A1 M1 AUD CPA

Non-issuer

A private company that is audited can look to Statement on Auditing Standards (SAS) for their guidance

• Mom and Pop Shops

Issuer

Public company that files with the SEC and can look towards the Public Company Oversight Board (PCOB) auditing standards

Generally Accepted Government Auditing Standards (GAGAS)

Professional standard that provides guidance for audits of government organizations, programs, activities, and of entities that receive government funds

Financial Forecast

Financial statement based on expected financial results of a future period

• Client can ask CPA to examine this financial statement as CPAs can issue reports on items other than historical financial statements

• CPA would follow Statements on Standards for Attestation Engagements (SSAE)

Statements on Standards for Attestation Engagements (SSAE)

Professional standard that provides guidance for attestation engagements; includes three types of engagements:

1. Examinations

2. Reviews

3. Agreed-upon procedures

These types of engagements are on subject matters other than historical financial statements

Statement on Standards for Accounting and Review Services (SSARS)

Professional standard that provides guidance for unaudited financial statements or unaudited financial information of to non-issuers

Public Company Accounting Oversight Board Auditing Standards (PCAOB AS)

Professional standard that provides generally accepted auditing standards for the audits of issuers and provides guidance for other services, such as review of interim financial information and letters to underwriters

Statement on Auditing Standards (SAS)

Professional standards that provides generally accepted auditing standards for the audits of non-issuers (Private companies) and provides guidance for other services, such as review of interim financial information and letters to underwriters

• Includes 3 types of engagements:

1. Preparations

2. Compilations

3. Reviews

Auditor may depart from the guidance, but they must justify such departures.

AICPA Code of Professional Conduct

Type of professional guideline that is the ethical backbone of the Audit profession that provides members with guidelines on how they are expected to conduct themselves

• It also reassures the public that CPAs are held to a very high ethical standards

Statements on Quality Management Standards (SQMS)

Type of professional guideline that provides guidance to CPA firms about a system of quality management that gives guidance on how a firm should create their policies and procedures to ensure their work complies with professional and legal requirements and ensures reports that are issued are reliable

• Applies standards at the firm level

Interpretive Publication

Level of audit guidance that are recommendations for how auditing standards should be applied, but are NOT considered to be auditing standards

Generally Accepted Auditing Standards (GAAS)

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

Audit

The purpose is to provide financial statement users with an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with GAAP

Auditor’s Report

An auditor issues an opinion which gives credibility to users of the financial statements so they can rely on the numbers/ disclosures that are presented to them

• Helps with management bias

Management’s Responsibilities

1. The preparation and fair presentation of the financial statements in accordance with GAAP

2. The design, implementation, and maintenance of internal controls relevant to preparation and fair presentation of financial statements that are free of material misstatement due to error/ fraud

3. Provide the auditor with access to information and persons within the entity needed to complete the audit.

Auditor’s Responsibilities

1. Expressing an opinion on financial statements based on the audit

2. Maintaining professional skepticism

3. Complying with ethical requirements

4. Exercising professional judgement

5. Obtaining sufficient and appropriate evidence

6. Complying with GAAS

Professional Skepticism

An attitude that an auditor must apply when making professional judgement that provide the basis for the auditor’s actions; “Having a questioning mind”

• Used for when an auditor plans and performs the audit

• Needed for the critical assessment of audit evidence

Generally Accepted Auditing Standards

Provides a set of guidelines and principles for planning, performing, and reporting on audit engagements

Reasonable Assurance

A very high, but not absolute level of assurance

• In order to express an opinion, auditor must obtain whether the financial statements are free from material misstatement, whether due to error or fraud by:

  • Plan the work and properly supervise any assistants

  • Determine and apply appropriate materiality levels

  • Identify and assess risks of material misstatement, whether due to error or fraud; and

  • Obtain sufficient appropriate audit evidence.

• CanNOT provide 100% assurance because of inherent limitations of an audit:

  1. Nature of Financial Reporting

  2. Nature of Audit Procedures

  3. Timeliness of Financial Reporting and Balance Between Cost and Benefit

Financial Statement Audit

Where only one opinion is rendered on the fairness of the financial statements

• Non-issuer has the choice of an audit is needed

Objective:

• To obtain reasonable assurance that the financial statements are free from material statement which enables an auditor to express an opinion on if the financial statements are presented fairly in accordance with framework

• To issue report on financial statement and communicate as required by GAAS based on auditor’s findings

Integrated Audit

Where two opinions are rendered:

1. One opinion on the fairness of the financial statements

2. One opinion on the operating effectiveness of internal controls over the financial reporting

• Non-issuer has the choice if an audit is needed

• Issuers are required to have

Audit of Internal Controls Over the Financial Reporting

Overall objective is to express opinion on effectiveness of a company’s internal controls over financial reporting and to plan and perform the audit to obtain appropriate evidence that’s sufficient to obtain reasonable assurance about if a material weakness exists as of the date specified in management’s assessment

• Must be integrated with audit of financial statement

• Issuers are required to have an Integrated audit

Unmodified (Unqualified) Opinion

Type of audit opinion that states that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework ←- Best opinion that a company may receive

• Issuer —→ Unqualified

• Non-Issuer —→ Unmodified

Required Sections = “OBRA” (NON-Issuer)

1. Opinion (Must be 1st / Framework Referenced = GAAP)

2. Basis for Opinion: Lets users’ know which auditing standards are followed (Must be 2nd/ GAAS Referenced)

3. Responsibilities of Management for Financial Statements (Framework Referenced = GAAP)

4. Auditor’s Responsibilities for the Audit of the Financial Statements

Required Sections = Issuer

1. Opinion on the Financial Statements

2. Basis for Opinion

3. Critical Audit Matters

Qualified Opinion

Type of Modified Audit Opinion that is issued if an auditor is unable to obtain sufficient appropriate audit evidence and it’s concluded that the possible effect of the matter is material, but NOT pervasive or the auditor concludes that the financial statements contains a material, but NOT pervasive misstatement

• Can be an audit issue or a financial statement issue depending on the issue

• Term = “Except For… ” ←— Opinion section for F/S Issue

• “Except for the possible effects…” ←- Opinion Section for Audit Issue (Non-Issuer)

• “Except for the effects of the adjustments…” ←— Opinion Section for Audit Issue (Issuer)

Disclaimer of Opinion

Type of Modified Audit Opinion that is issued if an auditor concludes that the possible effect is material AND pervasive and they deny rendering an opinion because they cannot obtain sufficient appropriate audit evidence ←— Scope limitations

• Disclaim = “To Deny”

• Audit issue

Term = “Engaged to audit…” and “We do NOT express an opinion”

Scenarios that will always result in Opinion :

1. Auditor is NOT independent

2. Unaudited financial statements

3. Refusal of management to provide written representation/ acknowledgement of its responsibility for the fair presentation of the financial statements in conformity with GAAP ←— May also withdraw

Adverse Opinion

Type of Modified Audit Opinion that is issued if an auditor concludes that there is a misstatement in the financial statements that’s material AND pervasive, therefore the financial statements are NOT presented fairly

• Financial statement issue

• Term = “Do NOT present fairly”

Pervasive

Far-reaching effects across several accounts in the financial statements

• Can be specific to only one account that represents a significant potion of the financial statements

• Has issues with disclosures that are fundamental to the users’ understandings

Emphasis-of-Matter Paragraph

The purpose is to bring the report user's attention to a specific matter and should specifically clarify that the matter did not lead to a modified opinion

• For a non-issuer

Key Audit Matters (KAMs)

A section that may be added to the Non-issuer report (optional section) when the client engages the auditor to communicate KAMs and let’s the user know the areas that the auditor found to be more complex/ difficult to use judgement when an unmodified/ qualified opinion is rendered

• Provides more visibility into the more complex areas that require judgement in the audit

• Prohibited when auditor expresses an adverse opinion or disclaimer is rendered

When deciding to communicate, auditor should consider:

• Riskier areas of the audit

• Areas involving accounting estimates and uncertainty

• Significant events/ transactions

Do NOT include matters giving rise to:

1. A Qualified Opinion ←- Referenced in Basis of Opinion

2. Substantial doubt about an entity’s ability to continue as a going concern

Critical Audit Matters (CAMs)

A matter that was communicated or is required to be communicated to the audit committee and involves an especially challenging judgment made by the auditor; Section that that NOT is required in an Issuer Auditor report when an unqualified or qualified opinion is rendered

• Provides more visibility into the more challenging areas of the audit

Matter must meet ALL three criteria:

1. Be a matter that was communicated or is required to be communicated to the audit committee

2. Relate to accounts or disclosures material to the financial statements

3. Involve challenging , subjective, or complex auditor judgement

Identification = “IPAD”

1. Identify each CAM in audit report

2. Principal consideration that led auditor to determine CAM

3. Addressed CAM in audit

4. Refer to relevant financial statement accounts and Disclosures

Form AP (Audit Participants)

Special form auditors of Issuers are required to file with the PCAOB that provides more visibility into the audit participants; lets users know who participated in the audit

• File by the 35th day after the audit report is filed with the SEC

• File within 10 days if audit report is included in a registration statement

Engagement Letter

Letter that documents understanding between the auditor and management regarding the services to be performed, including objectives, scope, responsibilities, and limitations of the engagement

Modified Opinion

Audit Issue

Auditor canNOT gather sufficient appropriate audit evidence to ensure balances and disclosures are fairly stated

• Leads to Issuing:

  1. Qualified Opinion ←— Material, but NOT pervasive

  2. Disclaimer of Opinion ←— Material AND pervasive

Scope Limitations:

1. Time constraints

2. Inability to obtain sufficient appropriate audit evidence

3. Refusal of client’s attorney to respond to inquiry

Emphasis-of-Matter Paragraph

A paragraph for Non-issuers that emphasizes a matter that is already disclosed and properly presented in the financial statements and is fundamental to the user’s’ understanding of the financial statements ←— Auditor wants to highlight it in their report

• For a non-issuer, paragraph is included in the auditor’s report when required by GAAS or at auditor’s discretion

Reporting Requirements:

1. Use heading “Emphasis of Matter”

2. Describe matter being emphasized and location of disclosures in f/s

3. Indicate the auditor’s opinion is not modified

Use Requirements = “Change in Accounting Principle”

1. Consistency (Lack of) ←- Justified change in accounting principle

2. Audit Opinion Change ←- Can use Emphasis-of-Matter or Other-Matter paragraph

3. Purpose (Special Purpose Framework)

Other-Matter Paragraph

Paragraph for Non-Issuers that’s included in the auditor’s report when referring to matters other than those that are presented or disclosed in the financial statements that are relevant to:

1. User’s understanding of the audit

2. Auditor’s responsibilities

3. Audit report

Use Requirements:

1. Restricted Use

2. Subsequently Discovered facts leading to change in audit opinion

3. Comparative Financial Statements are Presented ←- 2 yrs or more

Restrict Use

Auditor only wants certain individuals to look at report, so they will restrict the use of the report

• Circumstance that causes “Other-Matter” paragraph

Explanatory Paragraph

A paragraph for Issuers that explains a matter without modifying the opinion ←— Auditor wants to highlight it in their report

• For an Issuer, paragraph is included in the auditor’s report when required by PCAOB AS or at auditor’s discretion

Consistency

The comparability of financial statements from year to year

• Implied, NEVER state

• Lack of ←- Requires Emphasis-of Matter or Explanatory paragraph

  • Must have a material effect on the comparability of the financial statements

Comparative Financial Statements

Financial statements where there’s more than one year presented and users can easily compare numbers

• Auditors must let users know what happened in all financial statement years presented ←- CanNOT ignore prior years presented

• Individual f/s within same year, can receive different opinions