Becker CPA Audit- A1 Actual Flashcards

Which standards provide the most authoriative US auditing guidance for nonissuers and issuers, and who issues those standards?

Nonissuers: Statements on Auditing Standards (SASs), issued by the AICPA Auditing Standards Board

Issuers: Auditing Standards (ASs), issued by the Public Company Accounting Oversight Board (PCAOB)

State the primary purpose of an audit

To provide financial statement users with an opinion on whether the financial statements are fairly presented, in all material respects, in accordance with the applicable financial reporting framework.

What are the five general GAAS requirements related to the conduct of an audit?

SEJEC

Professional Skepticism

Ethical Requirements

Professional Judgment

Sufficient and Appropriate Audit Evidence

Compliance with GAAS

Identify three inherent limitations of an audit

-Nature of financial reporting

-Nature of audit procedures

-Timeliness of financial reporting and the balance between benefit and cost

When should an auditor's opinion be modified?

A modification to the auditor's report is necessary when:

-The auditor determines that the financial statements as a whole are materially misstated (GAAP issue) or;

-The auditor is unable to obtain sufficient apporpriate audit evidence to conclude that the financial statments as a whole are free from material misstatement (GAAS issue)

List in order the primary sections of an unmodified audit opinion (nonissuer)

-Title: Based on the circumstances of the engagement

-Introduction: We have audited the accompanying financial statements of

-Managements Responsibility for the Financial Statement: Managment is responsible for the prepartation and fair presentation of the financial statements

-Auditor's Responsibility: Our responsibility is to express an opinion on these financial statments based on our audit

-Opinion: In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position

-Report on Other Legal and Regulatory Requirements: If applicable

What should be included in the introductory paragraph of the unmodified audit opinion (nonissuer)?

The inductory paragraph should include:

-The entity whose financial statements have been audited

-A statement that the financial statements were audited

-The title of each financial statement audited

-Dates or periods covered by each financial statement

What should be included in the management's responsibility paragraph of the unmodified audit opinion (nonissuer)?

-An explanation that management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework

-A statement that this responsibility includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error

What should be included in the auditor's responsibility paragraph of the unmodified audit opinion (nonissuer)?

-A statement that it is the auditor's responsibility to express an opinion on the financial statements based on the audit

-A statement that the audit was conducted in accordance with auditing standards generally accepted in the United States of America

-A statement that standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement

-A description of the audit

-A statement whether the auditor believes the audit evidence obtained is sufficient and appropriate to provide a basis for the auditor's opinion

What should be included in the opinion paragraph of the unmodified audit opinion (nonissuer)?

1.) A statement that the financial statements present fairly, in all material respects, the financial position of the entity as of the balance sheet date and the results of operations and its cash flows for the period then ended, in accordance with the applicable financial framework

2.) Identification of the applicable financial reporting framework and its origin

Where in the standard unmodified opinion (nonissuer) does the auditor refer to (1) the applicable financial reporting framework (i.e., GAAP or IFRS) and (2) generally accepted auditing standards?

1.) The applicable financial reporting framework is referred to in the management's responsibility paragraph and opinion paragraph

2.) GAAS is referred to in the auditor's responsibility paragraph

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

-Title

-Addressee

-Opinion Section

-Basis for Opinion Section

-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 title "Opinion on the Financial Statements" and the following elements:

-The name of the company whose financial statements have been audited

-A statement identifying each financial statement and any related schedule that has been audited

-Dates or periods covered by each financial statement and related schedule

-A statement indicating that the financial statments were audited

-An opinion that the financial statments present fairly, in all material respects, the financial position of the company as of the balance sheet date and the results of its operations and its cash flows for the period then ended in conformity with the applicable financial reporting framework (e.g., GAAP)

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

The second section of the auditor's report must include the section title "Basis for Opinion" and the following elements:

-A statement that the financial statements are the responsibility of the company's management

-A statement that the auditor's responsibility is to express an opinion on the financial statements based on the audit;

-A statement that the auditor is a public accounting firm registered with the PCAOB (United States) and is required to be independent with respect to the company in accordance with the U.S. 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 financial statements are free of material misstatement, whether due to error or fraud;

-A statement that the audit included:

1.) Performing procedures to assess the risks of material misstatement

2.) Examining, on a test basis, evidence regarding the amounts and disclosures

3.) Evaluating the accounting principles used and significant estimates made by management

4.) Evaluating the overall presentation of the financial statements

-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 (i.e., GAAP) and (2) the standards of the Public Company Accounting Oversight Board (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.) Financial statements have been prepared

3.) Management has taken responsibility for the financial statements

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 financial statements; and

2.) Involved especially challenging, subjective, or complex auditor judgment

Note: Audit reports for issuers must include any CAMs or state that the auditor determined there were no CAMs

In determining critical audit matters (CAMs), what factors should the auditor consider?

The auditor should consider the auditor's assessment of the risks of material misstatement, areas of significant judgment or estimation by management, 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

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

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

if there are no CAMS that needs to be stated

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

-descriprion 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 financial statement accounts or Disclosures

When would an auditor use professional judgment to determine whether to issue a qualified opinion or an adverse opinion?

When audit evidence indicates that there is material misstatement of the financial statements.

~A qualified opinion is issued when the auditor concludes that misstatements, individually or in the aggregate, are material but not pervasive to the financial statements

-An adverse opinion is issued when the auditor concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements

Describe the circumstances in which a material misstatements of the financial statements may arise

Misstatements may arise in relation to:

-The appropriateness of accounting policies

-The application of accounting policies

-The appropriateness of the financial statement presentation

-The appropriateness or adequacy of disclosures in the financial statements

If an opinion is qualified due to material misstatement of financial statements on an issuer audit report, where does the paragraph explaining the qualification appear?

A paragraph should be placed immediately following the opinion paragraph. There is no heading for this paragraph. The paragraph should include:

-All of the substantive reasons that lead the auditor to conclude that there has been a departure from generally accepted accounting principles

-Disclosure of the principal effects of the subject matter of the qualification on financial position, results of operations, and cash flows, if practicable

1.) If the effects are not reasonably determinable, the report should so state

2.) If such disclosures are made in a note to the financial statements, the explanatory pargraph(s) may be shortened by referring to it

GAAS

measure of the quality of the audit

• SAS nonissuers set by AICPA

• PCAOB AS issuers

issuer qualified for adverse opinion

same headings

expect for = qualifed

adverse = do not peresent farily F/S

disclaimer = enaged to audit disclaimer (omit certian sentences) AUDITOR

add paragraph

Is an auditor required to report on critical audit matters (CAMs) when issuing an adverse opinion?

No, the auditor is not required to report CAMs when an adverse opinion is expressed

When would an auditor use professional judgment to determine whether to issue a qualified opinion or a disclaimer of opinion?

When there is a limitation on the scope of the audit.

A qualified opinion is issued when an auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion and the audtior determines that the possible effects could be material but not pervasive

A disclaimer of opinion is expressed when the auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion and the auditor determines that the possible effects could be both material and pervasive

Identify some examples of scope limitations

Restrictions on the auditor's ability to perform auditing procedures may are caused by:

-Time constraints

-Inability to observe inventory

-Inability to confirm receivables

-Inability to obtain audited financial statements of a consolidate investee

-Restrictions on the use of auditing procedures

-Inadequacy of accounting records

-Refusal of the client's attorney to respond to inquiry

-Refusal of management to provide a representation letter

What situations may result in a disclaimer of opinion in an audit report?

-Persavive inability to obtain sufficient appropriate audit evidence

-Lack of independence (always results in disclaimer)

-Going concern uncertainty (note: if adequate disclosure of going concern exists, the auditor may choose between an unqualified opinion with an explanatory paragraph or a disclaimer of opinion)

If an opinion is modified, on a nonissuer audit report where does the paragraph explaining the modification appear?

The paragraph explaining the modification would appear prior to the opinon paragraph. The "basis for modification" paragraph should use the appropriate heading. Appropriate headings include:

-Basis for Qualified Opinion - expect for

-Basis for Adverse Opinion - do not present fairly

-Basis for Disclaimer of Opinion - engaged to audit, no opinion expressed

statements on standards for attestation engagements

set by AICPA

for attestation services

GAAP

gernnerally accepted accouting principles

conventions, tules, processes to define US accepted accting principles at a time

How do uncertainties affect the auditor's report?

1.) No material misstatement and management's analysis of uncertainty is supported and properly reported or disclosed=Unmodified opinion (Note: the auditor may add an emphasis-of-matter or explanatory paragraph if the auditor determines that further explanation is necessary)

2.) Unable to obtain sufficient evidence involving uncertainty (scope limitation)= qualified opinion or disclaimer of opinion

3.) Financial statements are materially misstated due to departure from GAAP related to the uncertainty= qualified or adverse opinion

Is an auditor required to report on critical audit matters (CAMs) when issuing a disclaimer of opinion?

No, the auditor is not required to report CAMs when issuing a disclaimer of opinion

What is the purpose of an emphasis-of-matter paragraph (nonissuer)?

The purpose of an emphasis-of-matter paragraph is to reference a matter that is appropriately presented in the financial statements, but is of such importance that it is fundamental to the user's understanding of the financial statements

What are the reporting requirements for an emphasis-of-matter paragraph (nonissuer)?

Reporting requirements for an emphasis-of-matter paragrpah include:

-Placing the paragraph immediately after the opinion paragraph

-Using the heading "emphasis-of-matter" or another appropriate

-Describing the matter being emphasized and the location of relevant disclosures in the financial statements

-Indicating that the auditor's opinion is not modified with respect to the matter emphasized

Under what circumstances would an emphasis-of-matter paragraph be required in an auditor's report (nonissuer)? GAASP

An emphasis-of-matter paragraph should be used in the auditor's report when:

-the auditor determines there is substantial doubt regarding the entity's ability to continue as a going concern for a resonable period;

-there is a need to describe a justified change in accounting principle that has a material effect on the entity's financial statements;

-facts are subsequently discovered that lead to a change in the auditor's opinion (note: an other-matter paragraph may also be appropriate); or

-the financial statements are prepared in accordance with an applicable special purpose framework, other than regulatory basis financial statements intended for general use

What are the reporting requirements for an other-matter paragraph (nonissuer)?

-Placing the paragraph immediately after the opinion paragraph and after any emphasis-of-matter paragraph

-Using the heading "other-matter" or another appropriate heading

-Describing the matter being emphasized and the location of relevant disclosures, if applicable, in the financial statements

not events that would normal be in the F/S

Under what circumstances would an auditor use an other-matter paragraph in an auditor's report (nonissuer)?

-the auditor includes an alert in the audit report that restricts its use;

-facts are subsequently discovered that lead to a change in auditor's opinion (note: an emphasis-of-mater paragraph may also be appropriate)

-prior period financial statements were audited by a predecessor auditor and the predecessor's audit report is not reissued;

-current period financial statements are audited and presented in comparative form with complied or reviewed financial statements for the prior period;

-prior to the audit report date, the auditor identifies a material inconsistency in other information included in a document with audited financial statements that requires revision;

-the auditor chooses to report on supplementary information presented with financial statements that requires revision;

-the auditor chooses to report on supplementary information presented with financial statements in the auditor's report, rather than in a seperate report

-special purpose financial statements are prepared in accordance with a contractual/regulatory basis of accounting (requiring a restriction on the use of the auditor's report); or

-the auditor's report on the financial statements includes a compliance report

Under what circumstances would an explanatory paragraph with an appropriate heading be required in an auditor's report (issuer)?

-There is substantial doubt about the entity's ability to continue as a going concern

-There has been a material change between periods in accounting principles or in the method of their application

-There has been a change in a reporting entity, unless the change in the reporting entity results from a transaction or event

-There has been a change in an investee year-end that has a material effect on the company's financial statements has been corrected

-Other information in a document containing audited financial statements is materially inconsistent with information appearing in the financial statements

-Selected financial data required SEC Regulation S-K has been omitted or has not been reviewed

-Supplementary information required by an applicable reporting framework has been omitted, or departs materially from guidelines

Under what circumstances would an explanatory paragraph without a heading be required in an auditor's report (issuer)?

-The prior year auditor report is not presented

-The prior year opinion is updated

-Management is required to report on the company's internal controls over financial reporting but such report is not required to be audited, and the auditor has not been engaged to perform an audit of management's assessment of the effectiveness of the company's internal control over financial reporting

What are the reporting requirements for an explanatory paragraph (issuer)?

Reporting requirements for an explanatory paragraph include:

-The explanatory paragraph generally should should include an appropriate title

-The paragraph should describe the matter being emphasized and the location of relevant disclosures about the matter in the financial statements

-The explanatory paragraph will generally follow the opinion paragraph when added to an unqualified report

How is an alert that restricts the use of the auditor's written communication reflected in the auditor's report, and what items should be included in the alert?

-An other-matter (nonissuer) or explanatory (issuer) paragraph is used to restrict the use of the auditor's report when required by GAAS or when the auditor deems it necessary

-The alert that restricts the use of the auditor's written communication includes:

-a statement that the auditor's written communication is intented solely for the information and the use of the specified parties;

-identification of the specified parties

the audit process

engagement acceptance

assess risk and plan response

perform procedures and obtain evidence

form conclusion

reporting

compoent auditor

auditor that does work on the f/s for the group audit

engagement partner can take responsiblity for their work and not mention them

or can divide work done by compnet auditor

if significant risk of MM then the group performs additional audit

subsequent events

recognized - before b/s date ( bank rupcey, law suit loss )

not recognized - after b/s date (may require foot note - material loss)

procedures

• review post b/s transactions

• representation letter from mgmt

• inquire if sub event could impact f/s

• reveiw minutes of board meeting

• examine current interim f.s and compare to f/s under audit

auditor has no reponsiblity for sub events after the date of audit report (expet if for expemt offering document, or registration statement)

discover material info after issuance of the report (affects report)

• who is relying on the f./s

• tell cleint to disclose or revise the info or notify that the f/s cant be relied apon

• tell client to discuse new revision with the sec

• make sure client did this

dual dating

sub event requiring f/s adjustemnt

• date one is the orginal date

• date 2 is the new date only for that specific sub event

if not dual dated have to date at new date but check for all sub events until then

supplementary information objective

evaluate the presentation of the supp information in relation to the f/s as a whole

report on weather the supp info is fairly stated, in all material respects, in relation to the f/s as a whole

special purpose framework

cash basis

tax basis

regulatory basis

regulatory basis ( general use)

contractual bais

nonissurers - mention framework in opion and mgmt standards paragrpahs

cash and tax basis includes

emphasis of matter paragraph

regulatory basis and contractual basis includes

description of purpose

emphasis of matter paragraph

other matter paragraph

regulatory basis for general use

description of purpose

emphasis of matter for special purpose framework

• f/s prepared in special framework

• refer to the note in the f/s that describes the framework

• other than gaap

• f/s are not suitable for any purpose but the one stated

report on special purpse framework

address + title that auditor is independed

opinion

dare of report, issuance city and state, audit firm signature

other information

read info

engagement to report supp info

info derived from the f/s

required supplemental info

limited procedures

• inquire about methods used to prepare

• determine if supp info is consistent

• obtain written mgmt representation for info

can but doesnt have to issue an opinion on the info

supplemental information is materially inconsistnant with f/s but no required revision

auditor requests client fixes it

GAAP V GAAS

gaap - rules for F/S (framework)

gaas - rules for audit

filing Form AP

auditorof public comp /issuer must file form AP with PCAOB for each audit report issued

• within 35 days after the audit report is filed

auditors responsibilities

professional skeptisim, professional judgement, ethical requirments, suffiencent and approprate audit evidence , comply w gaas

not independent

disclaimer of opinion

consistency is implied

dont mention if suffiencent evidence for consistency

emphasis of matter use (non issuers)

required

• justified change in acct priciple

• change in audit opinion

• applicable special framework

maybe for

• doubt for an entires ability to contiune as a growing concern

• significant related party transaction

• uncertainties related to litigations if important

• very important sub events

not for lawsuit unless it says “unusally important”

explanatory paragraph v other matter and emphasis of matter

issuers v non issuers

both only if material

different opinion on f/s over a period

one period can be adverse or disclaimer and the next can be unmotified

updating/changing opinion on prior f/s

auditor becomes aware of evidence that changes prior yr opinion

disclose in emphasis of matter - dadte of previous report, previous opinion issued, reason for the prior opinion, changes that have occured, new opinion

reporting with predecessor auditor

can reissue their f/s

• read current period

• compare

• obtian letter of representation from the successor auditor

• obtain letter of representation frrom mgmt at or near date of reissuance

unrevised = og date

revised = dual date

comparative f/s unaudited

must say unaudited

add other matter (nonissuer) or expanatory paraphraph (issuer) saying they were prior period unaduited and current auditor has nothing to do with them

componet auditor responsiblities (unmotified opinion)

assume no responsiblity for componet —> motify opion section including division

assume responsiblity for compnet —> dont motify opioon section