Audit Reports 17

Unqualified (Unmodified) Opinion

This is the opinion given when the auditor concludes there are no material misstatements in the financials

Qualified Opinion

This is the opinion given when the financials are mostly good, “except for” one area where there is a material misstatement

Non-Pervasive

What is a material misstatement called when it can be limited to a small area of the financials?

Pervasive

What is a material misstatement called when it cannot be limited to a small area of the financials?

Scope Limitation

When the auditor is unable to gather sufficient, appropriate evidence on which to base their opinion

Adverse Opinion

This is the opinion given when there are one or more material misstatements that cannot be limited to a small area; The financials as a whole are unreliable

Disclaimer of Opinion

This is the opinion given when there are one or more scope limitations that cannot be limited to a small area; The auditor cannot form an opinion on any of the financial statements

Going Concern Issues, GAAP Consistency Issues

What are the two required instances in which the auditor must add additional language?

Explanatory Language

Under the two required instances in which the auditor must add additional language (Going Concern Issues/GAAP Consistency Issues), what is the PCAOB term for what must be added?

Emphasis of Matter Paragraph

Under the two required instances in which the auditor must add additional language, what is the AICPA term for what must be added?

Change in Accounting Estimate Uncertainties

Important Subsequent Events

Major Catastrophes

Division of Responsibilities

What are the four optional instances in which the auditor may add additional language?

Emphasis of Matter Paragraph

Under the four optional instances in which the auditor may add additional language, what is the PCAOB term for what may be added?

Emphasis of Matter Paragraph

Under the four optional instances in which the auditor may add additional language, what is the AICPA term for what may be added?

Not Directly Addressed by Standards

For other items not in the financial statements, what is the PCAOB term for any additional language?

Other Matter Paragraph

For other items not in the financial statements, what is the AICPA term for any additional language?

Other Matter Paragraph Definition

The defining feature of an Other Matter Paragraph, is that it

discusses items NOT INCLUDED in the financial statements.

Other Matter Paragraph EX

By definition, these are unique/uncommon

items:

- Issues/problems with conducting the audit.

- Elaboration of the auditor’s responsibilities.

- Highlighting similar client financials made under a different set of

rules (e.g., IFRS).

- Remote but catastrophic contingencies.

Are Not, Unqualified

When adding additional language, there (are/are not) GAAP violations/misstatements and the core audit opinion is (unqualified/adverse)

Good

Is being a going concern a good or bad thing?

Annual, Substantial Doubt

GAAP requires that companies evaluate on a(n) _____ basis whether any conditions exist that raise _____ ___ about the company’s ability to operate as a going concern for a reasonable period of time.

Optional

If the auditor has substantial doubt and the client has a satisfactory plan to address the issues, is the extra paragraph required or optional?

Required

If the auditor has substantial doubt and the client does not have a satisfactory plan to address the issues, is the extra paragraph required or optional?

Dislike, Self-Fulfilling Prophecy

Clients ____ having an extra paragraph added because it creates a _____ ______ where investors/lenders are scared away and they do actually go bankrupt.

Dislike, Odd, Trained, Good

Auditors ____ adding an extra paragraph because it puts them in a(n) ___ spot with their client, they aren’t ____ to make these kinds of assessments, and they aren’t ____ at it.

Expanatory Language, Emphasis of Matter

If there is a justified change in accounting method/principle, the auditor is required to add _____ _____ (PCAOB) or a(n) _____ ___ _____ paragraph (GAAS) to the audit report.

Liquidation, Fire-Sale

If bankruptcy is immanent, the client must switch to a _______ basis of accounting and write-down all assets to their _____ values.

Not Included

The defining feature of an Other Matter Paragraph is that is discusses items ______ in the financial statements.

Critical Audit Matter Paragraph

A little paragraph at the end of the report describing something on the audit that was hard to deal with that readers of the report might want to know about

False

A critical audit matter paragraph means that something was wrong and it changes the audit opinion.

True or False?

Audit Process is Opaque, Gets More Information Out of the Auditor

What were the two major motivations for the requirements to disclose critical audit matters?

Material, Required Communications to Audit Committee, Challenging/Subjective/Complex

What qualifies as a critical audit matter? (3 Things)

Name/Description, Accounts Affected, The “Why,” Auditor Response

What do you have to describe in a critical audit matter paragraph? (4 Things)

Revenue Recognition, Goodwill, Taxes, Business Combinations

What are the four common critical audit matters?

Boilerplate, Offer a Window Into the Audit

What were the PCAOB/AICPA’s two major hopes when the critical audit matter requirements were created?

Group Financial Statements, Comparative Financial Statements, Audit Firm Tenure Disclosures, Form AP Partner Disclosures

What are the four miscellaneous issues related to the audit report?

Group Financial Statements

Miscellaneous issue related to the audit report when a parent and subsidiary have different auditors

The parent auditor needs to decide if they are going to “take responsibility” for the sub auditor; If they do, no disclosure needed… If they don’t, disclosure needed

% of Assets

If the parent auditor doesn’t take responsibility for the subsidiary auditor, they need to name them and the ___ ___ ____ they were responsible for.

True

Audit opinions of parent and subsidiaries do not have to match.

True or False?

True

The audit report and opinion covers all years presented, even prior years presented for comparative purposes. We do not re-audit every year presented, we update our prior audit opinions.

True or False?

True

If the prior years were audited by a different auditor, we have to ask the prior auditor to reissue their old audit opinion.

True or False?

Read New Financial Statements, Compare Old Data to Comparative Columns, Get New Management Representation Letter

If the old auditor has the reissue their old audit opinion, what three things must they do?

Increases Competence Perspective

Regulator’s perspective that believes it’s good to change auditors every now and then to get a “fresh look”; This will make the audit and financials better

Impaired Independence Perspective

Regulator’s perspective that believes if the firm/partner stay with the same client for a long time, they will become friendly/soft/predictable and the quality of the audit will suffer

Increases Competence Perspective

Industry’s perspective that believes auditing is difficult with a large client-specific learing curve; As auditors learn more about clients, their ability to do a quality audit goes up

5, 5

Since SOX, audit partners have to rotate off clients after ___ years, and stay off for another ___ years.

True

Starting in 2016, audit firms have to disclose in the audit report how long the firm has had the client.

True or False?

True

Since 2016, the identity of the specific audit partner has been disclosed on Form AP, which is filed with the PCAOB at the same time as the audit report.

True or False?

A

What is the purpose of the Emphasis of Matter Paragraph?

A. Highlight items properly disclosed in the financials

B. Highlight items improperly disclosed in the financials

C. Highlight items not needed, but also not disclosed in the financials

D. Highlight items needed, but not disclosed in the financials

A, B

Check all situations where additional explanatory language/emphasis of matter paragraphs are required:

A. Substantial doubt about the client’s ability to continue as a going concern

B. Changes in accounting method/principle

C. Changes in accounting estimates

D. Important Subsequent Events

E. Material uncertainties

F. Major catastrophes

A, D, E

Check all reasons why optional Emphasis of Matter and Other Matter Paragraphs are rarely used:

A. Auditor concerns over maintaining the client relationship

B. Investors are unlikley to listen to what the auditor has to say

C. Regulators ban the auditor from adding such paragraphs

D. Auditor concerns over ethical violations

E. Auditor comments may be used against them in litigation

D

Which of the following is/are true about Critical Audit Matters (CAMs/KAMs)?

A. They come from the list of required Audit Committee Communications

B. They are material

C. They involve challenging, subjective or complex part of the audit

D. All other answers are true.

E. None of the other answers are true.

A

What is required when there are different auditors for a Parent and Subsidiary Co.?

A. Decide whether the auditor will take responsibility for subsidiary auditor

B. Make mention of the subsidiary auditor

C. Disclose the % of assets audited by the subsidiary auditor

D. Include the subsidiary auditor report with the parent company report

D

Since 2016, the identity of the Auditor Partner has been disclosed:

A. In the body of the audit report

B. It is not disclosed

C. In the 10-K footnotes

D. On Form AP

False

Regulators generally think audit quality goes up with auditor tenure because of increased auditor competence.

True or False?

False

The audit opinion only applies to current year data, even if prior years are presented for comparative purposes.

True or False?