Becker AUD A1

Generally accepted auditing standards ("GAAS")

measures of the quality of the auditor's performance, and guide the auditor in the performance of a properly planned and executed audit.

U.S. generally accepted accounting principles

Encompasses the conventions, rules, and procedures necessary to define U.S. accepted accounting practice at a particular time.

The term "must" indicates an...

unconditional requirement, which must be followed in all cases in which the requirement is relevant.

The term "may" indicates...

explanatory material that does not impose a professional requirement for performance.

The term "might" indicates...

The term "might" indicates explanatory material that does not impose a professional requirement for performance.

The term "should" indicates...

a presumptively mandatory requirement, which must be followed in all cases in which the requirement is relevant, except in rare circumstances when departure from the requirement is permitted if there is appropriate justification, performance of sufficient alternative procedures, and thorough documentation.

The words "may," "might," and "could"

describe actions and procedures that auditors have a responsibility to consider

An auditor's responsibilities for audited financial statements are confined to the ...

expression of the auditor's opinion.

In order to obtain reasonable assurance, the auditor must ...

(a) plan the work and properly supervise any assistants;
(b) determine and apply appropriate materiality levels;
(c) identify and assess risks of material misstatement, whether due to error or fraud; and

(d) obtain sufficient appropriate audit evidence.

The auditor's Opinion section indicates the...

nature of the engagement (i.e., audit), the financial statements covered in the (audit) engagement, the name of the entity whose financial statements have been audited, and the dates covered by each financial statement.

Critical Audit Matter

a matter that was communicated or is required to be communicated to the audit committee and involves an especially challenging judgment made by the auditor.

In which of the following sections of an auditor's report for a nonissuer does an auditor communicate the nature of the engagement and the specific financial statements covered by the audit?

Opinion

Language that could be viewed as disclaiming, qualifying, restricting, or minimizing the auditor's responsibility for the critical audit matters is ....

not appropriate and may not be used.

Which of the following best describes the earliest date for an auditor's report?

The date the auditor has obtained sufficient appropriate audit evidence to support the opinion.

" Do not present fairly" is found in which opinion?

Adverse

"Except for" is found in which opinion?

Qualified

If management does not provide reasonable justification for a change in accounting principles, the auditor would issue what opinion?

a qualified or adverse opinion, depending on materiality.

An auditor of a nonissuer should disclose the substantive reasons for expressing an adverse opinion in a Basis for Adverse Opinion section after _______

Following the Opinion section.

If management does not provide reasonable justification for a change in accounting principles, the auditor would issue a __________or ________opinion, depending on materiality.

qualified or adverse

GAAP departures result in what type of audit opinions? (2 options)

Qualified or Adverse

No material misstatement and sufficient evidence results in a ___________ opinion

Unmodified

Material misstatement related to uncertainty results in a ___________ opinion

Qualified or Adverse

Insufficient evidence (scope limitation) results in a ___________ opinion

Qualified or Disclaimer

If there is a GAAP issue (departure), issue a ______ or _____ opinion

Qualified or Adverse

If there is a GAAS issue (audit), issue a ________ or ______ opinion

Qualified or Disclaimer

In which of the following should an auditor's report for a nonissuer refer to the lack of consistency when there is a justified change in accounting principle that is significant?

A justified lack of consistency caused by a material change in GAAP between periods would be reported in an emphasis-of-matter paragraph

If an accounting change has no material effect on the comparability of the financial statements, the auditor does...?

does not need to recognize the change in the current year's audit report.

Financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP that are not suitably titled require what type of opinion?

qualified opinion with a basis for modification paragraph.

What users apply the Statement of Auditing Standards? (AICPA) (SAS)

SAS = Nonissuers, private

What users apply to PCAOB Auditing Standards?

Auditing Standards = Issuers, Public

What users apply Governmental Accepted Auditing Standards?

Governmental = Gov. Audits

Statements for Standards for Attestation engagements relate to subject matters other than historical financial statements...

AICPA

Statements on Standards for accounting/review services =

Unaudited Financials

Code of Professional Conduct is used for members of ______

AICPA

Statements on Quality Control Standards (SQCS)

provides guidance to CPA firms about a quality control system

3 levels of Audit Guidance

1. AICPA SAS (non-issuers), PCAOB AS (issuers)

2. Interpretive Publications (audit guidance, interpretations)

3. Other ACC publications (journal of accountancy, CPE courses, textbooks)

Audit Process Steps

1. Plan the audit

2. Obtain an understanding of the client and its environment, including internal control

3. Assess the risks of material misstatement and design further audit procedures

4. Perform further audit procedures

5. Complete the audit

6. Form an opinion and issue the audit report

Purpose of an audit

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

An auditor's report gives credibility to the ___________

client's financial statements

Management Responsibilities

1. Preparation, fair presentation of financial statements in accordance with applicable framework

2. Design, implementation, maintenance of internal control relevant to preparation, fair presentation of FS

3. Provide auditor with access to all info, persons

Auditor Responsibilities

- Expressing an opinion

- Professional skepticism

- Complying with ethical requirements

- Professional judgement

- Obtaining sufficient, appropriate evidence

- Complying with GAAS

Professional skepticism

an attitude that includes a questioning mind and a critical assessment of audit evidence

Professional Judgment

The application of relevant professional knowledge and experience to the facts and circumstances in order to reach a conclusion or make a decision.

Reasonable assurance is high but not absolute...

...not 100% due to nature of inheritance of financial statements

Inherent Limitations of an audit

1. Nature of financial reporting

2. Nature of audit procedures

3. Timeliness of financial reporting and balance between cost and benefit

Non issuers (private) clients can receive either one opinion or two opinions. How is this possible?

One opinion if the audit is a financial statement audit ONLY

Two opinions if an integrated audit. One on fairness of financials and the second on the operating effectiveness of ICFR

Issuers (public) clients generally receive one opinion due to the nature of an integrated audit which includes ______

Financial statement audit and ICFR audit

Objectives of Fin. St. Audit

1. To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error...present/express an opinion on the financial statement presentation

2. To report on financial statements and communicated as required by GAAS based on Audit findings

Objectives of ICFR

-Required for issuers, optional for non-issuers

-Express an opinion on the effectiveness of the company's ICFR

-Obtain reasonable assurance about whether material weaknesses exist

MUST be integrated audit

Objectives of ERISA Plan Audit

-gather evidence about comparative financial statements

-express an opinion through a written report

-presentations met and fair

-report on supplementary information

-report findings to those charged w/governance

Types of Audit Opinions

Unqualified

Qualified

Adverse

Disclaimer

Unqualified (Unmodified) Opinion

A "clean" audit report, indicating the auditor's opinion that a client's financial statements are fairly presented in accordance with agreed-upon criteria.

-Materially correct

Qualified (Modified) Opinion

Material, but not pervasive (Fin. st. issue or audit issue)

Adverse Opinion

Material and pervasive, GAAP issue

Disclaimer Opinion

Material and pervasive, GAAS issue

DO NOT ISSUE AN OPINION

GAAP issue (fin. st. issue)

Materially misstated

GAAS issue (audit issue)

Unable to obtain sufficient and appropriate audit evidence

Required sections of Standard UNMODIFIED Opinion (OBRA)

Opinion (always first)

Basis of Opinion (always second)

Responsibility of management (3rd or 4th)

Auditor Responsibility (3rd or 4th)

Opinion section includes...

Intro, sentence stating opinion and framework

Basis of opinion section includes...

Discusses auditing standards followed and ethical responsibilities, independence

Management responsibility section includes...

• Responsibility for preparing the financial statements in accordance with the applicable financial reporting framework (GAAP).

• Responsibility for internal control relevant to financial statement preparation.

• Responsibility for assessing the entity’s ability to continue as a going concern

Auditor responsibility section includes...

• Obtaining reasonable assurance.

• Performing the audit in accordance with GAAS.

• Evaluating the overall presentation of the financial statements.

• Assessing substantial doubt about going concern.

GAAP is referred to in the _ and _ sections

O and R

Opinion and Management responsibility

GAAS is referred to in the _ and _ sections

B and A

Basis of opinion, and Auditor responsibility

Key Audit Matters (KAMs) -nonissuer

As included in the AICPA and international auditing standards, matters that, in the auditor's professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated to those charged with governance.

KAMs can be added anywhere after the 2nd section (basis of opinion). They must include the title KAM, definition of KAM and describe each one. Can there be no KAMs that arise in an audit?

Yes, there can be no KAMs but there must be a sentence stating such.

KAMs are not allowed in which 2 audit opinions?

Adverse and Disclaimer

Auditor report for unqualified opinion (issuer)

A required element that is unique is that under the signature, there is the tenure of the auditor required

Critical Audit Matters (CAMs)

As included in the PCAOB auditing standards, a matter arising from the audit of the financial statements 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, subject, or complex auditor judgement

Identification of CAMs (IPAD)

I - IDENTIFY each CAM in audit report

P - Describe the PRINCIPAL considerations that led to CAM determination

A - describe how CAM was ADDRESSED in audit

D - refer to the relevant fin. st. accounts and DISCLOSURES

Filing of Form AP

Public company/issuer

Must file Form AP with the PCAOB

Name of the engagement partner

Form AP must be filed by the 35 day after the audit report is first filed with the SEC or within 10 days if audit report is included in registration statement

Examples of GAAP issues

-Not following selected framework

-Inappropriate ACC principles

-Unreasonable estimates

-Provide inadequate disclosures

-Incorrect numbers

-No reasonable justification for change in ACC principle

If one of the five GAAP financial statements is excluded, what opinion is rendered?

Qualified Opinion

Changes when Qualified Opinion due to material misstatement (Nonissuer)

Opinion: "except for...as described in Basis section" added

Basis of opinion: add paragraph describing departure from framework and quantify effects

3. "sufficient appropriate evidence for QUALIFIED opinion"

Changes when Adverse Opinion due to material misstatement (Nonissuer)

Opinion: "Because of the significance of this matter discussed in the Basis of Adverse Opinion section of the report..." "Do not present fairly"

Basis of Opinion (2): Add paragraph describing GAAP departure, "Adverse opinion"

How does an auditor modify the audit report when issuing a qualified opinion due to a material misstatement for an issuer?

• Use “except for” language in the opinion paragraph.

• Add a basis-for-qualified-opinion paragraph describing the departure from GAAP.

Changes when Adverse Opinion due to material misstatement (Issuer)

1. "Because of...discussed in the following paragraph, financial statements do not..."

2. Add paragraph describing GAAP departure and effects

3. OMIT Critical Audit Matters (overall)

Examples of Scope Limitations

- inability to observe inventory

- inability to confirm receivables

- inability to obtain audited FS of a consolidated investee

- restrictions on the use of auditing procedures

- inadequacy of accounting records

Disclaimer opinion can arise from...

-Lack of auditor independence

-Unaudited financial statements

-Refusal of management to provide written presentation and/or lack acknowledgement for responsibility of fair representation of financial statements in conformity w/GAAP

Causes of Scope Limitations (2 reasons)

1. Circumstances - beyond the control of the entity or relating to the nature or timing of auditor's work

2. Management Imposed - Ask to remove limitation, talk to those charged w/governance

Qualified Opinion Scope Limitations - Nonissuer report

1. Change name to "Qualified Opinion"

2. Add "except for possible effects" to Opinion section

3. Amend Basis of Opinion section with additional reasoning paragraph

Qualified Opinion Scope Limitations - Issuer report

Opinion: Add "except for" and add reasoning paragraph

Basis of Opinion: "except as discussed above"

Disclaimer Opinion due to Scope Limitation (Nonissuer) — Report Changes

• Opinion: State the auditor was engaged to audit but does not express an opinion.

• Basis for Disclaimer: Describe the scope limitation.

• Auditor’s Responsibility: Limit content; do not reference reasonable assurance.

• KAMs: None reported.

Disclaimer Opinion Scope Limitations - Issuer report

Opinion: Engaged to audit and disclaimer

Basis of Opinion: "Basis of Disclaimer of opinion"

OMIT CAMs section!

Emphasis-of-matter paragraph (nonissuers)

-When required by GAAS or at auditor discretion

-Emphasizes a matter already disclosed in financial statements

When is an emphasis-of-matter paragraph required? (CAP)

• Consistency issues (lack of consistency),

• Changes in audit opinion due to subsequent events, and

• Special purpose frameworks (to describe the framework’s purpose).

Other Matters Paragraph (Nonissuers)

Used when referring to matters OTHER than those presented or disclosed in the financial statements

-relevant to users' understanding, auditor responsibility, or audit report

An Other Matters Paragraph is required when?

1. Restricted use of report

2. Subsequent discovered facts lead to change in audit opinion

3. comparative fin. st. where CY is audited and PY is NOT audited

Explanatory Paragraph (Issuers)

Included when required by PCAOB or at auditor discretion

-Use appropriate heading and location of relevant disclosure

USUALLY FOLLOWS OPINION SECTION IN QUALIFIED REPORT

When an entity changes an accounting principle, reporting entity, or related practice, what evaluation must the auditor perform before modifying the audit report?

The auditor must evaluate compliance, method acceptability, disclosure sufficiency, and management justification. The evaluation ensures that the new accounting approach meets GAAP requirements and does not materially misstate the financial statements.

Circumstances that affect Consistency

1. Change in accounting estimate inseparable from change in accounting principle

2. Correction of error in accounting principle (cash to accrual)

3. Correction of material misstatement in previously issued fin. st.

4. Equity method investments (20-50% ownership)

When PY financial statements were NOT audited, but CY are audited, this results in a

Scope Limitation!

Updating Prior Opinions (DORCS)

1. Date of auditor's previous opinion

2. Opinion type previously issued

3. Reason for prior opinion

4. Changes that have occurred

5. Statements that the "opinion...is different"

Report of Prior Auditor Presented (re-issued)

Old auditor should read CY statements, compare audited with current, and obtain a representation letter from new auditor, and management letter

Date of report...Revised = Dual date if revision

Unrevised = use original report date of reissuance

How should a new auditor report when the prior auditor’s report is not presented?

• The new auditor states an opinion only on the current year financial statements.

• Add an other-matter paragraph (nonissuer) or explanatory paragraph (issuer) stating:

  • the prior auditor,

  • the type of prior opinion and any modifications,

  • the nature of any extra paragraph in the prior report, and

  • the date of the prior auditor’s report.

What does the auditor do when prior-year financial statements were not audited?

Add an other-matter paragraph stating the service performed, report date, any material modifications, that the engagement was less in scope than an audit, and that no opinion is expressed.

PY Fin. st. are not audited, reviewed, or compared the auditor must..

State in paragraph that the auditor did not audit, review, or compile prior period Fin. St. and auditor assumes NO responsibility

Unaudited financials must be clearly marked to users

-If filing with SEC, mark as unaudited but NOT referenced in audited report

Group Engagement Partner (AICPA)

The partner or other person in the firm who is responsible for the group audit engagement and the auditor's report on the group financial statements

Group Financial Statements

the financial statements of more than one component (division, subsidiary, or other segment)

Group Engagement Team

The team, including the group engagement partner, other partners, and staff, that establishes the overall audit strategy, communicates with component auditors, performs work on the consolidation process, and evaluates the conclusions drawn from the audit evidence as the basis for forming an opinion on the group financial statements.