Audit Final Exam Review Questions PDF

1. List the procedures an auditor might use to search for unrecorded liabilities a. obtain a listing of payments made after the balance sheet date up to the current date b. select items to test and obtain supporting documents for the payment c. review the documents to...

1. List the procedures an auditor might use to search for unrecorded liabilities a. obtain a listing of payments made after the balance sheet date up to the current date b. select items to test and obtain supporting documents for the payment c. review the documents to determine which time period the liability should have been recorded based on service or shipment date d. determine if the liability was properly recorded in the correct period e. review unpaid/open invoices at fieldwork for the same 2. Discuss how an auditor might audit inventory costing a. Inventory price testing i. obtaining a detailed listing of inventory and select a sample for testing ii. for sample selected, obtain original purchase documents to verify cost of inventory item iii. recalculate average cost in inventory and compare to the cost shown on the inventory listing iv. Recalculate finished goods costs by assessing labor and overhead components as necessary 3. List the procedures that the auditor should perform during the count of the entity’s physical inventory a. the auditor should i. scrutinize the care with which client employees are following the inventory plan ii. observe that all merchandise is counted once and only once. If the inventory is tagged, no items should be double tagged iii. determine the electronic count media, pre numbered inventory tags, or compilation sheets are properly controlled iv. perform some test counts and trace quantities to final count 1. direction of testing matters - sheet to floor vs floor to sheet v. be alert for empty containers and hollow squares (empty spaces) that may exist when goods are stacked in sold formations vi. identify the last receiving and shipping documents used and determine that goods received during the count are properly segregated vii. watch for damaged and obsolete inventory items and evaluate the general condition of the inventory viii. inquire of employees about the existence of slow moving inventory items ix. ensure consignment inventory is properly separated and marked b. should also i. count locations outside the entity or confirm with those locations ii. examine consignment contracts or agreements 4. List the major items on a bank reconciliation and discuss how an auditor might go about testing the bank reconciliation and its various items a. Major items: i. outstanding checks  ii. deposits in transits iii. cash receipts iv. cash disbursements b. procedures i. foot the reconciliation and outstanding check listing ii. trace balances per book to general ledger iii. obtain bank confirmation and trace balance per bank to bank reconciliation iv. obtain cutoff bank statement v. trace deposit in transit, outstanding checks and other reconciling items to cutoff bank statement 5. How are the audits of cash, revenue, and purchases/payables related? a. Cash balances are affected by internal controls related to cash receipts and cash disbursements b. Controls over cash receipts and cash disbursements are tested as part of testing controls in the revenue process and the purchasing process 6. How are the audits of inventory, revenue and purchases/payables related? a. Inventory is affected by internal controls related to purchases and revenue sales b. Tracing documentation of transactions that decrease inventory balances such as sales provides evidence for existence, valuations, and accuracy assertions c. Helps determine that entries were recorded and entered at correct amounts 7. What information does the auditor ask the attorneys to provide related to pending or threatened litigation? a. Existence of uncertainties arising from litigation b. time period in which the cause for legal action occurred c. the probability of an unfavorable outcome for the client d. an estimate for potential loss 8. What are the types of subsequent events relevant to financial statement audits? a. type 1; event that provides evidence of conditions that existed at the date of the financial statements i. requires an adjustment to financial statements b. type 2: event that provides evidence of conditions that arose after the date of the financial statements i. no adjustments 9. Why does an auditor obtain a representation letter from management, who signs the letter, and when is it obtained? a. To corroborate significant oral representations made by management during the audit b. Serves as evidence for some issues but cannot be sole source of evidence for everything  c. Obtained right at completion of date d. Signed by whoever is in charge of financial reporting at the organization (CEO, CFO, chair of audit committee) 10. What types of procedures are performed near the end of the audit/at the completion stage? a. final analytical procedures b. re evaluate materiality c. re evaluate risk assessment i. audit risks based on audit findings (inherent, control, fraud risk) d. consider indications of fraud e. review corrected and uncorrected misstatements i. factual, judgmental, projected misstatements ii. any quantitative and qualitative factors from effect of uncorrected misstatements f. consider going concerns g. final work paper review h. quality control review i. obtain management representation letter j. issue report k. required communication with management l. issue management comment letter 11. What are the situations that cause an auditor to modify its opinion on the financial statements to something other than unqualified or unmodified? How does materiality and pervasiveness impact the opinion rendered? i. Scope limitation: results from an inability to obtain sufficient appropriate evidence about something on financial statements 1. issue a qualified opinion or disclaimer ii. not in conformity with GAAP: results when FS are materially affected by a departure from GAAP 1. issue a qualified opinion or adverse opinion iii. auditor not independent: results when auditor has some form of prohibited relationship with entity 1. issue a disclaimer b. Pervasiveness i. As materiality increases, auditor must judge the effect of the item on the financial statements overall ii. pervasive effects on FS 1. not confined to specific elements, accounts, or items on FS 2. if so confined, represent or could represent a substantial portion of the financial statements 3. with regard to disclosures, are fundamental to users understandings of FS iii. requires lots of auditor judgment  12. What are the major sections of the audit report (private company) and what are the differences between the private and public company reports a. Major sections i. title - must include the term independent ii. address iii. opinion section iv. basis for opinion paragraph v. management’s responsibility paragraph vi. signature vii. date b. Differences c. clean opinion for PCAOB - unqualified and ASB - unmodified d. ASB audit report is called independent auditors report e. ASB report has no reference to ICFR f. critical audit matters is required in PCAOB (public) and ASB (private) is voluntary Actg 460 Final Exam Study Guide This exam will be approximately 20 multiple choice questions (2 pts each), matching, and approximately 6 written answer questions of varying lengths and point values. This exam will be Closed Book/Note. It will be administered on Canvas using a lockdown browser. Chapter 11 The basic flow of the revenue/AR process o Step 1: initial audit planning ▪ understand the client’s revenue process transactions and balances understand entity and its environment conduct analytical procedures ▪ Assess inherent risk associated with revenue process assertions o Step 2: understand internal controls and determine preliminary audit strategy ▪ understand client controls entity level controls flow of transactions identify WCGW and related controls  ▪ evaluate internal controls for credit sales, cash receipts, sale adjustments, and AR ▪ do you plan to perform tests of controls yes go to step 3 if no go to step 4 o Step 3: test controls based on preliminary audit strategy ▪ Perform tests of controls at interim date ▪ Do tests of controls indicate that controls are effective if yes or no go to step 4 o Step 4: determine and perform substantive procedures ▪ if yes - substantive procedures nature: determine procedures based on moderate to low risk of material misstatement timing: interim and year end extent: less extensive based on moderate to low RMM ▪ if no - substantive procedures nature: determine procedures based on high to maximum RM timing: year end extent; more extensive based on high to maximum RMM ▪ collect and evaluate evidence o Step 5: draw conclusion about fair presentation ▪ Of transactions, balances, and disclosures areas where revenue can be manipulated o consignment sales o rights and returns o bill and hold transactions Key controls over the revenue process and the cash receipts process o Revenue process ▪ initiating credit sales only a limited number of individuals can change the customer master file, and all file changes are reviewed by appropriate levels of management software matches the customer on the sales order with the customer master file software matches amount of sales order with credit authorization on the customer master file appropriate level of regular review of ales analysis and comparison with budgets ▪ delivering goods Software matches all goods pulled from inventory to approved sales order the software generates packing slip and delivery documentation when order is processed software prints a report of all unfilled sales orders ▪ recording sales  the software prints a report of all goods shipped but not billed invoices are pre numbered and accounted for software prints a report of all bills of lading not matched with sales invoice software matches sale invoice information with underlying shipping information software matches sales invoices date with accounting period in which goods are shipped software matches sales invoice quantities with shipping information and prices with master price list o cash receipts process ▪ receiving and depositing cash Electronic funds transfer directly to bank or establish a lockbox arrangement with the bank the client’s software application can recalculate cash discounts taken by customers ▪ Cash received by client use of cash registers or point of sale devices immediate preparation of pre list of mail receipts, restrictive endorsement of checks immediately upon receipt independent check of agreement of remittance advices with pre list of cash received ▪ Cash deposited by the client independent check of agreement of pre list of cash receipts or bank remittance report with validated deposit split ▪ Recording cash receipts software agreement of amounts journalized and posted with the pre list of cash receipts or bank remittance report preparation of periodic independent bank reconciliations mailing of monthly statements to customers Different assertions and what they mean to the revenue/AR process o Occurrence ▪ all revenue and cash receipt transactions and events that have been recorded have occurred and pertain to the entity o completeness ▪ all revenue and cash receipt transactions and events that should have been recorded have been recorded o authorization ▪ all revenue and cash receipts transactions and events are properly authorized o accuracy ▪ amounts and other data relating to recorded revenue and cash receipt transactions and events have been recorded appropriately o cutoff ▪ all revenue and cash receipt transactions and events have been recorded in the correct account period  o classification ▪ all revenue and cash receipts transactions and events have been recorded in the proper accounts What types of tests can we do to audit these assertions (focus on the primary tests that we discussed in class) o occurrence ▪ testing of a sample of sales invoices for the presence of authorized customer orders and shipping document ▪ observation and evaluation of segregation of duties ▪ review and test procedures for numerical sequence of sales invoices ▪ review and test procedures for mailing and handling complains about monthly statements o Completeness ▪ tracing of a sample of shipping documents to their respective sales invoices and to the sales journal ▪ review and test procedures for numerical sequence of sales invoices and shipping documents ▪ testing a sample of daily reconciliations ▪ examination of open order file for unfilled orders o authorization ▪ review of client’s procedures for granting credit ▪ examination of sales orders for evidence of proper credit approval ▪ comparison of prices and terms on sales invoices to authorized price list and terms of trade o accuracy ▪ examination of sales invoices for evidence that client personnel verified accuracy ▪ Recomputation of the information of a sample of sales invoices ▪ examination of reconciliation of sales invoices to daily sales report, entries to sales journal with entries to subsidiary ledger ▪ review of reconciliation of subsidiary ledger to general ledger control account o cutoff ▪ comparison of the dates on sales invoices with the dates of the relevant shipping documents ▪ comparison of the dates on sales invoices with the dates they were recorded in the sales journal o classification ▪ review of sales journal and general ledger for proper classification ▪ examination of sales invoices for proper classification The accounts receivable confirmation process o Why do we do it ▪ confirmations are the primary source of evidence in testing the existence assertion for accounts receivable ▪ gain an understanding that AR is correct o What assertions  ▪ existence, accuracy, valuation and allocation o How do we do it ▪ direct communication between client’s customer and the auditor ▪ auditor should mail the confirmation requests outside the entity’s facilities ▪ a record maintained of the confirmations mailed and those returned ▪ positive confirmations - must response whether it is incorrect or correct o Alternative procedures if no reply (order in preference) ▪ examination of specific subsequent cash receipts ▪ examination of shipping documentation ▪ examination of other client documentation tests of sales cutoff o must always do o look at a sample of population of invoices o pick items from before year end and after year end o getting shipping document o look at the date to assume in right accounting period Chapter 12 The basic flow of the purchases/payables process o same thing as revenue but understand the client’s purchasing process instead o evaluate internal controls for purchases, cash disbursements, purchase adjustments, and accounts payable Different assertions and what they mean to the purchasing/AP process o occurrence ▪ all purchase and cash disbursement transactions and events that have been recorded or disclosed have occurred and such transactions and events pertain to the entity o completeness ▪ all purchase and cash disbursement transactions and events that should have been recorded have been recorded and all related disclosures that should have been included in the financial statements have been included o authorization ▪ all purchase and cash disbursement transactions and events have been properly authorized o accuracy ▪ amounts and other data relating to recorded purchase and cash disbursement transactions and events have been recorded appropriately and related disclosures have been appropriately measured and described o cutoff ▪ purchase and cash disbursement transactions and events have been recorded in the correct accounting period o classification ▪ all purchase and cash disbursement transactions and events have been recorded in the proper accounts o presentation  ▪ all purchase and cash disbursements transactions and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework What types of tests can we do to audit these assertions (focus on the primary tests that we discussed in class) o occurrence ▪ match daily vouchers with receiving report to ensure purchase vouchers is supported by the receiving report ▪ report generated of any purchases not supported by documentation of receiving goods o completeness ▪ match daily vouchers to receiving report that results in voucher o authorization ▪ Review approval signatures on purchase orders o accuracy ▪ compare quantities and prices of vouchers with receiving report ▪ mathematical accuracy of voucher o cutoff ▪ compares the date on the voucher with date on underlying receiving report o classification ▪ Software compares information in cash disbursements journal with related voucher information procurement fraud risks include o fake vendors o fictitious invoices o personal purchases using company’s funds o kickbacks ▪ illegal payment as a reward for helping them get a deal or contract o bid rigging ▪ bid to do audit with company and someone in company help you win the bid and they get the money o duplicate payments/product substitution Common controls within the purchasing process o authorizing purchases ▪ only a limited number of individuals can change the vendor master file ▪ duties are segregated from receiving goods or recording transactions ▪ Software determines individuals who have authority to initiate a purchase ▪ purchases can only be made from approved vendors o receiving goods ▪ software matches all goods received to the approved purchase order o recording purchases ▪ Software prints a report of goods received that have not resulted in voucher ▪ software matches voucher and vendor invoice information with the receiving report  ▪ software matches the voucher date with the accounting period in which goods are received ▪ software matches voucher quantities with receiving information and prices with the purchase order Approach for auditing accrued liabilities vs accounts payable o accrued liabilities ▪ must be tested different than accounts payable ▪ typically an estimate ▪ not always evidenced by supporting documentation ▪ some may require specialists Search for unrecorded liabilities o Why do we do it ▪ to detect significant unrecorded obligations at the balance sheet date o What assertions ▪ completeness assertion for accounts payable o How do we do it ▪ obtain a listing of payments made after the balance sheet date up to the current date ▪ select items to test and obtain supporting documents for the payment ▪ review the documents to determine which time period the liability should have been recorded based on service or shipment date ▪ determine of the liability was properly recorded in the correct period ▪ review unpaid/open invoices at fieldwork for the same Chapter 13 Understand the bank reconciliation, how it is prepared, why it is a major control over cash and how the auditors test it o How it is prepared: ▪ balance per bank + deposits in transit - outstanding checks = balance per books ▪ books - fees - nsf +/- adjustments = balance per books o Why it is a major control over cash ▪ easy way to identify fraud/theft of cash ▪ Segregation of duties o How auditors test it ▪ Compare ending bank balance in books with the balance confirmed on the bank confirmation form Testing of cash is often coupled with testing of cash receipts for revenue and receivables process and testing of cash disbursements for the expense and payable process – be familiar with the controls for these areas as well o Cash receipts ▪ occurrence Vouch a sample of entries in the cash receipts journal to remittance advices, daily deposit splits and bank statements ▪ completeness  trace a sample of remittance advices to cash receipts journal and if necessary to deposit splits ▪ authorization for a sample of days, examine the signature on the deposit split and the check endorsements for proper authorization ▪ accuracy for a sample of daily deposits, foot the remittance advices and entries on the deposit slip and agree to the cash receipts journal and bank statement for a sample of weeks, foot the cash receipts journal and agree posting to the general ledger ▪ cutoff compare the dates for recording a sample of cash receipts transactions in the cash receipts journal with the dates the cash was deposited in the bank observe cash on hand for the last day of the year, and trace deposits to cash receipts journal and cutoff bank statement ▪ classification examine a sample of remittance advices for proper account classification o cash disbursements ▪ occurrence vouch a sample of entries from the cash disbursements journal to cancelled checks, voucher packet, and bank statement ▪ Completeness trace a sample of cancelled checks to the cash disbursements journal ▪ authorization examine a sample of cancelled checks for authorized signature and proper endorsement ▪ accuracy for a sample of voucher packets, agree amounts in purchase order, receiving report, invoice, cancelled check, and disbursement journal for a sample of weeks, foot the cash disbursements journal and agree posting to the general ledger ▪ cutoff compare the dates for a sample of checks with the dates the checks cleared the bank record the last check issued on the last day of the year, and trace to cash disbursements journal ▪ classification examine a sample of cancelled checks for proper account classification Other substantive tests that can be performed on cash o Perform analytical procedures  o Compare cash balances with budgeted amounts, prior years balances or other expected amounts o perform cash cutoff tests o confirm cash balances and loan balances with banks o proof of cash o lapping vs kiting o tests of details of presentation and disclosure The bank confirmation, why we use it, what it does, limitations, what the auditor has to control about the process o why we use it ▪ to verify balances, transactions, errors and use for cutoff testing o what does it do ▪ requests sent by auditors to a client’s financial institution to confirm specific details about client’s bank account ▪ third party confirmation best possible evidence o limitations ▪ reliability ▪ possibility of fraud o what the auditor has to control about the process ▪ Control over sending the confirmation request to bank and receiving the response directly from the bank What is a cutoff bank statement and what is it used for? o cutoff bank statement: a bank statement for the period subsequent to the date of the balance sheet o used to verify cutoff testing o used to trace a sample for all checks in the prior year to the outstanding checks listed on the bank reconciliation o vouch a sample of deposits in transit on the bank reconciliation to deposits on the cutoff statement o scan the cutoff statement and enclosed data for unusual items Different fraud related testing we can do o Proof of cash ▪ when fraud risk is high ▪ reconciles the ending balance of cash ▪ reconciles cash receipt transactions between accounting records and the bank and the cash disbursement transactions between the accounting records and the bank o Tests for lapping and kiting ▪ lapping Cash is stolen before it is recorded on company’s books Payment from one customer and move money around to each customer so no customer gets a notice covering the cash shortage by applying cash receipts from other customer accounts and eventually through write off accounts do this to hide skimming (cash/cash receipts stolen) ▪ kitting  Cash is stolen after recorded on company’s book transferring funds between accounts and recording improperly on books will record on one side in one year and the other side in another transferring money between different bank accounts and fluffing up the end amount since it is split between two periods Major functions and key segregation of duties within the inventory management process o physical controls over inventory o regular independent comparison of perpetual records with actual inventory o regular count of physical inventory for comparison with perpetual records o costs compared with recent purchases o key assertions ▪ existence, valuation, rights and obligations, completeness Major controls within the inventory process and ways to test those controls o cycle counts ▪ existence assertion ▪ client identifies small portion of items in the perpetual inventory, counts actual inventory and investigates any discrepancies ▪ counts different portions of inventory on a rotating basis instead of just at the end of the year o Regularly conducts review of obsolete inventory or slow moving inventory ▪ valuation assertion o comparing physical counts to perpetual records ▪ completeness assertion o having strong controls over consignment inventory ▪ rights and obligations Substantive procedures commonly used to test inventory and the related assertions o Inventory price testing ▪ obtaining a detailed listing of inventory and select a sample for testing ▪ for sample selected, obtain original purchase documents to verify cost of inventory item ▪ recalculate average cost in inventory and compare to the cost shown on the inventory listing ▪ reclaulte finished goods costs by assessing labor and overhead components as necessary Be able to discuss the process of the inventory observation o Including different things that the auditor must do/observe before and during the count o Inventory taking plans ▪ Plan or list of introductions of physical inventory count o the auditor should ▪ scrutinize the care with which client employees are following the inventory plan ▪ observe that all merchandise is counted once and only once. If the inventory is tagged, no items should be double tagged  ▪ determine the electronic count media, pre numbered inventory tags, or compilation sheets are properly controlled ▪ perform some test counts and trace quantities to final count direction of testing matters - sheet to floor vs floor to sheet ▪ be alert for empty containers and hollow squares (empty spaces) that may exist when goods are stacked in sold formations ▪ identify the last receiving and shipping documents used and determine that goods received during the count are properly segregated ▪ watch for damaged and obsolete inventory items and evaluate the general condition of the inventory ▪ inquire of employees about the existence of slow moving inventory items ▪ ensure consignment inventory is properly separated and marked o should also ▪ count locations outside the entity or confirm with those locations ▪ examine consignment contracts or agreements Chapter 14 Contingent liabilities: what are they, how and when does an auditor test for them o What they are: ▪ existing condition or set of circumstances involving uncertainty as to possible loss that will ultimately be resolved when some future event occurs or fails to occur ▪ probably: future event likely to occur Must be on financial statements as a liability and disclosed ▪ reasonably possible: chances of future event occurring is more than remote but less than likely Should disclose it ▪ remote: the chance of future event occurring is slight o examples ▪ pending to threatened litigation ▪ actual or possible claims and assessments ▪ income tax disputes ▪ product warranties or defects ▪ guarantees of obligations to others ▪ agreements to repurchase receivables that have been sold o When tests for them ▪ read minutes of meetings of board of directors, committees of the board, and stockholders ▪ review contracts, loan agreements, leases, and correspondence from government agencies ▪ review tax returns, IRS reports, and schedules supporting the entity’s income tax liability ▪ confirms or otherwise document guarantees and letters of credit ▪ inspect other documents for possible guarantees or other similar arrangements o how to tests for them  ▪ inquire with management about contingent liabilities or commitments ▪ review correspondence with and invoices from attorneys ▪ obtain a legal letter ▪ obtain a management representation letter Legal letters: who do we send to, why, when, what is their purpose o Who: sent to all attorneys the client paid for legal services o Why: attorneys cannot talk about a client's case to anyone without permission from the client. Signing the legal letter gives attorneys permission to talk with the auditor o legal letter: audit inquiry sent to all attorneys to obtain information about litigation, assessments, and claims o when: sent about midway through the completion of the year end fieldwork o Purpose: gather evidence regarding ▪ existence of uncertainties arising from litigation, claims, and assessments ▪ time period in which the cause for legal action occurred ▪ the probability of an unfavorable outcome for the client ▪ an estimate of the potential loss Subsequent events: different types, how we audit for them o type 1; event that provides evidence of conditions that existed at the date of the financial statements ▪ requires an adjustment to financial statements o type 2: event that provides evidence of conditions that arose after the date of the financial statements ▪ no adjustments but disclose if important as a whole ▪ Example: purchase of another company at end of year o How we audit for them ▪ obtain an understanding of how management identifies subsequent events ▪ inquiring with management ▪ reading the minutes of manager meetings and or board of directors meetings ▪ reading the client's subsequent interim financial statements and other data such as budgets and cash flow forecasts ▪ scanning manually or use of generalized audit software, sales and receipt journals and or other accounting records relating to transactions ▪ inquiring of the client's legal counsel regarding litigation, claims, and assessments Steps in the final evaluation process for an audit (ie. Procedures we must do at the very end of the audit) o final analytical procedures o re evaluate materiality o re evaluate risk assessment ▪ audit risks based on audit findings (inherent, control, fraud risk) o consider indications of fraud o review corrected and uncorrected misstatements ▪ factual, judgmental, projected misstatements  ▪ any quantitative and qualitative factors from effect of uncorrected misstatements o consider going concerns o final work paper review o quality control review o obtain management representation letter o issue report o required communication with management o issue management comment letter Management representation letter: What is on it, why do we get it, when do we get it, dating considerations o Purpose: to corroborate significant oral representations made by management during the audit o Management represent to us those issues in writing at the end of the audit o serve as evidence for some issues but cannot be the sole source of evidence for everything o When do we get it: right at completion of audit ▪ date of management representation letter is the date of the financial statements ▪ signed by whoever is in charge of financial reporting at the organization (CFO, CEO, chair of audit committee) o What is on it: ▪ client letterhead ▪ date ▪ address ▪ identification of audit ▪ materiality ▪ list of items that management is confirming ▪ subsequent events statement ▪ signatures Process of analyzing for going concern o Going concern assumption: requires management to make an assessment of the entity’s ability to continue as a going concern, entity, (survive) for the future period of one year beyond the issuance date of the financial statements o also whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time ▪ Must be disclosed in FS and paragraph on audit report o procedures ▪ 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  Communications to those charged with governance o any identifications of material noncompliance with laws and regulations must be communicated o critical accounting policies and practices and critical accounting estimates must also be communicated (PCAOB) o findings ▪ appropriateness of significant accounting policies ▪ process used by management to develop estimates ▪ difficulties during audits ▪ disagreements with management ▪ Corrected and uncorrected misstatements ▪ business conditions affecting the entity ▪ consultations with other accountants ▪ written representation the auditors are requesting Chapter 15 Different types of audit reports and why we would issue one vs. the other o standard unmodified audit report ▪ private company o standard unqualified audit report ▪ public company o differences ▪ clean opinion for PCAOB - unqualified and ASB - unmodified ▪ ASB audit report is called independent auditors report ▪ ASB report has no reference to ICFR ▪ critical audit matters is required in PCAOB (public) and ASB (private) is voluntary The elements of the standard audit report (PCAOB and ASB) o ASB ▪ title - must include the term independent ▪ address ▪ opinion section ▪ basis for opinion paragraph ▪ management’s responsibility paragraph ▪ signature ▪ date o PCAOB ▪ title - must include the terms registered and independent ▪ address ▪ opinion paragraph ▪ paragraph referencing the audit of internal control ▪ basis for opinion paragraph states responsibilities and references registration with PCAOB and adherence to independence requirements of SEC ▪ scope paragraph  ▪ critical audit matters ▪ signature ▪ date ▪ auditor tenure Modifications to the standard report (explanatory or emphasis of matter paragraphs, other matter paragraphs) – why do we use them, what do we use them for, where do they go on the report o emphasis of matter paragraph ▪ additional paragraph of circumstances that arise that requires auditor to add explanatory language o Where do they go ▪ placed after the basis for opinion paragraph in the standard unmodified report o Examples ▪ going concern ▪ emphasis added at discretion of auditor uncertainties related to future outcome of litigation or regulatory action major disasters material transactions with related parties significant subsequent events ▪ financial statements are not consistent change in accounting principle change in reporting entity correct of a misstatement in financial statements ▪ opinion based in part on the report of another auditor (group audit) How we treat scope limitations, GAAP departures and independence issues for audit reports o Scope limitation: results from an inability to obtain sufficient appropriate evidence about something on financial statements ▪ issue a qualified opinion or disclaimer o not in conformity with GAAP: results when FS are materially affected by a departure from GAAP ▪ issue a qualified opinion or adverse opinion o auditor not independent: results when auditor has some form of prohibited relationship with entity ▪ issue a disclaimer Pervasiveness o As materiality increases, auditor must judge the effect of the item on the financial statements overall o pervasive effects on FS ▪ not confined to specific elements, accounts, or items on FS ▪ if so confined, represent or could represent a substantial portion of the financial statements ▪ with regard to disclosures, are fundamental to users understandings of FS o requires lots of auditor judgment  The auditor’s responsibility for other documents containing the financial statements o no responsibility beyond financial information in report and has no obligation to perform any audit procedures to corroborate other information o auditor required to read other information and consider whether it is consistent with information contained in audited financial statements Elements of the standard report in ICFR - public o title: must include terms registered and independent o address o opinion paragraph o paragraph referencing financial statement audit ▪ references to auditors report o Basis for opinion paragraph ▪ responsibilities, references registration with PCAOB, adherence to independence requirements of SEC o scope paragraph ▪ process of conducting an audit of the effectiveness of ICFR and PCAOB standards were followed o definition and inherent limitations paragraphs ▪ defines concept of ICFR and inherent limitations of ICFR o signature o date Difference between a compilation and a review engagement and how they differ from an audit o Level of assurance ▪ No level of assurance - compilation ▪ limited level of assurance - review ▪ reasonable level of assurance - audit o compilation ▪ common for small private companies who don’t have financial reporting expertise or software to make FS ▪ uses client source documents ▪ no substantive testing or analytical procedures ▪ not an assurance or attestation services o review engagement ▪ attest engagement performed on FS of a private client ▪ performs analytical procedures and any necessary inquiries of management ▪ no substantive testing