Week 6 AP as substantive evidence, Materiality II and Chapter 19 Audit Reports

Analytical Procedures as Substantive Evidence

AP used in the planning and review stages cannot be used as audit evidence

AP can be used to rest assertions for income statement items if properly designated

Must develop an “expectation” for an account balance using plausible relationships that are expected to exist (i.e. QTY * Rate)

Material differences between actual and estimated must be investigated

Quantity of Analytical Procedure evidence

Quantity depends on the reliability of the data used and the precision of the estimate.

Reliability is enhanced by strong IC systems or the use of other audit evidence.

Materiality Account level

Representative sample error at the account level must be extrapolated to the population to determine the “likely misstatement.”

Aggregate all account-level errors and compare them to account-level materiality.

Materiality: Financial Statement level

Must also aggregate errors at the account level up to the FS level to determine the impact on key items like net income and net assets

Evaluation of Materiality

If aggregate misstatements are over or are approaching materiality, then:

• Get management to recheck areas of the highest misstatement and correct

• Perform additional audit procedures

• Have management correct the misstatements

If material misstatements remain, the audit report must contain a qualification

Types of misstatements:

Factual, Judgemental and Projected

Factual

No question, it is a misstatement

Judgmental

Caused by an unreasonable management estimate or inappropriate GAAP choice/application

Projected

Misstatement projected from the sample to the untested population segment

Communication of Misstatement

Any uncorrected misstatements must be presented to management and the audit committee for acknowledgement and sign-off

Revisions to materiality

Must revise materiality in the event of becoming aware of information during the audit that would have caused the materiality determination to be different initially.

If materiality is revised, one must consider the impact on planned procedures.

Levels of Assurance: High

Audit → Positive Assurance use “In our opinion.”

Levels of Assurance: Middle

Review → Negative Assurance use “Nothing has come to our attention”.

Levels of Assurance: No assurance

Complication → No attempt to verify the accuracy or completeness of information

Going Concern

Per CAS570, if adequate disclosure is made in the FS about material events or uncertainties that would cause doubt about the entity’s ability to continue

Unqualified Independent Auditor’s Report (Unmodified Opinion) Framework

Title: Independent Auditors’ Report

Opinion Paragraph

Basis for Opinion

Key Audit Matter (KAMs)

Other Information Other than Financial Statements and Auditor’s Report

Responsibilities of Management and Those Charged with Governance

Auditor’s Responsibilities

Engagement Partner’s Name and signature of audit firm

Auditor Address

Audit Date

Why is an unmodified audit opinion and include a section in the audit report titled “Material Uncertainty Related to Going Concern.”

Used to draw the user's attention to the note in the FS and state the events or conditions that indicate a material uncertainty.

Immediately follows the basis of opinion paragraph and would be before the key matter section.

(Going concern) If management does not provide adequate disclosures about the material uncertainty,

auditor must issue a qualified or adverse audit opinion.

(Going Concern) If the use of the going concern basis of accounting is not appropriate

an adverse opinion must be issued.

Key audit matters

Matters that, in the auditors' professional judgment, were of most significance in the audit of the entity’s FS of the current period

To determine KAMS, the following should be considered:

Areas of higher assessed RMM

Significant auditor judgements relating to areas in the f/s that involved significant management judgement

Effect on the audit of significant events or transactions that occurred during the period

Why are Emphasis paragraphs used?

emphasize something already disclosed in the FS

Circumstances in which an emphasis on the matter paragraph may be necessary are:

Significant uncertainty of the outcome of litigation or regulatory action

Early application of a new accounting standard has a pervasive effect on the FS

A major catastrophe that has had or continues to have an impact on an entity

Threats or expropriation of assets

Significant related party transaction

Unusually important subsequent events.

what are other matters used for?

sed to communicate other relevant information that is Not in FS

other matters Possible circumstances CAS 706, A5-A9

Laws and regulations, or common practice, require or permit the auditor to elaborate on certain issues.

The auditor has other responsibilities that are in addition to the FS.

The entity has prepared more than one set of FS (national framework and IFRS)

The FS were prepared for a special purpose (distribution is restricted to certain users)

Reservation in the Audit Report (reasons for qualifications in reports)

Financial statements contain a departure from GAAP, including inadequate disclosure.

Scope limitation (extent of audit work has been limited due to an inability to obtain sufficient evidence).

GAAP Departure Reports - Qualified report (material but not pervasive)

A departure from GAAP in the statement is material to users and can be isolated.

The opinion paragraph is a title-qualified opinion.

“Expect for “ opinion with reference to “basis for qualified opinion paragraph.

Qualified Report: CAS 705.A3 financial statements are materially misstated, but not pervasive

An inappropriate accounting treatment

• I.e. expensing capital assets

An inappropriate or unreasonable estimate

• I.e. failure to provide an adequate allowance for doubtful accounts

A failure to disclose essential information in an informative manner

• I.e. failure to disclose a going concern problem or material contingency

Adverse opinions (material or pervasive) - Departure from GAAP in statements is:

Material and pervasive misstatements affecting numerous accounts in the FS relationships

The auditor has concluded that the FS taken as a whole is materially misstated or misleading.

Scope Limitation Reports

The auditor is not able to obtain sufficient and appropriate evidence.

It can be due to conditions beyond the client’s control or be management-imposed

Opinion is qualified or denied

Reliance on another auditor or a specialist

The group auditor is responsible for the audit opinion, and only the group auditor's name appears on the auditor's report.

What do CAS 600 and CAS 620 highlight that during the audit engagement

the auditor is responsible for ensuring that the other auditors or any specialists hired are competent and conduct high-quality field work and maintain confidentiality.