Auditing Final Chap. 10, 16, 17
Change in accounting principles
the nature of, justification for, and effect of the change are reported in a note to the financial statements for the period in which the change is made.
Pervasive
the term used to describe the effects on the financial statements of misstatements (departures from GAAP) or the possible effects on the financial statements of misstatements (scope limitations). Material but not pervasive, a qualified opinion is appropriate.
If the financial statements of prior comparative periods are unaudited...
this fact should be indicated on the applicable financial statements and the auditors' report should include a disclaimer of opinion on those statements.
Modified opinions are required in two circumstances
• Materially misstated financial statements (ie a "departure from GAAP") - the auditors conclude that the financial statements as a whole are materially misstated. • Inability to obtain sufficient appropriate audit evidence (ie a "scope limitation") - the auditors are unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole area free from material misstatements
Modified Opinion
• Qualified - states that the financial statements are presented fairly in conformity with generally accepted accounting principles "except for" the effects of some matter. These are issued when the financial statements are materially misstated or when the auditors are unable to obtain sufficient appropriate audit evidence on which to base the opinion. • Adverse - states that the financial statements are not presented fairly in conformity with GAAP. Auditors issue an adverse opinion when the deficiencies in the financial statements are both material and pervasive. • Disclaimer of opinion - most frequently 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 the opinion, and they conclude that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.
Unmodified Opinions
• Standard report - may be issued only when the auditors have obtained sufficient appropriate audit evidence to conclude that the financial statements, 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 a group audit situation. • 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 the audit report. • Other-matter paragraph - follows the opinion paragraph (and any EOM paragraph) and refers to a matter other than those presented or disclosed in the audited financial statements. • On group financial statements - this circumstance involves a situation in which two or more CPA firms are involved in the audit of components of group financial statements.
Auditors cannot issue the standard report if:
• There are conditions, although not departures from GAAP, about which the readers of the financial statements should be informed. • There are material departures from GAAP in the client's financial statements. • The auditors are unable to obtain sufficient appropriate audit evidence
Cash equivalents
include money market funds, certificates of deposit, savings certificates, and other similar types of deposits.
The liquid nature of cash
increases the risk of fraud, which may be more difficult to detect.
4 sections of an Independent Auditor's Report
intro, Management's Responsibility for the Financial Statement, Auditors' Responsibility, and Opinion.
Guidelines for achieving internal control over cash may be summarized as follows:
1. Do not permit any one employee to handle a transaction from beginning to end 2. Separate cash handling (custody) from record keeping. 3. Centralize receiving of cash to the extent practical 4. Record cash receipts on a timely basis 5. Encourage customers to obtain receipts and observe cash register totals. 6. Deposit cash receipts daily 7. Make all disbursements by check or electronic funds transfer, with the exception of small expenditures from petty cash 8. Have monthly bank reconciliations prepared by employees not responsible for making cash payments or custody of cash. The completed reconciliation should be reviewed promptly by an appropriate official. 9. Monitor cash receipts and disbursements by comparing recorded amounts to forecasted amounts and investigating variances from forecasted amounts.
Contingent Liability losses that should be reflected in the accounting records when both of the following conditions are met:
1. Information available prior to the issuance of the financial statements indicates that it is probable that a loss has been sustained before the balance sheet date, and 2. The amount of the loss can be reasonably estimated.
The distinction between the effects of departures from GAAP that are material but not pervasive and those that are material and pervasive is a matter of professional judgement. We will either:
1. Use the terms material, but not pervasive and material and pervasive, or 2. Use terms from the criteria for when a misstatement is pervasive, such as "a substantial proportion of the financial statements" or "fundamental to users' understanding".
For the financial statements audited by the predecessor auditors, there are two reporting options:
1. the report of the predecessor auditors may be reissued by them bearing its original date. 2. to have the successor auditors refer to the report of the predecessor auditors by indicating in an other-matter paragraph of the current auditors' report: 1. that the prior-period statements were audited by predecessor auditors, 2. the type of opinion expressed by the predecessor and, if the opinion was modified, the reasons therefore, 3. the nature of any emphasis-of-matter paragraph or other-matter paragraph included in the predecessor auditors' report, and 4. the date of the predecessor auditors' report.
Form S-l
These are the "registration statements" for companies planning to issue securities to the public.
Form 10-Q
This form is filed quarterly with the SEC by publicly owned companies. It contains UNAUDITED financial information. (but reviewed)
Form 8-K
This is a "current report" filed for any time in which significant events occur for a company subject to the Securities Exchange Act of 1934.
Form 10-K
This report is filed annually with the SEC by publicly owned companies. The report includes AUDITED financial statements and other detailed financial info.
SEC's Regulation S-X
governs the form and content of financial statements filed with the various forms
Contractual Obligation
a common characteristic of the commitments in the future.
Contingent Liabilities
a possible loss, stemming from past events that will be resolved as to existence and amount by some future event. Loss contingencies should be disclosed in notes to the financial statements if there is a reasonable possibility that a loss has been incurred.
Lockbox
a post office box controlled by the company's financial institution. Financial institution employees pick up mail at the post office box several times a day, credit the company's checking account for cash received, and send the remittance advices to the company.
Proof of Cash
in addition to reconciling the account balance, reconciles cash transactions occurring during a specific period.
Representation Letter
a single letter or separate letters prepared by officers of the client company at the auditors' request setting forth certain representations about the company's financial position or operations. **should be dated as of the date of the audit report.
Cutoff Bank Statement
a statement covering a specified number of business days (7-10) following the end of the client's fiscal year.
Window Dressing
action taken by the client shortly before the balance sheet date to improve the financial picture presented in the financial statements.
Standard Confirmation Code
agreed to by the AICPA, the American Bankers Association, and the Bank Administration Institute, addresses only the client's deposit and loan balances.
Voucher
an authorization sheet that provides space for the initials of the employees performing various authorization functions.
Subsequent Event
an event occurring after the date of the balance sheet prior to completion of the audit and issuance of the audit report.
Auditors reasons for contributing to extensive auditing of cash
cash is the most liquid of assets and offers the greatest temptation for theft, embezzlement, and misappropriation.
Type 2 Subsequent Event
involves conditions coming into existence after the balance sheet date. These events do not require adjustment to the dollar amounts shown in the financial statements, but they should be disclosed in the financial statement notes if the statements otherwise would be misleading.
Disclaimer of opinion
is NO opinion. Cannot be used as a way to avoid expressing an adverse opinion.
Other Information
is financial and nonfinancial info that is included in a document that contains audited financial statements, except it does not include required supplementary info. Examples include a report by management discussing the year's operating results, financial summaries, employment data, planned capital expenditures, financial ratios, and names of officers and directors.**AICPA AU 720 requires auditors to read this info for inconsistencies, if any, with the audited financial statements.
Kiting
manipulations causing an amount of cash to be included simultaneously in the balance of two or more bank accounts. Kiting schemes are based on the float period - the time necessary for a check deposited in one bank to clear the bank on which it was drawn.
Loss Contingency
may be defined as a possible loss, stemming from past events that will be resolved as to existence and amount by some future event.
Voucher System
one method of achieving strong internal control over cash disbursements by providing assurance that all disbursements are properly authorized and reviewed before a check is issued.
Type 1 Subsequent event
provides additional evidence as to the conditions that existed at the balance sheet date and affects the estimates inherent in the process of preparing financial statements. This type of subsequent event requires that the financial statement amounts be adjusted to reflect the changes in estimates resulting from the additional evidence.
Pro Forma Financial Statements
should be prepared giving effect to the event as if they had occurred as of the balance sheet date.
Standard Report
states that the audit was performed in conformity with generally accepted auditing standards and expresses an opinion that the client's financial statements are presented fairly in conformity with generally accepted accounting principles.
When a scope limitation is encountered...
the auditors attempt to obtain sufficient appropriate audit evidence by performing alternative procedures.
If auditors encounter evidence that the client's financial statements were materially misstated
the auditors determine that the facts are significant and existed at the date of the audit report, they should advise the client to make appropriate disclosure of the facts to anyone actually or likely to be relying upon the audit report and the related financial statements.
Report Date
the auditors' report should not be dated prior to the date they have gathered sufficient. Appropriate evidence. This date is often the last day of fieldwork but it may be a later date.
Compensating Balance
the cash in a company's general account sometimes must be maintained at a specified minimum balance
Lapping
the concealment of a cash shortage by delaying the recording of cash receipts.
PCAOB standards require:
the consistency and going-concern emphasis-of-matter paragraphs of the audit report; other emphasis-of-matter paragraphs may either precede or follow the opinion paragraph.
