A1 M8 AUD CPA

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

• Engaged to perform the audit of the consolidated financial statements ←- Group Financial Statements

Can decide to:

1. Assume all responsibility for the work of the Component Auditor ←- Do NOT reference component auditor

   • Group engagement team is responsible or determining type of work to be performed and must review component auditor’s work

2. Divide responsibility with component auditor ←- Must reference component auditor

   • NOT assuming responsibility for the component' auditor’s work

   • Component auditor will provide audit report to group engagement team

Group Financial Statements

Financial statements that include the financial information of more than one component (Subsidiaries)

• Made up of several subsidiaries

• Also known as “Consolidated financial statements”

Group Engagement Team

Includes the group engagement partner, other partners, and staff who establish the overall audit strategy, communicate with component auditors, perform work on the consolidation process, and evaluate the conclusions drawn from the audit evidence as the basis for forming an opinion on the group of financial statements

• Establishes the overall rules

• Final decision makers on overall consolidated financial statements

• Must determine which components are significant or insignificant

  • Significant - Subsidiary must be audited

  • Insignificant - Must perform substantive analytical procedures

Component

An entity or business activity that prepares financial information that is included in the group (consolidated) financial statements

• Can be a subsidiary of the client

Component Auditor

An auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit

• Auditor who’s assigned (engaged) to audit subsidiary

Referred-To Auditors

Other auditor’s that are engaged in an audit for Issuers, where responsibility will be divided among the engagement partner and other auditor, which will be referenced in the financial statements

• Reference:

  • Indicate division of responsibility ←- Opinion section

  • Identify other auditor’s name/ refer to other auditor’s report

  • Disclose magnitude of the portion of company’s financial statements audited by other auditor

Engagement partner’s firm is NOT considered to be the lead auditor if the other auditor audits more than 50% of the company’s assets/ revenues

Subsequent Event

An event or transaction that occurs after the balance sheet date but before the financial statements are issued or available to be issued; occurs in the Forming Conclusion stage of the Audit

1. Recognized Event

2. Non-Recognized Event

Do NOT recognize events that occur between date financial statements were issued and date financial statements were reissued

Recognized Subsequent Event

Events that provide additional information about conditions that existed at the balance sheet date; underlying event that existed at or before the balance sheet date

• Adjust financial statements and Disclose

Examples:

1. Settlement of litigation for event that arose at or before the balance sheet date

2. Loss on an uncollectible receivable that existed at the balance sheet date (Bankruptcy)

Non- Recognized Subsequent Event

Events that provide information about conditions that occurred after the balance sheet date and did not exist at the balance sheet date; underlying event occurred after the balance sheet date

• Disclose ←- Investors would want to know

Examples:

1. Sale of capital stock

2. Business combination

3. Settlement of litigation that arose after the balance sheet date

4. Natural disaster that resulted in loss of building or inventory

Post Balance Sheet Transactions

Type of procedure where the auditor reviews post balance sheet transactions to understand/ evaluate subsequent events

Example: Changes in stock or long-term debt after year-end

Representation Letter

Type of procedure where the auditor obtains a management representation letter regarding whether any events occurred during the subsequent period that require adjustment or disclosure in the financial statements to understand/ evaluate subsequent events

Inquiry

Type of procedure where the auditor inquires of the client’s legal counsel and management about whether any subsequent events have occurred; ask questions

• Examples:

  • Status of any litigation, claims, and assessments

  • New commitments, borrowings, or guarantees

Minutes

Type of procedure where the auditor should obtain and review the minutes of stockholders, directors, and other committee meetings during the subsequent period to understand/ evaluate subsequent events

Examine

Type of procedure where the auditor should examine the most recent interim financial statements and compare them with the financial statements under audit to understand/ evaluate subsequent events

PRIME

Procedures that auditors primarily perform to identify subsequent events

1. Post Balance Sheet Transactions ←- Changes in stock/ long term debt after year-end

2. Representation Letter

3. Inquiry ←— Status of any litigation, claims, assessments, new commitments, borrowings, guarantees, or unusual transactions

4. Minutes

5. Examine

DAR

Additional steps that are taken when client refuses to address information that materially affects the report after issuance:

1. Disassociate: Auditor notifies the client that the auditor’s report must no longer be associated with the financial statements

2. Alert parties: Notify regulatory agencies that auditor’s report can no longer be relied on

3. Relying parties: Notify users who rely on financial statements that the auditor’s report can no longer be relied on

Other Information

Financial or non financial information (other than financial statements and the auditor’s report) included in an entity’s annual report

• Not required by a standard setter

Auditor’s Responsibility:

1. Read the other information (Procedure)

2. Consider any material inconsistencies between the other information and the audited financial statements

   • Material Inconsistency of Fact

   • Material Misstatement of Fact

Non-Issuers ←- Must report in separate section

Issuers ←- NOT required to include an Explanatory paragraph

Supplementary Information

Information presented outside of the basic financial statements that may be presented in a document containing the audited financial statements or separate from financial statements

• Auditor may be engaged to report (provide opinion) on information in relation to the financial statements as a whole ←- Optional engagement

• Information is derived from the audited financial statements

Procedures ←- Objective is to provide opinion on info. in relation to f/s as a whole

1. Inquire of management regarding purpose of supplementary information and criteria used to prepare info

2. Obtain understanding of methods used and changes from prior periods

3. Inquire regarding any significant assumptions underlying the preparation/ presentation of the information

4. Compare and reconcile the information to the audited financial statements and underlying accounting records

5. Evaluate appropriateness and completeness of the info

6. Determine if the form and content compiles with the criteria

7. Obtain written representations from management regarding the info

Non-Issuers ←- Present in separate section of auditor’s report or a separate report (Cannot express opinion if f/s have a adverse/disclaimer)

Issuers ←- Present as an Explanatory Paragraph in auditor’s report or a separate report (Can express opinion if f/s have adverse/disclaimer)

Material Inconsistency of Fact

The Auditor’s responsibility is to read the other information and consider any material inconsistencies between other information and the financial statements Other Information:

• If management refuses to revise financial statements —→ Modify the opinion

• If management refuses to revise the other information —→ Communicate matter to those charged with governance

Material Misstatement of Fact (Other Information)

Other Information may include a material misstatement of fact that is unrelated to the financial data

• Auditor should…

  • Discuss the matter with management

  • If management refuses to take corrective action, request management consult with a third party legal counsel

  • If management still refuses to correct, notify those charged with governance

Required Supplementary Information

Information that a designated account standard setter requires to accompany the basic financial statements

• Auditor’s opinion does NOT cover required information

Auditor’s Responsibility = Perform limited procedures on required info.

Limited Procedures:

1. Inquiry of management

2. Determine if info is consistent

3. Obtain written representations

Non-Issuers ←- Add separate section to the auditor’s report to explain issues/ no issues with info.

Issuers ← Only add Explanatory paragraph when there’s issues

Special Purpose Framework (Other Comprehensive Basis of Accounting)

A financial reporting framework other than GAAP that is one of the following bases of accounting:

1. Cash Basis

2. Tax Basis

3. Regulatory Basis

Only Non-issuers can select and auditor should understand why framework was chosen and obtain a representation letter

Cash Basis

Type of special purpose framework used to record cash receipts and disbursements and certain modifications of the cash basis (Depreciation)

• Includes:

  • No Description of purpose

  • Yes Emphasis-of-Matter paragraph

  • No Other-Matter paragraph

Tax Basis

Type of special purpose framework used to file income tax returns

• Includes:

  • No Description of purpose

  • Yes Emphasis-of-Matter paragraph

  • No Other-Matter paragraph

Regulatory Basis

Type of special purpose framework used to comply with the requirements of financial reporting provisions of a regulatory agency having jurisdiction over the reporting entity

• Includes:

  • Yes Description of purpose

  • Yes Emphasis-of-Matter paragraph

  • Yes Other-Matter paragraph

Other Basis

Type of special purpose framework used to define a set of logical, reasonable criteria that is applied to all material items appearing in the financial statements

• Includes:

  • Yes Description of purpose (if f/s are restricted)

  • Yes Emphasis-of-Matter paragraph

  • Yes Other-Matter paragraph (if f/s are restricted)

Contractual Basis

Type of special purpose framework used to comply with an agreement between the entity and one or more third parties (other than the auditor)

• Includes:

  • Yes Description of purpose

  • Yes Emphasis-of-Matter paragraph

  • Yes Other-Matter paragraph

Regulatory Basis (General use)

Type of special purpose framework used to comply with the requirements or financial reporting provisions of a regulatory agency having jurisdiction over the reporting entity where two opinions are rendered on special purpose framework and GAAP

• General Use = 2 opinions are rendered

• Includes:

  • Yes Description of purpose

  • No Emphasis-of-Matter paragraph

  • No Other-Matter paragraph