Mcconnell Auditing Chapter 3 Minitest

Front 1

Who sets the uniform wording for the auditor's report?

Back 1

AICPA professional standards

Front 2

What are the 7 parts of an auditor's standard unqualified audit report?

Back 2

1. Report title
2. Audit report address
3. Introductory paragraph
4. Scope paragraph
5. Opinion paragraph
6. Name of CPA firm
7. Audit report date (Date audit field work is completed)

Front 3

Report title for standard unqualified opinion

Back 3

Standards require every report be titled and the title include the word independent. The requirement is because it conveys to users that the audit was unbiased in all aspects.

Appropriate titles "independent auditor's report", "report of independent auditor". "Independent accountant's opinion"

Front 4

Audit report address unqualified opinion

Back 4

The audit report is usually addressed to the company, the BOD, or the shareholders. Nowadays it is customary to address to the BOD and stockholders to indicate the auditor is independent of the company.

Front 5

Introductory paragraph does 3 things unqualified opinion

Back 5

1. it states that the CPA firm has done an audit. This distinguishes from a compilation or a review.
2. It lists financial statements that were audited, including the B.S dates and accounting periods of i.s. and statement of cash flows. When it states it uses the same wording management uses on the financial statements.
3. STates that the statements are the responsibility of management and it's the auditor's responsibility to express an opinion on the statements based on an audit. Purpose is to communicate management is responsible for selecting appropriate accounting principles and making measurement decisions and disclosures in applying those principles to clarify respective roles of management and auditors.

Front 6

Scope paragraph unqualified opinion

Back 6

FActual statement about what the auditor did during the audit. This paragraph first states that the auditor followed US generally accepted auditing standards. For a public audit the auditor indicates they followed the standards of the Public Company Accounting Oversight Board. The country of origin of the accounting principles used in preparing the financial statements and auditing standards followed by the auditor are identified in the audit report.

The scope paragraph is designed to obtain reasonable assurance about whether the fin statements are free of material misstatement. Material conveys that auditors are responsible only to search for significant misstatements, not minor misstatements that don't affect users decisions. Reasonable assurance indicates an audit cannot be expected to completely eliminate the possibility that a material misstatement will exist.

Remainder of paragraph discusses audit evidence accumulated and states auditor believes evidence was appropriate for circumstances to express the ioinion. Test basis indicates that sampling was used rather than an audit of every transaction and amount. The scope paragraph states that the auditor evaluates appropriateness of accounting principles, estimates, and disclosures.

Front 7

For a public company audit what standards are used?

Back 7

For a public audit the auditor indicates they followed the standards of the Public Company Accounting Oversight Board.

Front 8

PCAOB

Back 8

Public Company Accounting Oversight Board

Front 9

What type of assurance does the scope paragraph of an unqualified opinion provide?

Back 9

The scope paragraph is designed to obtain reasonable assurance about whether the fin statements are free of material misstatement. Reasonable assurance indicates an audit cannot be expected to completely eliminate the possibility that a material misstatement will exist.

Front 10

What does material suggest in the unqualified opinion

Back 10

Material conveys that auditors are responsible only to search for significant misstatements, not minor misstatements that don't affect users decisions.

Front 11

What does test basis in an unqualified opinion mean?

Back 11

Test basis indicates that sampling was used rather than an audit of every transaction and amount.

Front 12

Opinion paragraph unqualified opinion

Back 12

States the auditor's conclusion based on the results of the audit. Most important part because of this often the entire audit report is referred to simply as the auditor's opinion. It is stated as an opinion rather than a statement of absolute fact with the intent of inidcating that the conclusions are based on professional judgement. The phrase in our opinion indicates that there may be some info risk associated with statements even thought hey have been audited.

Auditor is required to state an opinion on the fin statements taken as a whole, including a conclusion about whether the co followed US GAAP or IFRS issued by the IASB.

Front 13

Why isn't the auditor's word a guarantee?

Back 13

It is stated as an opinion rather than a statement of absolute fact with the intent of inidcating that the conclusions are based on professional judgement. The phrase in our opinion indicates that there may be some info risk associated with statements even thought hey have been audited.

Front 14

IASB

Back 14

International Accounting Standards Board

Front 15

What is controversial about an unqualified opinion?

Back 15

The term present fairly. Occasionally, the courts have concluded that auditors have responsibility to look beyond GAAP to determine if investors are being misled even with GAAP. Most auditors believe they are being fairly presented when they are following GAAP but it's necessary to examine substance of transactions and balances for possible misinformation.

Front 16

Name of the CPA firm unqualified opinion

Back 16

Typically the firm's name is used because the entire CPA firm has the legal and professional responsibility to ensure that the quality of the audit meets professional standards.

Front 17

Audit report date unqualified opinion

Back 17

The appropriate date for the report is the one on which the auditor completed the auditing procedures in the field. This date is important to users because it indicates the last day of the auditor's responsibilihty for the review of significant events that occurred after the date of the financial statements.

Front 18

5 conditions must be met to be awarded an unqualified opinion:

Back 18

1. All statements are included in the financial statements. (B.S, I.S., STatement of cash flows, statement of retained earnings).
2. Three general standards have been followed in all respects on the engagement.
3. Sufficient appropriate evidence has been accumulated, and the auditor has conducted and engaged in a manner that enables him or her to conclude that the 3 standards of field work have been met.
4. The financial statements are presented in accordance with GAAP. This means adequate disclosures throughout and in the footnotes.
5. There are no circumstances requiring addition of an explanatory paragraph or modified wording of the report.

Front 19

What is the PCAOB considering making a requirement on the report?

Back 19

They are considering making partner's signiture on the report mandatory.

Front 20

What is the standard unqualified audit report sometimes referred to as?

Back 20

A clean opinion because there are no circumstances requiring a qualification or modification of the auditor's opinion. The standard unqualified is the most common because most of the time companies make appropriate changes to their accounting records to avoid a qualification or modification by the auditor.

Front 21

What happens if a company fails to meet one of the 5 qualifications for unqualified opinion?

Back 21

IF they are not met the standard unqualified report cannot be issued as the opinion. Financial statement users are much more concerned with a disclaimer or adverse opinion than an unqualified report with an explanatory paragraph.

Front 22

Unqualified with explanatory paragraph or modified wording

Back 22

A complete audit took place with satisfactory results and financial statements that are fairly presented, but the auditor believes it is important or required to provide additional information.

Front 23

Qualified opinion

Back 23

The auditor concludes that the overall financial statements are fairly presented, but the scope of the audit has been materially restricted or applicable accounting standards were not followed in preparing the finacial statements.

Front 24

Adverse or disclaimer opinion

Back 24

Teh auditor conclused that the fianancial statements are not fairly presented (adverse) he or she is unable to form an opinion as to whether the financial statements are fairly presented (disclaimer) or he or she is not independent (disclaimer).

Front 25

What secction of SOX requires the auditor of a public company to attest to management's report on the effectiveness of internal control over financial reporting?

Back 25

section 404 of Sarbanes Oxley

Front 26

What types of companies are required to obtain an auditor's report on their internaal controls over financial reporting? When did this become a requirement? Who made this a requirement?
What section made this a requirement?

Back 26

larger public companies
2004
SEC
Section 404 of SOX

Front 27

Who made it required for the audit of internal controls to be integrated with the audit of financials?

Back 27

PCAOB standard 5

Front 28

How can the auditor issue a report about internal controls over financial reporting?

Back 28

may choose to make it integrated with the audit or they can issue a separate report on internal control over financial reporting or issue a combined report. The combined report on financial statements and internal control over financial reporting addresses oth financial statements and management's report on internal control over financial reporting. The separate report is more common.

Front 29

What does the report on internal controls over financial reporting include?

Back 29

1. The introductory, scope, and opinion paragraphs describe that the scope of the auditor's work and opinion is on internal control over financial reporting, and the intro paragraph highlights management's responsibility for and its separate assessment of internal control over financial reporting.
2. Teh introductory and opinion paragraphs also refer to the framework used to evaluate internal control. (Frequently COSO).
3. The report includes a paragraph after the scope paragraph defining internal control over financial reporting.
4. The report also includes an additional paragraph before the opinion that addresses inherent limitations of internal control.
5. Auditor's opinion about the effectiveness of internal control is as of the end of the most recent fiscal year.
6. Last paragraph is a cross referenece to auditor's separate report on the financial statements.

Front 30

What type of opinion can the auditor issue in regards to internal controls over financial reporting?

Back 30

qualified opinion, adverse opinion, or disclaimer of opinion on internal controls.

Front 31

When would a qualified. adverse, or disclaimer be issued?

Back 31

When the auditor has not performed a satisfactory audit, is not satisfied that the fin. statements are fairly presented, or is not independent.

Front 32

What are the causes of addition of an explanatory paragraph?

Back 32

1. Lack of consistent application of GAAP
2. Substantial doubt about going concern
3. Auditor agrees with a departure from promulgated accounting principles.
4. EMphasis of a matter
IF these conditions exist, the three standard report paragraphs are included without modification and a separate explanatory paragraph follows the opinion paragraph.

Front 33

What is the only cause of a modified wording?

Back 33

Only reports involving the use of other auditors involve a modified wording. This report contains three paragraphs all of which are modified.

Front 34

What is the cause of lack of consistent application of GAAP

Back 34

Accounting princples are not consistently observed in the current period in relation to the preceding period. GAAP requires that changes made must be to a perferable princople and the nature and impact of the change must be adequately disclosed. WEhn a material change occurs, the auditor should modify the report by adding an explanatory paragraph after the opinion that discusses the nature of the change and points to the footnote. The materiality is evaluated based on the current year effect of the change. Explanatory paragraphs are required for both vonuntary and onvoluntary changes caused to new accounting pronouncement

Front 35

What do we know implicitely about explanatory paragraphs?

Back 35

We know that the auditor concurrs with the appropriateness of the change. If the auditor didn't agree then the change would be a violation of GAAP and the opinion issued would be qualified.

Front 36

Consistency vs. Comparability

Back 36

The auditor must distinguish between changes that affect consistency and those that may affect comparaibility but not consistencyt.

Front 37

What are some things that affect consistency and require an explanatory paragraph if material?

Back 37

1. Changes in accounting principles (FIFO to LIFO).
2. Changes in reporting entities (inclusion of an additional company in fin. stmt.)
3. Corrections of errors involving principles, by changing from an accounting principle that is not generally acceptable to one that is.

Front 38

What are some things that affect comparability but not consistency and do not need an explanatory paragraph?

Back 38

1. changes in an estimate (asset value based on depreciation estimate)
2. Error corrections not involving principles, such as previous year math error).
3. Variations in format and presentation.
4. Changes because of substantially different transactions or events such as new research and D or the sale of subsidiary.

Front 39

Where are items that affect comparability typically disclosed?

Back 39

In the footnotes. A qualified audit report for inadequate disclosure may be issued if a client refuses to properly disclose items.

Front 40

What does an audit do in regards to the financial health of the company?

Back 40

The purpose of an audit is not to evaluate the financial health of the company, the auditor has a responsibility to evaluate whether the company is likely to continue as a going concern.

Front 41

What factors cause uncertainty about the ability of a company to continue as a going concern?

Back 41

1. Significant recurring operating losses or working capital deficiencies.
2. Inability of the company to pay its obligations as they come due
3. Loss of major customers, the occurrance of uninsured catastrophes such as an earthquake, flood, or unusual labor deficiencies
4. Legal proceedings, legislation, or similar matters that have occurred that might jeopardize the entity's ability to operate.

Front 42

What is the auditor concerned with when looking at going concern?

Back 42

The auditor's concern is the possibility that the client may not be able to continue its operations or meet its obligations for a reasonable period.

Front 43

What is considered a reasonable period when an auditor checks for going concern?

Back 43

A reasonable period is considered not to exceed 1 year from the date of the financial statements being audited.

Front 44

What happens if the auditor believes there is substantial doubt in regards to going concern?

Back 44

An unqualified opinion with explanatory paragraph is required.

Front 45

In regards to going concern what is not required?

Back 45

Auditing standards permit but do not require a disclaimer of opinion when there is substantial doubt about going concern. This type of opinion is rarely issued in practice. An example for which a disclaimer might be required is when a regulatory agency, such as the EPA, is considering a severe sanction against a company, and if the proceedings result in an unfavorable outcome, the company will be forced to liquidate.

Front 46

What does Rule 203 of the AICPA Code of Professional conduct state?

Back 46

States that in unusual situations, a departure from GAAP may not require a qualified or adverse opinion. However, to justify an unqualified opinion the auditor must be satisfied and must state and explain, in a separate paragraph in the audit report, that adhering to the principle would produce a misleading result in the situation

Front 47

Emphasis of a matter

Back 47

Sometimes the CPA will want to emphasize specific matters even though they intend to express a unqualified opinion.

Front 48

What are some situations where an auditor may want to emphasize and give explanatory material in the audit report?

Back 48

1. The existence of significant related party transactions.
2. Important events occurring subsequent to the balance sheet date.
3. The description of accounting matters affecting the comparability of the financial statements with those of the preceeding years.
4. Material uncertainties disclosed in the footnote.

Front 49

What options do the CPA have when the report involves other auditors

Back 49

1. make no reference in the audit report. When no mention is made, a standard unqualified opinion is given. This approach is followed when the other auditor audited an immaterial portion, is well known or closely associated with the principal auditor, or the principal auditor throughly reviews the other auditor's work. The other auditor is still responsible for their own report and work in the event of a lawsuit.
2. Make reference in the report (Modified wording report). Called a shared opinion report. Appropriate when impractical to review work or when part audited is material in regards to the whole. Does not include a separate paragraph to discuss shared responsibility but does so in intro and refers to the other auditor in the scope and opinion paragraphs.
3. Qualify the opinion. A qualified opinion or disclaimer, depending on materiality, is required if the principal auditor is not willing to assume any responsibility for the work of the other auditor. The principal auditor may also decide that a qualification is required in the overall report if the other auditor qualified his position of the audit.

Front 50

What options are there when more than 1 CPA performs the audit? 1. Make no reference in the audit report.

Back 50

1. make no reference in the audit report. When no mention is made, a standard unqualified opinion is given. This approach is followed when the other auditor audited an immaterial portion, is well known or closely associated with the principal auditor, or the principal auditor throughly reviews the other auditor's work. The other auditor is still responsible for their own report and work in the event of a lawsuit.

Front 51

What options are there when more than 1 CPA performs the audit? 2. Make a reference in the report

Back 51

2. Make reference in the report (Modified wording report). Called a shared opinion report. Appropriate when impractical to review work or when part audited is material in regards to the whole. Does not include a separate paragraph to discuss shared responsibility but does so in intro and refers to the other auditor in the scope and opinion paragraphs.

Front 52

What options are there when more than 1 CPA performs the audit? 3. Qualify the opinion

Back 52

3. Qualify the opinion. A qualified opinion or disclaimer, depending on materiality, is required if the principal auditor is not willing to assume any responsibility for the work of the other auditor. The principal auditor may also decide that a qualification is required in the overall report if the other auditor qualified his position of the audit.