Auditing Standards
A. GAAS : Mandatory on all audit engagement Note: AICPA's ASB - SAS for non-issuer.
Measures the quality of auditor's performance
B. GAGAS: Government org, programs, activities and entities that received govt funds.
C. PCAOB (establish by SOX 2002): required when auditing issuer company and is subject to
rules of the SEC. Need to register with PCAOB to audit issuers company.
D. ISA or IFAC: International Standards for auditing.
Other Engagement Standards:
A. SSAE: Attestation Engagement
B. SSARS: For non-issuer not seeking audited statements.
Other Guidelines:
A. AICPA Professional Conduct
B. Standards of Quality Control
C. SOX 2002
A1.1 : Audit Reports
Auditor's responsibility is to expressed opinion on F/S.
The adoption of appropriate accounting policies is an implicit reponsibility of
Management.
The auditor may draft the F/S based on infor provided by management -> Compilation.
Auditors may make suggestion about entity's internal control without imparing Independence.
US GAAP: encompass the conventions, rules, and procedures to define US accepted accounting
practice at a particular time (IFRS is another one).
AICPA: SAS - performance of F/S audit not govern accounting principles. General Guidance
provided by SAS is authorative rules governing audit (non-issuer, for issuer: PCAOB).
Auditor must obtain sufficient appropriate Audit Evidence!
A1.2 : Audit Reports
Auditors are generally required to follow guidance provided by SAS and are required to be
able to justify any departures.
Auditor must conduct audit in accordance:
Non-issuer: ASB Standards
Issuer: PCAOB standards
Audit should be plan and perform with Professional Skepticism because the is a risk of
material misstatement.
Professional Skepticism example:
Using 3rd party confirmation to provide support on management representation.
Obtaining corroboration of management explatation through consultation with specialist.
Design additional procedures to obtain more reliable evidence.
An auditor must have:
Adequate Technical Training and experience to meet requirement of professional. Professional
Skepticiam attitude.
AICPA Quality Control Standards:
Policies and procedures designed implemented, and maintained to ensure that the firm
complies with professional standards and appropriate legal and regulatory requirements, and
that any reports issued are appropriate in the circumtances.
GAAS Standards:
Consider inherent and control risk before determining detection risk.
Use attributes sampling techniques in testing internal controls.
When F/S contain a departure from US GAAP because otherwise it would be misleading issue:
Unmodified opinion.
PCAOB AS allows auditors to perform a specific procedure after the auditors excersice
professional judgement to decide on performing the specific procedure.
A1.3 : Audit Reports
Fair presentation of the F/S framework includes description of the framework. There
is no requirement that an entity's F/S should be prepared in accordance with prevalent
industries practices.
In a qualified opinion due to insufficient audit evidence. Disclose in Audit responsibility
paragraph and discusses in explanatory paragraph before the opinion paragraph, basis
for Qualified Opinion.
Substantial doubt of going concern:
1. The condition that gave rise to the doubt.
2. Auditor's conclusion of the doubt remains or alleviated
3. The effect on auditor's conclusion in the report.
Red flags of going concern or financial difficulties:
1. Increase Ownership Equity.
2. Usual Trade credit from suppliers is denied.
3. Plans to postpone expenditures.
4. Plan to dispose assets.
5. Plans to borrow money or restructure debt
6. Confirming with 3rd parties the details of arrangements to maintain financial support.
7. Negotiate reductions inrequired dividends being paid on preferred stock.
8. Lease rather than purchase operating facilities.
9. Recurring working capital shortages.
10. Extend due dates of existing loans.
11. Cash flows from operating activities are negative - very strong indication!
Auditor's main concern/reponsibilities in an entity's doubt of going concern is to make sure the
substantial doubt is properly disclosed and possible effects on FS.
To check for the possibility of going concern:
1. Read the minutes of stockholders and board of directors.
2. Inquiring the entity's legal counsel about litigation, claims, and assessments.
3. Review of compliance with terms of debt agreements.
Audit report for Substantial doubt of going concern that is properly disclose in FS:
1. Issue Unmodified opinion with explanatory paragraph or Disclamer opinion.
2. Include emphasis of matter paragraph
3. Use words "going concern" and "substantial doubt" on the emphasis of matter paragraph.
Refer to US as the country of:
1. The acct principle used to prepare F/S
2. AS followed in perfoming audit.
Qualified or Adverse: when there is a departure from GAAP -> INADEQUATE DISCLOSE,
unjustified acct change. Refuse to disclose related party transaction in the footnotes of F/S is
GAAP problem not scope limitation.
Qualified or Disclamer: when there is a scope limitation impose, not independent CPA
Unmodified with emphasis of matter paragraph after opinion: Change in acct principle
Unmodified without emphasis of matter paragraph: all material loss from uncertainties are
sufficiently supported and disclosed.
Subtantial doubt of going concern included in emphasis of matter: "GOING CONCERN" and
"SUBSTANTIAL DOUBT"
When there is 2 CPA auditing a company and sub-company, the partner of the parent company
whould only make reference to the sub CPA only if he is unable to review the audit
documentation of sub CPA and the sub CPA has excellent reputation.
When the auditor decide to make reference to the audit of a component auditor as a basis, the
auditor can issue unmodified opinion without emphasis of matter paragraph.
Consistency is implicitly reported: only mention when material inconsistency occured. A
change in useful life to calculate depriciation does not affect consistency. Consistency affect
change in accounting principle or method of accounting inventories.
Unable to form opinion on new beginning inventory account: Unmodified on B/S and
diclamer on I/S, RE, cash flows
Basic element on audit report:
1. Audit includes management significant estimates.
2. ....standards requie that we plan and perform audit to obtain reasonable assurance
that the FS are free of material mistatements.
3. In making those assessment, the auditor considers internal control relevant to the enity's
preparation and fair presentation of FS in order to desin audit procedures that are appropriate
in the circumtances, but not for the purpose of expressing an opinion on entity's IC
effectiveness.
Implicit: consistency, examination of evidence
Explicit: obtaining evidence that is sufficient and appropriate.
When auditor refer to work of specialist, it is qualified opinion because auditor only refer to
them when the findings change audit's report.
Unmodified opinion is allowed for:
1. Different invent method as long as it is properly disclosed.
2. Material change in accounitng principles between period is properly disclosed.
4. ommision of selected data required by SEC is properly diisclosed.
When an uncertainty (e.g. loss on litigation doubt -> probable but not estimable) is properly
disclosed, then unmodified opinion without emphasis of matter paragraph. The contingent
liabilities is disclosed in the FS footnotes.
When the doubt of going concern has been eliminated in the current year, the previous year
emphasis of matter whould not be repeated to the current year.
When a CPA is lack of independence, could only read the F/S for obvious material
mistatements.
GAAS: Auditor's Responsibility paragraph
GAAP: Audit Opinion
In audit report for qualified opinions due to client's impose scope limitation, it should include
the statement: the possible effects on the financial statements.
Qualified opinion due to inadequate disclosure modify: Basis for opinion paragraph and opinion
paragraph.
Adverse opinion needs a paragraph that directly refered to a separate paragraph
disclosing the basis for the opinion (basis: substantive reasons for the financial statements
being misleading). Read eBook question number 55
Issue a disclamer opinion when the client prohibit the observation of inventories account for
35% of all assets and other alternative procedures cannot be conducted.
CPA report does not include the CPA''s assessment of sampling risk factors. It does includes,
management significant estimates, management responsibility for financial statement, and
assessment of entity's acct principles.
Reference should be made:
1. Auditor's responsibility paragraph: PCAOB standards or GAAS
2. Opinion Paragraph: GAAP
When the management refuses to accept the CPA's suggestion, the CPA should decribe the
nature of the departure from GAAP in the report and state the effects on the financial
statements, if practicable.
When the clients refuses statements that collectively not material and wants to use the
unadjusted numbers, the FS is free from material misstatement and no disclosure is necessary
on the notes of FS
Under ISA, the going concern period is at least 1 year from the date the FS being
audited.
The auditor communicates the nature of the engagement and the specific FS covered by the
audit in the Introductory Paragraph
A1.4 : Audit Reports
In reporting on comparative FS, an auditor ordinarily should change the prior year's FS if the
prior year's FS are restated to conform with GAAP.
When drafting the current year's comparative auditor report:
1. Not name the predecessor auditor.
2. Indicate the type of report issued.
3. Indicate the substantive reasons for the qualifications.
Before reissuing the prior year's audit report, a predecessor auditor should:
1. Read the FS of current period
2. Compare the prior period info with the current FS
3. Obtain letter of representation from management and successor auditor.
When a previously qualified report become properly disclosed, the auditor should expressed
unmodified opinion on the restated FS, state the substantive reasons for the change in
opinion in the emphasis of matter paragraph following opinion.
When predecessor audit reprt is not presented, the successor auditor should indicate:
1. The statement that the previous audit is done by predecessor.
2. The type of opinion expressed by the predecessor auditor and reason for modification
3. Emphasis of matter paragraph included in predecessors audit
4. The date of predecessor auditor's report.
Dual Dating is used to report subsequent event occuring after the audit report's date.
If predecessor report is presented, management need to provide letter of representation to
predecessor auditor.
If predecessor report is not presented, an other matter paragraph should be included to
explain this situation.
If predecessor report is qualified due to scope limitaton, successor auditor may still issue
unmodified opinion on current report.
A1.5 : Audit Reports
Auditor's responsibility on Subsequent event:
1. Auditor has no active responsibility to make continuing inquiries after the date of the
auditor's report.
2. Auditor continue inquiries between date of FS and date of audit report.
3. Auditor continue inquiries between date of FS and date of sufficient appropriate evidence
obtained.
Management refusal to revise FS for a subsequent event: Auditor should notify the entity's
board of director about management refusal.
Audit procedures to identify any subsquent event:
1. Inquiring as to whether any unusual adjustment were made after year-end.
2. Investigate Long-ter, debt occuring after year end.
3. Compare the latest available interim FS to the FS being reported on.
Subsequent event such as NATURAL DISASTER occuring after auditor's report is not auditor's
obligation.
Steps when subsequent event is found to be reliable and have existed at the date of audit
report:
1. Assess the importance of the event/omitted procedures to the present ability to support the
opinion.
2. Determine whether there are persons relying on the FS and the importance of the sub event.
3. Assess if there is an alternative procedure that can be used to support current opinion
4. If there is no alternative procedure, require the client to notify FS users
The date for the sub event to be reported is the date when the CPA found out about the sub
event.
Events occur before year end: adjust the FS
Events occur after year end: disclose in FS
A1.5 : Audit Reports
A reporting accountant may report on the application of the requirements of the applicable
financial reporting framework to a proposed future transaction as long as the transaction
involved the facts and circumtances of a specific entity.
Before reporting the FS of US entity that use different reporting report, the auditor should
understand the applicable legal reponsibilities involved if the auditor plan to use the form.
Application of the requirements of the applicable financial reporting framework is not Conculting
services and therefore should follow AICPA Standards. The reporting accounting should state
that any difference in the facts, circumtances, or assumptions presented may change
the report.
When a report is made in accordance of other country's standards, the US entity who
want to report on that company may not change the report to US Standard report.
There is no requirements that Auditor's report on supplementary infor required by GAAP be
restricted
If supplementary info is used in report, then the auditor should report "All material respects in
relation to the basic FS taken as a whole"
The auditor should apply limited procedures to the supp infor and add an explanatory
paragraph to the FS report