A1, M4: An Unmodified (Unqualified) Opinion

A1, M4,

When an auditor is engaged to communicate key audit matters in the auditor’s report, what information should be included?

When an auditor is engaged to communicate key audit matters in the auditor’s report, what information should be included?

When the auditor is engaged to communicate key audit matters, the auditor’s report should include a separate section with the heading, “Key Audit Matters,” and the following information should be included:

• A description of each matter

• A description of why it was of most significant to the audit

• How the matter was addressed in the audit of the financial statements

In what circumstances would an auditor be prohibited from communicating key audit matters in the auditor’s report?

An auditor is prohibited from communicating key audit matters in the auditor’s report when the auditor expresses an adverse opinion or disclaims an opinion (no opinion given) on the financial statements, unless such reporting is required by law or regulation.

Can an auditor that has been engaged to communicate key audit matters in the auditor’s report conclude that there are no key audit matters to communicate?

Yes, an auditor may determine, based on the facts and circumstances of the audit, that there are no key audit matters to communicate. In this circumstance, a statement to this effect SHOULD BE ADDED to the KAM section of the auditor’s report.

List in order the primary sections of an unqualified audit opinion (issuer).

• Title

• Addressee

• Opinion section

• Basis for Opinion section

• Critical audit matters

• Signature, tenure, location

• Report date

What should be included in the opinion section of the unqualified audit opinion (issuer)?

The first section of the auditor’s report must include the section heading “Opinion on the Financial Statements” and the following elements:

• The name of the company whose F/S have been audited

• A stmt identifying each F/S and any related schedule that has been audited

• Dates or periods covered by each F/S and related schedule

• A stmt indicating that the F/S were audited

• An opinion that the F/S present fairly, in all material respects, the financial position of the company as of the B/S date and the results of its operations and its cash flows for the period then ended in conformity with the applicable financial reporting framework (GAAP, IFRS).

The auditor’s responsibility to express an opinion on the F/S under GAAS is explicitly represented in the first sentence of the Auditor’s Responsibility section of the nonissuer audit report. It says, “Our objectives are to obtain reasonable assurance about whether the F/S as a whole are free from MM, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.”

What should be included in the FIRST paragraph under the Basis for Opinion section in the unqualified audit opinion (issuer)?

The second section of the auditor’s report must include the section heading “Basis for Opinion” and the following elements:

• A statement that the F/S are the responsibility of the company’s mgmt

• A statement that the auditor’s responsibility is to express an opinion on the F/S based on the audit; and

• A statement that the auditor is a public accounting firm registered with the PCAOB (USA) and is required to be independent with respect to the company in accordance with the US federal securities laws and the applicable rules and regulations of the SEC and the PCAOB.

What should be included in the SECOND paragraph under the Basis for Opinion section in the unqualified audit opinion (issuer)?

The second paragraph under the Basis for Opinion section contains the following:

• A statement that the audit was conducted in accordance with the standards of the PCAOB;

• A statement that PCAOB standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the F/S are free of MM whether due to error or fraud;

• A statement that the audit included:

  • performing procedures to assess the risks of MM;

  • examining on a test basis evidence re: the amounts and disclosures;

  • evaluating the accounting principles used and significant estimates made by mgmt; and

  • evaluating the overall presentation of the F/S; and

• A statement that the auditor believes that the audit provides a reasonable basis for the auditor’s opinion.

Where in the standard unqualified opinion (issuer) does the auditor refer to (1) the applicable financial reporting framework (GAAP, IFRS) and (2) the standards of the PCAOB?

1. The applicable financial reporting framework is referred to in the opinion paragraph.

2. The standards of the PCAOB are referred to in the second paragraph under the Basis for Opinion section.

The auditor’s report should NOT be dated earlier than the date on which the auditor has obtained sufficient appropriate audit evidence. This should include evidence that what three things have occurred?

Evidence that:

1. audit documentation has been reviewed;

2. F/S have been prepared; and

3. Mgmt has taken responsibility for the F/S.

In most audits of issuers, how many critical audit matters (CAMs) will an auditor normally identify?

It it expected that in most audits, the auditor would identify at least one CAM.

What is the definition of a critical audit matter (CAM)?

A critical audit matter is defined as a matter that was communicated or required to be communicated to the audit committee and that:

1. relates to accounts or disclosures that are material to the F/S; and

2. involved especially challenging, subjective, or complex auditor judgment.

Note: audit reports for issuers must include an CAMs or state that the auditor determined there were no CAMs.

In determining CAMs, what factors should the auditor consider?

The auditor should consider the auditor’s assessment of the risks of MM, areas of significant judgment or estimation by mgmt, nature and timing of unusual transactions, the degree of subjectivity in applying audit procedures, and the extent of specialized skill or knowledge regarding a matter. The auditor should also consider the effects of significant unusual transactions and the complexity of the audit procedures applied.

For each CAM identified, what should the audit report of an issuer include?

For EACH CAM identified, the audit report should include:

• Identification of the CAM;

• description of the Principal considerations that led the author to determine the matter was a CAM;

• description of how the CAM was Addressed in the audit; and

• reference to the relevant F/S accounts or Disclosures.

What should the auditor of an issuer do if the auditor determines there are no CAMs?

When the auditor determines that there are no CAMs, the audit report should state:

We determined that there are no critical audit matters.

When F/S contain a departure from US GAAP b/c due to unusual circumstances, the F/S would otherwise by misleading, the auditor should express what kind of opinion?

When circumstances indicate that a financial presentation in accordance with US GAAP would be misleading, a departure from US GAAP is permissible. In such cases, the auditor should issue an unmodified opinion b/c the F/S are not MM.

The opinion paragraph in an auditor’s report for a nonissuer should include what statement?

The opinion paragraph in an auditor’s report should include a statement regarding the auditor’s opinion and an indication of the applicable financial reporting framework and its origin.

In what section of an auditor’s report for a nonissuer does an auditor communicate the nature of the engagement and the specific F/S covered by the audit?

The auditor’s Opinion section indicates the nature of the engagement (audit, review), the F/S covered in the audit engagement, the name of the entity whose F/S have been audited, and the dates covered by each of the F/S.

Consistency - implicit or explicit?

Implicit.

Consistency is implicit in the auditor’s report, and will be explicitly mentioned in an emphasis-of-a-matter paragraph only if there are issues with consistency. Within the Auditor’s Responsibility section of the report, the following statement is explicitly made: “Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the F/S.”

What is the earliest date for an auditor’s report?

The date the auditor has obtained sufficient appropriate audit evidence to support the opinion. The report should be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence to support the opinion.

In what sections of the auditor’s report should an auditor refer to US GAAP?

Opinion and Mgmt’s Responsibility —> under GAAS, the auditor expresses an opinion on the F/S conformity with GAAP in the Opinion section and the Mgmt’s Responsibility section that the mgmt is responsible for the preparation and fair presentation of the F/S in accordance with GAAP.

What item is explicitly included in an audit report expressing an unmodified opinion?

“We identify and assess the risks of material misstatement of the F/S, whether due to fraud or error, and design and perform audit procedures responsive to those risks.”

—> The auditor’s responsibility paragraph of the unmodified opinion audit report explicitly states that an audit includes identifying and assessing the risks of MM and designing and performing audit procedures responsive to those risks.