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Audit Test 2

QuestionAnswer
Two types of Fraud Fraudulent financial reporting. Ex Enron Misappropriation of assets- theft- employee
Material Accounting Deficiency, Not GAAP Qualified, except for
Pervasively Material Accounting Deficiency, Not GAAP Adverse
Material Auditing Deficiency, Not GAAP Qualified, except for
Pervasively Material Auditing Deficiency, Not GAAP Disclaimer
Uncertainty Not Going Concern (Audit) assumes uncertainty was properly disclosed Unmodified
Pervasively Material Uncertainty Not Going Concern (Audit) May not be able to form opinion. Disclaimer
Material Uncertainty -- Going Concern (Audit) Unmodified Emphasis of Matter Going Concern Paragraph
Pervasively Material Uncertainty--Going Concern (Audit) Disclaimer
NO Material uncertainty- Audit Unmodified Opinion
Material Uncertainty Not Going Concern (Audit) assumes uncertainty was properly disclosed Unmodified Opinion
Independent Auditor's Report; AICPA Independent in Title Addressee, Report of F/S, Mgt's Responsibiltiy for F/S, Auditor's Responsibility (GAAS, Int'l PCAOB, Gov't Opinion, Emphasis, Other matter Other Reporting Responsibilities Signature of Auditor,Auditor's Address Date of Auditor
When F/S not fairly presented Discuss with mgt/governance If not change modify opinion. Modify is not a type of opinion; it means it will be different from the standard unmodified opinion
Accounting Deficiency Material Misstatment Inappropriate GAAP, Application, Presentation Inadequate disclosure-footnotes
Auditing Deficiency Unable to obtain sufficient appropriate audit evidence
Emphasis of a Matter and Other Matter Paragraphs Emphasis Required by GAAS At CPA's Discretion matter is properly presented/disclosed in F/S and want to emphasis Fundamental to the user's understanding of the F/S
Emphasis of a Matter and Other Matter Paragraphs Other Matter Required by GAAS at the CPA's discretion Refers to matter other than those presented/disclosed in F/S Relevant to the user's understanding of the audit, CPA's responsibility or the audit report
Emphasis of a Matter and Other Matter Paragraphs Communicate to Governance its inclusion & proposed wording
Audit Report Date 1 Report not dated earlier than the date the CPA has sufficient appropriate audit evidence to support the opinion
Audit Report Date 2 Audit documentation has been reviewed F/S & disclosures have been prepared
Audit Report Date 3 Mgt has accepted responsibility for F/S & Disclosures CPA has obtained client representation letter but not until governmental body accepts them
Audit Report Date 4 Engagement partner has reviewed them
Audit Release Date Date CPA grants the entity permission to use audit report Not before CPA's firm quality control review is done CPA can never attach audit report to F/S until the audit release date
If mgt wants to change terms of audit engagement agreement without reasonable justification Withdraw communicate with corporate governance
When an item is not resolved CPA may take the following actions Infor governance Modify Audit Opinion Obtain legal advice about different actions Communicate with 3rd parties or higher authority outside the entity(owners) or governmental agency Withdraw from the audit
MGt impossed limits prior to accepting audit that would result in Disclaimeer- do not accept engagment
If audit of employee benefit plans required by law or regulation allow a disclaimer, then CPA can accept
Other scope limits by mgt, may result in qualified or disclaimer of opinion
Scope limitation restrictions imposed by circumstances beyond the control of mgt.
Consistency of F/S from 1 year to the next Change in Accounting Principle Correction of Material misstatement in previously issued F/S Change in Classification CPA would add Emphasis of matter paragraph after opinion
Change in Accounting Principle Criteria Agrees with FR Framework,Change accounted for correctly, Disclosures are adequate, Change is justified If criteria is met &it's material Add Emphasis of Matter Par If criteria not met- Modify Opinion
Other Accounting Principles Changes:Change of estimate inseparable from change in principle Treat like change in accounting principle
Other Accounting Principles Changes:Material change in investee [Investment under the equity method] Add Emphasis-of-matter¶
Other Accounting Principles Changes:Change in applying accounting principle Add Emphasis-of-matter ¶
Other Accounting Principles Changes:Change in the Reporting Entity Add Emphasis-of-matter ¶
Change in the Reporting Entity[Part 2]:Consolidate F/S instead of single entity F/S Add Emphasis-of-matter ¶
Change in the Reporting Entity[Part 2]:Change subsidiaries in the group of entities Add Emphasis-of-matter ¶
Change in the Reporting Entity[Part 2]:Change entities included in the combined F/S Add Emphasis-of-matter ¶
If creating, ending, purchasing or selling a business unit do not add Emphasis-of-matter ¶
Correction of material misstatement in previously issues F/S Add Emphasis-of-matter ¶ Refer to Footnote
Determine if change is Change in accounting principle or Correction of material misstatement in previously issued F/S If yes, Add Emphasis-of-matter ¶
Mgt. Limits Audit Scope After Start of Audit Ask mgt. to remove limit Are alternative procedures possible? If yes, do so; If not, go to governance If limitation not removed and effects could be material & pervasive Disclaim or Withdraw Communicate with governance
Limitations by Management If audit is substantially complete when limit is imposed by mgt. Disclaim or Withdraw
Limitations by Management If withdrawal is not allowed by law/reg. (e.g. audits of governmental entities) May need to include Other Matter ¶
Limitations by Management If audit almost complete, may decide to Disclaim
Fraud in a F/S Audit Misstatements Error_____ Fraud_______ error- unintentional Fraud--intentional
Fraud in a F/S Audit Two types of fraud*** Fraudulent financial reporting Misappropriation of assets - theft CPA does not make a legal determination that fraud has occurred
Responsibility of Mgt. & Corporate Governance ____________ responsibility for preventing & detecting of fraud Culture of honesty & __________ behavior ______oversight Potential for ________ override Not_________ earnings Management Primary ethical Active Management manage
Responsibility of CPA Reasonable assurance that F/S are free of ______________ misstatement Risk of Fraud> Mgt. fraud risk> Professional Skepticism material > risk of error > employee fraud risk should have this
Responsibility of CPA FRAUD Sophisticated schemes Forgery, unrecorded transactions, misrepresentation Collusion Mgt. may OVERRIDE controls
******FRAUD **** Intentional act by 1 or more individuals among mgt,, those charged with governance, employees, or 3rd parties, involving the use of deception that results in a misstatement in F/S audit
Fraud Risk Factors Events or conditions that indicate an incentive or PRESSURE to perpetrate fraud, provide an OPPORTUNITY to commit fraud, or indicate attitudes or rationalizations to JUSTIFY a fraudulent action
Fraud Triangle Need, want , pressure Opportunity-I/C Rationalization
Characteristics of Fraud Incentive Incentive Manage earnings Inflate earnings Compensation Reduce taxes Other pressures Opportunity Rationalization
Fraudulent Financial Reporting False or _______ accounting records (forgery…) Misrepresent or intention _________ of sign. info Intentional misapplication of acct. principles to $, classification, presented or disclosure Altered Omission
Fraudulent Financial Reporting _____________ override controls by Management Recording fictitious entries Omitting, advancing, or delaying recognition of events Concealing or NOT disclosing facts Structuring COMPLEX transactions to misrepresent events Altering records or terms of significant/unusual events
Fraudulent Financial Reporting Never OK to Back Date= Prison
Misappropriation of Assets Embezzling receipts- SKIMMING CASH Stealing physical ASSETS or intellectual property Causing payment for goods or services not received – fictitious vendors, kickbacks, GHOST employees
Misappropriation of Assets Using entity assets for PERSONAL use – collateral for a personal loan or loan to a related party. --Have to Disclose
CPA Requirements when if comes to Fraud(6) 1 Professional Skepticism GAAS rarely involve authentication of documents, but if reason to suspect documents are not authentic or undisclosed side agreements, then investigate further: Confirm directly with 3rd parties or Use specialist to determine authenticity
CPA Requirements when if comes to Fraud(6) 2. Discussion Among Engagement Team Brainstorming
CPA Requirements when if comes to Fraud(6) 3. Assessment Procedures Perform RISK Assessment Procedures
CPA Requirements when if comes to Fraud(6) 4. Procedure Results ANALYTICAL Procedures Results
CPA Requirements when if comes to Fraud(6) 5. Fraud Risk Factors Evaluation of Fraud Risk Factors
CPA Requirements when if comes to Fraud(6) 6. Identification & Assessment of RMM Identification & Assessment of RMM OVERALL F/S level Assertion level
Discussions with Mgt. Mgt. assessment of fraud risk, specific risks, discussed with corporate GOVERNANCE, employee ethical training, actual or SUSPECTED fraud instances
Discussions with Others in the Entity Actual or suspected fraud instances Internal auditors
Corporate Governance (6) 1. How they oversee mgt. Process of fraud assessment Internal control
Corporate Governance (6) Their VIEW of the risks of fraud
Corporate Governance (6) COMPETENCE & integrity of mgt.
Corporate Governance (6) Knowledge of actual or suspected fraud
Corporate Governance (6) Corroborate mgt. responses
Corporate Governance (6) Read the MINUTES or make inquiries
Identification & Assessment of RMM(5) Overall F/S level
Identification & Assessment of RMM(5) ASSERTION level
Identification & Assessment of RMM(5) Presumption of FRAUD in rev. recognition Sales vol. vs. production capacity Trend analysis of sales & sales returns by month during and shortly after year-end – look for undisclosed side agreements Trend analysis of sales by month with units shipped
Identification & Assessment of RMM(5) Assessed RMM due to fraud >>significant risks Understand related internal controls Design & Operating Effectiveness
Identification & Assessment of RMM(5) Assessment is ongoing thru audit
Responses to Assessed RMM***(2) 1. OVERALL 1.Assignment of personnel 2. SUPERVISION of personnel 3.Accounting policies used 4.Be UNPREDICTABLE in nature, timing, & extent of audit procedures used
Responses to Assessed RMM***(2) 2. At Assertion Level Tests of controls $ubstantive testing(MONEY)
Responses to Mgt. Override(5) Is there a Significant Risk of MGT_ Override?
Responses to Mgt. Override(5) Test journal entries in general ledger & others Adjusting entries at the end of period Entries posted directly to F/S drafts
Responses to Mgt. Override(5) Review accounting ESTIMATES Judgments, look for possible BIAS Perform retroactive review of judgments & assumptions of prior year
Responses to Mgt. Override(5) Review significant transactions OUTSIDE of normal course of business
Responses to Mgt. Override(5) Review other unusual transactions
Evaluation of Audit Evidence(3) Analytical procedure Analytical procedure of REVENUE_ thru the end of the period
Evaluation of Audit Evidence(3) If misstatement identified, consider 1.MATERIALITY 2.Mgt. / Employee integrity 3.Reliability of mgt. representations & previous ones 4.IS IT AN ISOLATED instance or more 5.Reevaluate the RMM and revise audit procedures Collusion
Evaluation of Audit Evidence(3) CPA If CPA concludes or is unable to conclude if fraud [240.37] , consider effect on audit opinion [A61 & A63], next slide
Withdraw*** -A61 and A63-65(2) See Forming an Opinion & Misstatements Identified [A61] - accounting vs. audit deficiency
Withdraw*** -A61 and A63-65 Examples of when CPA may not be able to continue audit A63-65 :(4) Appropriate remedial action not taken even when fraud is not mat to F/S RMM due to fraud & results of audit tests indicate a significant risk of mat & pervasive fraud
Withdraw*** -A61 and A63-65 Examples of when CPA may not be able to continue audit A63-65 :(4) Significant concern about competence or integrity of mgt. or corporate governance Consider Withdraw; consult legal counsel
If CPA Unable to Continue Audit(2) For identified or suspected fraud, consider Professional & legal responsibilities Duty to report to persons who engaged CPA or regulatory authorities
If CPA Unable to Continue Audit (2) Withdraw, when it is possible under law or reg. If withdraw, discuss Appropriate level of mgt & corporate governance Reasons for withdrawal Duty to report to persons who engaged CPA or regulatory authorities & reasons for withdrawal
Communicate to Corporate Governance Appropriate level of mgt. [1 level above fraud] and To corporate GOVERNANCE, fraud involving 1. MANAGEMENT 2.Those with significant roles in INTERNAL CONTROL 3.Other when fraud is material 4.Timely basis
Regulatory/Enforcement Authorities & Governmental Entities Consider communications to authorities Confidentiality responsibilities versus Legal responsibilities may override
Regulatory/Enforcement Authorities & Governmental Entities May have additional responsibilities due to 1.Laws & regs. of governmental entity or not-for-profit organization 2.Governmental audit organization’s mandate, or 3. Governmental Auditing Standards
Documentation(4) 1.Understanding of entity & its environment & assessment of RMM Understanding of entity & its environment & assessment of RMM Significant decisions on RMM in F/S Identified & Assessed RMM due to fraud at F/S level Assertion level
Documentation(4) Responses to Assessed RMM Responses to Assessed RMM Overall, audit procedures, linkage 2Results of audit procedures for mgt. override of controls
Documentation(4) Communication 3.Communication to mgt. & corporate governance
Documentation(4) CPA RMM 4.Reasons CPA concluded that RMM to due fraud in revenue recognition is overcome
Consideration of Laws & Regulations in F/S Audit Management Responsibility Responsibility of Mgt. & Corporate Governance Operations comply with laws & regulations
Consideration of Laws & Regulations in F/S Audit Responsibility of Auditor (4) Obtain reasonable assurance that F/S are free of material misstatement, due to ERROR or FRAUD
Consideration of Laws & Regulations in F/S Audit Responsibility of Auditor (4) ***Obtain evidence about laws & regs. that have a direct & material $ effect on F/S, including disclosures Tax and pension laws
Consideration of Laws & Regulations in F/S Audit Responsibility of Auditor (4) **Perform specific procedures to identify noncompliance on laws & regs., that do not have a DIRECT effect on F/S Operating license, environmental, reg. solvency requirements
Consideration of Laws & Regulations in F/S Audit Responsibility of Auditor (4) Professional skeptical, be alert for possible illegal acts
CPA’s Considerations of Laws & Regs Consider (4) Legal & regulatory framework & its compliance with that framework
CPA’s Considerations of Laws & Regs Consider (4) Laws & regs. with DIRECT& material F/S effect
CPA’s Considerations of Laws & Regs Consider (4) Perform audit procedures(5) Perform audit procedures Inquiries of mgt. & corporate GOVERNANCE_ Read MINUTES Inspect correspondences from licensing or regulatory agencies Inquire of in-house or external LEGAL counsel $ubstantive tests of detail(money)
CPA’s Considerations of Laws & Regs Consider (4) Remain alert to possibility of illegal acts
When Identify or Suspect Noncompliance (5) Obtain understanding of act: see later slide
When Identify or Suspect Noncompliance (5) Evaluate possible effects on F/S
When Identify or Suspect Noncompliance (5) Discuss withMGT(one level above)
When Identify or Suspect Noncompliance (5) If mgt. does not provide info, obtain legal advice
When Identify or Suspect Noncompliance (5) If info cannot be obtained, consider Effect on audit opinion--AUDIT Can CPA rely on WRITTEN_ mgt. representation
Reporting to Corporate Governance(3) Communicate unless matter is clearly inconsequential
Reporting to Corporate Governance(3) If noncompliance is INTENTIONAL & material, tell corporate governance as soon as possible
Reporting to Corporate Governance(3) If MGT & corporate governance are involved, go to next higher level if it exists. If no high level, obtain legal advice
Effect on Audit Report (2) 1.If material effect on F/S & not corrected in F/S Material-Qualified or Pervasively Material- Adverse opinion [Paragraphs 8 & 9 of the proposed SAS Modifications to the Opinion in the Independent Auditor’s Report]
Effect on Audit Report (2) 2.If CPA unable to determine noncompliance due to limitations imposed by the client Accounting Disclaimer of opinion or Withdraw [Paragraphs 11-14 of the proposed SAS Modifications to the Opinion in the Independent Auditor’s Report]
If identified or suspected noncompliance with laws & regulations Determine if CPA has a responsibility to report it to parties outside the entity See governmental auditing
Application: Management Policies To Prevent & Detect Noncompliance With Laws & Regs.(8) Monitor LEGAL requirements Internal control system Code of CONDUCT Training employees to understand code Monitoring compliance & disciplining violators Engage LAWYERS to monitor legal requirements
Application: Management Policies To Prevent & Detect Noncompliance With Laws & Regs.(8) Maintain LOG of laws & regs. and record of complaints Larger entity Internal audit Audit committee Legal function Compliance function
CPA Understands Legal & Regulatory Framework(4) Legal, regulatory, & other EXTERNAL factors Update Laws & regs.
CPA Understands Legal & Regulatory Framework(4) Inquire of mgt. Laws & regs. affecting OPERATIONS Policy & procedures on COMPLIANCE, including prevention of noncompliance Policy on identifying & accounting for LIGATION claims Use of directives & reporting by mgt. on compliance
Laws with Direct & Material F/S Effect(6) Form & content of F/S (Are there statutorily-mandated requirements) Industry-specific reporting issues Accounting for transactions under government contracts (may affect revenue that can be accrued)
Laws with Direct & Material F/S Effect(6) Accrual or recognition of INCOME TAXES Accrual or recognition of PENSION COST Noncompliance may result in FINE, litigation, or other factors which may affect the accounting for illegal acts or disclosures
Indications of Noncompliance with Other Laws & Regs. (not Direct) (4) Operational license may be revoked Could be going concern issue for the entity May need to DISCLOSE contingent liabilities Correspondence with REGULARTORY agencies
Indications of Noncompliance with Other Laws & Regs. (not Direct) (4) Other laws: Environmental protection Securities trading Occupational safety & health Food & drug administration Equal employment Price-fixing or other antitrust violation
Noncompliance Learned by CPA From Other Audit Procedures(6) Reading the MINUTES Inquiries of MGT Inquiries of in-house LEGAL counsel
Noncompliance Learned by CPA From Other Audit Procedures(6) Inquiries of external legal counsel on litigation, claims & assessment Performing $ubstantive tests of details of Class of transactions Account balances or Disclosure
Noncompliance Learned by CPA From Other Audit Procedures(6) WRITTEN representation from mgt.
Indicator of Noncompliance(13) Investigations by reg. agency/govt. depts. or reports of ______________ Payment of fines or penalties Payments for UNSPECIFIED services
Indicator of Noncompliance(13) LOANS to consultants, related parties, government officials/employees Excessive sales commissions or agent’s fees Purchases significantly above or below market prices
Indicator of Noncompliance(13) Unusual PAYMENT[cashier checks payable to bearer, transfers to numbered bank accounts] Unusual transactions to companies in _TAX HAVENS Payments made to a country that was not the originating country
Indicator of Noncompliance(13) Unauthorized transaction or improperly recorded transactions Info system fails WITHOUT_ adequate audit trail/evidence Failure to file TAX returns or pay government duties/fees Adverse media comment
Obtain Understanding of Identified or Suspected Act of Noncompliance Procedures(4) Examine SUPPORTING documents: invoices, cancelled checks, agreements & compare to accounting records Confirm significant info with 3RD parties (bank, lawyers)
Obtain Understanding of Identified or Suspected Act of Noncompliance Procedures(4 Determine if it was properly AUTHORIZED Consider if other similar ones have occurred & audit them
Matters Relevant to CPA’s Evaluation(4) $QUANTATIVE effect of noncompliance Fines, penalties, damages, threats of expropriation of assets, enforced discontinued operations, litigation
Matters Relevant to CPA’s Evaluation(4) QualitativeMATERIALITY_ of noncompliance Illegal payment leading to material contingent liability or material loss of revenue
Matters Relevant to CPA’s Evaluation(4) Accrual or DISCLOSURE requirements(Accounting) Serious enough to question F/S ‘presents fairly’ or are misleading (Qualified or Adverse)
Audit Procedures(2) Discuss findings with corporate GOVERNANCE
Audit Procedures(2) If still not sufficient information, discuss Entity’s in-house LEGAL counsel Entity’s external legal counsel Possibly of FRAUD Possible F/S effects If not satisfied with the above, consult CPA’s legal counsel & further action (Withdraw)- NO OPINION
CPA’s Evaluation of Implications of Noncompliance(5) Relations of perpetrator to INTERNAL CONTROLS Level of MGT/employee involved
CPA’s Evaluation of Implications of Noncompliance(5) If entity does not take appropriate remedial action even for ones that are not material Consider withdrawing Seek legal advice If withdrawing is not allowed under applicable law or reg., consider describing noncompliance in audit report
CPA’s Evaluation of Implications of Noncompliance(5) Reliability of WRITTEN representation from mgt. Consider if CPA should continuing association with the entity
Describe Act to Corporate Governance(4) Describe the act or suspected act Circumstances of its occurrence Effect on F/S If they do not want to know about inconsequential ones, do not report those
Modification of Audit Opinion on F/S Present Modified Opinion to client Refusal by client to accept modified opinion WITHDRAW when possible under law or reg. Indicate reason in writing to corporate governance Have client sign Disengagement Letter Always
Reporting Noncompliance to Regulatory & Enforcement Authorities(3) Consider if confidentiality precludes CPA from reporting it Legal responsibilities can vary by jurisdiction
Reporting Noncompliance to Regulatory & Enforcement Authorities(3) Duty to notify outside parties may exist 1.PREDECESSOR auditor 2.Court order 3.Compliance for entities receiving GOVERNMENTAL financial assistance 4.Discuss with CPA’s legal counsel first
Subsequent Events(2) After B/S date but PRIOR to audit report date
Subsequent Events(2) Type I, “recognized subsequent events”(3) Provides additional evidence to conditions existing at the B/S date & affect ESTIMATES in F/S
Subsequent Events(2) Type I, “recognized subsequent events”(3) Adjust for any changes in estimates: Dr. & Cr. Examples: Loss on uncollectable A/Rec. from typical bankruptcy Realization of assets or settlement of estimated liabilities
Examples of Subsequent Events Bankruptcy allowance doubtful accounts AR Plane crash 6 people died before year end Before Balance date(Lawyers Settle Case) Dr. Cash Cr Loss
Subsequent Events: Type II(2) Type II, “Nonrecognized subsequent events” Provides additional evidence to conditions not existing at the B/S date & affect estimates in F/S Do not adjust, may need DISCLOSURES Happening after year end
Subsequent Events: Type II Examples Loss on uncollectible A/Rec. from customer fire/flood occurring after B/S date Sale of bond or capital stock issue Purchase of a business Settlement of litigation when event giving rise to claim took place after the B/S date Loss on client’s plant
Auditing procedures in subsequent period to learn of subsequent events Obtain understanding of mgt.’s procedures to identify subsequent events Read INTERIM F/S; compare to year-end F/S
Auditing procedures in subsequent period to learn of subsequent events Inquire of mgt. & governance regarding: Substantial CONTINGENT liabilities Any significant changes in capital stock, LTD Current status of items accounted for on a TENATIVE basis Any UNUSUAL adjustments
Auditing procedures in subsequent period to learn of subsequent events Read MINUTES of B of D meetings; make inquiries if none Inquire of legal counsel about litigation, claims & assessments Obtain letter of REPRESENTATION_ as of audit report date
Subsequent Discovered Facts Known After the Report Release Date This section does not apply to 2 situations if: Item arose after the audit report date Item was disclosed in F/S or audit report
Subsequent Discovered Facts Known After the Report Release Date, continued If Subsequent Discovered Facts become known after the Report Release Date Discuss with mgt. & _________________
Subsequent Discovered Facts Known After the Report Release Date, continued Determine if F/S need revision(2) If Subsequent Discovered Facts become known after the Report Release Date If mgt. revises F/S Date report the later date & extend subsequent events procedures Can DEAL date the report
Subsequent Discovered Facts Known After the Report Release Date, continued Determine if F/S need revision(2) Request WRITTEN mgt. representation as of new date Mgt. informs 3rd parties of situation.If not, tell governance If client refuses, to revise
Mgt. Does Not Revise F/S (2) If F/S have not been given to 3rd parties yet Notify mgt. & governance not to make F/S available before revisions are made & that new report on revised F/S Describe nature of item & its effects on F/S If old F/S given to 3rd parties, see next item [560.17b]
Mgt. Does Not Revise F/S If F/S have been given to 3rd parties, make sure that client promptly informs 3rd parties that F/S cannot be relied upon [17b] If mgt. does not, then CPA notifies mgt. & governance that CPA will seek to prevent future reliance on audit reports
Mgt. Does Not Revise F/S If F/S have been given to 3rd parties, make sure that client promptly informs 3rd parties that F/S cannot be relied upon [17b] CPA seeks legal counsel Notify client that audit report must not be associated with F/S, and Notify regulatory agencies that audit report cannot be relied on, and Notify users relying on F/S or SEC that report cannot be relied on.
CPA’s Opinion on Revised F/S Differs from Opinion Previously Expressed due to Sub. Disc. Facts Predecessor auditor REISSUES the opinion on prior year Read CURRENT F/S Compares F/S to PRIOR year F/S Inquires of MGT Obtain letter of representation from successor auditor
CPA’s Opinion on Revised F/S Differs from Opinion Previously Expressed due to Sub. Disc. Facts Use Emphasis ¶ or Other Matter ¶ 1.Date of previous report 2.Type of opinion given 3.Reasons for different opinion 4..That opinion on revised F/S is different
Litigation, Claims, & Assessments [LCA] [AUC 501] PROCEDURES Inquire of mgt. regarding LCA Obtain description & evaluation from mgt. Review MINUTES Review LEGAL expenses & invoices Talk to in-house legal counsel-- Remember eployees Obtain Letter of Inquiry from external legal counsel- maybe more than 1
Litigation, Claims, & Assessments [LCA] [AUC 501] Actual or potential litigation [LCA] Period of underlying CAUSE Probability of unfavorable outcome Range of LOSS
Attorney’s Letter of Inquiry [AUC501.16-24](5) Mgt. lists pending or threatened MATERIAL litigation, claims, & assessments that the lawyer has devoted substantive attention or have their lawyers do so
Attorney’s Letter of Inquiry [AUC501.16-24](5) List describes: Nature of matter, progress to date, action company will take Evaluation of likelihood of unfavorable outcome &, if possible, an estimate of loss Any omissions or a statement that list is complete
Attorney’s Letter of Inquiry [AUC501.16-24](5) Confirm agreement with MGTS list Comment if response is limited Lawyer give effective date of the response. COINCIDES WITH AUDIT REPORT
Attorney’s Letter & Opinion If lawyer can’t respond to likelihood of unfavorable outcome or range of loss due to inherent uncertainty [A57] Modify opinion as a scope limitation-AUDIT
Legal counsel refuses to respond & CPA cannot obtain evidence through alternative audit procedures Modify opinion QUALITY OR DISCLAIM
Mgt. refuses to give CPA permission to communicate or meet with entity’s external legal counsel If mgt. limits scope & CPA cannot obtain evidence by alternative procedures & effect is material & pervasive OPINION Disclaim or Withdraw, when practicable
Using the Work of a Auditor’s Specialist [AUC620](5) SPECIALIST one with special skill in a field other than accounting or auditing (actuaries, appraisers, ...)
Using the Work of a Auditor’s Specialist [AUC620](5) CPA CPA is solely responsible for the audit opinion
Using the Work of a Auditor’s Specialist [AUC620](5) Evaluate specialist’s COMPETNECE, capabilities, and objectivity (any relationships that may compromise objectivity) Understand the field of expertise of specialist so that CPA can evaluate ADEQUENCY of the work for the audit purposes
Using the Work of a Auditor’s Specialist [AUC620](5) Obtain agreement on Nature, scope, objectives of the work Respective roles & responsibilities of specialist & CPA, Nature, timing, & extent of communication such as the form of report, Specialist need to observe confidentiality
Evaluate Adequacy of the Work of Specialist(3) Evaluate adequacy of the work for the audit purposes Relevance & reasonableness of ASSUMPTIONS (do the #s make sense Relevance and reasonable of the findings & their consistency with other audit evidence
Evaluate Adequacy of the Work of Specialist(3) If work of specialist is not adequate Agree on further work to be performed by specialist CPA perform additional procedures as appropriate
Evaluate Adequacy of the Work of Specialist(3) Effect on Audit Opinion If audit report is unmodified, do not refer to specialist Refer to specialist in a modified opinion [findings disagree] This does not reduce the CPA’s responsibility for the audit opinion Audit Modified not clean
Other Information in Documents Containing Audited F/S [AUC720] SAS 118 Other information is financial and nonfinancial (other than F/S) in document containing ________ F/S & audit report excluding required supplemental information [Example: Annual reports]
Other Information in Documents Containing Audited F/S [AUC720] SAS 118 CPA'S REPONISIBILITY Read it, no obligation to audit it Look for Material Inconsistencies between other info & F/S(gray area) Look for Material Misstatement of Fact (Fraud)
Other Information in Documents Containing Audited F/S [AUC720] SAS 118 MATERIAL INCONSISTENCY – conflicts with information in F/S. May raise doubt about audit conclusion or audit opinion.
Other Information in Documents Containing Audited F/S [AUC720] SAS 118 MISSTATEMENT OF FACT Other info, unrelated to matters appearing the audited F/S, that is incorrectly stated or presented. Material misstatement may undermine the credibility of the document containing audited F/S.(Faud)
Other Information Requirements Read it, no obligation to audit it Communicate with GOVERNANCE CPA’s responsibility on other information Does not cover Press releases Info in analyst briefings Info on company’s WEBSITE
Other Info. - May Disclaim in Explanatory ¶ Not required to reference other information in audit report on F/S
May Disclaim in Explanatory ¶ in F/S audit report (1) Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole.
May Disclaim in Explanatory ¶ in F/S audit report(2) The (identify the other information) is presented for purposes of additional analysis and is not a required part of the basic financial statements.
May Disclaim in Explanatory ¶ in F/S audit report(3) Such information has not been subjected to the auditing procedures applied in the audit of the basic financial statements, and, accordingly, we do not express an opinion or provide any assurance in it.
Other Info. - Materially Inconsistency known prior to report release date MATERIALLY INCONSISTENCY known prior to report release date MATERIALLY INCONSISTENCY known prior to report release date If yes, ask client to REVISE Other Information If client refuses to revise, modify audit opinion*
Other Info. - Materially Inconsistency known prior to report release date Communicate to GOVERNANCE and 1.*Include emphasis paragraph in the audit report describing material inconsistency [AU508.11] or 2.Withhold use of CPA’s report in the document, or 3.Withdraw from the engagement if possible under law/reg.
Other Info. - Material Inconsistency Know After Report Release Date Go to Subsequent Discovered Facts If mgt. agrees to make revision, go to prior slide If mgt. does not revise Communicate with governance Take any further appropriate action; Consult your legal counsel as to further action
Other Info. - Material Misstatement of Fact Discuss with mgt. Request mgt. to consult with qualified 3rd party (legal counsel) & consider the advice given
Other Info. - Material Misstatement of Fact IF MGT REFUSES TO CORRECT Notify governance Take any further appropriate action Advice from CPA’s legal counsel
Other Info. - Material Misstatement of Fact If mgt. refuses to correct Withhold audit report if not release yet or Withdraw from the engagement
Written Representations From Management AUC580(3) Required to obtain written representation from: Management and Where appropriate, corporate GOVERNANCE
Written Representations From Management AUC580(3) Written Representations are audit evidence Do not provide sufficient appropriate evidence COMPLEMENT other audit procedures
Written Representations From Management AUC580(3) Materiality, individually or in the aggregate Reach understanding with MGT May be DIFFERENT for different representations May be explicit in letter, either $ or qualitative Some items do not have materiality, such as mgt. responsibility for F/S & I/C
Content of Management Letter(12) 1.Responsible for fair presentation of F/S 2.Responsible for designing & maintaining internal controls for F/S, whether due to fraud and error
Content of Management Letter(12) 3.Provided all relevant information & access needed 4.All transactions are recorded and in F/S
Content of Management Letter(12) Fraud - Management 5.Fraud - Management A.Responsible for I/C to prevent and detect fraud B.Areas where RMM are from fraud
Content of Management Letter(12) Fraud - Management C.Fraud or suspected fraud by management, employees with significant I/C role, and others where fraud could be material to F/S D. Any allegations of fraud or suspected affecting F/S by employees, former employees, regulators, or others.
Content of Management Letter(12) 6.All identified or suspected noncompliance with laws and regulations. 7.Mgt. believes that the effects of uncorrected misstatements are immaterial either individually or in the aggregate
Content of Management Letter(12) 8.All know actual or possible litigation and claims All transactions are recorded it the F/S 9.Significant assumptions in accounting estimates are reasonable
Content of Management Letter(12) 10.All related parties, transactions, and relationship & that they are properly accounted for and disclosed 11.All subsequent events that require adjustment or disclosure 12.Others in A18-A22 and A 29
Date of Written Representations Letter -Dated as of the date of the audit report -Occasionally, mgt. can’t sign by audit report date ---CPA can accept mgt.’s oral confirmation ---Need signed letter PRIOR to audit report release date Letter may need to be updated for SUBSEQUENT events
Written Representation Letter must be signed by CEO and CFO that they told you everything
Doubt About Written Representations(3) If concerns over mgt.’s integrity, COMPETENCE, or diligence, consider its effect On the reliability of mgt.’s representations (oral or written) and audit evidence in general
Doubt About Written Representations(3) If representations are INCONSISTENT with other audit evidence
Doubt About Written Representations(3) If representations are INCONSISTENT with other audit evidence If representations are INCONSISTENT with other audit evidence a.Perform audit procedures to resolve the matter bIf still unresolved, reconsider mgt.’s integrity, competence, or diligence to determine reliability of mgt.’s representations (oral or written) and audit evidence in general
Doubt About Written Representations(3) If representations are not reliable, consider effect on audit opinion, see next slide.
Written Representations About Mgt.’s Responsibilities -If sufficient doubt exists about the integrity of mgt. so that representations are not reliable Disclaim or withdraw
Written Representations About Mgt.’s Responsibilities If mgt. does not provide written representations required Disclaim or withdraw
Entity’s Ability to Continue as a Going Concern (SAS) [AU570] Consider if substantial doubt about going concern for reasonable period of time: 1 year after date F/S are issued or available
Going Concern When conditions & events in the aggregate indicate that it is probable that the entity will be unable to meet its obligactions as they become due within one year after the date that the F/S are issued (or available to be issued).
Obtain information on whether there is substantial doubts Mgt. evaluates going concern every year Analytical Procedures Review of Subsequent events Compliance with loan agreements - (must pay off loan) Minutes Legal counsel inquiries Confirmation with third parties providing financial support
Going Concern Issues (4) Look for: Negative trends Other indications: dividend ARREARS restructure DEBT
Going Concern Issues (4) Internal matters economic DEPENDENCY Dependent on foreign country for raw material labor problems -- strikes
Going Concern Issues (4) External matters loss of franchise loss of customer uninsured
Look at _____________ plans to mitigate such effects Going Concern Look at MGT plans to mitigate such effects Dispose assets Borrow money Delay expenditures -- like R&D Increase ownership
Going Concern Assess likelihood that such plans can be SUCCESSFUL
Going Concern Does substantial doubt exist? No Consider the need for disclosure of mgt. plans
Going Concern Does substantial doubt exist? Yes Unmodified opinion with going concern explanatory paragraph ¶ After the opinion paragraph With phrases “substantial doubt” and “going concern” Material GC
Going Concern Does substantial doubt exist? Yes Or disclaimer: ¶ goes before disclaimer paragraph & with phrases “substantial doubt” and “going concern” Pervasive GC
Created by: jpforstall