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52 Cards in this Set

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What are the 7 steps in the audit process?
1. Plan the audit (Understand the client, engagement letter)
2. Review the Internal Control
3. Evaluate the Internal Control
4. Evidence
5. Determine the Final Assessed Level of Control Risk
6. Substantive Tests
7. Audit Report
What are the 10 Generally Accepted Auditing Standards?
Training, Independence, Performance
Supervision and Planning, Internal Control, Evidence
Accounting=US GAAP, Consistency, Disclosure, Expressing an Opinion
What is the difference between Auditing Procedures and Auditing Standards?
Procedures relate to the acts to be performed, and standards deal with measures of the quality of performance of the auditing procedures and the objectives the procedures are to attain
What are the 4 elements of Quality Control for Personnel Management?
Hiring
Assignment of Personnel to Engagements
Advancement
Professional Development
What are the 6 necessary conditions for an Unqualified Opinion?
1. No departures from GAAP
2. Disclosures in financial statements are adequate and complete
3. No unusual uncertainties (contingencies surrounding the FS)
4. No scope limitations
5. GAAP must be consistently followed between periods
6. Independent auditor
When would explanatory language be added to an unqualified report?
- performed by other auditors
- change in consistency
- material uncertainty
- going concern exists
- emphasis of a matter
How is a remote likelihood of a material loss handled?
no explanatory paragraph
How is a probable chance of material loss handled?
if mgmt cannot provide a reasonable estimate -> consider adding an explanatory paragraph

if mgmt makes reasonable accrual, auditor can decide whether or not to add one
How is a "reasonable possibility of material loss" handled?
(more than remote, less than probable)
consider the magnitude by which the amount of the potential loss exceeds the auditor’s judgment about materiality and the likelihood of its occurrence.
When expressing a Qualified opinion:
1) Where does the explanatory paragraph go?
2) "Except for"? "Subject to?" "with the foregoing explanation?"
1) preceding the opinion paragraph
2) yes, no, no
What goes in the explanatory paragraph of an adverse opinion, and where is it placed?
-precedes the opinion paragraph
-all substantive reasons for the adverse opinion
-principal effects of the subject matter on financial position, results of ops, CF (or state that not reas. determ)
When does a scope limitation warrant a disclaimer of opinion?
- scope of audit was not sufficient to warrant the expression of an opinion
- do not identify procedures performed
- do not include scope paragraph
Reason for modification: GAAP Departure
1. Opinion expressed
2. Explanatory Paragraph
3. Opinion Paragraph
1. Qualified or adverse
2. Before opinion to explain departure(s) and amounts
3. Modified to provide qualifying language and refer to explanatory paragraph.
Reason for modification: Inadequate disclosure
1. Opinion expressed
2. Explanatory Paragraph
3. Opinion Paragraph
1. Qualified or Adverse
2. Before opinion paragraph to explain missing disclosure
3. Modified to provide qualifying language and refer to explanatory paragraph
Reason for modification: Uncertainty
1. Opinion expressed
2. Explanatory Paragraph
3. Opinion Paragraph
1. Unqualified (disclaimer is allowed)
2. After opinion paragraph to explain uncertainty and refer reader to footnote
3. Not modified
Reason for modification: Scope Limitation
1. Opinion expressed
2. Explanatory Paragraph
3. Opinion Paragraph
1. Qualified or Disclaimer
2. Before opinion paragraph to explain scope limitation and possible monetary effects
3. Modified to provide qualifying language or to provide disclaimer
Reason for modification: Going concern uncertainty
1. Opinion expressed
2. Explanatory Paragraph
3. Opinion Paragraph
1. Unqualified (disclaimer is allowed)
2. After opinion paragraph to describe going concern using wording "substantial doubt" about entity's ability to continue as a GC and refer to FS footnote
3. Not modified
Reason for modification: Emphasis of a matter1
1. Opinion expressed
2. Explanatory Paragraph
3. Opinion Paragraph
1. Unqualified
2. After opinion paragraph describing matter and refer to FS footnote
3. Not modified
Reason for modification: Reliance on another auditor
1. Opinion expressed
2. Explanatory Paragraph
3. Opinion Paragraph
1. Unqualified
2. Division of responsibility indicated in Intro P, including significance of portion done by other auditor
3. Modified to include other auditor
Reason for modification: Changed opinion on prior period information
1. Opinion expressed
2. Explanatory Paragraph
3. Opinion Paragraph
1. Unqualified
2. After opinion, to describe reason for different opinion
3. Not modified
Four main reasons for a Qualified Opinion
1. Scope limitation (not significant)
2. Material departure from GAAP (if very material, adverse)
3. Inadequate disclosure (if very material, adverse)
4. Innappropriate accounting changes (if very material, adverse)
When is the Opinion dated?
Date that fieldwork is completed.
Describe the management plans that an auditor should consider that could mitigate the adverse effects of a client's financial difficulties if they identified conditions and events that indicated a potential going concern problem.
-should consider any management plans to increase sales, reduce costs, or dispose of assets
-availability of financing, the possibility of restructuring or subordinating debt, the effects of existing borrowing restrictions, and the sufficiency of collateral
-evaluate any management plans to reduce or delay expenditures
consider any plans to increase ownership equity and raise capital.
What are the 3 general standards?
Training
Independence
Professional Care
What are the three standards of field work?
Planning
Internal Control
Evidential Matter
When is an explanatory paragraph added to an unqualified opinion?
-division of responsibility
-necessary and justified departure from GAAP
-going concern
-emphasize a matter
-justified lack of consistency
How is lack of consistency handled in an auditors report?
-explanatory paragraph added following the opinion paragraph describing the change and referring the reader to the appropriate note in the FS
-if GAAP is followed = unqualified.
-if GAAP is not followed = qualified or adverse, depending on materiality
What audit procedures should the auditor perform regarding going concern?
ADMITS!
-analytical procedures
-debt compliance (review compliance)
-minutes (read and review)
-inquiry of client's legal counsel
-thrid parties (rev. fin support arrangements)
-subsequent events review
What conditions and events may indicate substantial doubt about an entity's ability to continue as a going concern?
(FINE)
-Financial difficulties
-Internall matters (labor difficulties, substantial dependence on a part. project)
-Negative trends
-External matters (legal proceeding, new legislation, loss of a principal customer, natural disasters)
Identify some causes of scope limitation.
Restrictions on the use of auditing procedures due to:
- time constraints
- lack of sufficient competence evidence or unavailability of pertinent records
Examples of scope limitations?
-inability to obvserve inventory
-inability to confirm receivables
-refusal of mgmt to allow inquiry of attorney
-refusal of mgmt to provide rep letter
What is the format of a report issuing a qualified opinion due to scope?
-Same 1st P
-Same 2nd, except insert, "Except as stated in the following P" at the beg.
-Explanatory P before Opinion, describing the scope limitation
-Opinion: In our opinion, except for the effects of such adjustment, if any, as might have been disclosed had we been able to [describe scope limitation], the FS referred to above...
What is the format of a report issuing a qualified opinion due to nonconformity with GAAP?
Same 1st and 2nd P's

The reasons for the qualified opinion and the related financial impact should be set forth in an explanatory P preceding the opinion P

OP: "in our opinion, except for the effects of the matters discussed in the preceding P, the FS referred to..."
What is the format of the report when a disclaimer of opinion is issued?
-no reference to auditor's responsibilty in the IP
-use terms "we were engaged to audit"
-no scope paragarph
-an explanatory P descr. why the examination was not in accordance w/GAAS
-a statement that the auditor was unable to perform the auditing procedures necessary to render an opinion, and consequently no opinion is expressed
What is the format of a report issuing an adverse opinion?
Same 1st and 2nd Ps
-The reasons for the adverse opinion and the related financial impact should be set forth in an explan P preceding the OP
-OP: "In our opinion, b/c of the effects of the matters discusses in the preceding paragraph, the FS referred to..."
What is a piecemeal opinion?
A qualified or adverse opinion or disclaimer of opinion is given on f/s taken as a whole, but a favorable opinion is given on part of the f/s
Who is the Independent Auditors Report addressed to?
Board of Directors or shareholders, not management
What are the five types of special reports?
1. OCBOA - general use
2. Specified elements, accounts, or items - restricted use
3. Compliance with contract or regulatory provisions - restricted use
4. Incomplete presentation - restricted use
5. Financial information in prescribed forms or schedules - restricted use
What are the four types of OCBOAs
1. Cash basis
2. Income tax basis
3. Price level basis
4. Regulatory basis
Name the 2 standards of reporting that are explicit in the opinion
accounting principles and express opinion
What is an auditors first action if omitted audit procedures are discovered
Determine whether other audit procedures compensated for it
When the principal auditor decides to mention the work done by another auditor, the report will express a division of responsibility. Which P mentions it?
All 3 paragraphs
In a qualified opinion due to a scope limitation, name the Ps included and state if each one is changed due to the scope limitation.
Intro - not changed
Scope - yes
Explanatory - changed
Opinion - changed
What changes in the intro paragraph in an OCBOA special report?
statements of assets and liabilities, statements of revenue, no statement or RE or OE (cant use terms BS or IS)
- no GAAP terms
What changes in scope paragraph in an OCBOA special report?
Nothing changes.
Where does the explanatory paragraph go in an OCBOA special report, and what do you put in it?
-Before opinion paragraph
-say what the OCBOA is
-state that it is an OCBOA other than GAAP
What changes in the opinion paragraph of an OCBOA special report?
-cant use GAAP terms (BS/IS)
-on the basis of acctng described in note X (not on the basis of GAAP)
Of the 5 special reports, which are general or restricted use?
OCBOA is general, the other four are restricted
What is negative assurance?
Nothing came to our attention that would cause us to believe there is a problem
What is the objective of a letter to underwriter (comfort letter)?
To obtain negative assurance
- nothing came to our attention that would cause us to believe the f/s were not in conformity with GAAP
After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to
an auditor's consideration of management's plans may include plans to dispose of assets, restructure debt, reduce expenditures, and increase ownership equity.
Green, CPA, concludes that there is substantial doubt about JKL Co.'s ability to continue as a going concern. If JKL's financial statements adequately disclose its financial difficulties, Green's auditor's report should specifically use the words:
going concern and substantial doubt