AUDIT

What is a non-issuer and issuer?

Non-issuer = private

Issuer = public

Meaning/responsibility for the following terms:

- Must or Is required

- Should

- May, might, could

• “Must” or “is required”: unconditional requirement

• Should: presumptively mandatory requirement

• “May”, “might”, and “could”: a recommendation

Purpose of an audit

To provide financial statement users with an opinion on whether the financial stmts are presented fairly with GAAP (or their framework)

What should an auditor do to obtain reasonable assurance during an audit?

Plan the work and properly supervise any assistants

What order are the sections in for an unmodified opinion for nonissuers?

1. Opinion

2. Basis for Opinion

3. Management’s Responsibility

4. Auditor’s Responsibility

What is the Opinion section for nonissuers?

• States the framework.

• Info: fin stmt titles, periods covered, and nature of the engagement

• GAAP

What is the Basis section for nonissuers?

• States that the auditor is required to be independent

• States whether the auditor believes that sufficient evidence has been obtained to form an opinion

• GAAS

What is the Management’s Responsibility section for nonissuers?

• States the framework again

• GAAP

What is the Auditor’s Responsibility section for nonissuers?

• Where the opinion/judgement is

• Where they evaluate the entity’s ability to continue as a going concern

• GAAS

What order are the sections in for an unqualified opinion for issuers?

1. Opinion

2. Basis for Opinion

3. Critical Audit Matters (required)

What does the Critical Audit Matters section for an issuer need to make a reference to?

The opinion should make a reference to PCAOB and GAAP

What is a Disclaimer of Opinion?

From Audit Issues.

Disclaimer:

Material and pervasive.

Due to:

• Time constraints

• Inability to obtain sufficient appropriate audit evidence (such as):

• Inability to observe or confirm

• Inadequacy of accounting records

• Refusal of client’s attorney to respond to inquiry (this is a SCOPE LIMITATION)

• Refusal of management to provide acknowledgment for their responsibility to present fairly with GAAP

• Not independent

What is a Qualified Opinion (due to Audit Issues)?

Material but not pervasive.

Due to:

• Time constraints

• Inability to obtain sufficient appropriate audit evidence (such as):

• Inability to observe or confirm

• Inadequacy of accounting records

• Refusal of client’s attorney to respond to inquiry (this is a SCOPE LIMITATION)

What is a Qualified Opinion (due to Fin Stmt Issues)?

Material but not pervasive.

Due to:

• Inappropriate accounting principles

• Unreasonable estimates

• Inadequate disclosures

• Including related party transactions

• Incorrect numbers

• No reasonable justification for change in accounting principles

What is an Adverse Opinion?

Material and pervasive.

Due to:

• Inappropriate accounting principles

• Unreasonable estimates

• Inadequate disclosures

• Including related party transactions

• Incorrect numbers

• No reasonable justification for change in accounting principles

What is the formatting of opinions from misstatements for nonissuers?

What is the formatting of opinions from scope limitations for nonissuers?

What is the formatting of opinions from misstatements for issuers?

What is the formatting of opinions from inability to obtain sufficient evidence for issuers?

What is an “except for” opinion?

“Except for opinion”: a qualified opinion that says the fin stmts are a fair representation of of their financial position, except for a specific issue described in the report

What % would generally be considered material and pervasive?

15%

(This isn’t a hard number but its what they generally use)

What are the contents for a nonissuer for the Emphasis-of-Matter Paragraph?

Contents/Info:

• No specific location

• Material justified change in accounting principle

• Change in audit opinion

• Special Purpose framework

What are the contents for a nonissuer for the Other-Matter Paragraph?

Contents/Info:

• Change in audit opinion

• Prior fin stmts audited by prior auditor and prior auditor’s report is not presented

• Comparative fin stmts where the current year is audited and prior year is not

• Restrict use of report

• Report on compliance in auditor’s report

What are the contents for an issuer for the Explanatory Paragraph?

Contents/info:

• AFTER the Opinion Paragraph

• Material justified change in accounting principle

• Change in audit opinion

• Prior fin stmts audited by prior auditor and prior auditor’s report is not presented

• Comparative fin stmtswhere the current year is audited and prior year is not

• Reference to other info required when issues with info

• Report on supplementary info w/in auditor's report

• Reference to supplementary info required when issues with info

• Special purpose framework

• Restrict use of report

• Going concern when substantial doubt is not alleviated (this is an unqualified opinion)

• Report on compliance in auditor’s report

What are recognized subsequent events?

Events that provide additional info about conditions that existed AT the balance sheet date.

What are nonrecognized subsequent events?

Events that occurred AFTER the balance sheet date and did not exist at the balance sheet date.

They should consider disclosing it though.

What procedures should be performed to evaluate subsequent events?

Procedures done for subsequent events (PRIME)?

• Post balance sheet transactions (changes in stock or LT debt after year end)

• Representation letter (about subsequent events)

• Inquiry (legal counsel and mgmt)

• Minutes

• Examine (prior stmts vs current)

What are the special purpose frameworks?

• Cash

• Tax

• Regulatory basis

• Contractual basis

• Other basis

What all is in an engagement letter?

• Addressee

• Objective and scope of audit

• Responsibility of the auditor

• Resp. of mgmt

• Other relevant info

• Reporting

• Signature

Does the client have to give the new auditor consent to contact the previous auditor?

Yes

What can the new auditor ask the previous auditor about?

• Management integrity

• Disagreements with management

• The reason for the change in auditor

• Any fraud, noncompliance, and internal control matters related to communications

• Nature of entity’s relationships and transactions with related parties and significant unusual transactions

What are the unacceptable reasons for a change in auditor?

• The client refused to allow correspondence with legal counsel

• The client refuses to provide a signed representation letter

The auditor should consider withdrawing from the engagement if so ^^

Elements of Quality Control: Human Resources

• Assign personnel to the engagement

• Professional development

• Performance eval, compensation, advancement

Elements of Quality Control: Engagement/Client Acceptance and Continuance

• Accept or continue relationship?

• Policies should give reasonable assurance that the client’s mgmt doesn’t lack integrity and that the firm can be independent

Elements of Quality Control: Leadership Responsibilities

Firm leadership bears ultimate responsibility for the firm’s quality control system

Elements of Quality Control: Performance of the Engagement

• Provides means to resolve differences in opinion

• Consultation with experts

• Proper supervision and work is appropriately reviewed

• Keep the info safe

Elements of Quality Control: Monitoring

• Ongoing eval of the quality control system

• Having a 2nd partner or “wrap up” to review work of other person (only required for issuers)

• Peer review

Elements of Quality Control: Ethical Requirements

• Maintenance of independence

• Helps maintain public confidence in the profession

What are the elements of Quality Control?

• Human resources

• Engagement/Client acceptance and continuance

• Leadership responsibilities

• Performance of the engagement

• Monitoring

• Ethical requirements

HELP ME

What are the differences between the quality control standards and GAAS?

Quality control standards:

• Applies to all professional activities of the firm

• HELPME

GAAS:

• Applies to each individual engagement

• Engagement process:

  • Acceptance

  • Assess risk and plan response

  • Perform procedures and obtain evidence

  • Form conclusions

  • Reporting

What is the report release date?

Often the date on which the report is delivered to the client. (usually the same date as the audit report)

(Date on which the auditor grants the client permission to use the report)

What is are the document retention requirements?

• Nonissuers: documents need to be retained for at least 5 years

• Issuers: documents need to be retained for at least 7 years

According to PCAOB standards, the documentation completion date is fourteen days following the report release date (for an issuer)

What goes in the permanent/continuous file?

Anything for year to year items

• Pension plans

• Multi-year leases

• Minutes of board meetings

• Stock options

• Articles of incorporation

What goes in the current file?

Typically just for the year under audit

• Bank recs

• Statement of earnings

• The audit plan

At completion of the audit, who has ownership of the working papers?

The CPA firm!

Client owns the evidence only.

Internal control categories

ORC:

• Effectiveness and efficiency of operations

• Reliability of financial reporting (most relevant objective for audit)

• Compliance with applicable laws and regulations

COSO’s full name

COSO of the Treadway Commission

What are the five components of internal control (COSO)?

• Control environment

• Risk assessment

• Information and communication systems

• Monitoring

• Existing control activities

COSO: Control Environment

Component: Control environment (is the foundation for the other components)

Description: Sets the tone of the organization (tone at the top)

Key Points:

• Integrity

• Competence

• Participation of those charged with governance

• Mgmt philosophy

• Org structure

• Assignment of responsibility

• HR policies

COSO: Risk assessment

Component: Risk assessment

Description: Identification by mgmt of risks relevant to the prep of the fin stmts.

Key Points: Changes or anything new!

COSO: Information and communication systems

Component: Information and communication systems

Description: Methods used to classify and report roles and responsibilities.

Key Points:

• Initiating, authorizing, recording, processing, and reporting entity transactions conditions and events

• Communicating roles and responsibilities

COSO: Monitoring

Component: Monitoring

Description: Procedures established to assess the quality of control performance over time.

Key Points:

• Internal audit function

• Regular mgmt and supervisory activities

• Other procedures such as mailing customer statements

COSO: Existing control activities

Component: Existing control activities

Description: Policies and procedures established to ensure that mgmt objectives are carried out.

Key Points:

• Authorization

• Segregation of duties

• Safeguarding of assets

• Asset accountability

• Technology