Auditing Exam
The term "accountant" refers to
CPAs when they are performing financial statement reviews, agreed-upon procedures, and compilation engagements of nonpublic companies.
Loss Contingencies Continued
If both conditions are not met, loss contingencies should be disclosed in the notes to the financial statements if there is a reasonable possibility that a loss has be incurred.
404a
requires that each annual report filed with the SEC include an internal control report prepared by management in which management acknowledges its responsibility for establishing and maintaining adequate internal control and provides an assessment of internal control effectiveness as of the end of the most recent fiscal year.
Although review procedures may bring to the CPAs' attention significant departures from GAAP,
they do not guarantee that the CPAs will become aware of all significant matters that would be discovered in an audit.
404 b
requires the CPA firm to audit internal control and express an opinion on the effectiveness of internal control (applies to public companies with a market capitalization in excess of $75,000,000).
: The term "auditor" is most frequently used when
discussing a CPA's role of providing an opinion on the fairness of historical financial statements under GAAS
In Chapter 19—Focus is on
engagements that involve audits of information prepared using a financial reporting framework other than GAAP and a summary of several attestation and accounting services not discussed previously.
Other Communications, AICPA AU-C 260—
equires an oral or written communication of certain information to those charged with governance of the company being audited. This information includes: (1) the auditors' responsibility under GAAS and management's responsibility; (2) an overview of the planned scoped and timing of the audit; and (3) significant findings from the audit.
Types of Reports with Modified Opinion A qualified opinion
A qualified opinion states that the financial statements are presented fairly in conformity with generally accepted accounting principles "except for" the effects of some matter. PPT 17-24/25, 28/29
Financial statements prepared for use in other countries
A. often two sets of financial statements and audit reports are prepared—one following GAAP for distribution in the US and the other following the accounting principles of the foreign country for distribution outside of the US.
In a financial statement audit, the consideration of internal control is performed to help
A. plan the audit and to assess control risk for the entire financial statement period. The auditors must perform test of controls throughout the year to meet the objective of obtaining sufficient evidence to support the opinion on internal control and assess control risk.
In the audit of internal control, the focus is on whether internal control is effective at a point in time
A. the as of date—which is ordinarily the last day of the client's fiscal period.
The term "practitioner" is
A. used in the attestation standards and in most other assurance services.
What is an integrated audit under PCAOB Standard No. 5?
An audit that includes audit reports on both a company's internal control over financial reporting and the financial statements. Section 404 of the Sarbanes-Oxley Act of 2002 is composed of two sections:
Completing the Audit
The auditors' opinion on the financial statements is based on all evidence gathered by the auditors up to the last day of fieldwork and any other information that comes to their attention between that date and the issuance of the financial statements
Unmodified opinion—with an other matter paragraph
To emphasize a matter other than those presented or disclosed in the financial statements (e.g., other information in documents containing audited financial statements).
1. Review Procedures for a Nonpublic Company
a. Screen clients b. Engagement letter c. Review procedures (analytical procedures and inquires of management) NOTE: No knowledge of client's internal control is required d. Obtain representation letter
Types of Reports with Modified Opinion An adverse opinion
. An adverse opinion states that the financial statements are not presented fairly in conformity with generally accepted accounting principles. PPT 17-26/27
1. Reviews for Nonpublic Companies
. Nonpublic companies may not need an audit of annual financial information b. CPAs follow Statement on Standards for Accounting and Review Services (SSARs) c. General steps—(1) perform analytical procedures; (2) make inquires of management and others; and (3) obtain representation from management relating to financial statements d. The report provides limited (negative) assurance
Three Types of Control Deficiency
1) Less than a significant deficiency 2)Significant Deficiency 3) Material Weakness
Examples of Loss Contingencies
1) Litigation—Lawyer's letters 2) Income tax disputes 3) Accommodation endorsements and other guarantees of indebtedness 4) Accounts receivable sold or assigned with recourse 5) Environmental issues 6) Commitments 7) General risk contingencies See page 644
A. Final audit procedures
1) Search for unrecorded liabilities 2) Review the minutes of meetings 3) Perform final analytical procedures 4) Perform procedures to identify loss contingencies 5) Perform the review for subsequent events. 6) Obtain a representation letter.
The major differences between a review of a nonpublic company and that of a public company is
1. (1) public companies are required to have quarterly interim reviews (option for nonpublic companies) and (2) the accountant must obtain a more detailed understanding of the company's business and particularly its internal control with a public company review. See PPT 19-24
Perform procedures to identify loss contingencies.
1. Definition: a possible loss, stemming from past events that will be resolved as to the existence and amount by some future event. Addressed by FASB ASC 450-20 "Loss Contingencies." Estimated amounts of contingent losses should be recorded in the FS if both of the following conditions are met: a. Probable that a loss has been sustained before the balance sheet date b. Amount of the loss may be reasonably estimated
Perform the review for subsequent events
1. Definition: an event or transaction that occurs after the date of the balance sheet but prior to the completion of the audit and issuance of the audit report. The two categories of subsequent events are as follows: a. Those providing additional evidence about facts existing on or before the balance sheet date. [Adjust F/S] (see page 645 for examples) b. Those involving facts coming into existence after the balance sheet date. [Disclosure only] (see page 645 for examples) c. Distinguishing which type requires a careful consideration of when the underlying conditions came in to existence. d. Audit procedures relating to subsequent events (see page 646) e. See Figure 16.4 on page 647.
A. Auditing Financial Statements that use a financial reporting framework other than GAAP
1. Includes financial statements prepared in accordance with special- purpose financial reporting frameworks (e.g. cash basis, tax basis, regulatory basis, contractual basis) 2. Using a financial reporting framework generally accepted in another country 3. See example of report on page 741 and Figure 19.1 (page 742) regarding reporting requirements. 4. The most notable change to the unmodified report involves an emphasis of matter paragraph which indicates the use of a special-purpose framework and describes the basis of accounting. Additionally, financial statement titles in the report may have to be changed to reflect the non-GAAP basis of accounting being used.
Auditors' Standard Report (unqualified opinion)—Public Clients (see example page 674) Main differences between the PCAOB audit report and the report used for audits of nonpublic companies
1. Includes the words "Registered" and "Independent" in the title 1. References standards of the PCAOB rather than GAAS 2. Includes less detailed discussions of management and auditor responsibilities 3. Includes an additional paragraph indicating that the auditors have also issued a report on the client's internal control over financial reporting (a fourth paragraph) 4. Does not include section headings
. Auditors' Standard Report (unmodified opinion)—Nonpublic Clients Report
1. Introductory paragraph 2. Management's responsibility paragraph 3. Auditors' responsibility paragraphs 4. Opinion paragraph B. May be issued when... 1. The auditors are able to obtain sufficient appropriate audit evidence to obtain reasonable assurance so as to be able to conclude that the financial statements as a whole are free of material misstatements.
A. Test and evaluate design effectives of internal control
1. Nature (inquiries, inspections, observations, and re-performance; vary exact tests, when possible) 2. Timing (sufficient period of time) Extent (depends on frequency of control) (see Case on page 720
Obtain a representation letter.
1. Primary purpose: to have client's principal officers acknowledge that they are primarily responsible for the fairness of the financial statements.
Perform final analytical procedures
1. Purpose: to assist the auditors in assessing the validity of the conclusions reached, including the opinion to be issued. The final review may identify areas that need to be examined further as well as provide a consideration of the adequacy of data gathered in response to unusual or unexpected relationships identified during the audit.
Search for unrecorded liabilities
1. Purpose: to detect liabilities that existed at year-end but were omitted from the liabilities recorded in the client's financial statements.
A. Use a top-down approach to identify controls to test (see Figure 18.5 on page 714)
1. Stages of the work 2. Entity-level controls, significant accounts and disclosures, relevant assertions, major classes of transactions and significant processes 3. Relationships among processes, transaction types and significant accounts (see Figure 18.7 on page 717)
3) Material weakness—
1. a deficiency in internal control over financial reporting (or a combination of deficiencies) such that there is a reasonable possibility that a material misstatement of the company's financial statements will not be prevented or detected on a timely basis.
2) Significant Deficiency
1. a deficiency in internal control over financial reporting (or combination of deficiencies) that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting.
Fraud & Illegal Acts, AICPA AU-C 240 (PCAOB 316) and AICPA AU-C 250 (PCAOB 317
1. require the audit committee to be informed about fraudulent or illegal acts that the auditors became aware of, unless those acts are clearly inconsequential.
Significant Deficiencies/Material Weaknesses, AICPA AU-C 265—
1. requires that the auditors communicate to the audit committee any significant deficiencies and material weaknesses in internal control to the audit committee.
Fourth Standard of Reporting--GAAS (page 41) A. The standard report meets the fourth standard by:
1. stating that the audit was performed in conformity with GAAS AND 2. expressing an opinion that the client's financial statements are presented in conformity with GAAP B. Reports on the financial statements ordinarily include the financial statements themselves and the related disclosures.
A review is NOT
1. sufficient to enable the accountants to express an opinion on the fairness of the financial statements.
Types of Reports with Modified Opinion A disclaimer of opinion
A disclaimer of opinion means that due to a significant scope limitation, the auditors were unable to form an opinion or did not form an opinion on the financial statements. PPT 17-30/31 D. Placement of additional paragraphs PPT 17-32
Unmodified opinion—standard report
A. . This report may be issued only when the auditors have obtained sufficient appropriate audit evidence to conclude the financial statements are not misstated and there is no need to alter the report for situations B, C, or D below.
Unmodified opinion—with an emphasis of matter paragraph
A. . To emphasize a matter appropriately presented in the financial statements. 1. Substantial doubt about the company's going concern status PPT17-13/14 2. Generally accepted principles not consistently applied PPT 17-15 3. Uncertainties PPT 17-16 4. Other circumstances that auditors believe should be emphasized (e.g. major catastrophe, related party transactions, and subsequent events)
II. The auditors' responsibility for reporting on internal control Objective
A. : plan and perform the audit to obtain reasonable assurance about whether material weaknesses exist to express an opinion on the company's internal control over financial reporting.
Comfort Letter
A. A letter issued by the independent auditors to the underwriters of securities registered with the SEC under the Securities Act of 1933. Comfort letters help the underwriters in fulfilling their obligation to perform a reasonable investigation of the securities registration statement. Refer to page 739 for topics covered in a comfort letter.
II. Management's responsibility for internal control
A. Accept responsibility for effectiveness B. Evaluate the effectiveness using suitable criteria C. Support the evaluation with sufficient evidence D. Provide a report on internal control E. Management's report on internal control (see PPT 18-5)
A Compilation
A. An accounting service that involves the preparation of information from client records. No assurance is provided in a compilation. A CPA does not have to be independent to perform a compilation. If not independent, the accountants should disclose their lack of independence. Statements are marked "unaudited" on each page. In a compilation, there is no responsibility to perform investigative procedures except to read statements for obvious material misstatements. See example on page 753.
. Auditors' Standard Report (unmodified opinion)—Nonpublic Clients Details
A. Details 1. Title includes word "Independent" 2. Addressed to the company itself, the shareholders, the audit committee, and/or the board of directors 3. Signed with name of CPA firm not individual partner unless sole practitioner 4. Dated last day of fieldwork or date on which auditors obtained sufficient appropriate audit evidence to support their opinion
Evaluating Audit Findings/Reporting Process
A. Evaluating known misstatements, projected misstatements, and other estimated misstatements B. See example of "proposed adjustments" worksheet on page 650—Aggregated Misstatements (quantitative and qualitative factors) C. Examination of Financial Statements, notes and disclosures D. Completion of reporting checklists E. Tying numbers in the report to audited numbers in the working papers F. Summary memo G. Opinion formulation and report issuance H. Additional Communications
II. Management's assessment
A. Management can be assisted by consultants but not by the CPA firm that conducts the audit of financial statements B. Must understand definition of internal control adopted by the SEC C. Evaluation must use an accepted "control framework" such as Internal Control-Integrated Framework created by COSO D. Must understand concepts of control deficiency, significant deficiency, and material weakness E. Objective of Management's Evaluation of Internal Control 1. Provide a reasonable basis for its annual assessment 2. Process a. Evaluate design effectiveness of controls b. Evaluate operating effectiveness of internal control c. Documentation of process d. Reporting
The auditors' responsibility for reporting on internal control Plan the engagement (requires coordination with the financial statement audit).
A. Planning should consider matters such as the client's industry, regulatory matters, client's business, and recent changes in client's operations. A. NOTE: Difference between audit of internal control and audit of financial statements is the time period. Audit of internal control—as of date. Audit of financial statements—entire financial statement period.
Other Matters Reports on comparative statements
A. Reports on comparative statements—may issue different reports on statements for different years/updating of reports on prior years' statements B. Reports to the SEC (page 689)
Post-Audit responsibilities.
A. When auditors find, subsequent to the issuance of their audit report, that the financial statements are materially misleading, they should take steps to prevent continued reliance on their report (after an investigation of the issues). In some cases this might involve notification of regulatory agencies.
Unmodified opinion on group financial statements
A. When two or more CPA firms are involved in an audit and the group auditor (firm that does most of the work) does not wish to take responsibility for the work of the component auditors. PPT 17-17 to 20
A Review of financial statements
A. a form of attestation based upon inquiry and analytical procedures applied for the purpose of expressing limited assurance that historical financial statements are presented in accordance with GAAP or some other appropriate basis.
Control deficiency—
A. a situation in which the design or operation of a control does not allow management or employees, in the normal course of performing their functions, to prevent or detect misstatements on a timely basis.
Audits (Examinations), reviews, and certain agreed upon procedures are
A. attestation engagements. An auditor/accountant must be independent for all attestation/assurance engagements.
The auditors' responsibility for reporting on internal control Evidence is gathered as of the date specified in management's assessment
A. normally the last day of the company's fiscal year
Review the minutes of meetings
Purpose: to identify any matters discussed at the Board level that may have a bearing on the financial statements and which have not been addressed in the working papers thus far.