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55 Cards in this Set
- Front
- Back
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What is an Audit?
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Consists of a methodical review and objective examination of Financial Statements.
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What is the objective of an audit?
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to express an OPINION on the financial statements in the form of an Audit Report
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In an audit: what are the responsibilities the two main parties?
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Management = Financial Statements
Auditors = Expression of an opinion/ |
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What does the audit function do for a company?
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By having an auditor attest to the statements, the company adds credibility to the company
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An Auditor must be:
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Independent
Expert -in accounting (GAAP) -in auditing (GAAS) -in the industry Poses professional skepticism |
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The primary assertion of a an audit is what?
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Whether or not the financial statements are fairly presented
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What is the meaning of "fairly presented?"
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A judgement call reflecting whether or not financial statements reflect the transactions of a company within an acceptable range.
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An auditor uses which auditing standards for which companies?
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GAAS = mandatory on ALL audits
GAGAS = government organizations, programs, activities, and entities that receive government funds. PCAOB = companies that are "issuers" (i.e. companies that are subject to SEC regulations) |
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Describe requirements for auditing a public company?
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Public accounting firms must register with the PCAOB and are subject to board inspection. The PCAOB originally adopted ASB standards. Since then it has released 5 additional standards to replace related ASB standards.
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What is SOX
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1. Auditors report to and are overseen by the issuer's audit comittee(PCAOB)
2. All services must be pre-approved by said comitee 3. A second partner review is required for every public company audit 4. Penalties for destruction of records, willful maintainence for 7 years, commit securities fraud, fail to report fraud 5. protection for whistleblowers 6. Anyone associated with a pubic accounting firm can be held responsible for violation of accounting standards. |
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Name and describe the 3 levels of GAAS hierarchy:
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SASs - Published by the ASB. Require professional judgement and may be departed from in certain situations.
Interpretive Publications - recommendations regarding how SASs should be applied in specific situations (can be departed from). Other Auditing Publications - no authoritative status, but can be helpful |
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What is GAAS and Name the 10 standards
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Minimum standards for auditing. These standards deal with measures of audit quality and the objectives to be achieved in an audit, not the procedures necessary to complete the audit.
T - training I - independence P - professional care P- planning and supervision I - internal control E - evidence A - accounting = gaap C - consistency D - disclosure O - express opinion |
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What are the GAAS general standards
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TIP:
Training - the auditor must have an accounting education, practical auditing experience, and technical knowledge of the industry for the company being audited. Independence - the auditor must be independent in fact and appearance. This is the cornerstone of the profession. SOX mandates a one year cool-off period Professional Care - Auditor is expected to perform due care (attain reasonable assurance and professional skepticism), but not expected to be infallible. the auditor should do what the average auditor would do. |
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What are the Standards of field work?
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PIE:
Planning and supervision - audit programs to enumerate action and supervision and review of all audit work. Internal Control, Entity, and Environment - the auditor should gain an understanding of internal controls, the entity, and its industry in order to plan and design further auditing procedures. Evidence - Procedures are performed so as to gather evidence needed to render an opinion regarding the FS |
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What are the standards of reporting?
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ACDO
Accounting = GAAP (E) - Must state whether or not the financial statements are in accordance with generally accepted accounting principles. Consistency (I)- does not need to be explicitly stated, however, auditor must note circumstances where consistency is not observed. Disclosure (I)- Auditor must note when any disclosures are not adequately presented. Express Opinion (E)- The auditor must state and opinion on the financial statements. If they cannot place an opinion they must explain why. This standard is used to prevent misinterpretation of the auditors degree of responsibility. Opinions can be unqualified on one and qualified or disclaimer on another. |
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What are the three paragraphs of an unqualified report and what do they contain?
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RAPMEAM RAPEAM
Introductory: Name of the FS to be reported on. RR - FS responsibility of mgmt. Auditor resp. for opinion Scope: AA - Audit conducted in Accordance with GAAS or PCAOB for publicly traded co. PP - Planned and Performed to obtain reasonable assurance MM - FS free from Material Misstatement. EE - Examined Evidence on a test basis. AA - Assessed Accounting prncpls. MM -tested Management Made estimates Opinion: reference to the FS (from the intro) and opinion on the fair presentation of the FS and conformity with GAAP. |
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What is the report date
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the final date of Auditor responsibility. Report should be dated after audit documentation has been reviewed, financial statements have been prepared, and management has taken responsibility for the financial statements.
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What are PCAOB standards for audtis of issuers and non-issuers
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Issuers: There must state in the Scope: "We conducted our audits in accordance with the standards of the PCAOB.."
Non-issuers: May, but is not required to conduct the audit in accordance with GAAS and the PCAOB. |
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What is the general rule for GAAS and GAAP in the standard report.
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GAAS - Scope Paragraph
GAAP - Opinion Paragraph |
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What are the types of opinions:
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Unqualified (clean) - FS is presented fairly in all material respects and in conformity with GAAP. (standard report)
Modified Unqualified - when an explanatory paragraph is needed for certain circumstances, even when the opinion is unqualified. Qualified Opinion (except for) - despite certain matters, the FS is presented fairly. GAAP problems change the opinion P. while GAAS problems change the scope and opinion P. Adverse Opinion: Very material GAAP problems cause the statement to not be presented fairly. Disclaimer of Opinion - Significant GAAS problems have caused the auditor to not render an opinion because they were not able to complete the audit. |
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What GAAP issues result in qualified and adverse opinions?
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Qualified:
1. Non-GAAP change 2. Inadequate Disclosure 3. Unjustified Departure from GAAP 4. Unreasonable Acctg. Estimate Adverse: "Very Material" versions of issues that cause qualified opinions. |
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What GAAS issues result in qualified and disclaimer opinions?
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Qualified:
1. Uncertainty 2. Scope Limitation Disclaimer: 1 - 2: same as qualified 3. Lack of independence 4. Unaudited |
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When does an auditor withdraw?
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When statements are false, fraudulent, deceptive, or misleading.
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What is an uncertainty?
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A matter where conclusive audit evidence is not currently available. examples are impairments, intangibles, lawsuits, and warranties.
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What is the effect of an uncertainty on an audit?
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According to GAAP, management must either record the event if it is probable and reasonable or decide an estimate cannot be made and disclose the liability.
If the auditor agrees with management then an unqualified opinion is rendered. If the auditor cannot obtain enough info to agree with management they should render a qualified (gaas) opinion or a disclaimer due to limitation of scope If the auditor does not agree with managements decision the auditor should release a qualified gaap or adverse opinion. |
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What situations warrant a modified opinion? how do these situations affect the audit report?
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*(Division of responsibility) audit opinion is based on the report of another auditor - modified wording
Explantory Paragraph Needed: *Necessary and justified departure from GAAP *Going concern *To emphasize a matter *A justified lack of consistency *Quarterly financial data has been omitted or not reviewed *Supplementary info that is required by GAAP is omitted. *Other information in a document containing audited FS is inconsistent with info appearing in the FS |
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Where is the explanatory paragraph placed in the various opinions?
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Unqualified:
after the opinion paragraph Qualified, adverse, or disclaimer: before the opinion paragraph Exceptions: can be placed before or after opinion for Justified GAAP departure or Emphasis of a matter. |
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What is the effect upon the audit statement when multiple auditors have audited part of the FS and the primary auditors want to show a division of responsibility?
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The division of responsibility is should be referenced in all three paragraphs of the report. The primary CPA can only mention the secondary by name if they have express permission.
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What is the effect upon the audit statement when multiple auditors have audited part of the FS and the primary auditors want to assume responsibility?
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Before you assume responsibility (and not mention the other CPA) you must RIPP them:
R- check Reputation I - assure auditors' Independence. P - check Professional capacity P - check audit Programs |
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What are the procedures for evaluating a going concern:
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ADMITS:
A - analytical procedures D - view terms of Debts and loans M- review Minutes of the board I - Inquiry of legal council T- view Third party financial support agreements S - subsequent events review |
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What events are indicative of substantial doubt?
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F - Financial difficulties
I - Internal matters like work stoppages N - Negative trends E- External matters |
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What mitigating factors can allow an alleviation of doubt?
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Plans to borrow money or restructure
Plans to sell assets Plans to delay or reduce expenditures Plans to increase ownership equity |
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What should be included in audit documentation when there is substantial doubt about a company's ability as a going concern?
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-The events that gave rise to the doubt
-any mitigating factors that are significant -audit work performed to evaluate managements plans -conclusion on whether the doubt remains -the effect on the audits report and the financial statements |
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When do you emphasis a matter?
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when the company is a "RECC"
R - Related-party transaction E - subsequent Event C - Component of an enterprise C - matters that effect Comparability |
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What must be met in order for an accounting change to be acceptable?
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An auditor will render a modified unqualified report only when all three of the following are met:
-The change is to an acceptable principle -The method of accounting for the change is acceptable -Management is justified in the change If these changes are material then an explanatory paragraph is needed. |
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How do you deal with no statement of cash flows?
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An explanatory paragraph is added with missing info and its effects on the FS. Except for terminology is used in the opinion paragraph
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Name some scope limitations
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Time constraints
Inability to obtain enough audit evdnc. No management letter Refusal of clients attorney to respond Only report the scope limitation if you cannot identify and use alternative audit procedures (in which case you render an unqualified opinion with a potential modification) |
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Describe changes to the standard report when a disclaimer of opinion is issued:
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Intro:
- say "were engaged to audit" instead of have audited - delete reference of auditor's responsibility Delete Scope Paragraph Add Explanatory Paragraph and describe reason for disclaimer and why the statement was not in accordance with GAAP Opinion Paragraph: - disclaimer is placed on FS as a whole |
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If during a current audit an auditor realizes that he must change a previous year's opinion, what steps must be taken?
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In an explanatory paragraph,"DORCS"
D-Date of the previous report O-type of Opinion issued b4 R-Reason for the prior opinon C-Changes that have occured S-Statement that the opinon is different |
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Before deciding to reissue an audit what steps should a predecssor take?
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-Read the statements for the current period.
-Compare the statments auditied with the current statements -Obtain a letter of represenation from the successor auditor. -Obtain a rep. letter from management. Unrevised reports should use the original date, Revised reports should be dual dated |
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What should a successor auditor do when they decide not to present the predecssor's audit report?
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Include the following in an introductory paragraph:
-Statements were examined by other auditors in prior periods (do not specifally mention predecessor). -Date of predecessor's report -Type of opinon they expressed -the reason why it wasn't unqualified |
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What are subsequent events?
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Events that occur after balance sheet date but before FS are issued.
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Subsequent events have what effects can they have on the FS
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Subsequent events can cause adjustments (type 1 event) to the FS (if the event existed during the year)or additional disclosures (Type 2 event) to bring statement users up to date on potential future effects.
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How long is the auditor held liable for the audit?
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Until the date on the Audit report. However, if the auditor is made aware of events after the report date, they must consider whether or not to adjust FS
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What subsequent period actions should an auditor take?
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PRIME:
P-Post balance sheet transactions should be reviewed R-Representaion letter obtained from management regarding any disclosures etc. I-Inquiry to mgmt. about material liabilities or commitements, changes in equity, material unusual adjustments, and to mgmt's legal counsel M-Minutes of the board should be read E-Examine and compare latest interim FS |
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How should a report be dated if additional details are found?
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The report can be dual dated (Jan. 21, 20XX except for note 2, as to which the date is Feb 3, 20XX)
Or the date can be extended, but this increases responsibility until the new date |
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What does an auditor do if new info is found after the audit report is completed?
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- advise client to issue revised statements and new audit report
- Advise the client to make necessary disclosures and revisions - Provide notification to the client that the statements cannot be relied upon. |
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What should an auditor do if a client refuses to disclose new information that may denigrate the value of the FS?
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DAR:
D-Disassociate yourself with the financial statements. A- Alert Agencies with jurisdiction over the client that the auditor's report cannot be relied upon R-Notify relying parties of the events |
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What steps should an auditor take when omitted audit procedures are taken after submission of an Auditor's Report?
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-Determine whether or not other procedures compensated for those that were omitted.
-Undertake the (alt.) procedures. -If opinion is changed proceed as if subsequent information was discovered. |
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What limited procedures must be undertaken for sup. info?
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-Inquire of mgmt. how the info was prepared.
-Determine if the info is consistent with mgmt's responses, audited FS, etc. -Consider whether the client rep. letter should refer to the supplemenatry information |
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How is supplementary information reported on?
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Auditors are not required to audit sup. info. However, certian situations require expansion of the report:
-required sup. info is missing -the info is not in compliance with GAAP -The auditor cannot complete required procedures. -Substantial doubt is raised regarding the info. These concerns should be expressed in the form of an explanatory paragraph. |
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When can a disclaimer be placed on Sup. Info?
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Supplementary info is not distinguished from audited info. Or when the company tries to make it look as if the sup. data has been audited
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What are condensed financial statements and how does an auditor's report deal with them?
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FS with much less detail. Derived from audited stmts.
The auditor must indicate: 1. they audited and expressed an opinion on the full FS 2. date of audit report on complete FS 3. type of opinion expressed 4. whether the statements are fairly presented. |
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What is included in a reporting accountant's report?
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-A brief description of the nature of the engagement
-Stmt. that AICPA standards were used during the engagment -Identification of the entity, description of transactions, facts, assumptions, and the source of info. -Stmt. describing acct. principles, type of opinion -stmt. that the preparers of the FS are responsible -stmt. that differences in facts or assumptions will change the report -seperate paragraph restricting use to mgmt, BOD, and auditors. |
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How should an auditor prepare a report when distribution will include other countries?
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For foreign distribution only:
Use the report of the other country OR a U.S.report formated for the other country For more than limited distribution with the US: Use GAAP |
