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Auditing 1- notes from HW

Terms in this set (80)

An auditors responsibilities for audited financial statements are confined to
the expression of the auditors opinion.
The literature pertaining to ____ changes over time, and therefore it can be said to encompass the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. It is one of the financial reporting frameworks acceptable for preparation of financial statements. (IFRS is another one.)
GAAP
The auditor must obtain ____ ______ audit evidence to afford a reasonable basis for the opinion.
sufficient appropriate
a high, but not absolute, level of assurance to allow an auditor to detect a material misstatement
reasonable assurance
An auditor of a nonissuer must conduct the audit in accordance with the
ASB standards
The auditor should plan and perform the audit with an attitude of ______. the attitude includes a questioning mind and a critical assessment of audit evidence, and recognizes that circumstances may exist that cause the financial statements to be materially misstated.
professional skepticism
a ________ consists of policies and procedures designed, implemented, and maintained to ensure that he firm complies with professional standards and appropriate legal and regulatory requirements, and that any reports issued are appropriate in the circumstances.
quality control ssytem
When circumstances indicate that a financial presentation in accordance with US. GAAP would be misleading, a departure from US GAAP is permissible. In such cases, the auditor should issue an ______ opinion because the financial statements are not materially misstated.
unmodified
The public company accounting oversight board (PCAOB) was established by the
Sarbanes- Oxley Act of 2002
When a disclaimer of opinion is issued due to lack of sufficient audit evidence, the lack of evidence should be disclosed in the Auditor's Responsibility paragraph and discussed in an additional paragraph before the opinion paragraph. This paragraph should be titled
Basis for Disclaimer of Opinion
If the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented, the successor auditor should indicate in an Other-Matter paragraph of the report:
1. that the financial statements of the prior period were audited by another auditor
2. the date of the previous report
3. the type of report issued by the predecessor auditor
4. if the report was other than an unmodified report, the substantive reasons therefor.

(the successor auditor may name the predecessor auditor only if the predecessor auditors practice was acquired by or merged with that of the successor auditor)
Before reissuing the prior years audit report on the financial statements of a former client, the auditor should
1. read the financial statements of the current period
2. compare the prior period information that the auditor reported on with the financial statements to be presented for comparative purposes
3. obtain letters of representation from management of the former client and from the successor auditor.
The representation letter from management should indicate
whether any of managements previous representations should be modified and whether there have been any subsequent events that would affect the previous financial statements.
The representation letter from the successor auditor should state whether the successor auditors audit disclosed any
issues of a material nature that might affect the previous financial statements.
If the auditor reissues the audit report at the clients request, the auditor should
use the original report date on the reissued report. (use of a subsequent ate implies that the auditor has done additional work)
If an auditor has previously qualified his or her opinion on financial statements of a prior period, and the prior period statements are restated to conform with GAAP, the auditor should express an ____ opinion on the restated financial statements.
unmodified

(In addition the auditor would state the substantive reasons for the change in opinion in an emphasis of matter (or other matter) paragraph following the opinion paragraph)
If the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented, the successor auditor should indicate in an other-matter paragraph of the audit report:
1. that the financial statements of the prior period were audited by a predecessor auditor
2. the type of opinion expressed by the predecessor auditor and, if the opinion was modified, the reasons for the modification
3. the nature of the emphasis-of-matter or other-matter paragraph included in the predecessor auditor's report
4. the date of the predecessor auditors report
when prior- period financial statements are restated in the current period to conform with GAAP, the auditors updated report on the prior period financial statements should express an _____ opinion concerning the restated financial statements
unmodified
when a successor auditor does not present the predecessors auditors report, the successor should indicate in an _____ paragraph that the predecessor auditors expressed an unmodified opinion on the prior years financial statements
other matter
If the auditor is unable to gather sufficient evidence on the beginning balance of the balance sheet accounts, the auditor would be unable to express an opinion on the current years results of operations and cash flows. The auditor could express an opinion on the
statement of financial position
used when there is a subsequent event occurring after the original date of the auditors report, and the auditor wishes to extend responsibility only for the one event. It is not used for comparative financial statements.
dual dating
The preparation and fair presentation of the financial statements requires
identification of the applicable finacnail reporting framework and inclusion of an adequate description of the framework, as well as preparation and fair presentation in accordance with the framework.
Whether substantial doubt remains or is alleviated is a judgment call made by the auditor, and there is no requirement to document managements opinion in the matter under US auditing standards. However under international standards on auditing, management must
assess the entits ability to continue as a going conern and the auditor must evaluate this assessment and document the evaluation in the audit workpapers.
An Emphasis of matter paragraph is required in the following circumstances:
1. the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time.
2. to describe a justified change in accounting principle that has a material effect on the entitys financial statements
3. subsequently discovered facts lead to a change in audit opinion (the auditor may use an emphasis of matter or other matter paragraph, as appropriate.
4. The financial statements are prepared in accordance with an applicable special purpose framework (other than regulatory basis financial statements intended for general use.)
The auditor has a responsibility to evaluate whether there is substantial doubt about the entitys ability to continue as a going concern for a reasonable period of time. If the auditor concludes that there is substantial doubt, the auditor should include an emphasis-of-matter paragraph following the opinion paragraph that includes the terms
"Substantial doubt" and "going concern"
Under US GAAS, the group engagement partner makes reference in the audit report to the work of the component auditor when
the group engagement partner is unable to review the component auditors audit documentation.

(This is because the group engagement partner will be unable to be satisfied concerning the work performed by the component auditor. Even though the component auditor has an excellent reputation, the group engagement partner must see the work to be able to assume responsibility for it. )-- Further note that under ISAs no reference is made to the component auditor unless required by law or regulation.
when assessing managements plans for dealing with the adverse effects of future conditions and events, mitigating factors would include:
1. the postponement of expenditures (including R&D)
2. Plans to dispose of assets
3. plans to borrow money or restructure debt
4. plans to increase ownership equity (Sell stock)
If the auditor is unable to form an opinion on a new clients opening inventory balances, the auditor will issue an opinion on the __________ and will issue a disclaimer of opinion on the ____, ____ and ____.
closing balance sheet only

statements of income, retained earnings, and cash flows.
If the auditor lacks independence with respect to an audit client,
the auditor must disclaim an opinion on the financial statements.
an unjustified accounting change may cause the auditor to issue a
qualified or adverse opinion
When inadequate disclosure has a material but not pervasive effect on the financial statements, the auditors opinion should state
"in our opinion, except for the omission of the information described in the Basis for Qualified Opinion Paragraph..."
If, after considering identified conditions and events and managements plans, the auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the audit report should include an emphasis of matter paragraph (following the opinion paragraph) to reflect that conclusion. This conclusion should be expressed through the use of the phrase
"substantial doubt about its (the entity's) ability to continue as a going concern"

(The "reasonable period...not to exceed one year" is inherent in the definition of going concern under US auditing standards and is not explicitly stated in the audit report.)
If the financial statements, including accompanying notes, fail to disclose information that is required by generally accepted accounting principles, the auditor should express a
qualified or adverse opinion, depending on pervasiveness
When the group auditor decides not to make reference in the audit of a component auditor, the group auditor assumes responsibility for the work of the component auditor and should
determine the type of work to be performed on the financial information of the component. (If the component is significant, the component should be audited by the group engagement team or the component auditor)
When an accountant is associated with the financial statements of a public entity, but has not audited or reviewed such statements, the accountant must issue a report
disclaiming any opinion on the statements
When an auditor concludes there is a substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditors responsibility is to
consider the adequacy of disclosure about the entity's possible inability to continue as a going concern and include an emphasis of matter paragraph in the audit report.
When the auditor is unable to satisfy himself or herself regarding the amount of beginning inventory, he or she must ____an opinion on the income statement because of the inability to verify the cost of goods sold during the year. The auditor may however still be able to issue an _____ opinion on the balance sheet, since inventory can be verified as of the balance sheet date
disclaimer

unmodified
Under US auditing standards, the auditor states that the audit was conducted in accordance with GAAS in the _____Paragraph
Auditors responsibility
The auditor expresses an opinion on the financial statements conformity with GAAP in the
opinion paragraph
When a qualified opinion results from an inability to obtain sufficient appropriate audit evidence, the situation should be described in a
Basis for Qualified opinion paragraph preceding the Opinion paragraph and should be referred to in the Opinion paragraph.
When an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the
possible effects on the financial statements
In a report qualified for inadequate disclosure, the auditor would
add a paragraph titled Basis for Qualified Opinion preceding the Opinion paragraph and modify the opinion paragraph by adding an "except for.." statement.
If a company issues financial statements that purport to present financial position and results of operations but omits the related statement of cash flows, the auditor will normally conclude that the omission requires
qualification of the opinion
Restrictions on the scope of the audit, such as the timing of the work, the inability to obtain sufficient appropriate audit evidence, or an inadequacy in the accounting records, may require the auditor to
qualify or disclaim an opinion.
An "Except for" qualified opinion is expressed when
the "exceptions to GAAP" or scope restrictions are material but not pervasive
When a change in accounting principle materially affects the comparability of the comparative FS, the auditor should refer to the change in an
emphasis of matter paragraph following the unmodified opinion paragraph.
When a qualified opinion results from a limitation of scope, it should be described in an
Basis for Qualified Opinion paragraph preceding the opinion paragraph.

(it should describe the reasons for the inability to obtain sufficient appropriate audit evidence. Furthermore, the Opinion paragraph should have the heading "Qualified Opinion."
If an auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern and that the entity's disclosures are adequate, then the audit report may be either:
1. Unmodified with emphasis of matter paragraph
2. disclaimed
The auditor should disclose the substantive reasons for expressing an adverse opinion in a
separate basis for adverse opinion paragraph preceding the opinion paragraph
When management does not provide reasonable justification that a change in accounting principle is preferable and it presents comparative FS, the auditor should
express a qualified opinion each year that the FS initially reflecting the change are presented.
In a situation where it is likely that an entitys operations will be discontinued, disclosure of information about the entitys ability to continue as a going concern is required by GAAP. Failure to make such disclosure would be a departure from GAAP, resulting in either
a qualified or adverse opinion
An auditor reporting on the audit of financial statements of an issuer should indicate in the _______ paragraph that the engagement was conducted in accordance with PCAOB standards, and should refer to GAAP in the _____ paragraph
scope

opinion
Under International standards on auditing, the going concern period must be at least, but not limited to,
twelve months from the date of the financial statements being audited.

(under US auditing standards, the going concern period cannot exceed one year from the date of the financial statements being audited.)
If a departure from GAAP is justified, the auditor may issue an unmodified opinion with an
emphasis of matter paragraph
a justified lack of consistency caused by a material change in GAAP between periods would be reported in an
emphasis-of -matter paragraph after the opinion paragraph.

(under these circumstances, the auditor issues an unmodified opinion)
indicates the nature of the engagement, the financial statements covered in the engagement, the name of the entity whose financial statements have been audited, and the dates covered by each financial statement
introductory paragraph
The auditor has no active responsibility to make continuing inquiries between the date of the auditors report and the date on which the report is submitted. the auditors active responsibility stops on the date of the
auditors report
when the auditor concludes that an auditing procedure is considered necessary at the time of the audit was omitted, the auditor should
assess the importance of the procedure to the present ability to support the previously issued option.

(the results of other procedures that were applied may tend to compensate for the one omitted or make its omission less important)
when subsequently discovered information is found both to be reliable and to have existed at the date of the auditors report, the auditor should
determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information
adjustments or disclosures made after the original report date require the auditor to
dual date or extend the date of the auditors report.
The auditor may choose to perform detailed audit work during an interim period prior to the balance sheet date, especially for accounts that are
reasonably predictable
in obtaining evidence about subsequent events, the auditor should examine the latest available interim financial information and
compare them with the financial statements under audit
when an auditor issues a report that is dual dated for a subsequent event occurring after the original date of the auditors report, but before issuance of the related financial statements, the auditors responsibility for events occurring subsequent to the original report date is
limited to the specific event referenced
conditions that did not exists at year end but arose after year end are
type 2 (nonrecognized) subsequent events that must be disclosed to keep the financial statements from being misleading
If an auditor becomes aware of material information existing at the date of the audit report, the auditor should advice the client to
issue revised financial statements.
The reporting accountants report on the application of the requirements of an applicable financial reporting framework should include a statement that should any facts or circumstances differ from those presented to the reporting accountant, the accountants report
may change
when issuing a report on the application of the requirements of an applicable financial reporting framework to a specific transaction, the reporting CPA should consult with the continuing CPA to obtain information relevant to the transaction. If the reporting accountant decides it is unnecessary to consult with the continuing accountant then
he or she must document the reasons for not consulting.
when financial statements are prepared in accordance with a financial reporting framework generally accepted in the parents country and are for use only in that country, the auditor may report using either
a US style report modified to report on the financial reporting framework of the parents country or the report from of the parents country
when information accompanying the basic financial statements has been subjected to auditing procedures, the auditor may include in the auditors report an opinion that the information is fairly stated in all material respects in relation to the financial statements as a whole. This statement would appear in an
other matter or explanatory paragraph following the opinion paragraph.

(the information may be included in a separate report instead of the opinion report)
If the auditor discovers a material inconsistency in other information accompanying the audited financial statements, the financial statements do not require revision, and the client refuses to eliminate or revise the inconsistency, the auditor should communicate the matter with those charged with governance and then consider
1. revising the report to include an other matter paragraph describing the material inconsistency
2. withholding the use of the report
3. withdrawing from the engagement and consulting with legal counsel
For additional supplementary information required by the FASB, the auditor should
apply certain limited procedures to the information and add an other matter paragraph to the financial statement audit report
If management declines to present information required by the GASB, the auditor should issue an
unmodified opinion with an other matter paragraph
a reporting accountant may accept the engagement but should request permission from the entitys management to consult with the continuing CPA to ascertain the available facts relevant to forming a professional judgment. If the reporting CPA determine it is not necessary to consult with the continuing CPA, the reporting accountant should
document the rationale for not consulting
when information accompanies audited financial statements in a client prepared document, the auditor is required to read the information. If such information is materially inconsistent with the financial statements and financial statements do not require revision, the auditor should
request that the information be revised
with respect to supplementary information required by the GASB that is placed outside the basic financial statements, the auditor should apply limited procedures to the information and add an
other matter paragraph to the financial statement audit report
when reporting on the application of the requirements of an applicable financial reporting framework to a specific transaction, the CPA should include in his or her report a statement that the preparers of the financial statements, who should consult with their continuing accountants,
bear the ultimate responsibility for proper accounting treatment
when the audit engagement includes reporting on selected financial date, the report prepared by the auditor should be
limited to the data that was obtained from the financial statements.
measures of the quality of the auditors performance, and guide the auditor in the performance of a properly planned and executed audit
Generally accepted auditing standards (GAAS)
While GAAS do not override laws or regulations that govern an audit of financial statements, an audit may be conducted in accordance with two sets of auditing standards in their entirety. In this case, the auditor should add additional language to the _______ paragraph to state that the audit was conducted in accordance with both sets of auditing standards
auditors responsibility
the auditor in order to express an opinion, must obtain a reasonable level of assurance about whether the financial statements are free from material misstatement, whether due to error or fraud. In order to obtain reasonable assurance, the auditor must
1. plan the work and properly supervise any assistants
2. determine and apply appropriate materiality levels
3. identify and assess risks of material misstatement, whether due to error or fraud
4. obtain sufficient appropriate audit evidence
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