Lesson 24 - Issuing Audit Reports on FS + ICFR

For PUBLIC co’s, auditors issue:

1. opinion on FS

2. opinion on ICFR

For PRIV co’s, auditors issue:

1. opinion on FS

Types of Opinions for FS: (5)

1. Disclaimer

2. Adverse

3. Qualified

4. Unqualified w/ an Explanatory paragraph

5. “Unqualified opinion” (standard)

Audit Opinion: Disclaimer (for FS)

• when there is a pervasive scope limitation (not limited to 1 area)

• for going concern doubts (in 2nd year of doubts)

Audit Opinion: Disclaimer (for ICFR)

• when there’s major restriction on scope of audit work over ICFR

Audit Opinion: Adverse (for FS)

• when there is an MM or other material departure from GAAP pervasive to FS

Audit Opinion: Adverse (for ICFR)

• when there is a material weakness in ICFR

Audit Opinion: Qualified (for FS)

• when there is a material but NOT pervasive misstatement or material departure from GAAP

• when there’s scope restriction that prevented audit work on an area that COULD have material but NOT pervasive M’s

Audit Opinion: Qualified (for ICFR)

DOES NOT EXIST

Types of Opinions for ICFR

1. Disclaimer

2. Adverse

3. Unqualified Opinion w/ Explanatory Paragraph

4. Unqualified Opinion (standard)

Audit Opinion: Unqualified w/ Explanatory Paragraph (for FS) (4)

1. Inconsistent application of GAAP (REQD)

2. Going concern doubts (REQD, unless Disclaimer issued)

3. Other emphasis of matter (NOT reqd)

4. Reference to other auditors who audited portion of FS (NOT reqd)

Audit Opinion: Unqualified w/ Explanatory Paragraph (for ICFR) (2)

1. minor restriction on scope of audit work over ICFR (REQD, unless Disclaimer issued)

2. Reference to others who audited portion of ICFR (NOT reqd)

Audit Opinion: Unqualified Opinion (standard) (for FS + ICFR)

• when no conditions for modification of audit report are met

for PUB co’s, auditors must consider:

critical audit matters

Critical audit matters are matters that: (3)

1. communicated to the audit commitee

2. relate to material FS accounts or disclosures

3. involve judgements that are especially challenging, complex, or subjective

Modified Reports w/ Modified Opinions can be issued for:

1. Disclaimer of Opinion

2. Adverse Opinion

3. Qualified Opinion

Modified Report w/ Modified Opinion - Disclaimer

1. on FS w/o CAMs

2. on ICFR

Modified Report w/ Modified Opinion - Adverse

1. on FS w/o CAM

2. on ICFR

Modified Report w/ Modified Opinion - Qualified

1. On FS ONLY w/ CAM

Modified Reports w/ Unmodified Opinions can be issued for:

1. Unqualified Reports w/ Explanatory paragraphs

Modified Reports w/ Unmodified Opinions issued when: (2)

• want/need to include an explanatory paragraph

  • REQD: (GAAP inconsistency + going concerns)

  • NOT reqd: other matters

• auditor references others as responsible for auditing part of FS

Unmodified Reports w/ Unmodified Opinions issued for:

1. Unqualified Opinion (standard)

Unmodified Reports w/ Unmodified Opinions - Unqualified Opinion (FS + ICFR)

1. on FS w/ CAM

2. on ICFR

Common Report for Auditors: (DCL)

debt covenance letter - report from auditors for company to give to creditors/others who request the letter giving assurance that co will meet its fin obligations

• typically sent to bank w/ reference to loan agreement

In debt covenance letter:

auditors provide report on compliance w/ debt covenants from loan agreements

Which of the following statements most accurately describe(s) the types of audit reports that auditors typically issue for public companies?

a. Reports on financial statements and on ICFR

b. Reports on financial statements and on ICFR, and attorney letters

c. Letters on compliance with debt covenants

d. A & C

b. Reports on fin stmts + ICFR + attorney letters

Under which of the following circumstances is the auditor most likely to issue an unqualified opinion with an explanatory paragraph?

a. A material, but not pervasive, misstatement is present in the financial statements

b. A material, but not pervasive, departure from GAAP is present in the financial statements

c. There are no scope restrictions or departures from GAAP, but the company may file for bankruptcy in less than a year.

d. Auditors experienced a scope restriction that was material but not pervasive

c. No scope restrictions but there are going concern doubts

Which of the following audit opinions may not be issued by the auditor on the ICFR?

 

a. Qualified Opinion

 

b. Adverse Opinion

 

c. Disclaimer

 

d. Unqualified Opinion

a. Qualified

Which of the following statements is(are) correct about the reporting options available to an auditor of a public?

 

a. The auditor can deliver two separate reports to the company’s Board of Directors—one on the FS and one on the ICFR

 b. The auditor can deliver one combined report to the company’s Board of Directors— combining the reports on the FS and on the ICFR

 c. Both A & B

 d. None of the above

c. Both A + B - auditor can deliver two separate reports for FR + ICFR or combine them in one report

Which of the following matters are unlikely to be considered as critical audit matters (CAMs) by auditors?

 

a. Matters were required to be communicated to the company’s audit committee

 

b. Matters for which auditor was unable to perform any audit procedures

 

c. Matters that relate to material FS accounts or disclosures

 

d. Matters that involved judgments that were especially challenging, subjective, or complex

b. matters for which auditor was unable to perform any audit procedures

Which of the following statements are correct about critical audit matters (CAMs)?

 

a. Auditors are required to identify CAMs and discuss them in all audit opinions of public companies

 b. Auditors are required to identify CAMs and discuss them in all opinions on FS of public companies except for adverse opinions and disclaimers of opinion

 c. Auditors are required to identify CAMs and discuss them in all opinions on ICFR of public companies except for adverse opinions and disclaimers of opinion

d. B&C

b. Auditors MUST discuss CAMs in ALL FS PUBLIC audits except: Adverse + Disclaimers

Which of the following are not typically discussed in an audit report?

 

a. The opinion itself

 b. Responsibilities of the auditor

 c. The basis of the auditor’s opinion 

d. All of the above are typically discussed in an audit report

d. all of the above are discussed

Which of the following situations require the auditor to include the emphasis of matter paragraph in the audit report? Assume that all areas in question are material to the financial statements.

 

a. Inconsistency in application of GAAP or going concern doubts

 b. Presence of particularly complex estimates in the financial statements

 c. Another firm audited a portion of the financial statements

 d. A & C

a. inconsistenct in application of GAAP + Going concern doubts

Under which of the following cases, the auditor will likely issue a disclaimer of opinion on the financial statements or ICFR?

 

a. There is a material inconsistency in the application of GAAP

 b. The auditor is unable to obtain sufficient audit evidence to support an opinion, and the possible misstatement is both material and pervasive

 c. There is a material misstatement in the financial statements

 d. All of the above

b. Disclaimers for:

1. scope restrictions where misstatements is material + pervasive

2. going concern doubts

Which of the following situations are likely to result in an adverse audit opinion?

 

a. There is a material and extremely large misstatement in a specific account

 b. There are several misstatements that increase net income and are material when combined

 c. The management omitted a disclosure that is fundamental to the users of the financial statements

 d. A & C

d. Adverse opinions when:

1. there is a material misstatement / other material departure from GAAP that is material + pervasive

2. there’s a material weakness in ICFR