Audit Class 8/27 Ch. 18

The auditor gathered sufficient appropriate evidence.

The audit was performed in accordance with PCAOB standards.

The financial statements conform to GAAP.

What conditions must be met to issue a standard unqualified audit report for a public company

• Report title

• Addressee

• Opinion section (with reference to ICFR report if separate)

• Basis for Opinion section

• Critical Audit Matters (CAMs) section

• Audit firm name/signature

• Auditor tenure (year service began)

• Report location and date

What are the 8 required elements of a standard PCAOB unqualified audit report

Critical Audit Matter

Any matter arising from the financial statement audit that was communicated (or required to be communicated) to the audit committee, relates to accounts or disclosures material to the financial statements, and involved especially challenging, subjective, or complex auditor judgment

• Risks of material misstatement (including significant risks).

• Degree of auditor judgment relating to management's significant judgment or estimates.

• Nature and timing of significant unusual transactions and audit effort required.

• Degree of auditor subjectivity in applying procedures or evaluating results.

• Need for specialized skill or knowledge.

• Nature of audit evidence obtained

What factors should an auditor consider when identifying a Critical Audit Matter (CAM)

• Identification of the CAM.

• Principal considerations that led to identifying it as a CAM.

• Description of how the CAM was addressed during the audit.

• Reference to the relevant financial statement accounts and disclosures.

What 4 components must be included for each CAM described in the audit report

• Report Title/Terminology: "Unqualified" under PCAOB vs. "Unmodified" under ASB.

• Auditing Standards: PCAOB standards vs. GAAS (Generally Accepted Auditing Standards).

• Internal Control: PCAOB audits ICFR; ASB considers internal control for planning only and expresses no opinion.

• Matters Reported: CAMs are mandatory for PCAOB; Key Audit Matters (KAMs) are voluntary for ASB

What are the key differences between a PCAOB audit report and an ASB (nonpublic) audit report

• Separate report issued on ICFR.

• Reference to the report of other auditors.

• Substantial doubt about going concern.

• Lack of comparability (accounting changes or error corrections).

• Management reports on ICFR but an ICFR audit is not required (non-accelerated filers).

• Auditor wishes to emphasize a matter.

What 6 circumstances require explanatory language added to an unqualified/unmodified audit report?

• Opinion Section: States the opinion is based on "our audit and the report of the other auditors" and adds a paragraph disclosing the percentage of assets and revenue audited by the other auditor.

• Basis for Opinion: States "our audit and the report of the other auditors provide a reasonable basis for our opinion".

How is the audit report modified when referring to the report of another auditor?

• Add an explanatory paragraph immediately after the Opinion section.

• Must include the specific phrase "substantial doubt about its ability to continue as a going concern".

• Reference management's footnote disclosure and state that no adjustments are included in the statements.

• Include a reference to the going concern paragraph in the CAM section

What are the reporting requirements when there is substantial doubt about an entity's ability to continue as a going concern?

• Change in accounting principle (e.g., switching inventory valuation from LIFO to FIFO).

• Correction of a material misstatement in previously issued financial statements (restatements, correcting an improper principle to an acceptable one, or correcting account classifications/balances)

Which accounting changes affect comparability and REQUIRE an explanatory paragraph?

• Change in accounting estimate.

• Reclassification from one acceptable classification to another. (These are disclosed in the financial statement notes only).

Which changes affect comparability but do NOT require an explanatory paragraph?

Add an explanatory paragraph in the Basis for Opinion section stating:

• The company is not required to have, nor was the auditor engaged to perform, an ICFR audit.

• An understanding of ICFR was obtained for audit planning purposes only.

• The auditor expresses no opinion on the effectiveness of ICFR

What language must be added for non-accelerated filers when management reports on ICFR but an ICFR audit is not required

• Used when a matter is properly presented or disclosed in the financial statements, but the auditor wants to draw special attention to it.

• Examples: Significant related-party transactions, important subsequent events, comparability issues other than principle changes, and major litigation/regulatory uncertainties.

When is an "Emphasis of a Matter" paragraph used, and what are typical examples?

• Scope limitation.

• Departure from GAAP.

• Lack of auditor independence.

What are the 3 conditions that require a departure from an unqualified/unmodified audit report?

Qualified Opinion ("except for")

Adverse Opinion

Disclaimer of Opinion

What are the 3 types of audit reports other than unqualified/unmodified?

Pervasiveness (materiality)

Effects that:

• Are not confined to specific accounts, elements, or items.

• Represent a substantial proportion of the financial statements if confined.

• Are fundamental to users' understanding of the financial statements (with regard to disclosures

• Immaterial: Unqualified / Unmodified.

• Material but not pervasive: Qualified opinion ("except for").

• Pervasively material: Disclaimer of opinion

How does materiality determine the audit report for a Scope Limitation

• Immaterial: Unqualified / Unmodified.

• Material but not pervasive: Qualified opinion ("except for").

• Pervasively material: Adverse opinion.

How does materiality determine the audit report for a Departure from GAAP?

A Disclaimer of Opinion

What type of audit report is issued if the auditor lacks independence?

“We were not able to obtain sufficient evidence”

What phrasing distinguishes a Qualified opinion from a Disclaimer for a Scope Limitation?

Present Fairly vs. Do Not Present Fairly

What phrasing distinguishes a Qualified opinion from an Adverse opinion for a Departure from GAAP?

• Read the current-period financial statements.

• Compare the prior-period financial statements reported on with the current-year statements.

• Obtain representation letters from entity management and the successor auditor

What steps must a predecessor auditor take before reissuing a prior-year audit report for comparative statements?

• The auditor has no obligation to perform audit procedures to corroborate the other information.

• The auditor must read the other information to consider whether it is materially consistent with the audited financial statements.

What is the auditor's responsibility for "Other Information" in documents containing audited financial statements (e.g., annual reports)?

• Regulatory basis

• Tax basis

• Cash (or modified cash) basis

• Contractual basis

What are the 4 Other Comprehensive Bases of Accounting (OCBOA) covered under Special Reports?

Negative assurance ("nothing came to our attention that caused us to believe that the Company failed to comply..." with specific covenants/provisions relating to accounting matters)

What type of assurance is provided in compliance reports related to contractual/regulatory agreements?