Audit Reports

Question 1

Standard report - Unmodified Opinion – Nonpublic/Non Issuer

Answer 1

• Required title – “Independent” should be in the title
• *Addressee: * Company, BOD, Stockholder NOT management
• Introductory paragraph: identify the entity, financial statement has been audited, titles of financial statement, date or period covered by financial statement
• Management responsibility paragraph (section with heading):
• Auditor responsibility (section with heading):
• Opinion (section with heading): when expressing an unmodified opinion, that the financial statements present fairly, in all material respect, in accordance with the applicable financial reporting framework
• Manual or printed signature (firm name)
• Auditor address (city and state)
• Date (no earlier than date auditor has obtained sufficient appropriate audit evidence

Question 2

Standard report - Unmodified Opinion – Nonpublic/Non Issuer

Management responsibility paragraph

Answer 2

Management responsibility paragraph:

• Responsibility for preparation and fair presentation of the financial statement, and
• Responsibility for the Design, Implementation and Maintenance of IC

Question 3

Standard report - Unmodified Opinion – Nonpublic/Non Issuer

Auditor responsibility

Answer 3

Auditor responsibility:

• Express an opinion;
• Audit conducted in accordance with GAAS of the USA;
• Standards require auditor to plan and perform audit to obtain reasonable assurance financial statements free of material Misstatement;
• Discuss the nature of the audit procedures;
• Audit evidence sufficient and appropriate opinion

Question 4

Standard report - Unqualified Opinion – Public Company/Issuer -PCAOB

Answer 4

• The title on the page is “Report of Independent Registered Public Accounting Firm”
• **Introduction: **management and auditor responsabilities
• Scope: refer to standard of the PCAOB - audit definition
• Opinion:
• Reference of IC in the explanatory paragraph - combined
• Manual or printed signature (firm name)
• Auditor address (city and state)
• Date (no earlier than date auditor has obtained sufficient appropriate audit evidence

Question 5

Main Differences between public and non company Audit Report

Answer 5

Main Differences between public and non company Audit Report

• Public company : The title on the page is “Report of Independent Registered Public Accounting Firm”
• Pubic company audit report refer to standard of the PCAOB rather than generallyaccepted audit standard GAAS
• Pubic company audit report less discussion on auditor and management responsibilities
• Pubic company audit report a paragraph refer to Internal Control ( whenthe reports on financial statement and Internal Control are separated)

Question 6

Unmodified Opinion with Emphasis-of-Matter

Treatment

Answer 6

• Included AFTER the opinion paragraph
• Use the heading “Emphasis-of-matter”
• Include a clear reference to matter emphasized and where that matter is in the financial statements
• Indicate that the auditor’s opinion is not modified with respect to the matter

Question 7

Circumstances resulting in unqualified opinion paragraph with an Emphasis of Matter paragraphs

Answer 7

Circumstances that may result in inclusion of Unmodified Opinion with emphasis of Matter paragraphs - **WHEN MATERIAL **

• Substantial doubt about the ability to continue as a Going Concern - AU-C507 - **_Note _when management does not disclose such information in the financial statements, a departure from GAAP exists and lead to either a qualified or adverse opinion.
• Inconsistency in Application of Account Principles (justified)** - AU-C708**
• *Uncertainties - AU-C706 - *Uncertainties are situations in which conclusive audit evidence concerning the ultimate
  outcome cannot be expected to exist at the time of the audit since that outcome will occur in the future. (**e.g. **unusually important litigation or regulatory action in process against the client)
• Other Circumstances at the Discretion of the Auditor - **AU-C706 ** - e.g. • A major catastrophe that affects the entity’s financial position. • Significant transactions with related parties. • Unusually important subsequent events

Question 8

Conditions or events indicating Going concern doubts:

4

Answer 8

Conditions or events indicating that may Going concern doubts:

including wordings “substantial doubt” & “going concern”

• Negative trends (recurring losses, negative cash flows, recurring working capital shortages)
• Other financial difficulties (default on loan, arrearages in dividends, denial of usual credit from supplier)
• Internal matter (work stoppages, labor difficulties)
• External matters (obsolesce of patents, legal proceedings )

Question 9

Procedures that may reveal Going concern doubts:

5

Answer 9

Procedures that may reveal Going concern doubts:

• Analytical procedures
• Review of subsequent events
• Examination of debt agreements to determine compliance
• Reading of minutes of board meetings
• Confirmation with related parties of the details of arrangement to provide or maintain financial support

Question 10

Management’s plan for dealing with condition of going concern doubts:

4

Answer 10

Management’s plan for dealing with condition of going concern doubts:

• Disposition of assets
• Borrowing money or restructuring debt
• Reducing or delaying expenditures - e.e leasing instead of purchase
• Increasing ownership equity

Question 11

Change in accounting principle that DO result in emphasis of matter paragraph

4

Answer 11

• Change in accounting principal – 1) GAAP to GAAP; 2) non GAAP to GAAP
• Change in principle that is inseparable from a change in estimate
• Correction of an error
• Change in the companies included in consolidated financial statement

Question 12

Change in accounting principle that DO NOT result in emphasis of matter paragraph

3

Answer 12

• Change in accounting estimate – judgmental adjustment (e.g., changing the life of a fixed asset)
• Changes in principles with an immaterial effect (even if expected to be material in the future)
• Changes in Entity - Adoption of new principal for new transaction

Question 13

Other Circumstances at the Discretion of the Auditor AU-C706

Answer 13

• Major catastrophe that affect the entity’s financial statement
• Significant transaction to related parties
• Unusually important subsequent events

Question 14

Circumstances resulting in Modified opinions

AU-C 705

Answer 14

• Material Misstatement of financial statements – Departures from GAAP
• Inability to obtain sufficient appropriate Audit evidence – Scope limitation

Question 15

3 Types of Modified opinions

Answer 15

3 Types of Modified opinions

• Qualified Opinion: is issued in both Material Misstatement of financial statements (Departures from GAAP) and Inability to obtain sufficient appropriate Audit evidence (Scope limitation) – while material NOT pervasive - wording “expect for….”
• Adverse Opinion: is issued when Material Misstatement of financial statements (Departures from GAAP) – both Material AND pervasive - wording “because of the significance of the matter….do not present fairly the financial position “.
• Disclaimer Opinion: is issued when Inability to obtain sufficient appropriate Audit evidence (Scope limitation) – both Material AND pervasive

Question 16

Modified opinions - Traitement

Answer 16

• Include a basis for modification paragraph that describes that describes the matter giving rise to the modification
• This paragraph is placed immediately BEFORE the opinion paragraph with a Heading “Basis for ….”
• The title of the paragraph becomes “Qualified Opinion or Adverse Opinion or Disclaimer Opinion”

Question 17

Example of Departures from GAAP

Answer 17

Example of Departures from GAAP

• Principles not generally accepted
• Principles are not appropriates under the circumstances
• Information in the financial statement is not classified and summarized in reasonable matter - related-party transactions
• Financial statements do not fairly present financial position, results of operation, cash flow with a range of acceptable limite

Question 18

The materiality of the departure from GAAP will determine the type of report

Answer 18

The materiality of the departure from GAAP will determine the type of report

• NOT material → Unmodified report
• Material → Qualified Opinion
• Material AND Persuasive → Adverse Opinion

Question 19

Piecemeal Opinion

Answer 19

Piecemeal Opinion

• When an adverse opinion is being issued, an auditor may be asked to add a comment in the audit report indicating that certain identified accounts or disclosures in the financial statement are fairly presented.
• INAPPROPRIATE because overshadow or contradict the overall adverse opinion

Question 20

Omission of the statement of cash flow

Answer 20

Omission of the statement of cash flow result in:

• Qualified opinion
• Omit “cash flows” in introduction paragraph
• Basis for qualified opinion is added BEFORE the opinion explaining that the company declined to present the statement as required by GAAP
• Opinion paragraph mentions, “except that omission of Cash Flows results in an incomplete presentation”

Question 21

Type of scope Limitations:

Answer 21

Scope limitation are restrictions on the actions of the auditor

• Prevent auditor from performing procedures as planned
• May be imposed by client
• May results from 3 circumstances
  
  • Circumstances beyond the client control (e.g. records destroyed by fired)
  • Circumstances relating to timing of auditors’ work (e.g. hired too late to observe inventory)
  • Client (e.g. refuses to allow auditor to confirm receivable)

Question 22

Effect on report when auditor is not able to overcome scope limitation

Answer 22

Effect on report when auditor is not able to overcome scope limitation

• NOT material → Unmodified report
• Material → Qualified Opinion
• Material AND Persuasive → Disclaimer Opinion

Question 23

Group Financial Statements

Answer 23

• This situation arises when more than one audit firms is involved in the audit of a particular year.
• A group engagement partner who is the auditor of a parent corporation that needs to rely on the work of component auditors who audited one or more subsidiaries

Question 24

The group engagement partner and responsibility

Answer 24

The group engagement partner decides whether to take responsibility for work of component auditor

• If responsibility taken → the other auditors are not mentioned in the audit, should perform additional procedures
• If responsibility NOT taken → the other auditors are clearly mentioned in the audit: give the appropriate amount, obtain permission of other auditor to name, and present other auditor report – shared responsibility - The audit report is only modified when the group (principal) auditor does not wish to take responsibility for the component (other) auditor’s work

Question 25

Unmodified Opinion with Other-Matter Paragraphs

Answer 25

Unmodified Opinion with Other-Matter Paragraphs

• Comparative financial statement
• Other information in documents containing Audited Financial statement
• Required Supplementary Information
• Supplementary information in Relation to the Financial Statement as a Whole
• Alerts as to report Intended Use (restricting the use of an Auditor’s report)
• Additional Circumstances
• Summary of Placement of Additional Paragraph

AFTER opinion paragraph, after emphasis of matter

Question 26

Comparative Financial Statement

Answer 26

When financial statement for two or more periods are presented in comparative form, the auditor’s report applies to all of the financial statement presented

• Prior period financial statement not audited (that is, they are reviewed, compiled, or there is no CPA association) → an emphasis of matter paragraph is added
• Opinion on prior period statement different from opinion previously issued → other-matter paragraph is added
• Prior period financial statement is audited by a predecessor auditor
  
  • if predecessor do not reissued, other-matter paragraph is added: date of the report issued, audited by another auditor, the type of report issued and reason
  • If the predecessor’s audit report is reissued, the financial statements will have two audit reports—one on year 1 (predecessor’s report) and one on year 2 (successor’s report). Before reissuing the prior year’s audit report the predecessor auditor should perform limited procedures such as reading the current financial statements, comparing them to the prior period financial statements and obtaining representation letters from both the client’s management and the successor auditor. The reissued report’s date is not changed unless the report is revised (e.g., due to subsequent events).

Question 27

Other information in Audited Financial statement

Answer 27

This is financial and non-financial information (other than required supplementary information) that is included in a document (e.g. an annual report) that has audited financial statements

The Professional Standards require that an auditor read the “other information” to determine whether it is inconsistent with the financial statements

• When NO inconsistencies identified - No modification of the audit report
• When inconsistencies identified
  
  • If financial statement are incorrect → this is a departure from GAAP: qualified or adverse
  • If other information is incorrect → add an other-matter paragraph

Question 28

Auditor’s responsibility for required supplementary information that is placed outside the basis financial statements

Answer 28

AU-C 730 **requires that **

• the auditor apply limited procedures ( e.g inquire of management how information was prepared, compare information for consistency with financials, obtain written presentations of management responsibility) and
• report deficiencies in , or
• the omission of the supplementary information

→ other matter paragraph added, but opinion paragraph not modified when supplementary information is not properly presented

Question 29

Audit of financial statement prepared in accordance with special purpose financial reporting framework AU-C 800

Answer 29

The report should include an emphasis-of –matter paragraph alerting users that the financial statement are prepared in accordance with the special purpose financial reporting framework

Question 30

Special purpose financial reporting framework

Answer 30

The Professional Standards define four special purpose financial reporting frameworks: (a) cash basis, (b) tax basis, (c) regulatory basis and (d) contractual basis.

example: Financial statements following a state’s insurance statutory basis

Question 31

Review of interim Financial Statement

Answer 31

• Objective : provide accounting with a basis for communication whether he/she is aware of an material modifications that should be made to the interim financial information for it to confirm with applicable financial reporting framework e.g. GAAP
• Required for Issuer; non issuer can choose
• Procedures
  
  • Inquiries of management about the method of preparing information and
  • AP
• Auditor is required to have an understanding of IC
• Report includes limited (negative) assurance
• obtain a written representation from management
• Independent
• Compare information for consistency with (1) Management’s responses to the inquiries **(2) **The basic financial statements **(3) **Other knowledge obtained during the audit
• When dealing with the annual financial statements, omission, misstatement, or auditor inability to review the quarterly information all lead to inclusion of an emphasis-of-matter paragraph in the annual audit report. Be aware that the information is to be reviewed, not audited. Therefore, its misstatement will not lead to a qualified or an adverse opinion.

Question 32

Letter Underwriters /Comfort letters

Answer 32

• AU920 Accountants provides Letter Underwriters (comfort letters) in connections with the registration of Securities with SEC
• Date same date or just before registration statement becomes effective
• Accountant’s involvement limited to negative insurance
• Letter may include: independence of accounts, unaudited financial statement, condensed interim information, pro forma financial statement, and financial forecast
• Address to the underwriter and signed by independent auditor
• When a public company wishes to issue new securities to the public, the underwriters of the securities will generally ask the company’s auditor to provide “comfort” on the financial and accounting data in the prospectus that is not covered by an accountant’s report of some form (e.g., an audit report on the financial statements).
• In comfort letters, the CPAs will provide
  
  • positive assurance that they are independent and that their audit followed SEC standards.
  • negative assurance (or a summary of findings on various types of accounting) related matters such as the following:
    
    • unaudited summary and summarized interim information,
    • pro forma financial information,
    • change subsequent to the balance sheet date, and
    • on various tables of data.

Question 33

Attestation Engagement (ERA’s)

Answer 33

• AT101 Attestation Engagement: apply to engagement in which the CPAs are engaged to issue or do issue an examination, a review, or agreed upon procedures report on the subject matter or an assertion about subject matter, that is the responsibility of another party
• Attestation engagement – suitable and available to the user
• engagement and representation letter required
• Auditor must be independent for attestation engagement
• Unmodified attestion report may ordinarily refer to that assertion or to the subject matter to which the assertions relates - BUT when deviation from the criteria being reported upon exist → the CPA should report directly upon subject matter and NOT assertion

Question 34

Attestation Engagement Form

Answer 34

• Examination – level of service comparable to Audit; positive assurance
• Review – limited (negative) assurrance; inquiries and AP
• Agreed-upon procedure – AT 201 - agreement upon the nature of procedure – restricted use - provides a summary of procedures performed and findings NOT limited inssurance. do NOT require a written assertion

Question 35

What are the requirements for Agreed Upon Procedures?

Answer 35

• Independence is required
• Only limited use by the client is allowed
• Report the accountant’s findings
• A written assertion is not always required for an agreed-upon procedures engagement

Question 36

What is a Forecast?

Answer 36

• AT 301 - A prospective financial statement -
• Forcast based on what is expected to occcur under normal circumstances
• General and limited use allowed
• Independence is NOT required
• include a statement that prospective result may not be achieved
• Examination: adverse opinion is appropriate when significant assumption are not disclosed
• Know that a compilation report provides no assurance (again, this is also the case with financial statement compilations); an examination report provides positive assurance with respect to the reasonableness of assumptions; and an agreed-upon procedures report provides a summary of findings.
• NO review

Question 37

What is a Projection?

Answer 37

• AT- 301 - Projection A prospective financial statement using hypothetical situations - What if ?
• Only limited use meant for responsible party (management) and 1/3 whith whom the responsible party is negotiating directly
• Include a statement that prospective result may not be achieved
• NO review

Question 38

Governement reporting accordance with GAAS Audit (Generally Accepted Auditing Standards)

Answer 38

• Opinion on Financial Statement
• NO compliance report is issued
• NO IC report unless significant deficiencies have been identified

Question 39

What is a Yellow Book audit?

Answer 39

An audit performed under governmental auditing standards (GAS)

Compliance Auditing of Federal Financial Assistance Programs. A major factor causing the demand for compliance auditing is the need for accountability over the financial assistance provided by the federal government. Guidance is provided by Government Auditing Standards (GAS), also referred to as the “Yellow Book,” published by the Comptroller General of the United States (the top executive within the General Accounting Office). GAS presents what it refers to as “generally accepted government auditing standards”; the importance of GAS on the CPA exam is emphasized by its inclusion in Information for CPA Candidates as a publication that should be studied.

Question 40

How do GAS standards (Yellow book) compare to GAAS?

Answer 40

• AU-C 806
• GAS is more strict that GAAS
• Required
  
  • *Opinion on FS * (report on FS)
  • Written report on IC
  • Report on compliance with law & regulation (direct and material effect) - include all material instances of noncompliance, and all instances or indications of illegal acts which could result in criminal prosecution
  • Documentation of supervisory review before report is issued
• This requirement may be met by issuing (1) one combined report, (2) two reports (internal and compliance combined) or (3) three separate reports .

Question 41

What is required under the Single Audit Act?

Answer 41

• More extensive than GAAS and GAS
• Required AU-C 806
  
  • Opinion on FS
  • Written report on IC
  • Report on compliance with law & regulation
  • Report on Scope of audit testing on IC - GAAS and GAS don’t require it
  • Report on schedule of expenditures of federal awards

Question 42

Assertion and Criteria in Attestation engagement

Answer 42

• An assertion is a declaration about whether the subject matter is presented in accordance with certain criteria.
• A CPA should evaluate the criteria being followed. The criteria used in an attestation engagement should be suitable and available to the users.
  
  • Suitable criteria should have an appropriate combination of the following characteristics: objective, measurable, complete, and relevant.
  • In addition to meeting the requirement that they be suitable, the criteria should also be available to users. This requirement of availability actually has two parts in that not only should the criteria be available, they should be understandable to users. (1) publicly, (2) included with the subject matter or in the assertion, (3) included in the CPA’s report, (4) well understood by most users (e.g., the distance between A and B is twenty feet) or (5) available only to specified parties.
• While an attestation engagement will always have subject matter, it sometimes will not have a written assertion

Question 43

Several multiple-choice questions have required knowledge of the “circumstance for which it is not appropriate to refer a reader of an auditor’s report to a financial statement note for details.”

Answer 43

The proper answer is generally a scope limitation since details of audit scope are not presented in the financial statement notes.

Question 44

Service Organization Control (SOC) Reports

Answer 44

SOC Reports. Service organizations provide processing services to customers who decide to outsource their processing of particular data. Examples of service organizations include data centers, flexible spending account servicers, and medical claims processers.

The AICPA has established three types of examination services that result in the following three types of CPA reports on service organization controls (SOC):

• SOC 1: Restricted use reports on controls at a service organization relevant to a user entity’s internal control over financial reporting.
• SOC 2: Restricted use reports on controls at a service organization related to security, availability, processing integrity, confidentiality, and/or privacy.
• SOC 3: General use SysTrust reports related to security, availability, processing integrity, confidentiality, and/or privacy.

Question 45

Summary Financial Statements

Answer 45

Occasionally, a client-prepared document will include summary financial statements (condensed financial statements) developed from audited financial statements.

These statements typically include considerably less detail than the audited financial statements.

The CPAs who issued the report on the audited financial statements may be asked to report on the summary statements.

• Unless they have issued an adverse opinion or a disclaimer of opinion on the audited financial statements, the CPAs may accept an engagement related to the summary financial statements.
  
  • In these circumstances the CPAs determine whether the criteria applied by management in the preparation of the summary financial statements is acceptable and whether those criteria have been properly applied.

While the audited financial statements need not accompany the summary financial statements, those statements should be readily available to any user who wishes to obtain them (e.g., available on the company’s website).

When the CPAs have concluded that the summary financial information is properly presented, they issue an opinion stating that the summary financial statements are consistent, in all material respects, with the financial statements from which they have been derived, in accordance with the applied criteria.

Question 46

If the predecessor auditor’s report is not reissued, an other-matter paragraph is added to the successor auditor’s report indicating

Answer 46

If the predecessor auditor’s report is not reissued, an other-matter paragraph is added to the successor auditor’s report indicating

1. That the financial statements of the prior period were audited by a predecessor auditor.
2. The type of opinion expressed by the predecessor and, if the opinion was modified, the reasons therefor.
3. The nature of an emphasis-of-matter paragraph or other-matter paragraph included in the predecessor auditor’s report, if any.
4. The date of that report.

Question 47

The assertions embodied in MD&A include

(management discussion and analysis)

Answer 47

The assertions embodied in MD&A include

a. Occurrence
b. Consistency with financial statements
c. Completeness
d. Presentation and disclosure

MD&A is included in reports filed with the SEC (e.g.,
Form 10K and 10Q) and in annual reports sent directly to shareholders. In addition, a number of companies that do not report to the SEC prepare such information. This service allows a CPA to provide assurance (“negative assurance” for a review, and “reasonable assurance” for an examination) on a client’s MD&A.

Question 48

Segment information

Answer 48

Segment information

The auditor should obtain sufficient appropriate audit evidence on segment information in accordance with the applicable financial reporting framework by
** (1) Obtaining an understanding of the methods used by management in determining segment
information, and (a) Evaluating whether such methods are in accordance with the applicable financial reporting
framework, and (b) Where appropriate, testing the application of such methods.
** (2) Performing analytical procedures or other audit procedures appropriate in the circumstances.

NO reference need be made to the segment information when the information has been audited and is found to be adequate and in conformity with GAAP.

Question 49

Trust Services

Trust Services Principles and Criteria

Answer 49

Trust Services are designed to provide information system business assurance and advisory services that instill confidence in an organization, system, or other entity by improving the quality or context of information for decision makers.

They were developed by the AICPA’s Assurance ServicesExecutive Committee.

The CPA reports on whether the system meets one or more of the following PRINCIPLES over a particular reporting period:
1. Security. The system (infrastructure, software, people, procedures, and data) is protected against unauthorized
access (both physical and logical).
2. Availability. The system is available for operation and use as committed or agreed.
3. Processing Integrity. System processing is complete, accurate, timely and authorized.
4. Online Privacy. Private information obtained as a result of electronic commerce is collected, used, disclosed, and retained as committed or agreed.
5. Confidentiality. Information designated as confidential is protected as committed or agreed.
For each principle reported upon by the auditor, the auditor considers each of the following 4 CRITERIAS: 1).** Policies. ** The entity has defined and documented its policies relevant to the particular principle. These policies are written statements that communicate management’s intent, objectives, requirements, responsibilities, and/or standards for a particular subject.** 2). Communications.** The entity has communicated its defined policies to authorized users.3). Procedures. The entity utilizes procedures to achieve the objectives in accordance with its defined policies.** 4). Monitoring. ** The entity monitors the system and takes action to maintain compliance with its defined policies.