Chapter 15/16
List the 5 Presentation and Disclosure Audit Objective
Presentation and Disclosure Audit Objectives
Occurrence and rights and obligations
Completeness
Classification
Accuracy
Valuation
What are the 6 audit procedures related to going concern?
Audit procedures related to going concern
Analytical procedures during risk assessment
Review of subsequent events
Review of compliance with terms of debt and loan agreements
Reading of minutes of meetings with stockholders, board of directors, and other important committees of the board
Inquiry of client’s legal counsel
Confirmation with related parties and third parties of the details of arrangements to provide or maintain financial support
What are the 4 categories of specific matters that should be included in the management representation letter?
Financial statements
Completeness of information
Recognition, measurement and disclosure
Subsequent events
Consistency Issue or Comparability Issue?
1) Require an additional paragraph
2)Do not need to be included in the audit report
Consistency issues require an additional paragraph
Comparability issues do not need to be included in the audit report
What is the difference between probably, reasonably possible, and remote?
Probable: the future event is likely to occur
Reasonably possible: the changes of the future event occurring is more than remote but less than probable
Remote: the chance of the future event occurring is slight
The final analytical procedures are intended to corroborate......
The final analytical procedures are intended to corroborate audit evidence obtain during the audit and to confirm the financial statements are consistent with the auditor’s revised expectations based on evidence evaluated during the audit
What are the 4 types of audit reports? Define them
Clean or unqualified report
Auditors conclude that the financial statements present its affairs fairly in all material respects
Business complied with GAAP and statutory requirements
Qualified report
When there is either a limitation of scope in the auditor’s work, or when there is a disagreement with management regarding application, acceptability or adequacy of accounting policies
Adverse or negative report
When the auditor issues an opinion that the financial statement does not show the true and fair view of the state of affairs of the business
Disclaimer report
Means no opinion is being given regarding the financial statements of a client
An Other Matters paragraph is required when....
An other matters paragraph is required in the following circumstances
The auditor includes an alert in the audit report that restrict the use of the auditor’s report
Subsequently discovered facts lead to a change in the audit opinion (emphasis of matter or other matters paragraph)
The financial statements of the prior period were audited by a predecessor auditor and the predecessor’s audit report is not reissued
When the auditor chooses to report to supplementary information it the auditor’s report rather than a separate report
The auditor identified a material inconsistency in the other information that is included in the document containing the audited financial statements
What is the difference between a type 1 and 2 event? What do they each require?
Type I Event
Conditions existed before the balance sheet date and affect estimated that are part of financial statements
Require adjustment of the financial statements
Type II Event
Conditions did not exist at the balance sheet date and do not affect the accuracy of the financial statements
Require disclosure and possibility pro forma financial statements
What are the 3 categories of classified misstatements
Factual (known) misstatements are misstatements that are known with certainty
Judgmental (likely) misstatements typically involve accounting estimated in which uncertainty is a factor
Projected (likely) misstatements are the result of audit sampling
What are the 3 departures from an unqualified/unmodified opinion?
Material scope limitation
Material departure from GAAP
Lack of independence
An explanatory paragraph is required in the following circumstances...
An explanatory paragraph is required in the following circumstances:
Substantial doubt about the entity ability to continue as a going concern
There has been a material change between periods in accounting principles or in their method of application
A material misstatement in previously issued financial statements has been corrected
Other information in a document containing audited financial statements is materially inconsistent with information appearing in the financial statements
Selected quarterly financial data required by SEC S-K has been omitted or has not been reviewed
The auditor performs an integrated audit and issues separate reports on the company’s financial statements and internal controls over financial reporting
Management is required to report on the company’s internal controls over financial reporting but such report is not required to be audited
What are the 2 categories of audit procedures for subsequent events
Procedures normally integrated as a part of the verification of year-end account balances. This includes cutoff and valuation done as part of the tests of detail of balances
Procedures performed specifically for the purpose of discovering events or transactions that must be recognized as subsequent events. This includes
What are the 3 purposes of the client letter?
The three purposes of the client letter of representation are
To impress upon management its responsibility for the assertions in the financial statements
To remind management of potential misstatements or omissions in the financial statements
To document the responses from management to inquiries about various aspects of the audit
When is an additional paragraph used (aka what type of opinion needs to be issued)?
What is this additional paragraph really called?
There are certain situations when the auditor issues an unmodified or unqualified opinion but may include an additional paragraph in the report to draw attention to important information that is already presented or disclosed in the financial statements
This additional paragraph is called an emphasis-of-matter paragraph. The emphasis-of-matter paragraph is placed after the opinion paragraph in the standards unmodified report
3 services related to financial statements are... (what type of service is it/is it not)
Preparation of financial statements
Not an assurance or attest service
Compilation of financial statements
Considered an attest service because the accountant issues a report
Review of financial statements
An attest engagement in which a CPA issues a limited assurance report
Auditors ______ responsibility to perform audit procedures to identify going concern issues beyond the time period evaluated by management
do not have
What do written representations complement? Do they provide sufficient appropriate evidence on its own for any matters discussed in the letter?
Although written representation by management provides necessary audit evidence, it complements other audit procedures and does NOT provide sufficient appropriate audit evidence on its own for any matters discussed in the letter
When is an emphasis of matter paragraph required?
An emphasis of matter paragraph is required in the following circumstances:
Substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time
A justified change in accounting principle that has a material effect on the entity’s financial statements
Subsequently discovered facts lead to a change in the audit opinion (emphasis of matter or other matter paragraph)
The financial statements are prepared in accordance with an applicable special purpose framework