CPA Review - Auditing (A1)

The objective of the auditor's examination is to express an opinion on the financial statements.

Company's Management = Financial Statements

Auditor = Expression of Opinion

The audit reports gives "creditability" to the financial statements.

The auditor is responsible for the performance of a properly planned and executed audit. Compliance with GAAS is required on all audit engagements.

PCAOB establishes auditing and related professional practice standards to be used in the prepartion and issuance of audit reports for "ISSUERS" (Public Company)

• Training
• Indendence
• Professional Care

• Planning and Supervision
• Internal Control, Entity & Environment
• Evidence

• Accounting = GAAP
• Consistency
• Disclosure
• Opinion

• "TIP"
• Training: auditor must have adequate technical training
• Indendence: auditor must be independent in Fact and Appearance
• Professional Care: auditor must exercise due professional care in planning and preformance of the audit and preparation of the report. "Professional Sketipicism"

An accounting firm may not provide audit services to a public company if a top official of that company is also a previous employee of the accounting firm who worked on the audit during the last year.

• "PIE"
• Planning and Supervision: auditor must adequately plan the work and must properly supervise any assistants.

Internal Controls, Entity & Environment: Auditor must obtain a sufficient understand of the entity and its envirnoment including internal controls, to assess the risk of material misstatement of the financial statements.

Evidence: Auditor must obtain sufficient appropiate audit evidence.

No, weak internal controls = more evidence (work) needed NOT an adverse opinion.

• "ACDO"
• Accounting = GAAP: Auditor MUST state F/S arepresented in accordance with GAAP

Consistency: Auditor must identify in the report those circumstances in which such principles have not been consistentlys observed in current period in relation to those of prior periods. Silence is ok!

Disclosure: When auditor determines that information disclosures are not reasonable adequate, the auditor MUST so state in the report.

Express Opinion: Auditor must express an opinion regarding the F/S, taken as a whole, or state that an opinion cannot be expressed.

"RAPMEAN-RAPMEAN"

1. Statement that the F/S were audited

• 2. Statement that the F/S are the responsibilty of management &
• Auditor's responsibilty is to express an opinion

"RAPMEAN-RAPMEAN"

1. Statement that Audit was conducted in Accordance with GAAP

2. Statement that the audit was Planned & Performmed to obtain reasonable assurance that the F/S are free from Material Mistatement

3. Statement that audit included Examining Evidence on a test basis; Assessing the Accounting Principals used and significant estimates Made by Management; and evaluating the over presentation.

4. Statement that audit provides a Reasonable basis for an opinion.

Report should be dated on or after the date on which appropiate audit evidence, sufficient to support the opinion, has been obtained.

FINAL Date of AUDITOR Responsibility.

Only state "we have audited the accompanying balance sheet of X Company as of December 31, 20XX" remove and the related statements of income, retained earnings, and cash flows

PCAOB Auditing Standard No. 1 REQUIRES the auditor report to include a reference to the standards of Public Company Accounting Oversight Board (United States)

"We conducted our audits in accordance with the standards of the Publich Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit..."

An Auditor may (but is NOT Required to) conduct the audit of a nonissuer in accordance with both GAAP and PCAOB.

"We conducted our audits in accordance with generally accepted auditing standards as established by the Auditing Standards Board (United States) and in accordance with the auditing standards of the Publich Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit..."

• GAAS ------> Scope
• GAAP ------> Opinion

• 1. Unqualified (Clean) Opinion
• - Explanatory Language (Modified Unqualified Opinion)

2. Qualified Opinion (Except For) - Material GAAS or GAAP Problem

3. Adverse Opinion - Very Material GAAP problem

4. Disclaimer of Opinion - Significant GAAS Problem

Management must:

• a. Estimate the effect of future events on the F/S and record and present this estimate or
• b. Determine that a reasonable estimate cannot be be made and make the required disclosures to that effect

• Under GAAP if:
• Probably and Reasonably Estimable ---> Record
• Probable but not reasonable estimated ---> Disclose

Qualified or Disclaimer

Qualified or Adverse

1. Modified Wording - auditors opinion is based in part on the report of another auditor.

2. Explanatory Paragraph - departure from GAAP, Going Concern, lack of consistency, etc...

It will be mentioned in all 3 paragraphs.

Intro - "We did not audit the....Those statements were audited by other auditors"

Scope - " and the report of other auditors"

Opinion - "and the report of other auditors"

This is a Modified Unqualified Opinion

Additional Investigation of the Other Auditor Step:

• Treat just like your staff and examine:
• - Repuation
• - Independence
• - Profession Competency
• - Program Steps (review and discuss)

This is a Modified Unqualified Opinion

Explanatory Paragraph will be added and should contain a description of the departurem its approzimate effects and the reason why adherence to GAAP would make F/S missleading

This is a Modified Unqualified Opinion

Auditor "ADMITS" Going Concern

• Analytical procedures
• Debt compliance: review terms of debt and loan agreements
• Minutes: review
• Inquiry of client's legal counsel
• Third parties: confirm details of financial support arrangements
• Subsequent events review

• Financial difficulties: loan defaults, dividend arrearages, disposal of sustanital assets
• Internal matters: work staopage, sugnificant dependence on one project, Negative trends: recurrent losses, negative cash flow, adverse ratios
• External Matters: legal procedings, new legistalation, loss of license/patent

The explanary paragraph must include "substanial doubt" and "going concern"

DO NOT say "for one year"

This is a Modified Unqualified Opinion

• 1. A Related-party transaction
• 2. A significant subsesquent Event
• 3. The entitiy is a Component of a larger business
• 4. Accounting matters that affect the Comparability of the F/S

Explanatory Paragraph may precede OR follow the opinion paragraph.

This is a Modified Unqualified Opinion

If change in GAAP between accounting perios and effect is material, auditor must add explanatory paragraph AFTER the opinion paragraph.

This is a Modified Unqualified Opinion

An explanatory paragraph should appear BEFORE the opinion paragraph and "except for" in the opinion paragraph.

Not GAAP = Unacceptable/Unjustified = Qualified or Adverse

F/S must include adequate disclosure of all material matters (GAAP)

Missing information is disclosed in an explanatory paragraph BEFORE the opinion paragraph and "except for" in the opinion paragraph.

This is a Qualified or Adverse Opinion

Consider the departure from GAAP

• Material = Qualified / "Except for"
• Very Material = Adverse
• Explanatory paragraph stating new basis does not conform with GAAP BEFORE the opinion paragraph and "except for" in the opinion paragraph.

Justified GAAP departure = Modified Unqualified

Qualified/"Except for" or Adverse Opinion

When an adverse opinion an explanatory paragraph should precede the opinion paragraph.

Management Letter is REQUIRED, if not = scope limitation

Qualified (Except For) or Adverse Opinion

For Qualified - Explanatory paragraph preceding the opinion paragraph and "except for" in the scope and opinion paragraph.

Always a Disclaimer.

• No Title
• No Intro
• No Scope
• Opinion - "We are not independent..."

The auditor must however read F/S for obvious errors.

Intro - use words "we were engage to audit" and delete auditor's responsibility

Scope - OMITTED

Explanatory - reason for disclaimer

Opinion - disclaimer = "we do not express..."

• Intro - Same
• Scope - Same

Explanatory (middle) = describe problem

Opinion - "In our opinion, except for.....as described in the preceding paragraph, the F/S..."

Format of explanatory paragraph (preceding opinion paragraph)

• Date of Auditor's previous report
• Opinion previsionly issued
• Reason for prior opinion
• Changes that occured
• Statement that the "opinion...is different."

Prior CPA should:

• 1. Read statements for current period
• 2. Compare statements audited with current period statements
• 3. Obtain letter of representation from successor auditor
• 4. Obtain letter of representation from mgmt

Use original report date when unrevised or Dual Date when Revised

Current CPA should indicate in introduction paragraph:

• 1. Statements were examined by other auditors in prior periods
• 2. Date of predecessor auditor's report
• 3. Type of opinion expressed
• 4. Substantive reasones for other than unqualified report.

• Type I Events - conditions existing on or BEFORE the balance sheet date
• * Requires a F/S adjustment

• Type II Events - conditions existing AFTER the balance sheet date
• * May require footnote disclosure

• Post balance sheet transactions: review for proper cutoff
• Representation Letter: obtained
• Inquiry: contingent liabilities, change in capital stock, usual adjustments
• Minutes
• Examine latest interim F/S and compare with F/S under audit

Audit has NO active responsibility to make any inquiries or to perform any further auditing procedures to discover subsequent events after date of auditor's report. However, if become aware of any information (relating to subsequent event) auditor should consider if adjustment to F/S is needed.

Dual Date: January 21, 20X2, except for Note 2, as which the date is February 3, 20X2

May use one date however this will extend the auditor's responsibility for ALL subsequent events to this date!

Auditor should advise client to immediate disclose the new information and its impact on the F/S to any persons relying on the F/S.

• Done by:
• 1. Advise client to issue revised F/S describing reason for revision
• 2. Advise client to make necessary disclosures and revisions to any imminent F/S
• 3. If effect on F/S cannot be determined in timely basis, provide notification that F/S and report should not be relied on

• Steps to prevent further reliance:
• Disaddociate
• Alert agencies
• Relaying parties

• 1. Determine if other audit procedure compensate
• 2. Promptly undertake to apply the omitted audit procedures (better late than never)
• 3. If affects auditor's report ---> act as subsequent discovery of facts

Auditor performs LIMITED PROCEDURES on supplementary information:

• - inquire of managment how prepared (including significant assumptions)
• - determine if consistent with mgmt responses, audited F/S and other knowledge
• - should client rep letter refer to supplementary information?

Not require to audit supplementary information however report should be expanded in situations which:

• 1. Supplementary information is omitted
• 2. Information not in compliance with GAAP
• 3. Not able to complete required procedures
• 4. Substantial doubt about conformance of required information

When an auditor submits a document containing audited F/S to a client or others, the auditor has responsibilty to report on ALL information in the document.

Must indicate in the report whether the accompanying information is fairly stated in all material respects.

• 1. Auditor audited and expressed an opinion on the complete financial statements.
• 2. The date of the auditor's report on complete F/S
• 3. They type of opinion expressed
• 4. whether information in condensed F/S is fairly stated, in all material material respect, in relations to the F/S from which it has been derived.

The auditor must indicate whether the SFD is fairly stated.

• Distribution OUTSIDE US ONLY use:
• a. the report of the other country OR
• b. a US style report modified to report on the accounting principles of another country.

- Intro: "...on the basis of accounting generally accepted in (Country)."

- Scope: "We conducted our audit in accordance with standards generally accepted in the United States and in (Country)."

- Opinion: "...in conformity with accounting generally principles accepted in (Country)."

More than Limited Distribution within the US: the auditor's report should be the US standard report modified as appropiate for departure from US GAAP.