Gleim 15
A CPA is considered not associated with unaudited financial statements of a public entity when (s)he
Completed an audit and reported on the financial statements that, without the CPA's consent, were part of a prospectus including unaudited financial statements.
In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion and an adverse opinion?
Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going concern are inadequately disclosed.
A CPA concludes that the unaudited financial statements of an issuer on which the CPA is disclaiming an opinion are not in conformity with generally accepted accounting principles (GAAP) because management has failed to capitalize leases. The CPA suggests appropriate revisions to the financial statements, but management refuses to accept the CPA's suggestions. Under these circumstances, the CPA ordinarily would
Describe the nature of the departure from GAAP in the CPA's report and state the effects on the financial statements, if practicable.
When an auditor expresses an adverse opinion, the opinion paragraph should include
A direct reference to a separate paragraph disclosing the basis for the opinion.
When the client fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the related notes, it is the responsibility of the auditor to present the information, if practicable, in the auditor's report and express
A qualified or an adverse opinion.
AICPA Standards (nonissuers).
EXAMPLE -- Opinion Qualified for a Material but Not Pervasive Scope Limitation (AICPA Standards) Basis for Qualified Opinion ABC Company's investment in XYZ Company, a foreign affiliate acquired during the year and accounted for under the equity method, is carried at $XXX on the balance sheet at December 31, 20X1, and ABC Company's share of XYZ Company's net income of $XXX is included in ABC Company's net income for the year then ended. We were unable to obtain sufficient appropriate audit evidence about the carrying amount of ABC Company's investment in XYZ Company as of December 31, 20X1, and ABC Company's share of XYZ Company's net income for the year then ended because we were denied access to the financial information, management, and the auditors of XYZ Company. Consequently, we were unable to determine whether any adjustments to these amounts were necessary. Qualified Opinion In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Misstatements that are material but not pervasive. Examples of misstatements include the following:
Inappropriate selection of accounting principles Inappropriate application of accounting principles Unjustified change in accounting principles Inadequate disclosure Failure to provide a basic financial statement, e.g., statement of cash flows
Example of an Auditor's Report for a Nonissuer
Independent Auditor's Report To the Board of Directors and/or Shareholders We have audited the accompanying consolidated financial statements of X Company and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 20X1 and 20X0, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of X Company and its subsidiaries as of December 31, 20X1 and 20X0, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Auditor's signature <----------- May be manual or printed Auditor's address <----------- City and state Date <----------- No earlier than the date that sufficient appropriate audit evidence was obtained
AICPA Standards (nonissuers).
Independent Auditor's Report To the Board of Directors or Shareholders We were engaged to audit the accompanying financial statements of ABC Company, which comprise the balance sheet as of December 31, 20X1, and the related statements of income, changes in stockholders' equity, and cash flows for the year then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on conducting the audit in accordance with auditing standards generally accepted in the United States of America. Because of the matters described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Basis for Disclaimer of Opinion We were not engaged as auditors of the Company until after December 31, 20X1, and, therefore, did not observe the counting of physical inventories at the beginning or end of the year. We were unable to satisfy ourselves by other auditing procedures concerning the inventory held at December 31, 20X1, which is stated in the balance sheet at $XXX. In addition, the introduction of a new computerized accounts receivable system in September 20X1 resulted in numerous misstatements in accounts receivable. As of the date of our audit report, management was still in the process of rectifying the system deficiencies and correcting the misstatements. We were unable to confirm or verify by alternative means accounts receivable included in the balance sheet at a total amount of $XXX at December 31, 20X1. As a result of these matters, we were unable to determine whether any adjustments might have been found necessary in respect of recorded or unrecorded inventories and accounts receivable, and the elements making up the statements of income, changes in stockholders' equity, and cash flows. Disclaimer of Opinion Because of the significance of the matters described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on these financial statements. Auditor's signature <----------- May be manual or printed Auditor's address <----------- City and state Date <----------- Date disclaimer signed
PCAOB Standards (issuers).
Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of X Company Disclaimer of Opinion on the Financial Statements We were engaged to audit the accompanying balance sheets of X Company (the "Company") as of December 31, 20X2, and the related statements of income, comprehensive income, stockholders' equity, and cash flows and the related notes (collectively referred to as the "financial statements"). As described in the following paragraph, because the Company did not take physical inventories and we were not able to apply other auditing procedures to satisfy ourselves as to inventory quantities and the cost of property and equipment, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the financial statements. We do not express an opinion on these financial statements. The Company did not make a count of its physical inventory in 20X2 stated in the accompanying financial statements at $______ as of December 31, 20X2. Further, evidence supporting the cost of property and equipment acquired prior to January 1, 20X2, is no longer available. The Company's records do not permit the application of other auditing procedures to inventories or property and equipment. Basis for Disclaimer of Opinion These financial statements are the responsibility of the Company's management. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. Auditor's signature <----------- The signature of the auditor's firm Auditor's tenure <---------------- We have served as the Company's auditor since XXXX. Auditor's address <------------- City and state Date <----------------------------- No earlier than the date that sufficient appropriate audit evidence was obtained
Example of an Auditor's Report for an Issuer (PCAOB Standards)
Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of X Company Opinion on the Financial Statements We have audited the accompanying balance sheets of X Company as of December 31, 20X2 and 20X1, the related statements of income, comprehensive income, stockholders' equity, and cash flows, for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20X2 and 20X1, and the results of its operations and its cash flows for each of the years in the period ended December 31, 20X2, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Auditor's signature <----------- The signature of the auditor's firm Auditor's tenure <---------------- We have served as the Company's auditor since XXXX. Auditor's address <------------- City and state Date <----------------------------- No earlier than the date that sufficient appropriate audit evidence was obtained
An auditor has been engaged by the State Bank to audit the XYZ Corporation, a nonissuer, in conjunction with a loan commitment. The report would most likely be addressed to
The State Bank.
PCAOB Standards (issuers).
The auditor's report must be addressed to the shareholders and the board of directors (or equivalents for noncorporate entities).
AICPA Standards (nonissuers).
The auditor's report should be addressed to those for whom the report is prepared. It may be addressed to the entity whose statements are being audited or to those charged with governance.
he Date of the Auditor's Report
The date of the audit report is no earlier than the date on which the auditor has obtained sufficient appropriate evidence to support the opinion. This date is important because users expect the auditor to perform subsequent events procedures.
A client decides not to correct misstatements communicated by the auditor that collectively are not material and wants the auditor to issue the report based on the uncorrected numbers. Which of the following statements is correct regarding the financial statement presentation?
The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.
An auditor decides to express a qualified opinion on an entity's financial statements because a major inadequacy in its computerized accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the auditor's report should state that the qualification pertains to
The possible effects on the financial statements.
An auditor's opinion reads as follows: "In our opinion, except for the above-mentioned limitation on the scope of our audit..." This is an example of an
Unacceptable reporting practice. /Possible Effects /Not limitation
In May Year 3, an auditor reissues the auditor's report on the Year 1 financial statements at a former client's request. The Year 1 financial statements are to be presented comparatively with subsequent audited statements. They are not restated, and the auditor does not revise the wording of the report. The auditor should
Use the original report date on the reissued report.
Omission on cash flow
is basis for modify opinion not disclaimar
When would an audit report refer to both the auditing standards of the PCAOB and generally accepted auditing standards (GAAS)?
r the audit of a nonissuer in accordance with the standards issued by the PCAOB.
