AUD - Notes Chapter 1

Audited F/S The Basics

The Independent Audit Function

What is the purpose of an audit?

To provide financial statement users with an opinion on whether the financial statements are presented fairly, in
all material respects, in accordance with GAAP (the applicable financial reporting framework).
It gives credibility to the financials (auditors are unbiased and have no conflicts of interest)

What does the applicable financial reporting framework (GAAP) include?

It includes the conventions, rules, and procedures necessary to U.S. accepted accounting practice at a particular
time.

What are managements responsibilities?

1. The preparation and fair presentation of the financial statements in accordance with GAAP
2. The design, implementation, & maintenance of internal controls relevant to the presentation/preparation of the f/s
3. Providing the auditor with access to information and persons within the entity needed to complete the audit

What are the auditors responsibilities?

1.
2.
3.
4.
5.

Expressing an opinion on the financial statements based on the audit

Having appropriate competence and capabilities to perform the audit
Comply with ethical requirements
Maintain professional scepticism
Exercise professional judgement throughout the planning/performing of the audit

In order to express an opinion, the auditor obtains reasonable assurance about whether the financial
statements are free from material misstatement. In order to obtain reasonable assurance, the auditor must do
what?
1.
2.
3.
4.

Plan the work and properly supervise any assistants

Determine and apply appropriate materiality levels
Identify and assess risks of material misstatement due to fraud or error
Obtain sufficient appropriate audit evidence

The auditor is unable to obtain absolute assurance that the financial statements are free from material
misstatement because of inherent limitations. What are some of the inherent limitations?
1. Those items that involve management judgement, subjective decisions/assessments, or have a degree of
uncertainty
Intangibles
Impairments
Asset life/ salvage value
Bad debt
Warranties
Lawsuits
2. Fraud
3. Errors

The auditor should form an opinion on the f/s within a reasonable time period and should achieve a balance
between the cost and benefit of an audit. It is impractical to address all info that may exist so what is absolutely
necessary for the auditor to do in an audit?
1. Plan the audit so that it is performed effectively
2. Direct efforts to areas most expected to contain risk of material misstatement and
3. Use testing and other means of examining populations for misstatement

Professional Standards
Auditing Standards

What are Generally Accepted Auditing Standards (GAAS)?

They guide the auditor in the performance of a properly planned and executed audit.
Measures of the quality of the auditor's performance.

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Compliance with GAAS is mandatory on all audit engagements

Describe some traits about Statements on Auditing Standards (SAS).

Audits for nonissuers (private co.) are issued by Auditing Standards Board (ASB) in the form of SASs

Describe some traits about the Public Company Accounting Oversight Board (PCAOB).
PCAOB establishes auditing standards to be used in the preparation and issuance of auditing reports for issuers
(public co.)
o A privately own company does not have to comply (they can choose to follow)

The Public Company Accounting Oversight Board was established by what?

The Sarbanes-Oxley Act of 2002

Standards for Engagements Other than Audits

What are standards for engagements other than auditing?
1. Statements on Standards for Attestation Engagements (SSAE)
2. Statement of Standards for Accounting and Review Services (SSARS)

Other Guidelines
What does the AICPA Code of Professional Conduct provide?

Guidelines for behavior in the conduct of their professional affairs

Assurance to the public that the profession intends to maintain high standards
Enforce compliance with these standards by its members

What do the Statements on Quality Control Standards require?

Firms providing auditing, attestation, and accounting/review services to adopt a system of quality control
o A quality control system = policies and procedures that are designed, implemented, and maintained to
ensure that the firms complies with professional standards and appropriate legal and regulatory
requirements

Auditing Guidance: The GAAS Hierarchy

What are the levels of auditing guidance?(provide some traits about each one)
1. AICPA Statements of Auditing Standards (SASs) and PCAOB Auditing Standards
Provides the most authoritative guidance
An auditor should use professional judgement in applying SAS or PCAOB standards
Any departures from the requirements require justifications
2. Interpretive publications
Provides recommendations regarding how SASs should be applied in specific situations
They are not accounting standards
Includes interpretations, exhibits, guidance, and statements of position
3. Other auditing publications
They have no authoritative status, but may be helpful
Includes textbooks, publications, journals, and articles

Auditors are required to comply with ________ for audits of nonissuers and ________ for audits of issuers.

Nonissuers = Statements of Standards (SAS)

Issuers = Public Company Accounting Oversight Board (PCAOB) auditing standards

Overall Objectives of the Auditor and the Conduct of the Audit

What are the overall objectives of the auditor when conducting a financial statement audit?
1. To obtain reasonable assurance about whether the financials are, as a whole, free from material misstatement due
to error or fraud.
2. To report on the financials and communicate their findings

What are the general requirements related to the conduct of the audit?(Describe each component)
1. Professional skepticism = the recognition that circumstances may exist that cause the financials to be materially
misstated

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2. Ethical requirements = follow the code of professional conduct including being independent in fact and
appearance
3. Professional judgement = use judgement to interpret ethical requirements, GAAS, materiality, risk, etc.
4. Sufficient appropriate audit evidence and audit risk = to obtain reasonable assurance and therefore enabling the
auditor to draw a reasonable conclusion on which to base their opinion on
5. Compliance with GAAS = comply with all GAAS relevant to the audit. An auditor may have to comply with
other auditing requirements in addition to GAAS.
Examples = PCAOB standards, international standards on auditing (ISA), government auditing standards
(GAGAS), or auditing standards of a specific jurisdiction or country.

What would be examples of professional skepticism?

Performing additional audit procedures designed to obtain more reliable evidence.

Obtaining corroboration of management's explanations through consultation with a specialist.
Using third party confirmations to provide support for management's representations.

Reports on Audited F/S

Forming an Opinion on the Financial Statements
In order to form an opinion, the auditor needs to evaluate if the f/s are fairly presented. How do you determine
if the f/s is fairly presented?

Accounting policies are consistent with GAAP and are appropriate

There are adequate disclosures about accounting policies, and material transactions/events
Accounting estimates are reasonable
Information is relevant, reliable, comparable, and understandable
The applicable financial reporting framework is identified and includes an adequate description of the
framework

Unmodified Audit Opinion

When will an auditor express an unmodified opinion?

When the auditor concludes that the financial statements are presented fairly, in all material respects, in
accordance with the applicable financial reporting framework.
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What are the elements of the auditors report?(describe some of the components)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

Title: Independent Auditors Report

Addressee: goes to the entity that engaged them
Introductory Paragraph: own card
Managements Responsibility for the F/S: own card
Auditors Responsibility: own card
Basis for (qualified, adverse, or disclaimer) opinion: described in later flashcard if not unmodified
Auditors Opinion: own card
Other Reporting Responsibilities: If the auditor uses other reporting responsibilities other than GAAS
Signature of the auditor
Auditors Address: name of city and state where the auditor practices
Date of the auditors Report: shows the final date of auditor responsibility
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What is included in the introductory section?

Identify the entity whose f/s have been audited

State the f/s were audited
Identify the title of each f/s
Specify the dates or periods covered by each f/s
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What is included in the Management Responsibility section?

MR PPP DIM

Explanation that management is responsible for preparation and fair presentation of the f/s in accordance with
accounting principles generally accepted in the United States.

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Statement that this responsibility includes the design, implementation, and maintenance of internal controls
relevant to the preparation and presentation of f/s that are free from material misstatement whether due to fraud or
error.
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What is included in the Auditors Responsibility section?

ARE C PRPA JR CD RES

Statement that auditors responsibility is to express an opinion on the f/s based on the audit
The audit was conducted with auditing standards generally accepted in the United States
The standards require that the auditor plan and perform the audit to obtain reasonable assurance that f/s are free
from material misstatement
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the f/s
Procedures selected depend on the auditors judgement, including the assessment of the risks of material
misstatement of the f/s
The auditor considers internal controls relevant to the entitys preparation/presentation of f/s to design audit
procedures that are appropriate
An audit includes evaluating the appropriateness of the accounting policies used and the reasonableness of
significant accounting estimates made by management as well as evaluating the overall presentation of the f/s
The audit evidence obtained is sufficient and appropriate for an opinion

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What is included in the opinion section?

Statement that the f/s present fairly the financial position of the entity as of the b/s date and the results of
operations and its cash flows for the period are in accordance with accounting principles generally accepted in the
United States.

What does it mean when that a statement was explicit versus implicit stated?

Explicit = precisely and clearly expressed or readily observable

Implicit = implied though not directly expressed

In response to an unmodified audit opinion, GAAS is referenced in which section? GAAP is referenced in which
section?

GAAS = Auditors Responsibility Paragraph

GAAP = Management Responsibility Paragraph
And the opinion paragraph

How should audits of issuers make reference to auditing standards in the audit report? What about nonissuers?

Issuers (public co) = Include a reference to PCAOB in the U.S.

o They should also make reference to GAAP
Nonissuers (private co) = Include a reference to generally accepted auditing standards in the U.S.
Example = We conduct our audits in accordance with.
o If the auditor followed 2 sets of standards, mention them both.

Audits of Group Financial Statements

What do audits of group financial statements mean and deal with?
When a large company has many divisions overseas and has a foreign auditor assist in the audit

Example- Wal-Mart operates in the U.S., China, Canada, Brazil, Japan, etc. As a U.S. CPA firm, you need
assistance with other foreign accounting firms for Wal-Marts other divisions.

Define the following terms: 1) component, 2) component auditor, 3) group engagement partner, 4) group
engagement team, and 5) group financial statements.
1. Component = an entity or business activity that prepares financial information that is included in group financial
statements
2. 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
3. GE partner = the partner or other person in the firm who is responsible for the group audit engagement and the
auditors report on the group F/S
4. GE team = includes the engagement partner, other partners, and staff who establish the overall audit strategy,
perform work, and evaluate the conclusions drawn from the audit evidence.
5. Group F/S = financial statements that include financial information of more than 1 component

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What does it mean when an auditor makes reference to the component auditor versus when an auditor does not
make reference to a component auditor?

If we reference a component auditor we are saying "that guy did the work, they are responsible if something
should come up"
o They are dividing up the responsibility
o Group engagement partner finds it impractical to review the component auditor's work
If you do not reference the component auditor it means that you trust him and are willing to take any blame for
his incompetence.
o You need to be able to trust his independence and reputation.
o The group engagement partner must contact the component auditor and review the audit program and
working papers pertaining to the component
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What should be stated in the auditors report on the group financial statements when making reference to the
component auditor?

The Auditors Responsibility The auditor is dividing up the responsibilities when making reference
1. That the component was not audited by the auditor of the group statements, but was audited by the
component auditor.
2. The magnitude of the portion of the f/s audited by the component auditor
3. When the components f/s are prepared using a different financial reporting framework from the group
f/sstate the financial reporting framework used by the component and that the auditor of the group f/s
is taking responsibility for evaluating the appropriateness of the adjustments to convert the components
f/s to the group f/s framework.
4. When the auditors report on the components f/s does NOT state that the audit was performed in
accordance with GAAS or PCAOB standards... state the set of auditing standards used by the
component auditor and that additional audit procedures were performed by the component auditor to
meet the relevant requirements of GAAS
Opinion
1. State it was based on our audit and the report of other auditors

Types of Opinions
What are the types of opinions and how would you end up with that opinion?

M
O
D
I
F
I
E
D

1. Unmodified opinion = clean. The f/s are presented fairly in all material respects and the financial position,
results of operations, and cash flows of the entity are in conformity with applicable financial reporting
framework.
If a material departure from GAAP is justified, a UM is still possible
2. Qualified opinion = material GAAP or GASS problem. States that except for the effects of the matter(s) to
which the qualification relates, the f/s present fairly the financial positionwith the applicable financial
reporting framework.
o GAAP = accounting policy, presentation, disclosures, and estimates
o GAAS = Insufficient evidence
3. Adverse opinions = very material (pervasive) GAAP problems. The f/s do not present fairly the financial
positionwith the applicable financial reporting framework.
o GAAP = accounting policy, presentation, disclosures, and estimates
Weak internal controls doesnt necessarily mean adverse opinion
4. Disclaimer of opinion = very material (pervasive) GAAS problem. The auditor does not express an
opinion because they were not able to obtain sufficient appropriate audit evidence to provide a basis for an
opinion
o GAAS = Insufficient evidence, significant going concern uncertainty, or lack of independence

When would you withdraw from an audit?

The financial information is false, fraudulent, deceptive, or misleading

When an auditor expresses an adverse opinion or a disclaimer of opinion on the f/s as a whole, the auditor
should not do what?

They should NOT include an unmodified opinion on a single f/s or 1+ specific elements, account, or item on f/s

Emphasis-of-Matter and Other-Matter-Paragraphs

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What is the purpose of the Emphasis-of-Matter Paragraphs?

The auditor may determine that it is necessary to add additional communications to the auditors report without
modifying the auditors opinion.
Used when referring to a matter that is appropriately presented or disclosed in the f/s and is of such importance
that it is fundamental to the users understanding of the f/s

What are some of the required traits for an emphasis-of-matter paragraph in the auditors report?

Should be placed immediately after the opinion paragraph

Describe the matter being emphasized and location of relevant disclosures of the matter in the f/s
Indicate that the auditors opinion is not modified with respect to the matter emphasized

What would cause an emphasis-of-matter paragraph to be required?

1.
2.
3.
4.

There is doubt about the entitys ability to continue as going concern

To describe a justified change in accounting principle that has a material effect (lack of consistency)
Subsequent discovered facts lead to a change in audit opinion
The f/s are prepared in accordance with an applicable special purpose framework

What would cause an emphasis-of-matter paragraph to possible be necessary (use professional judgement)?

A major catastrophe having a significant effect on the entitys financial position

Significant related party transactions
Unusually important subsequent events
An uncertainty related to the outcome of unusually important litigation (no need if it is disclosed)

What is the purpose of the Other-Matter Paragraphs?

Used when referring to matters other than those presented or disclosed in the f/s and that are relevant to the users
understanding
It is required when
o To report on supplementary information
o When an alert is included that restricts the use of the auditors report
o Identifies a material inconsistency in other information
o The f/s of the prior period were audited by a predecessor auditor and the predecessors audit report is not
reissued
o When the current period f/s are audited and presented in comparative form with compiled or reviewed f/s
for the prior period
o A report on compliance

Going Concern-- Under International Standards on Auditing, the going concern period is _____? What about
under U.S. auditing standards?

Under ISAs, the going concern period must be at least, but not limited to, twelve months from the date of the f/s
being audited.
Under U.S. auditing standards, the going concern period cannot exceed one year from the date of the f/s being
audited.
o Note: time reference should not be included in the auditors report

Going Concern-- What types of procedures should the auditor perform to obtain evidence about an entitys
ability for going concern?

ADMITS
Analytical procedures
Debt compliance = review the terms of debt and loan agreements
Review minutes = from stockholder and BOD meetings
Inquiry of clients legal counsel
Third party arrangements/agreements = confirm the details of financial support arrangements
Subsequent events review

Going Concern-- What are types of conditions or events that may indicate substantial doubt about going
concern?(Give examples of each)

FINE
Financial difficulties

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Loan defaults, dividend arrearages, denial of usual trade credit, debt restructuring, noncompliance with
capital requirements, new financing sources or methods, or disposal of substantial assets
Internal matters
Work stoppages, labor difficulties, substantial dependence on a particular project, uneconomic long-term
commitments, or significant revision of operations
Negative trends
Recurring losses, working capital deficiencies, negative cash flows, and adverse financial ratios
External matters
Legal proceedings, new legislation, loss of a key franchise, license, or patent, natural disaster, and loss of
a principal customer or supplier

Going Concern-- When an auditor believes that there is substantial doubt about an entitys ability to continue
as a going concern, the auditor is required to consider managements plans for dealing with the conditions or
events (mitigating factors) that led to the auditors beliefs. What must this plan include?

Plans to borrow money or restructure debt

Plans to sell assets
Plans to delay or reduce expenditures (delay/postpone due dates) can also lease rather than purchase
Plans to increase ownership equity (sell stock)

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Going Concern--What types of words must be included in the auditors report when there is a going concern
issue?

Emphasis-of-Matter
1. Substantial doubt (significant doubt for ISA)
2. Going concern
3. Draw attention to the f/s and state the areas of concern
Do not mention reasonable period of time, not to exceed one year

Going Concern-- When an auditor believes there is substantial doubt about the ability of the entity to continue
as a going concern for a reasonable time period, what items should be included in the audit documentation?
1.
2.
3.
4.
5.

The conditions or events that gave rise to the substantial doubt

Any mitigating factors that the auditor considers significant
Audit work performed to evaluate managements plans
The auditors conclusion about whether substantial doubt remains or is alleviated
The effect of the auditors conclusion on the evaluation of the f/s and related disclosures and on the resulting
auditors report

Going ConcernWhen would different types of opinions occur in relations to going concern?

If the entitys disclosures are adequate = unmodified with an emphasis-of-matter paragraph

If the entitys disclosures are inadequate = qualified or adverse with an emphasis-of-matter paragraph
If disclosures are adequate, but there is a significant going concern uncertainty = disclaimer

ConsistencyA lack of consistency is one reason an emphasis-of-matter paragraph would be needed. What
does a lack of consistency mean?

This deals with the comparability of the f/s from year to year.
If the auditor doesnt say there is a lack of consistency, the f/s are comparable between periods. (implicitly stated)
The issue of comparability is affected by changes in accounting principle or by an adjustment to correct a
material misstatement in a previously issued f/s
o Correction of errors of a principle always require an E-O-M paragraph
o A change of principle depends on certain factors
Correction of mathematical errors or changes in estimates do NOT affect the auditors report

ConsistencyWhen evaluating the acceptability of an accounting principle, what should the auditor consider?
1.
2.
3.
4.

If the new principle is in accordance with the applicable financial reporting framework
If the method of accounting for the change is acceptable
The disclosures related to the change are appropriate and adequate
The entity has justified that the new principle is preferable

ConsistencyWhat type of opinions can occur in relations to a lack of consistency?

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If all 4 criteria are met, then the opinion can be unmodified with an E-O-M paragraph
Note: the auditor will not say that they concur explicitly with the change
If not all 4 are met, then consider the change in principle is unjustified and the auditor should issue an adverse or
qualified opinion (not disclaimer)
o When management does not provide reasonable justification that a change in accounting principle is
preferable and it presents comparative FS, the auditor should express a qualified opinion each year that
the f/s initially reflecting the change are presented
If the change has an immaterial impact, then you do not need to mention it at all in the auditors report

GAAP Issues: Qualified or Adverse Opinion

What are the 2 types of GAAP issue opinions and what would cause that type of opinion for each?
1. Qualified = material issue w/ accounting policy, presentation, disclosures, and/or estimates
2. Adverse = material and pervasive issue w/ accounting policy, presentation, disclosures, and/or estimate
o The type of opinion is determined by judgement
o Unjustified/unreasonable estimates, unjustified policies, departures, and violations:
Policies dont follow GAAP or there is an error in the application
F/S do not fairly present transactions and events that achieves fair presentation
F/S are missing disclosures (example = related party transactions) or they dont follow GAAP
Required info (cash flow, etc.) has not been included
If there are no GAAP issues or they are immaterial = unmodified opinion
GAAP allows different methods for inventory as long as disclosed = unmodified
Weak internal controls doesnt necessarily mean adverse opinion
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What changes in the auditors report when a qualified or adverse opinion is given?

The Auditors Responsibility paragraph is modified:

o Amend to audit evidence obtained is sufficient and appropriate for a qualified or adverse opinion
The report will include a Basis for Qualified or Adverse Opinion paragraph which goes immediately before the
opinion paragraph:
o Have a description and quantification of the financial effects of any misstatement that relates to specific
amounts in the f/s
o An explanation of how disclosures are misstated (if any)
o A description of the nature of omitted info (if any)
Opinion paragraph is modified to say qualified or adverse opinion paragraph:
o Qualified opinion = State that in the auditors opinion, except for effects of the matter(s) described in the
basis for a qualified paragraph, the f/s are presented fairly in accordance with the applicable financial
reporting framework (operationscash flows)
o Adverse opinion = State that in the auditors opinion, because of the significance of the matter(s)
described in the basis for an adverse paragraph, the f/s are not presented fairly in accordance with the
applicable financial reporting framework (operationscash flows)

GAAS Issues: Qualified or Disclaimer Opinion

What are the 2 types of GAAS issue opinions and what would cause that type of opinion for each?
1. Qualified = material issue with insufficient evidence (scope limitation)
2. Disclaimer = material and pervasive issue with insufficient evidence (scope limitation), significant going
concern uncertainty, and/or lack of independence
o Scope limitations- circumstances:
When an auditor wasnt engaged at the beginning of the year when opening inventory should have
been observed (disclaimer)
The CPA was not independent (disclaimer) -- They read the f/s for obvious material misstatements.
The f/s were unaudited (disclaimer)
When certain circumstances prevent the auditor from performing a specific procedure (unless an
auditor can obtain sufficient evidence by performing alternative procedures. There is also no need
for an E-O-M paragraph in this situation)
If alternative procedures cannot be applied, but satisfactory evidence for all other items
in the f/s is present = disclaimer
o Scope limitations- management: (all disclaimer)

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Confirming A/R was denied

Consolidated subsidiary info denied or is unable to be obtained
Audit restrictions
Inadequate accounting records
No management representation letter signed
Client lawyers denied
If there are no GAAS issues or they are immaterial = unmodified opinion

When management causes a scope limitation what type of opinion should be given?

A qualified/disclaimer opinion or they should withdraw from the engagement (NEVER adverse)

If an auditor cannot obtain appropriate audit evidence due to management-imposed limitations and the
possible effects of any undetected misstatements could be material and pervasive, the auditor should withdraw
from the engagement. What would cause an auditor from being able to withdraw?

If the auditor has substantially completed the audit OR the audit is required by law or regulation
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What changes in the auditors report when a qualified or disclaimer opinion is given?

The Auditors Responsibility paragraph is modified:

o Qualified = Amend to say audit evidence obtained is sufficient and appropriate for a qualified opinion
o Disclaimer = State that their responsibility is to express an opinion on the f/s based on conducting the
audit in accordance with auditing standards generally accepted in the U.S. Because of the matter(s)
described in the basis for a disclaimer paragraph, however, we were not able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion.
The report will include a Basis for Qualified or Disclaimer Opinion paragraph which goes immediately before
the opinion paragraph:
o Describe the reasons for the inability to obtain sufficient appropriate audit evidence
Opinion paragraph is modified to say qualified or disclaimer opinion paragraph:
o Qualified opinion = State that in the auditors opinion, except for effects of the matter(s) described in the
basis for a qualified paragraph, the f/s are presented fairly in accordance with the applicable financial
reporting framework (operationscash flows)
When an auditor qualifies his opinion because of a scope limitation, the wording in the opinion
paragraph should indicate that the qualification pertains to the possible effects on the financial
statements and not to the scope limitation itself.
o Disclaimer opinion = State that in the auditors opinion, because of the significance of the matter(s)
described in the basis for a disclaimer paragraph, we have not been able to obtain sufficient appropriate
evidence to provide an opinion. Therefore, we do not express an audit opinion
A disclaimer of opinion will also require modification in the introduction paragraph:
o Amend to state that the auditor were engaged to audit instead of have audited the f/s

If an auditor is not independent, but is required by law to report on f/s, what type of opinion should be given?

A disclaimer

If an auditor has no audit work, what type of opinion should be given?

There should be no audit opinion

Summary What type of opinion relates to a group audit and what are a few traits?

Unmodified
o No emphasis-of-matter paragraph
o No basis for opinion paragraph

Summary What type of opinion relates to a going concern and what are a few traits?

Adequate disclosures = unmodified

o Yes emphasis-of-matter paragraph
o No basis for opinion paragraph
Inadequate disclosures (GAAP) = qualified or adverse
o Yes emphasis-of-matter paragraph
o Yes basis for opinion paragraph
Significant going concern uncertainty (GAAS) = disclaimer

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o
o

No emphasis-of-matter paragraph
Yes basis for opinion paragraph

Summary What type of opinion relates to a lack of consistency and what are a few traits?

Justified = unmodified
o Yes emphasis-of-matter paragraph
o No basis for opinion paragraph
Unjustified = adverse or qualified
o Yes emphasis-of-matter paragraph
o Yes basis for opinion paragraph
Immaterial = do not mention it in the report

Summary What type of opinion relates to a misstatement (GAAP) and what are a few traits?

Immaterial = unmodified
o No emphasis-of-matter paragraph
o No basis for opinion paragraph
Material = qualified
o No emphasis-of-matter paragraph
o Yes basis for opinion paragraph
Material and pervasive = adverse
o No emphasis-of-matter paragraph
o Yes basis for opinion paragraph

Summary What type of opinion relates to a scope limitation (GAAS) and what are a few traits?

Immaterial = unmodified
o No emphasis-of-matter paragraph
o No basis for opinion paragraph
Material = qualified
o No emphasis-of-matter paragraph
o Yes basis for opinion paragraph
Material and pervasive = disclaimer
o No emphasis-of-matter paragraph
o Yes basis for opinion paragraph

Summary What type of opinion relates to an uncertainty (GAAP and GAAS) and what are a few traits?

No material misstatement & there is sufficient evidence = unmodified

o Maybe emphasis-of-matter paragraph
o No basis for opinion paragraph
Material misstatement (GAAP) = qualified or adverse
o No emphasis-of-matter paragraph
o Yes basis for opinion paragraph
Insufficient evidence (scope limitationGAAS) = qualified or disclaimer
o No emphasis-of-matter paragraph
o Yes basis for opinion paragraph

Reports on Comparative Statements

Reporting with Different Opinions
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What is the main difference on the auditors report when going from an unmodified opinion in the prior year to
a qualified opinion for the current year?

Opinion Paragraph
o State, in our opinion, except for the effects on the 201X f/s of matter(s) described in the basis for a
qualified paragraph, the f/s are presented fairly.

Updating/Changing Prior Opinions

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When reporting on comparative financial statements (prior year and current year are presented), an auditor
should change the previously issued opinion (for example an adverse or qualified) on the prior year's financial
statements if what happens?

The prior year's f/s are restated to conform with generally accepted accounting principles.
o Indicate that the f/s have been restated and should express an unmodified opinion with respect to the
restated f/s.

If during the current examination the auditor becomes aware of evidence that affects the prior statements and
opinion that was expressed what should the auditor do?

Update the opinion in the current years report

You only update/change an opinion when the entity is not in conformity with GAAP
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If the updated/changed opinion differs from the previous opinion, the auditor should disclose the reason(s) in
the auditors report. What items should be disclosed?

Only DORCS change their mind

In the emphasis-of-matter or the other-matter paragraph disclose
D Date of the auditors previous report
O Opinion type previously issued
R Reason for prior opinion
C Changes that have occurred
S Statement that the opinionis different

Prior Period F/S audited by a Predecessor Auditor

What should the prior/old (predecessor) CPA do when they are deciding to present (reissue) their audit report?

Read the current period statements

Compare the statements audited with the current period statements
Obtain a letter of representation from the successor auditor
Obtain a letter of representation from management
o If the report is unrevised use the original report date in any reissue
o If the report is revised use the dual date
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What should the current/new (successor) CPA do when they do not present (dont reissue) the predecessors
audit report?

They should express an opinion on the current period f/s only

In the other-matter paragraph they should indicate
o The f/s of the prior period were audited by a predecessor auditor (do not name them)
o The type of opinion expressed by the predecessor auditor
If it was modified, give the reasons
o The nature of any emphasis-of-matter or other-matter paragraph included in the predecessor audits report
o The date of the predecessor auditors report

Prior Period F/S Not Audited

If the prior period financial statements were not audited, reviewed, or compiled, what needs to be shown?

The f/s should be clearly marked and

The auditors report should include an other-matter paragraph to indicate that the auditor did not audit the prior
period f/s and the auditor assumes no responsibility for them.

When the prior years f/s were not audited and the current years f/s are being audited, what type of opinion
should be issued?

Disclaimer (like a scope limitation) may be required on items

Events Occurring After Year-End

Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date, but before the f/s are
issued. What are the 2 types of subsequent events?(describe them)
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Type I events = conditions on or before the balance sheet date

o These are recognized events
o Requires a F/S adjustment
A large A/R was included in the f/s, but before the f/s was issued, it was written off due to the customer
filing bankruptcy

Type II events = conditions existing after the balance sheet date

o These are nonrecognized events
o May require footnote disclosure
The company closed the purchase of a competitor after the B/S date, but before f/s were issued

What is the auditors responsibility (type of procedures do they need to perform) for subsequent events?

PRIME is included in year-end fieldwork

Post balance sheet transactions = review for proper cutoff and to better evaluate year-end balances
Representation letter should be obtained from mgmt = about events that need adjustmnts/disclosures
Inquiry of mgmt = if sub. events have occurred that could effect f/s ex) litigation, claims, new info
Minutes of stockholders, directors, and other committee meetings should be read during sub. period
Examine latest available interim F/S and compare them with the F/S under audit

What is the auditors responsibility after the original date of the auditors report?

The auditor has no active responsibility.

However, if the auditor becomes aware of a subsequent event, the auditor must use professional judgement to
decide whether to adjust the F/S or disclosures if the information existed at the report date
If the auditor believes the f/s need to be revised to reflect the sub. event and mgmt. doesnt make the revision, a
qualified or adverse opinion should be issued
o If adjusts are made after the original date of the auditors report, the auditor may dual date the report
which extends their responsibility on that specific sub. event
Ex. Jan, 21, 2015, except for Note 2, as to which the date is Feb 3, 2015
If they decide not to dual date, the auditor takes responsibility for all sub. events up to that later
date

Subsequent Discovery of Facts after the Report Release Date: (we missed something)
Usually, an auditor has no obligation to make continuing inquiries after the date of the report. However, if the
auditor becomes aware of material information (something the auditor missed) that would have affected the
report, the auditor should take appropriate action. What actions should the auditor take?

First = Determine whether there are persons currently relying on, or likely to rely on, the f/s and whether those
persons would attach importance to the information.
Advise the client to issue revised f/s describing the reasons for the revision
Advise the client to make the necessary disclosures and revisions to the f/s
Provide notification that the f/s cannot be relied upon if the effects on the f/s cannot be determined on a timely
basis

If the client refuses to follow procedures, what should the auditor do?

Notify the board of the directors of the refusal and that they will take additional steps to prevent further reliance
on the auditors report and f/s
DAR them to fix it
o Dissociate with the client = notify the client that the auditors report must no longer be associated with
the f/s
o Alert agencies = notify any regulatory agencies that the auditors report should no longer be relied on
o Relying parties = notify any relying parties that the auditors report is no longer to be relied on

Omitted Audit Procedures Discovered after Submission of the Audit Program: (we forgot to do it)
Omitted audit procedures may be discovered, after the audit report has been submitted, during a firms internal
inspection program or during peer review. What actions should the auditor take?

Auditor should determine whether other audit procedures were adequate to compensate for the omitted audit
procedures
o If so, no further action is necessary

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If not, apply the omitted procedures (or alternative procedures)

Note: If the auditor did not perform the omitted or alternative procedures, this would impair the
auditors ability to support the previously issued option

Reporting on Other Information

Other Information in Documents Containing Audited Financial Statements
Frequently, audited f/s are incorporated into other documents, such as annual reports to the shareholders or
reports by charitable orgs. to the general public. Generally, an auditor is not responsible for determining
whether other info in the documents is properly stated, but the auditor should read the other info because of the
credibility of the audited f/s may be undermined if there are material inconsistencies or material misstatement
of fact between the audited f/s and the other info. What should the auditor do if they identify a material
inconsistency or misstatement of fact?

The auditor should determine whether the audited f/s or the other info. need to be revised.
o If the material inconsistency relates to the audited f/s and management refuses to change/eliminate the
issue then modify the opinion
o If the material inconsistency relates to other info and management refuses to change/eliminate the issue
then the auditor should communicate this matter to those charged w/ governance and
Include in the auditors report an other-matter paragraph describing the material inconsistencies
Withhold the use of the report
Withdraw from the engagement and consult with legal counsel if it was false, fraudulent,
deceptive, or misleading

Reporting on Supplementary Information

Supplementary information is info presented outside the basis f/s that may be presented in a document
containing the audited f/s or separate from the f/s. An auditor may be engaged to report on the supplementary
info. What are the objectives in this type of engagement?
1. Evaluate the presentation of the sup. info in relation to the f/s as a whole
2. To report on whether the sup. info. is fairly stated, in all material respects in relation to the f/s as a whole
In order to report on this information though, an auditor must perform sufficient audit procedures

When reporting on supplementary information, what are the auditors responsibilities when required by GASB
or FASB?

Apply certain limited procedures to the required supplementary information, and

o Inquire of management about methods used to prepare the sup. info
o Determine if the sup. info is consistent with managements responses and audited f/s
o Obtain an understanding of the methods used to prepare the info
o Evaluate the appropriateness and completeness of the info
o Obtain written management representations regarding the required sup. info
Add an other-matter paragraph to the financial statement audit report.
o State that the required sup. info is included and the required procedures has been applied or
o State that the required sup. info has some deficiencies and/or omissions and disclaim an opinion

Reports on Application of the Requirements of an Applicable Financial Reporting Framework

A reporting accountant is an accountant who prepares a written report on 1) the application of the
requirements of an applicable financial reporting framework to a specific transaction or 2) the type of report
that may be rendered on a specific entitys f/s. What are some other traits about the reporting accountant?

They may NOT report on hypothetical transactions.

o A proposed transaction is okay as long as the transaction involves the facts and circumstances of a
specific entity
They are NOT required to be independent
o If they are not independent they must state that in the accountants report
If the transaction is audited by another CPA, the reporting accountant should consult with the continuing
accountant to ascertain all the available relevant facts

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The accountants report should be restricted only to management, BOD, or specific parties

What items should be included in the accountants report?

1. Describe the nature of the engagement
2. Engagement was performed in accordance with AICPA standards
3. Identification of the specific entity, the specific transaction, statement of relevant facts, circumstances, and source
of info
4. Statement saying management is responsible for proper accounting treatment
5. Statement saying that any difference in facts, circumstances, etc. may change the report
6. If the accountant is not independent, a statement stating their lack of independence
7. A separate paragraph restricting the use of the report to specific parties only

Reporting on F/S Prepared in Accordance with a Financial Reporting Framework Generally Accepted in
another Country
Before reporting on the financial statements of a U.S. entity that have been prepared in accordance with a
financial reporting framework generally accepted in another country, an auditor practicing in the U.S. should
do what?

Understand the purpose for which the f/s are prepared

o Done by obtaining a written representation letter from management
Understand whether the financial reporting framework is a fair presentation framework
Understand the intended users of the f/s
Understand the applicable legal responsibilities involved if the auditor plans to use the form and content of the
auditor's report of another country.

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