how disclosures are misstated if there is a material misstatement related to narrative disclosure. c.A description of the nature of omitted information and inclusion of the omitted information, when practicable, if there is an omission of that is required to be presented or disclosed.
Qualified/Adverse Opinion--Modification of Auditor's responsibility paragraph
--necessary when auditor expresses qualified or adverse opinion, and must now state that the auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the auditor's modified audit opinion.
Component Auditor--Assumption of Responsibility by Group Engagement Auditor
--no reference to component auditor is needed **Significant Components--component that is of INDIVIDUAL financial significance to the group or that is likely to include significant risks of material misstatement of the group f/s. *High dollar amount component *High Risk amount component **Insignificant Components--Group engagement auditor should perform analytical procedures --less work, on insignificant (low dollar/low risk)components
Overall Objectives of Auditor
--obtain reasonable assurance --report on f/s and communicate as required by GAAS
Disclaimer of Opinion
--when auditor is unable to obtain SAAE on which to base an opinion and the auditor concludes that the possible effects of any undetected misstatements could be BOTH material and PERVASIVE **Lack of INDEPENDENCE requires use of disclaimer of opinion. **A client's refusal to permit its attorney to furnish information requested in a letter of audit inquiry would generally result in a disclaimer of opinion. **The auditor's inability to observe physical inventories or apply alternative procedures to verify their balances could result in a disclaimer. **The auditor's inability to determine the amounts associated with illegal acts committed by the client's management could result in a disclaimer.
GAAS Qualified Opinion
--when the auditor is unable to obtain SAAE on which to base an opinion and the auditor concludes that the possible effects of any undetected misstatements could be material but not pervasive.
Emphasis of Matter Examples
-A material change in accounting principles between periods is disclosed in an emphasis-of-matter paragraph added to an otherwise unmodified opinion. -Emphasis of a matter for subsequent event is disclosed in an additional paragraph added to an otherwise unmodified opinion.
Ethical Requirements
-Auditor must be independent in both FACT & Appearance. ***Auditor must be independent of an entity when performing an engagement in accordance with GAAS unless: a)GAAS provides otherwise b)The auditor is required by law or regulation to accept the engagement and report on the F/S
EXAM TRICK--Never Adverse Opinion
-Confirm A/R denied -Consolidation sub info denied -Audit Restrictions -Inadequate records -No mgt. rep. letter signed -Client lawyers denied **All of the above are disclaimers
Unmodified Opinion
-GAAP & GAAS Ok -f/s present fairly, in all material respects the fin. position, results of operations and cash flows of the entity in conformity with applicable fin. reporting framework. 1. Emphasis of Matter and Other Matter Paragraphs--auditor may determine it is necessary to add additional communications to report without modifying the auditor's opinion via E.O.M./O.M. Paragraphs.--Calls attention to something you want the public to know about.
GAAP Problems
-GAAP Consistency Change (unjustified) = Auditor Disagrees -Inadequate Disclosure -Departure/violation of GAAP (unjustified) -Unreasonable Accounting Estimate ***Client refusal to disclose related party transactions in the notes to the financial statements is a GAAP problem, not a scope problem (i.e. GAAS). For a GAAP problem, the auditor must either issue a qualified or adverse opinion.
Scope Limitation Examples:
-Inability to determine amounts associated with an employee fraud scheme is a scope limitation that may result in a disclaimer of opinion. -Refusal by the client to permit the auditor to confirm accounts receivable is a scope limitation that may result in a disclaimer of opinion. -Refusal of management to sign a management representation letter casts doubt on the audit evidence gathered and is a scope limitation that would likely result in a disclaimer of opinion.
Scope Limits--Management
-Managemet can impose scope limitations, in which case, auditor should ask management to remove the limitation. **If management doesn't comply, auditor should communicate with those charged with governance and determine whether it is possible to perform alt. procedures.
Going Concern--Mitigating Factors (company's gonna come out of slump)
-Plans to borrow money or restructure debt -Plans to sell assets -Plans to delay or reduce expenditures -Plans to increase ownership equity OR The postponement of expenditures (including R&D), Plans to dispose of assets, Plans to borrow money or restructure debt, Plans to increase ownership equity (sell stock).
Uncertainty--Emphasis of Matter
-U.S. auditing standards do not require an emphasis-of-matter paragraph when an uncertainty is properly disclosed.
Types of Opinion (Best to worst)
-Unmodified -Qualified "Except for" GAAP (accounting policy, presentation, estimates, disclosures) = GAAP problem is material -Qualified "Except for" GAAS (insufficient evidence) = GAAS problem is material -Adverse GAAP (accounting policy, presentation, estimates, disclosures) = GAAP Problem is Very Material/"Pervasive" -Disclaimer GAAS (insufficient evidence, Significant Going Concern Uncertainty, Lack of Independence, can't give opinion) = GAAS problem is very material (pervasive/SIGNIFICANT) = auditor does not express opinion -Withdraw (False, fraudulent, deceptive, misleading)
Going Concern--Emphasis of Matter Paragraph Language
-must contain words "SUBSTANTIAL DOUBT" AND "GOING CONCERN". -Don't say "for 1 year"
Qualified/Adverse Opinion--Form and Content of Auditor's Report
-must modify "Auditor's Responsibility" Paragraph and include "Basis for Modification" and a Qualified/Adverse opinion paragraph
GAAS Hierarchy (3 levels)
1. AICPA Statements on Auditing Standards (SAS)/PCAOB Auditing Standards -PCAOB Auditing Standards = Issuers -SAS = non issuers 2. Interpretive Publications -Recommendations regarding how SAS should be applied -NOT auditing standards 3. Other Auditing Publications -Other auditing publications have no authoritative status but may be helpful to an auditor
Fair Presentation Framework (FPF)
===>financial reporting framework that requires compliance with the requirements of the framework and: --acknowledges explicitly or implicitly that to achieve fair presentation of the F/S, it may be necessary for management to provide disclosures beyond those specifically required by the framework --acknowledges explicitly that it may be necessary for management, in extremely rare circumstances, to depart from a requirement of the framework to achieve fair presentation of the F/S.
Going Concern--Auditor's Report Effects
==>Adequate Disclosure of G.C. = Unmodified w/ Emphasis of Matter Paragraph ==>Inadequate Disclosure of G.C. = Qualified or Adverse (departure from GAAP) ==>Significant G.C. Uncertainty = disclaimer of Opinion (GAAS problem) ****If an auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern and that the entity's disclosures are adequate, then the audit report may be either: Unmodified with emphasis-of-matter paragraph, or Disclaimed. (Generally, an unmodified opinion is issued, but the auditor is not prohibited from choosing to issue a disclaimer.)
Auditor Responsibility
==>Attest function (expressing an opinion on the F/S after completing the audit) --needs appropriate competence and capabilities to perform the audit --needs to comply with relevant ethical requirements --maintaining professional skepticism --exercising professional judgement throughout the planning and performance of the audit
Variability on Financials (Inherent variability -- Judgement by Management required)
==>Causes inherent level of variability w/ regards to F/S items. Think of : --Intangibles --Impairment --Asset life/salvage value --Bad Debt --Allowances --Warranties --Law Suits
Reasonable Assurance
==>High level of assurance (but not absolute). To obtain "Reasonable Assurance", auditor must: --plan the work and properly supervise assistants --determine and apply appropriate materiality levels --Identify and assess risks of material misstatement (fraud/error) --obtain sufficient appropriate audit evidence
Lack of Consistency--Correction of Error
==>Not an Accounting principle change
Other-Matter Paragraph--Alert that Restricts the Use of the Auditor's Written Communication
Auditor may be required by GAAS or may decide that it is necessary to include language in the auditor's report that restricts the use of auditor's written communication. **This is included in other matter paragraph. **This should include the following: -Statement that the auditor's written communication is intended solely for the information and use of the specified parties. -Identification of the specified parties for whom use is intended. (By-product report = only management/those charged with governance/others within the entity/the parties to the contract or agreement) (For specified parties, auditor should obtain acknowledgment in writing from the parties of their understanding of the nature of the engagement)
Professional Skepticism
Auditors should be alert for: -Audit evidence that contradicts other audit evidence obtained -Conditions that indicate possible fraud (Pressure/Opportunity/Rationalization) -Circumstances that suggest the need for audit procedures in addition to those required by GAAS
Both GAAS and PCAOB Standards needed for:
Audits of Nonissuers in which PCAOB is being followed. MUST ALSO FALLOW GAAS--Must amend the PCAOB report to state that the audit was also conducted in accordance with GAAS.
Going Concern--Conditions and Events (F.I.N.E.)
Based on the procedures performed the auditor identifies conditions and events that may be indicative of substantial doubt. F--financial difficulties-loan defaults, dividend arrearages, denial of usual trade credit, debt restructuring, noncompliance with capital requirements, new financing sources or methods, disposal of assets. I--Internal Matters-work stoppages, labor difficulties, substantial dependence on a particular project, uneconomic long-term commitments N--Negative Trends-recurrent losses, working capital deficiencies, negative cash flows, adverse financial ratios E--External Matters-legal proceedings, new legislation, loss of a key franchise, license, or patent, natural disaster
SOX 2002
Came up because of Enron (2001) scandal and WorldCom
Lack of Consistency (acceptable/justified changes in accounting principle)
Consistency deals with the comparability of the f/s from year to year. Unless the auditor's report explicitly states otherwise, the auditor's report implies that the financial s are comparable between periods.
Accounting Principles Consistency & Examination of Evidence--Implicit/Explicit
Consistency is implicit in the auditor's report, and will be explicitly mentioned in an emphasis-of-a-matter paragraph only if there are issues with consistency. There is no explicit reference to "test basis." The report says "An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements."
Audits of Group F/S--Component
Entity or business activity that prepares financial information that is included in the group f/s
PCAOB
Established by SOX 2002 -- required when auditing a public company (issuer) -five full time financially literate members -two cpa members/three non-cpa members -can't receive money from a public accounting firm **Firms must register with PCAOB to audit issuers
Unjustified Change In Accounting Principle is:
GAAP PROBLEM!!!
GAAP--Inventory Costing Methods Rules
GAAP allows a company to use different methods for costing different inventories as long as the methods are disclosed. --Auditor's Opinions can be unmodified under these circumstances
GAAP (Accounting) Opinions vs. GAAS (Auditing) Opinions
GAAP-Unmodified/Qualified/Adverse **Reasons for Qualified/Adverse opinions = accounting policy / presentation / Disclosures / Estimates GAAS-Unmodifed/Qualified/Disclaimer **Reasons for Qualified Opinion = Insufficient Evidence **Reason For Disclaimer of Opinion = Insufficient evidence / Significant Going Concern Uncertainty / Lack of Independence
GAAS & GAAP--Unmodified Audit Opinion
GAAS--Auditor's Responsibility Paragraph GAAP--Management's Responsibility Paragraph AND Opinion Paragraph
Component Auditor--Modified Opinion Used
If the opinion of the component auditor is modified or the report includes an emphasis of matter or other matter paragraph, the group auditor should DETERMINE THE EFFECT ON THE AUDITOR"S REPORT OF THE GROUP F/s.
Going Concern--Language
If, after considering identified conditions and events and management's plans, the auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the audit report should include an emphasis-of-matter paragraph (following the opinion paragraph) to reflect that conclusion. This conclusion should be expressed through the use of the phrase "substantial doubt about its (the entity's) ability to continue as a going concern" [or similar wording that includes the terms "substantial doubt" and "going concern"]. The "reasonable period...not to exceed one year" is inherent in the definition of going concern under U.S. auditing standards and is not explicitly stated in the audit report. The phrase "possible discontinuation of operations" may be included in the going concern disclosure but is not specifically required.
Substantial Doubt of Going Concern--Inadequate Disclosure
Inadequate disclosure of the substantial doubt about an entity's ability to continue as a going concern is a departure from GAAP, resulting in either a qualified or adverse opinion. -->I.E. --Inadequate Disclosure of Going Concern =GAAP PRoblem
Audits of Group F/S--Group Engagement Team
Includes the group engagement partner, other partners, and staff who establish the overall audit strategy, communicate with component auditors, perform work on the consolidation process, and evaluate the conclusions drawn from the audit evidence as the basis for forming an opinion n the group f/s.
Qualified Opinion due to Inadequate Disclosure
Material GAAP Problem ***Client refusal to disclose related party transactions in the notes to the financial statements is a GAAP problem, not a scope problem. For a GAAP problem, the auditor must either issue a qualified or adverse opinion.
Professional Judgement
Needed for: -Materiality -Audit Risk -N.E.T. (nature/extent/timing) of audit procedures -Evaluating if S.A.A.E. (sufficient/appropriate/audit/evidence) has been obtained -Evaluating management judgement -Drawing Conclusions based on audit evidence obtained
EXAM TRICK-Opinioin
No Audit Work = No Audit Opinion (NOT EVEN A BAD / ADVERSE Opinion)
GAAS/GAAP Audit Opinions given Materiality of Problem
No Problems/Immaterial = Unmodified for both GAAP and GAAS Material Problems but not pervasive = Qualified for both GAAP and GAAS Material and Pervasive = Adverse Opinion for GAAP/Disclaimer of Opinion for GAAS **Material and Pervasive for GAAP = F/S are materially misstated **Material and Pervasive for GAAS = Inability to Obtain Sufficient Appropriate Audit Evidence ***WITHDRAW if F/S are deemed to be fraudulent, misleading, false, deceptive.
Prior Year Management Honesty (per PY auditors)
Not an example of the application of professional skepticism
Modification to the Auditor's Opinion
Should be done when-- 1. auditor concludes that the f/s as a whole are materially misstated (GAAP issue) or 2. Auditor is unable to obtain sufficient appropriate audit evidence to conclude that the f/s as a whole are free from material misstatement (GAAS issue)
S.A.A.E.
Sufficient/Appropriate/Audit Evidence must be obtained to reduce audit risk
Auditor's Report--Auditor's Opinion (Explicit Statement)
a statement that the f/s/ present fairly in all material respects the financial position of the entity as of the balance sheet date and the result of operations and its cash flows for the period then ended, in accordance with the applicable financial framework
Audits of Group F/S--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. Component auditor MAY BE PART of the group engagement partner's firm, a network firm, or another firm.
Applicable Financial Reporting Framework (AFRF)
framework that is acceptable in view of the NATURE OF THE ENTITY and the OBJECTIVE of the F/S, OR what is required by LAW and REGULATION. --IFRS --GAAP --Special Purpose Frameworks
Pervasive = Very Material
those effects on the f/s that in the auditor's professional judgement are: a. not confined to specific elements/accounts/items of the f/s b. if they are confined, represent a substantial proportion of the f/s c. are disclosures fundamental to the users' understanding of the f/s
