CPA Review - Auditing (A1)

  1. What is an Audit?
    The objective of the auditor's examination is to express an opinion on the financial statements.
  2. Audit Repsonsiblities
    Company's Management = Financial Statements

    Auditor = Expression of Opinion
  3. What is the purpose of an audit?
    The audit reports gives "creditability" to the financial statements.
  4. Generally Accepted Auditing Standards (GAAS)
    The auditor is responsible for the performance of a properly planned and executed audit. Compliance with GAAS is required on all audit engagements.
  5. The Public Company Accounting Oversight Board (PCAOB)
    PCAOB establishes auditing and related professional practice standards to be used in the prepartion and issuance of audit reports for "ISSUERS" (Public Company)
  6. What are the ten standards of GAAS?
    • Training
    • Indendence
    • Professional Care

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

    • Accounting = GAAP
    • Consistency
    • Disclosure
    • Opinion
  7. What are the General Standards of GAAS?
    • "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"
  8. What is the "cool off period" under SOX?
    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.
  9. What are the Fieldwork Standards of GAAS?
    • "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.
  10. Does weak internal controls mean adverse opinion?
    No, weak internal controls = more evidence (work) needed NOT an adverse opinion.
  11. What are the Reporting Standards of GAAS?
    • "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.
  12. What is contained in an Introduction Paragraph UNQUALIFIED OPINION Report?

    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
  13. What is contained in a Scope Paragraph UNQUALIFIED OPINION Report?

    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.
  14. What is the report date for an UNQUALIFIED OPINION Report?
    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.
  15. Unqualified Opnion (Reporting on a Single Financial Statement)
    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
  16. PCAOB Standards for Audits of Issuers
    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..."
  17. Standards for Audits of Nonissuers
    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..."
  18. Which paragraphs of an auditors standard report on F/S should refer to GAAS and GAAP?
    • GAAS ------> Scope
    • GAAP ------> Opinion
  19. What are different types of Opinions?
    • 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
  20. What is Management Responsibilities concerning Uncertainity?
    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
  21. GAAP = Questionable
    GAAS = Problem
    Qualified or Disclaimer
  22. GAAP = Problem
    GAAS = OK
    Qualified or Adverse
  23. What situations require an auditor to Modify the standard Unqualified Opinion?
    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...
  24. When the principal auditor decides to mention the work done by other auditors, the report will express a division of responsibility.
    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
  25. Assumption of Responsibility (no reference to other CPA)
    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
  26. Report change resulting from Necessary/JUSTIFIED Departure from GAAP
    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
  27. Procedures for examining Going Concern
    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
  28. Based on procedures preformed while examining Going Concern the audit looks for "FINE" Conditions and Events
    • 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
  29. For Going Concern: Explanatory Paragraph AFTER Opinion Paragraph
    The explanary paragraph must include "substanial doubt" and "going concern"

    DO NOT say "for one year"

    This is a Modified Unqualified Opinion
  30. Items to Emphasize (Emphasis of a Matter)

    Emphasize when company is a "RECC"
    • 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
  31. Lack of Consistency (Accepted/Justified Changes in Accounting Principal)
    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
  32. Non-GAAP change in Accounting Principal
    An explanatory paragraph should appear BEFORE the opinion paragraph and "except for" in the opinion paragraph.

    Not GAAP = Unacceptable/Unjustified = Qualified or Adverse
  33. Inadequate Disclosures
    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
  34. Unnecessary Departure from GAAP
    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
  35. Unreasonable Accounting Estimates
    (no estimate for warrenties)
    Qualified/"Except for" or Adverse Opinion

    When an adverse opinion an explanatory paragraph should precede the opinion paragraph.
  36. Uncertainty or Scope Limitation

    Uncertainty - auditor unable to obtain sufficient audit evidence to support managements assertions.

    Scope limitation - unable to complete the audit fully.
    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.
  37. Lack of Independence / Unaudited
    Always a Disclaimer.

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

    The auditor must however read F/S for obvious errors.
  38. Disclaimer of Opinion Report
    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..."
  39. Reporting with Different Opinions
    • Intro - Same
    • Scope - Same

    Explanatory (middle) = describe problem

    Opinion - "In our opinion, except described in the preceding paragraph, the F/S..."
  40. Updating (Changing) Prior Opinions

    Only "DORCS" change their minds
    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 " different."
  41. Report of a predecessor auditor - Presented
    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
  42. Report of a Predecessor Auditor - Not Present
    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.
  43. Subsequent Events - events that occur after the balance sheet date, but before the Financial Statements are issued.
    • 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
  44. Auditor's Responsibility for Subsequent Events

    Auditor must "PRIME" for subsequent events
    • 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
  45. Responsibility AFTER the Original Date of Audit Report
    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.
  46. Report Date
    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!
  47. Subsequent Discovery of Facts existing at the Date the auditors issued the report (WE MISSED IT)
    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
  48. If Client refuses to follow procedures for subsequent discoveries (we missed) "DAR" them
    • Steps to prevent further reliance:
    • Disaddociate
    • Alert agencies
    • Relaying parties
  49. Omitted Audit Procedures discovered after submission of the audit report
    • 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
  50. Required Supplementary Information
    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?
  51. Opinion NOT REQUIRED on 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
  52. Auditor-Submitted Documents (ASD)
    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.
  53. Condensed Financial Statements

    Auditor must indicate:
    • 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.
  54. Selected Financial Date (SFD)
    The auditor must indicate whether the SFD is fairly stated.
  55. Reporting on Financial Statements prepared for Use in Other Countries

    The auditor should obtain an understanding of, and written management representations regarding, the purpose and uses of the Statements.
    • 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: " 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.
Card Set
CPA Review - Auditing (A1)
Review for CPA Exam - Auditing, Section A1