A1 M8: Reporting with Different Opinions and Other Auditors

when comparative financial statements are presented, which periods must the auditor's report refer to?

the report must refer to each period for which financial statements are presented and on which an audit opinion is expressed

why must an auditor update the audit reports on previously issued financial statements when comparative statements are presented?

because the report date for the audit of the most recent financial statements is used

when updating a prior period report during a comparative audit, what does update mean

• reaffirm the original option

• change the original option

if comparative information is presented but not covered by the auditor's opinion, what must the auditor clearly indicate in their report?

• The character of the auditor's work, if any

• The degree of responsibility the auditor is taking

Can an auditor express a qualified, adverse, or disclaimer of opinion on one period's financial statements while expressing a completely different opinion on another period presented?

yes. The auditor's current year report covers all years presented, and they may express varying opinions with respect to different periods or statements

if the auditor becomes aware of evidence that affexts the prior statements and the opinion that was expressed

the auditor should update the opinion from the current year’s report

what happens if the updated opinion differs from the previous opinion

auditors should disclose the reason(s) in an emphasis-of-matter or other-matter parahraph or explanatory paragraph 

what needs to be included in the paragraph if the opinion is different

• Date of the auditor's previous report

• Opinion type previously issued

• Reason for the prior opinion

• Changes that have occurred

• Statement that the "opinion...is different"

what general condition may predecessor auditors reissue their report on prior period financial statements

they may reissue it as long as the report is still appropriate. However, the current presentation or subsequent events may make the previous report inappropriate

what should predecessor auditors do in deciding whether to reissue their report

1. read the statement for the current period

2. compare the statements audited with the current period statements

3. obtain a letter of representation from the successor auditor

4. inquire of and obtain a letter of representation from management at or near the date of reissuance

5. date the report as appropriate

unrevised

use the original report date in any reissue of a previous report because the predecessor auditor has limited knowledge of the former client's current status

revised

dual date is used in the event that the predecessor auditor revises the report 

if a predecessor auditor's report is not reissued, what type of opinion does the successor auditor express, and how do they reference the prior period

The successor auditor expresses an opinion on the current period only and includes an other-matter paragraph (nonissuer) or explanatory paragraph (issuer) to describe the prior period audit

what must the successor auditor include in their report when the predecessor’s report is not reissued

1. That the prior period statements were audited by a predecessor auditor

2. The type of opinion expressed by the predecessor 

3. The nature of any emphasis-of-matter, other-matter, or explanatory paragraphs in the predecessor's report

4. The date of the predecessor auditor's report

basic formatting requirement whenever unaudited financial statements are presented in comparative form with audited financial statements

unaudited financial statements should be clearly marked to indicate their status

prior period statements were reviewed or compiled (not audited) and the report is not reissued, what must the successor auditor add to their report

other-matter paragraph (nonissuer) or explanatory paragraph (issuer) detailing the prior period service

what must be disclosed in the successor's report regarding prior period statements that were only reviewed or compiled

• The service (review or compilation) performed.

• The date of the prior period report.

• A description of any material modifications described in that report.

• For a review: A statement that the service was less in scope than an audit and does not provide the basis for expressing an opinion on the financial statements as a whole.

• For a compilation: A statement that no opinion or other form of assurance is expressed.

if the prior period statements were not audited, reviews, or compiled what happens with the financial statements and auditor's report

• financial statements should be clearly marked

• auditor's report should include that the auditor did not audit, review or compile the prior period financial statements 

• auditor assumes no responsibility for them

auditor acts as auditor of group financial statments for a nonissuer

auditor must determine whether to make reference to any component auditors in the audit report on the group financial statements

component

entity or business activity that prepares financial information that is included in the group financial statements

component auditor

auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit

component auditor may be part of the

group engagement partner’s firm, a network firm or another firm

group engagement partner

partner or other person in the firm who is responsible for the group audit engagement and for the auditor's report on the group financial statements

group engagement team

includes the group engagement partner, other partners, and staff who establish the overall audit strategy, communicate with component auditors, perform work on the consolidation process, and evaluate the conclusions drawn from the audit evidence as the basis for forming an opinion on the group financial statements

group financial statements

financial statements that include the financial information of more than one component

what must the group engagement team must understand for each component auditor

• whether the component auditor is indpendent and will comply with all relevant ethical requirements

• the professional competence of the component auditor

• the extent to which the group engagement team will be involved in the work of the component auditor

• whether the group engagement team will be able to get information needed for the consoldiation process from the component auditor

• whether the component auditor operates in a regulatory environment that actively oversees auditors

group engagement team relies on a component auditor to perform a portiom of the audit they have two alternatives

1. make no refernce in the audit report 

2. make reference in the audit

if the group engagement partner decides to assume responsibility for the work of a component auditor, how should the component auditor be referenced in the audit report

no reference to the component auditor should be made in the auditor's report

why is no reference made to a component auditor if the group auditor assumes responsibility for their work?

because making a reference could cause a reader to misinterpret the degree of responsibility being assumed

when the group auditor assumes responsibility for the work of a component auditor, what is the responsibility of the group engagement team regarding the component's financial information

The group engagement team should determine the type of work to be performed on the financial information of the components

significant components

component that is of individual financial significance to the group or is likely to include significant risks of material misstatement of the group financial statement

significant due to individual financial significance

component that is significant due to individual financial significance should be audited by the group engagement team or the component auditor

significant due to significant risks of material misstatement

if a component that is significant because it is likely to include significant risks of material misstatement to the group financial statements, the group engagement team or a component auditor should perform an audit of the financial information and/or an audit of the account balances, transactions or disclosures related to the likely significant risks of material misstatement

components that are not significant

group engagement team should perform analytical procedures for components that are not significant components

when making reference to a component auditor, what two baseline disclosures must be included in the Opinion section of the group auditor's report

• That the component was not audited by the group auditor but was audited by the component auditor

• The magnitude of the portion of the financial statements audited by the component auditor

disclosures must be made in the group report if the component's financial statements are prepared using a different financial reporting framework

• The financial reporting framework used by the component

• A statement that the group auditor takes responsibility for evaluating the appropriateness of the adjustments to convert the component's statements to the group's framework

two disclosures must be made if the component report does not state the audit was performed in accordance with GAAS, but the group partner determines additional procedures were performed to meet GAAS requirements?

• The set of auditing standards used by the component auditor

• A statement that additional audit procedures were performed by the component auditor to meet the relevant requirements of GAAS

what must the group auditor do first if a component auditor's opinion is modified, or if their report includes an emphasis-of-matter or other-matter paragraph?

the group auditor should determine the effect of that modification or paragraph on the auditor's report on the group financial statements

actions should the group auditor take when appropriate based on a component auditor's modified report

• Modify the opinion on the group financial statements, OR

• Include an emphasis-of-matter or other-matter paragraph in the group auditor's report

lead engagement partner

has the responsibility is it to determine if their audit firm's participation is sufficient to carry out the responsibilities of the lead auditor

the lead auditor's dual responsibilities when using other auditors in an audit

• Supervising the other auditors used in the performance of the audit

• Determining whether responsibility will be divided with the other auditors (referred-to auditors) or if the lead auditor will maintain full responsibility

factors the engagement partner should consider when determining whether their firm can serve as the lead auditor

• Qualitative and quantitative factors regarding the importance of the locations/business units audited by the partner's firm compared to the financial statements as a whole

• The risks of material misstatement associated with the locations audited by the partner's firm relative to the portions audited by the other auditors

• The extent of supervision provided by the engagement partner's firm

the general rule regarding the 50% threshold when deciding if a firm is the lead auditor

engagement partner's firm is typically not considered the lead auditor if the referred-to auditor audits more than 50 percent of the company's assets or revenues

in an integrated audit, who is allowed to serve as the lead auditor of internal control over financial reporting?

only the lead auditor of the financial statements can be the lead auditor of internal control over financial reporting

when dividing responsibility, what must the lead auditor communicate and ensure regarding the audit report

the lead auditor is responsible for communicating with the referred-to auditor regarding necessary procedures and ensuring all necessary disclosures are included in the lead auditor's report

internal financial statement testing must the lead auditor perform regarding the referred-to auditor's work

Determine that audit procedures are performed to test and evaluate the consolidation or combination of the information audited by the referred-to auditor into the company's financial statement

how must the lead auditor communicate the plan to divide responsibility with the referred-to auditor

communication must be in writing

explicit points must be included in the written representations the lead auditor obtains from the referred-to auditor

• Independent under SEC and PCAOB requirements.

• Duly licensed to practice under the laws of the applicable jurisdiction.

what representations and knowledge must be verified before a lead auditor can divide responsibility with a referred-to auditor?

• The referred-to auditor must represent that their work was performed and report issued in accordance with PCAOB standards

• The lead auditor must determine that the referred-to auditor is familiar with the relevant reporting framework, PCAOB, and SEC standards

when is a referred-to auditor required to be registered with the PCAOB?

when they play a substantial role in preparing the lead auditor's report, or if they audit a business unit that is itself an issuer, broker, or dealer

what happens if the business unit audited by the referred-to auditor uses a different financial reporting framework

Either the lead auditor or the referred-to auditor must take responsibility for auditing the conversion of the information to the company's framework, and the report must indicate which party took that responsibility

the lead auditor must do if they are not satisfied that the referred-to auditor meets the necessary criteria to divide responsibility

They cannot divide responsibility. They must choose one of the following:

• Plan and perform the necessary procedures themselves.

• Qualify or disclaim an opinion.

• Withdraw from the engagement.

when responsibility is divided, in which specific sections of the lead auditor's report must the division of responsibility be clearly indicated

• Opinion on the Financial Statements section.

• Internal Control Over Financial Reporting section (if applicable).

• Basis for Opinion section.

when describing the scope of the audit and expressing an opinion, how must the lead auditor reference the referred-to auditor

they must identify the referred-to auditor by name and refer to the auditor's report of the referred-to auditor

what quantitative information must the lead auditor's report disclose regarding the referred-to auditor's work

the magnitude of the portion of the company's financial statements audited by the referred-to auditor

what must the lead auditor do if the referred-to auditor's report includes a modified opinion or explanatory language

the lead auditor should make reference to the departure or explanatory language unless the matter is clearly trivial to the company's financial statements as a whole