Audit Exam 4

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interim testing

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interim testing

testing done during the year prior to the date on the balance sheet; even though you don't have financial statements, you can study internal controls

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date of the financial statements

The year-end date under audit

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Date of the auditor's report

the date on which auditors have obtained sufficient appropriate evidence to support their opinion

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Date of the auditor's report

the date on which auditors have obtained sufficient appropriate evidence to support their opinion

  • also known as the audit completion date

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audit report release date

the date on which auditors allow the client to use their reports in conjunction with the financial statements; also the date on which the client's financial statements are issued

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roll-forward procedures

The procedure(s) performed by auditors to extend the conclusions from an interim date to the date of the financial statements

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required

analytical procedures used throughout the audit: During the planning to assist auditors in planning the nature, timing, and extent of other auditing procedures (required or optional?)

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optional

analytical procedures used throughout the audit: As part of substantive testing, to obtain audit evidence about particular assertions related to account balances or classes of transactions (required or optional?)

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required

analytical procedures used throughout the audit: Near the end of the audit as an overall review of the financial information to assess the conclusion reached and evaluate the overall financial statement presentation (required or optional)

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true

auditors cannot audit, corroborate, or verify accounting estimates. (t/f)

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contingecny

An existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur

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Contingent Liabilities

-Potential payments related to warranties for products and services sold by the entity,

  • income taxes in dispute for products and services sold by the entity,

-income taxes in dispute with the Internal Revenue Service, and guarantees of debt on behalf of another party.

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(1) have been disclosed and (2) are properly presented in client's financial statements

From the auditors' standpoint, two important issues relating to pending litigation, claims, and assessments are ensuring that all pending litigation, claims and assessments...

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the client

_________'s responsibility is to respond to auditors' inquiries and provide auditors with a description and evaluation of litigation, claims, and assessments.

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attorney letter (letter of inquiry)

When auditors assess a risk of material misstatement from pending litigation, claims, and assessments, they will request that the client send an...

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all attorneys who worked for the client during the period under the audit

An attorney letter is sent to who?

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the auditor

who sends the attorney letter

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the client

who prepares the attorney letter?

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the auditor

the attorney's response is provided directly to who?

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unasserted claim

Represents that no formal lawsuit or claim has been filed or threatened on behalf of others but that circumstances such as a catastrophe, accident, or other physical occurrence could result in a suit or claim being filed in the future.

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at least probable

Attorneys should encourage their client to disclose this information to auditors when the assertion of a claim is...

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true

attorney's are not required to disclose unasserted claims to auditors unless the client specifically lists them in the attorney letter. (t/f)

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written representations

  • Provided by (Management to auditors)

  • Dated using date of auditors' reports (audit completion date)

  • Broad purpose

  • Impress upon management its (primary) responsibility for the financial statements

  • May establish auditors' defense if a question related to inquiries subsequently arises

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withdrawal from the engagement, disclaimer of opinion, or to qualify the opinion

managements refusal to provide written representations could result in

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Going-Concern Uncertainties

Auditors are not expected to design and perform procedures solely for the purpose of identifying conditions that indicate...

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substantial doubt

Auditors are required to consider whether any evidence that comes to their attention during the examination provides ______ _______ about the client's ability to continue as a going concern for a reasonable period of time.

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emphasis of matter paragraph

A paragraph added to an auditors' report that provides information fundamental to users' understanding of the financial statements (such as consistency or going-concern uncertainties).

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audit documentation

______ _______ should include: (1) conditions or events that suggested going-concern uncertainties,

(2) management’s plans to mitigate going-concern uncertainties and the audit procedures performed to evaluate management’s plans, and

(3) the auditors’ conclusion as to whether substantial doubt exists about the client’s ability to continue as a going concern and whether the audit report needs to be modified to reflect that substantial doubt.

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the client

who's responsibility is it to adjust the financial statements?

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uncorrected misstatement

A misstatement that the auditors have identified and accumulated during the audit that the client has not corrected or adjusted), often because of materiality or cost/benefit considerations.

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rollover method or iron curtain method

Auditors may use either of two methods to evaluate the materiality of uncorrected misstatements

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rollover method

The process used when evaluating the effect of uncorrected misstatements that considers only the current-period income effect(s) of the potential adjustment

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iron curtain method

the process used when evaluating the effect of uncorrected misstatements that considers the aggregate effect of current and prior misstatements in the entity's balance sheet

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false; are required to regardless if they are material or not

auditors are not required to communicate non-trivial misstatements detected during the audit regardless if they have a material effect on the FS. (t/f)

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review process

Provides evidence of compliance with the performance principle, which requires proper planning and supervision.

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audit manager and audit partner

When this initial review has been completed, _____ and _____ review the audit documentation

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engagement quality review

A review of audit documentation by an additional person (normally, a partner or equivalent with the firm) who has not been involved with the audit to ensure that the quality of the audit work and reporting is consistent with the quality standards of the public accounting firm.

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audit documentation review

  • ensures that the audit was conducted in accordance with GAAS

  • ensures that the audit was conducted in accordance with GAAS

  • provides the firm with an opportunity to evaluate the overall quality of the firm's audit practices as a method of quality control

  • serves as an important component of the training and evaluation of audit staff

  • allows the firm to adhere to the performance principle

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Subsequent Events

events occurring between the date of the financial statements and the date of the auditor's report

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Two types of subsequent events

Recognized - condition existed at BS date and is therefore recognized in FS (i.e. Contingent legal liability) Unrecognized - condition did not exist at BS date and arose after and not recognized - DISCLOSURE REQUIRED

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subsequently discovered facts

Information that becomes known to auditors after the date of their report that, had it been known at that time, may have caused the auditors to revise their report

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dual date

the use of two dates in the auditor's report to limit the responsibility beyond the date of the auditor's report to a specific subsequent event identified in the report

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true

auditors have no responsibility to continue to review their work after the audit report release date (t/f)

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omitted procedures

the inadvertent failure of auditors to perform necessary audit procedures prior to the audit report release date

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individual(s) charged with governance

the person(s) responsible for overseeing the client's financial reporting process, including the internal control over financial reporting. Although this phrase can include the client's management and full board of directors, for issuers it is typically the audit committee and the board of directors.

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true

Professional standards require auditors to communicate (in writing) all significant internal control deficiencies and material weaknesses to the client and individuals charged with governance. (t/f)

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issuers

significant internal control deficiency communication for these users should be made prior to the audit report release date

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non-issuers

significant internal control deficiency communication for these users is preferred prior to the audit report release date, but it should be made no later than 60 days following the audit report release date

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express an opinion on the financial statements, not on internal control over financial reporting

purpose of the audit for non issuers is to

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management letter

Not required by GAAS; written by the auditor to a client's management containing the auditor's recommendations for improving any aspect of the client's business

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issuers

Are required to file certain financial information with the SEC within 60 to 90 days (depending upon their size) of their fiscal year-end

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non-issuers

Are not subject to filing or audit requirements

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effectiveness of internal control over financial reporting (by management and auditors) and the fairness of financial statements and related disclosures (auditors)

mandatory report(s) for issuers include reports on

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fairness of financial statements and related disclosures based on user demand (auditors)

mandatory report(s) for non issuers include a report on

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Independent Auditor's Report

a report for non-issuers, prepared by a certified public accountant for the public shareholder, stating an opinion on whether the financial statements present fairly, in conformity with GAAP, the company's financial condition and results of operations and cash flows

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opinion, basis for opinion, responsibilities of management for FS, auditor's responsibility for the audit of the FS

all standard (unmodified) reports contain the following major sections:

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opinion

This section identifies the financial statements and years examined by the audit team and the opinion on the financial statements.

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Basis for opinion

This section indicates that the audit was conducted according to GAAS, the auditors were independent and met other ethical responsibilities

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Responsibilities of Management for the Financial Statements

This section identifies the management's responsibilities for both the fairness of the financial statements and the design, implementation, and maintenance of internal control. In addition, this section discloses management's responsibility to evaluate whether substantial doubt about the entity's ability to continue as a going concern.

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Auditors' responsibility for the audit of the financial statements

This section discusses the audit team's responsibility to obtain reasonable assurance regarding the fairness of the financial statements, identifies several important components of GAAS audit, and discusses the audit team's responsibility to those charged with governance

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key audit matters

Those matters communicated to those charged with governance (such as the audit committee) that are the most significant in the audit and may include areas of higher risk, areas requiring significant audit team and management judgement, or significant transactions or events.

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unmodified, qualified, adverse, disclaimer

four types of opinions

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Unmodified Opinion

In which the conclusion is that the financial statements present the financial condition, results of operation, and cash flows in accordance with GAAP. (until recently, this type of opinion was referred to as an unqualified opinion).

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Qualified Opinion

in which the conclusion us that, with the exception of one or more non-pervasive issues, the financial statements present the financial condition, results of operations, and cash flows in accordance with GAAP. Typically use the phrase except for in describing the issues that give rise to the qualification.

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Adverse Opinion

In which the conclusion is that the financial statements do not present the financial position, results of operations, and cash flows in accordance with GAAP

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disclaimer of opinion

In which the auditors do not express an opinion on the fairness of the entity's financial statements.

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modified opinions

Professional standards refers to qualified opinions, adverse opinions, and disclaimers of opinion as

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group financial statements

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

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group auditors

the auditors who perform the audit of a material portion of the assets, liabilities, revenues, and expenses of an entity's group financial statements; also known as principal auditors

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component auditors

May be engaged by group auditors to audit divisions, subsidiaries, or components

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division of responsibility

situation in which the component auditors are involved with the examination of a subsidiary, branch, component, or investment that is included in the financial statements audited by group auditors

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Express permission

generally, when the group auditors refer to the component auditors' work, the component auditors are ordinarily not identified by name. In fact, the component auditors may be named in the group auditors' report only by ______ _______ and with publication of their report along with the group auditors' report.

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Qualified opinion

issued for matters that are material but not pervasive

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Adverse and Disclaimer of Opinion

usually issued for matters that are material and more pervasive

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unmodified opinions

usually issued for matters that are not material

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other-matter paragraphs

Paragraphs that provide information relating to users' understanding of the audit, audit teams responsibility, or auditors' report are known as

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explanatory paragraphs

Emphasis-of-matter and other-matter paragraphs may be collectively referred to as

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consistency

The concept of ________ is based on the importance of permitting users to appropriately compare an entity's financial statements across years

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Issues related to consistency

  1. Changes in accounting principles (from one GAAP method to another GAAP method)

  2. Changes in the form of the reporting entity (other than that resulting from a transaction or event)

  3. Changes in an accounting principle that is not a generally accepted accounting principle to one that is a generally accepted accounting principle (which is considered to be an adjustment to correct a misstatement in previously issued financial statements).

  4. Changes in accounting principles inseparable from changes in

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Going-Concern Uncertainties

Questions raised about the entity's ability to continue in operation and meet its obligation as they become due are known as

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unmodified report

The most common report issued when going-concern uncertainties exists is an

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other information included in annual reports

information that is not a part of the financial statements but is published with them; auditors must read this information for inconsistencies with the financial statements

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true

Audit teams are required to perform limited procedures (inquiring of management, comparing information for consistence with the financial statements, and obtaining written representations from management) with to respect the required supplementary information. (t/f)

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other-matter paragraph

When companies present required supplementary information, auditors are required to expand their report on the financial statements to include an ____ ____ _____ . This paragraph specifically disclaims an opinion or any form of assurance on the supplementary information.

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two, three

The SEC requires issuers to present balance sheets for _____ years and statements of income, changes in shareholders' equity, and cash flows from ______ years in comparative (side-by-side) format

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updated report

A report on previously issued financial statements that takes into consideration information that the accountant has become aware of during the current engagement, and includes any necessary revisions to the original report.

  • carries the most recent date of the auditors' report

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reissued report

A report that is issued subsequent to the date of the original report, but which bears the same date as the original report, indicating that no additional work has been performed since the date.

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Condensed Financial Statements

Financial statements that are presented in considerably less detail than complete financial statements and do not include all required disclosures under GAAP.

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associated with financial statements

cases when auditors consent to the use of their name in some form of communication containing the entity's financial statements or submit to their clients or others (third party users) financial statements they have prepared or assisted in preparing. Auditors should issue a one-paragraph disclaimer when they are associated with but did not audit financial statements

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attestation

as an engagement in which an accountant is engaged to issue or does issue a practitioner's examination, review, or agreed-upon procedures report on subject matter or an assertion about subject matter... that is the responsibility of another party.

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responsible party

the person at the client who is accountable for the information (e.g., the company's controller for financial information.)

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examination, review, agreed upon procedures

three types of engagements

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examination

Is similar in substance to an audit, only the subject matter may be assertions other than the financial statements and footnotes. In these engagements, accountants evaluate internal controls and assess the risk of material misstatement, gather evidence in support of the assertions, and render opinions that represent a high level of assurance

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review

Provides only a limited level of assurance. The procedures performed in a review engagement are generally limited to making inquiries and performing analytical procedures.

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Agreed-Upon Procedures

Specific procedures performed on the subject matter of an assertion while a practitioner is engaged by a client to issue a report of findings.

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special purpose frameworks

also known as other comprehensive bases of accounting; a coherent accounting framework in which substantially all important financial measurements are governed by criteria other than GAAP or IFRS

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(1) regulatory agency accounting rules, (2) tax basis accounting, (3) cash basis accounting (i.e., no accruals) or modified cash basis accounting

Examples of statements prepared under special purpose frameworks:

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true

Professional standards warn that special purpose framework financial statements should not use the titles normally associated with GAAP statements. (t/f)

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cannot

Auditors (can/cannot?) express an unmodified opinion on a single financial statement If they expressed a disclaimer or adverse opinion on the complete set of financial statements

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By product reports

The audit team does not perform procedures specifically designed to evaluate compliance but is considering whether evidence they gather during the financial audits indicates instances of noncompliance.

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