1.
Audited financial statements—the basics ........................................................................... 3
2.
Professional standards.................................................................................................... 4
3.
Reports on audited financial statements .......................................................................... 13
4.
Reports on comparative financial statements ................................................................... 41
5.
Events occurring after year-end ..................................................................................... 46
6.
Reporting on other information ...................................................................................... 50
7.
Appendix: GAAP sources for nongovernmental entities ...................................................... 58
8.
Simulation .................................................................................................................. 59
9.
Class questions ........................................................................................................... 71
Auditing & Attestation 1
Auditing & Attestation 1
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Auditing & Attestation 1
AUDITED FINANCIAL STATEMENTS—THE BASICS
I.
THE INDEPENDENT AUDIT FUNCTION
A.
WHAT IS AN AUDIT?
An audit consists of a methodical review and objective examination of an enterprise's
financial statements. The objective of the auditor's examination is to express an opinion on
the financial statements. This expression takes the form of an audit report.
B.
RESPONSIBILITIES
The financial statements of an enterprise are prepared by the management of the enterprise,
not by the independent auditor. Further, the financial statements are the product and
property of the enterprise; the independent auditor merely audits and expresses an opinion
on them. The expression of an opinion by the independent auditor is known as the "audit
function."
C.
1.
Company's Management = Financial Statements
2.
Auditors = Expression of Opinion
THE AUDIT FUNCTION ADDS "CREDIBILITY"
The auditor's report gives credibility to the financial statements. The auditors, as a group
independent of management, have an objective view and can report on a company's
activities without bias or conflict of interest. Without a report from an independent auditor, a
company's financial statements would be meaningless, because the public would have little
faith in financial statements issued by the inherently biased company.
D.
AN EXAMINATION IS MADE OF A COMPANY'S FINANCIAL STATEMENTS
1.
The auditor carries out this examination by following the ten Generally Accepted
Auditing Standards (GAAS) and all of the official pronouncements that explain and
interpret GAAS.
2.
The auditor must be:
3.
E.
a.
Independent
b.
Expert
(1)
As to accounting (knowledge of GAAP)
(2)
As to auditing (knowledge of GAAS)
(3)
As to industry (particular business)
The audit should be planned and performed with an attitude of "professional
skepticism," whereby the auditor neither assumes management is dishonest nor
assumes unquestioned honesty.
THE AUDITOR MUST THEN REPORT HIS OR HER FINDINGS BASED UPON THE
EVIDENCE EXAMINED
1.
2.
The primary assertion is whether the statements are "presented fairly" in accordance
with GAAP (Generally Accepted Accounting Principles).
a.
This decision as to fair presentation is a judgment call by the auditor. The
American Institute of Certified Public Accountants (AICPA) defines fair
presentation as follows: the financial statements reflect the underlying
transactions of the company in a manner that represents the financial statements
within a range of acceptable limits.
b.
GAAP sources are further discussed in the Appendix.
Most audits are performed not only for the primary benefit of the stockholders, but also
for any other interested outside parties.
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PROFESSIONAL STANDARDS
I.
AUDITING STANDARDS
A.
GENERALLY ACCEPTED AUDITING STANDARDS
The auditor is responsible for the performance of a properly planned and executed audit.
The criteria for such an audit are the ten generally accepted auditing standards (GAAS).
Statements on Auditing Standards (SASs) are interpretations of GAAS issued by the Auditing
Standards Board (ASB) of the AICPA. Note that compliance with GAAS is mandatory on all
audit engagements.
SAS
B.
GAGAS
C.
PCAOB
GENERALLY ACCEPTED GOVERNMENT AUDITING STANDARDS
Audits of government organizations, programs, activities, and of entities that receive
government funds should be conducted in accordance with generally accepted government
auditing standards (GAGAS), as covered later in the course.
THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD
The Public Company Accounting Oversight Board (PCAOB) was established pursuant to the
Sarbanes-Oxley Act of 2002. The PCAOB establishes auditing and related professional
practice standards to be used in the preparation and issuance of audit reports for "issuers."
1.
"Issuers" consist of entities subject to the rules of the SEC (primarily public
companies).
2.
The PCAOB is comprised of five full-time, financially literate members.
a.
Two members must be (or have been) CPAs, and the other three must not be (or
must not have been) CPAs.
b.
A CPA can only act as the Chair of the Board if he or she has not practiced as a
CPA for the past five years.
c.
No members of the Board can receive payments from a public accounting firm
(other than fixed continuing payments, such as retirement payments).
3.
Public accounting firms must register with the PCAOB in order to audit a public
company. Registered firms are subject to Board inspection, disciplinary proceedings,
and sanctions.
4.
PCAOB Standards
a.
The PCAOB adopted, on an initial, interim basis, ASB standards, but continues
to review each standard to evaluate whether it should be modified, repealed,
replaced, or permanently adopted. At present, the PCAOB has issued five of its
own auditing standards, which replace ASB Standards for audits of issuers.
These standards will be covered throughout the course.
b.
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Be sure to visit the Becker website for possible updates to this area.
Note that the ASB retains the authority to set performance and reporting
standards for audits of financial statements of nonissuers.
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II.
Auditing & Attestation 1
STANDARDS FOR ENGAGEMENTS OTHER THAN AUDITS
An audit is merely one type of engagement an accountant may be called upon to perform. Each
type of engagement has a different set of applicable professional standards, and the requirements,
responsibilities, and limitations vary with the nature and scope of the engagement. Below is an
overview of these various sets of standards.
A.
STATEMENTS ON STANDARDS FOR ATTESTATION ENGAGEMENTS
SSAE
Statements on Standards for Attestation Engagements (SSAE) are issued by senior
technical bodies of the AICPA. These standards apply to attest engagements, covered later
in the course.
B.
STATEMENTS ON STANDARDS FOR ACCOUNTING AND REVIEW SERVICES
SSARS
The Accounting and Review Services Committee was established by the AICPA to
regulate standards for privately held companies not seeking audited statements. Statements
on Standards for Accounting and Review Services (SSARS) are issued by this committee,
and they are applicable to unaudited financial statements or unaudited financial information of
a nonpublic entity. SSARS are covered later in the course.
C.
STATEMENTS ON STANDARDS FOR CONSULTING SERVICES
SSCS
Statements for Standards for Consulting Services (SSCSs) are issued by the
Management Advisory Services Executive Committee, and they provide standards for a
broad range of consulting services.
D.
STATEMENTS ON STANDARDS FOR TAX SERVICES
SSTS
Statements on Standards for Tax Services provide guidelines for tax preparation
services.
III.
OTHER GUIDELINES
A.
CODE OF PROFESSIONAL CONDUCT
The AICPA Code of Professional Conduct provides members with guidelines for behavior in
the conduct of their professional affairs. In addition, it provides assurance to the public that
the profession intends to maintain high standards and to enforce compliance with these
standards by its members. The Code of Professional Conduct applies to all services
performed in the practice of public accounting. (Note: The Code of Professional Conduct is
tested as part of the Regulation exam and is reviewed in the Regulation course.)
B.
THE SECURITIES AND EXCHANGE COMMISSION (SEC)
1.
The Securities Acts of 1933 and 1934 have given this governmental commission the
authority to set guidelines for publicly traded companies.
a.
The SEC publishes their regulations in the Accounting Series Releases and in
Regulation S-K.
b.
Final standards adopted by the PCAOB do not become effective unless and until
they are approved by the SEC.
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Auditing & Attestation 1
C.
Becker CPA Review
THE SARBANES-OXLEY ACT
Under the Sarbanes-Oxley Act:
1.
Auditors report to and are overseen by the issuer's audit committee.
2.
All services (both audit and non-audit) must be preapproved by the audit committee.
3.
A second partner review is required for every public company audit report.
4.
Severe penalties apply to those who destroy records (or willfully fail to maintain them
for at least seven years), commit securities fraud, or fail to report fraud.
a.
5.
The statute of limitations for the discovery of fraud was extended by this Act, and
protections were provided for corporate "whistleblowers."
Anyone associated with a registered public accounting firm (e.g., individual
accountants) can be held responsible if their actions contribute to a firm's violation of
laws, rules, or professional standards.
The Sarbanes-Oxley Act also contains provisions related to auditor independence, which will
be covered later in the course.
IV.
AUDITING GUIDANCE: THE GAAS HIERARCHY
There are three levels of auditing guidance.
A.
STATEMENTS ON AUDITING STANDARDS (SASs)
1.
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Auditors (who are AICPA members) are required to comply with SASs published by the
Auditing Standards Board. The auditor should:
a.
Use professional judgment in applying the SASs to a particular engagement.
b.
Be prepared to justify any departures from presumptively mandatory
requirements (see below).
2.
SASs generally apply only in situations where auditing services are being rendered.
However, a few SASs apply to other services, such as reviews of interim financial
information and letters for underwriters.
3.
Specific language is used within the SASs to clarify the auditor's level of responsibility.
a.
The terms "must" or "is required" indicate an unconditional requirement, which
must always be followed.
b.
The term "should" indicates a presumptively mandatory requirement, which
must always be considered; however, rare departures from the requirement are
permitted as long as there is appropriate justification, performance of sufficient
alternative procedures, and thorough documentation.
c.
The terms "may," "might," and "could" indicate explanatory material that does
not impose a professional requirement for performance.
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B.
INTERPRETIVE PUBLICATIONS
1.
2.
C.
Auditing & Attestation 1
Interpretive publications are recommendations regarding how SASs should be applied
in specific situations. They are not considered to be auditing standards. The auditor
should:
a.
Consider the guidance provided by these publications in performing an audit.
b.
Be able to explain any departures, and how compliance with standards was
otherwise achieved.
Interpretive publications include SAS Interpretations, appendices to the SASs, AICPA
Audit and Accounting Guides, and AICPA auditing Statements of Position.
OTHER AUDITING PUBLICATIONS
1.
Other auditing publications have no authoritative status but may be helpful to the
auditor.
2.
Other auditing publications include auditing articles in the Journal of Accountancy (or
other professional journal), auditing articles in the AICPA CPA Letter, continuing
professional education materials, textbooks, etc.
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Auditing & Attestation 1
V.
Becker CPA Review
GENERALLY ACCEPTED AUDITING STANDARDS
The ten Generally Accepted Auditing Standards comprise the foundation of auditing. These
standards are qualitative in nature and set minimum requirements for the profession. Auditing
standards differ from auditing procedures in that "procedures" relate to acts to be performed,
whereas "standards" deal with measures of audit quality and the objectives to be achieved in an
audit. Auditing standards (as distinct from auditing procedures) concern themselves not only with
the auditor's professional qualities, but also with the judgment exercised in the performance of the
examination and in the auditor's report.
A.
THE GENERAL STANDARDS
1.
Training
"The auditor must have adequate technical training and proficiency to perform the
audit."
GENERAL
STANDARDS
Comment: The auditor must have the education in accounting, the practical experience
in auditing, and knowledge of the particular industry being audited.
2.
Independence
"The auditor must maintain independence in mental attitude in all matters relating to the
audit."
Comment: This standard is often called the cornerstone of the profession since it is
necessary to add credibility to what we do. It is defined as independence in fact and
appearance. The auditor is judicially impartial.
a.
Independence in Fact and in Appearance
The auditor must be independent in fact and in appearance. Auditors must leave
no doubt as to their independence in the mind of the general public. Activities or
relationships that even suggest or imply a possible lack of independence must be
avoided by the auditor.
For example, assume the auditor owns an insignificant amount of the client's
common stock, and the auditor can in no way influence corporate policy. Thus,
in fact, the auditor is independent. However, the appearance of independence is
nonetheless impaired. Any direct ownership of a company, no matter how small,
will impair independence. (An indirect financial interest that is immaterial does
not impair independence.)
b.
Sarbanes-Oxley
Under the Sarbanes-Oxley Act of 2002, an accounting firm may not provide audit
services to a public company if a top official of that company is also a previous
employee of the accounting firm who worked on the audit during the last year.
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3.
Auditing & Attestation 1
Professional Care
"The auditor must exercise due professional care in the planning and performance of
the audit and the preparation of the report."
Due professional care imposes a responsibility upon each person within an
independent auditor's organization to observe the standards of fieldwork and reporting.
The auditor will be held to exercise the same components of professional care as a
reasonable auditor would exercise, which include good faith, integrity, and diligence,
but due professional care does not imply infallibility. Due professional care is
concerned with what the auditor does and how well it is done. The exercise of due
professional care implies that the auditor will obtain sufficient appropriate audit
evidence to limit audit risk to a low level. The high level of assurance expected to be
obtained is referred to as "reasonable assurance"; absolute assurance is not possible.
Due professional care also requires the auditor to exercise professional skepticism.
Professional skepticism can be defined as the maintenance of an objective attitude
throughout the audit, including a questioning mind and a critical assessment of audit
evidence. The auditor neither presumes management dishonesty nor presumes
unquestioned management honesty. The auditor needs to exercise professional
skepticism throughout the audit process, from engagement planning through
conducting fieldwork.
Comment: Often called the "average auditor" concept. The auditor should do what the
average auditor would do and never less, including review of work performed by
assistants and maintaining an attitude of professional skepticism. Evidence of "due
professional care" is indicated by critical management reviews of work performed at
every level of supervision.
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STANDARDS OF
FIELDWORK
B.
THE STANDARDS OF FIELDWORK
1.
Planning and Supervision
"The auditor must adequately plan the work and must properly supervise
any assistants."
Comment: Audit programs are designed to enumerate appropriate action, and all work
of staff auditors should be reviewed by a qualified auditor.
2.
Internal Control, Entity, and Environment
"The auditor must obtain a sufficient understanding of the entity and its environment,
including its internal control, to assess the risk of material misstatement of the financial
statements whether due to error or fraud, and to design the nature, extent, and timing
of further audit procedures."
Comment: Appropriate internal controls provide the auditor with confidence that
material misstatements will be prevented or detected on a timely basis.
3.
a.
Strong controls imply the auditor will require less evidence.
b.
Weak controls imply the auditor will require more evidence.
Evidence
"The auditor must obtain sufficient appropriate audit evidence by performing audit
procedures to afford a reasonable basis for an opinion regarding the financial
statements under audit."
Comment: All specific audit work is performed in order to gather evidence. Virtually no
specific audit evidence is required. The auditor applies his or her judgment.
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C.
Auditing & Attestation 1
THE STANDARDS OF REPORTING
1.
Accounting = GAAP
STANDARDS
OF REPORTING
"The auditor must state in the auditor's report whether the financial statements are
presented in accordance with generally accepted accounting principles (GAAP)."
Comment: Explicit statement in auditor's report.
2.
Consistency
"The auditor must identify in the auditor's report those circumstances in which such
principles have not been consistently observed in the current period in relation to the
preceding period."
Comment: Implicit in auditor's report.
3.
Disclosure
"When the auditor determines that informative disclosures are not reasonably
adequate, the auditor must so state in the auditor's report."
Comment: Implicit in auditor's report.
4.
Express Opinion
"The auditor must either express an opinion regarding the financial statements, taken
as a whole, or state that an opinion cannot be expressed, in the auditor's report. When
the auditor cannot express an overall opinion, the auditor should state the reasons
therefor in the auditor's report. In all cases where an auditor's name is associated with
financial statements, the auditor should clearly indicate the character of the auditor's
work, if any, and the degree of responsibility the auditor is taking, in the auditor's
report."
Comment: Explicit statement in auditor's report.
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PASS KEY
The examiners test on which reporting standards are explicit (Accounting is GAAP & Express Opinion) and which standards
are implicit (Consistency & Disclosure).
a.
The objective of the fourth standard of reporting is to prevent misinterpretation of
the degree of responsibility the auditor is assuming when his/her name is
associated with financial statements.
(1)
(2)
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The auditor, when associated with the financial statements, has two major
choices:
(a)
To render an opinion on the financial statements taken as
a whole; or
(b)
To disclaim an opinion (e.g., because not enough audit work was
done, or because the auditor was not independent).
Taken as a whole applies equally to a complete set of financial statements,
and to an individual financial statement, such as a balance sheet.
(a)
The auditor may express an unqualified opinion on one of the
financial statements (e.g., a balance sheet), while rendering a
qualified opinion or disclaimer of opinion on another financial
statement, such as the income statement (covered later).
(b)
The auditor may report on one basic financial statement and not the
others, as long as access is not limited to information underlying the
basic financial statement. This is considered a "limited" reporting
engagement.
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Auditing & Attestation 1
REPORTS ON AUDITED FINANCIAL STATEMENTS
I.
THE AUDITOR'S STANDARD REPORT (UNQUALIFIED OPINION)
The auditor's unqualified report states that the financial statements are presented fairly in all
material respects. The three-paragraph standard report includes all of the following:
A.
TITLE
"Independent" (auditor's report) must be included in the report title.
B.
ADDRESSEE
The report is generally addressed to the company, its stockholders and/or its board of
directors. It generally is not addressed to management.
C.
INTRODUCTORY PARAGRAPH
The introductory paragraph contains the following:
D.
1.
A statement that the financial statements as identified in the report were audited; and
2.
A statement that the financial statements are the responsibility of management and that
the auditor's responsibility is to express an opinion.
SCOPE PARAGRAPH
The scope paragraph contains the following:
1.
A statement that the audit was conducted in accordance with United States GAAS;
a.
E.
For audits of issuers, reference is made to PCAOB standards instead of United
States GAAS (covered later).
2.
A statement that the audit was planned and performed to obtain reasonable assurance
that the financial statements are free from material misstatement;
3.
Statements that the audit included examining evidence on a test basis; assessing the
accounting principles used and significant estimates made by management; and
evaluating the overall presentation; and
4.
A statement that the audit provides a reasonable basis for an opinion.
OPINION PARAGRAPH
The opinion paragraph of the report contains the following:
F.
1.
A statement referring to the financial statements specifically identified in the
introductory paragraph;
2.
An opinion as to the fair presentation of the financial statements (ACDO); and
3.
A statement regarding conformity with United States generally accepted accounting
principles. (ACDO)
FIRM NAME
The firm's name, either printed or signed, must appear in the report.
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Auditing & Attestation 1
G.
Becker CPA Review
REPORT DATE
The date of the audit report must be included in the report.
1.
The report should be dated on or after the date on which appropriate audit evidence,
sufficient to support the opinion, has been obtained. Sufficient appropriate audit
evidence includes evidence that:
a.
Audit documentation has been reviewed,
b.
Financial statements have been prepared, and
c.
Management has taken responsibility for the financial statements.
2.
The report date shows the final date of the auditor's responsibility.
3.
For comparative statements, the date appropriate for the most recent audit should be
used.
AUDITOR'S
STANDARD
REPORT
II.
UNQUALIFIED OPINION
A.
SAMPLE REPORT—THE UNQUALIFIED OPINION (REPORTING ON A
SINGLE YEAR)
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects,
the financial position of ABC Company as of (at) December 31, 20XX, and the results of its
operations and its cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
Scope
We conducted our audit in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
Intro
We have audited the accompanying balance sheet of ABC Company as of December 31,
20XX, and the related statements of income, retained earnings, and cash flows for the year
then ended. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audit.
Heading
INDEPENDENT AUDITOR’S REPORT
(Name)
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Sign
(Date)
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B.
Auditing & Attestation 1
SAMPLE REPORT – THE UNQUALIFIED OPINION (REPORTING ON A SINGLE
FINANCIAL STATEMENT)
(Unqualified) Opinion on Balance Sheet Only
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying balance sheet of X Company as of December 31, 20XX. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based
on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of X
Company as of (at) December 31, 20XX, in conformity with accounting principles generally accepted in the United States of
America.
C.
PCAOB STANDARDS
1.
Audits of Issuers
PCAOB Auditing Standard No. 1 requires the auditor's report to include a reference to
the standards of the Public Company Accounting Oversight Board (United States).
a.
An auditor reporting on the audit of financial statements of an issuer should state
in the scope paragraph:
"We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit…"
b.
2.
An auditor's report on the financial statements of an issuer should also include
identification of the city and state (or country) from which the report was issued.
Generally, this information is included with the signature and date.
Audits of Nonissuers
An auditor may (but is not required to) conduct the audit of a nonissuer in accordance
with both GAAS and the auditing standards of the PCAOB. Additional language may
be added to the scope paragraph to describe this situation:
"We conducted our audit in accordance with generally accepted auditing
standards as established by the Auditing Standards Board (United States) and in
accordance with the auditing standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform
the audit…"
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PASS KEY
When the examiners require CPA candidates to respond to questions concerning the standard audit report, you must
remember:
GAAS
Scope Paragraph
GAAP
Opinion Paragraph
Which paragraphs of an auditor's standard report on financial statements should refer to Generally Accepted Auditing
Standards (GAAS) and Generally Accepted Accounting Principles (GAAP)?
EXAMPLE
a.
b.
c.
d.
GAAS
Opening
Scope
Scope
Opening
GAAP
Scope
Scope
Opinion
Opinion
Solution: Choice "c" is correct. The auditor states that the audit was conducted in accordance with U.S. GAAS in the
scope paragraph. The auditor expresses an opinion on the financial statements' conformity with U.S. GAAP in the
opinion paragraph.
III.
THE TYPES OF OPINIONS ARE:
A.
UNQUALIFIED (CLEAN) OPINION
An unqualified opinion states that the financial statements present fairly, in all material
respects, the financial position, results of operations, and cash flows of the entity in
conformity with United States GAAP. This is the opinion expressed in the standard report.
1.
Explanatory Language (Modified Unqualified Opinion)
Explanatory language may be added to the auditor's standard (unqualified) report.
Certain circumstances, even those not affecting the auditor's unqualified opinion on the
financial statements, may require that the auditor add an explanatory paragraph (or
other explanatory language) to the report.
B.
QUALIFIED OPINION (EXCEPT FOR)
A qualified opinion states that, "except for" the effects of the matter(s) to which the
qualification relates, the financial statements present fairly, in all material respects, the
financial position, results of operations, and cash flows of the entity in conformity with United
States GAAP.
C.
ADVERSE OPINION
An adverse opinion states that the financial statements do not present fairly the financial
position, results of operations, or cash flows of the entity in conformity with United States
GAAP.
D.
DISCLAIMER OF OPINION
A disclaimer of opinion states that the auditor does not express an opinion on the financial
statements because he or she was not able to perform an audit sufficient in scope to render
an opinion.
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IV.
Auditing & Attestation 1
BRIEF SUMMARY OF WHEN TO USE DIFFERENT OPINIONS
(Covered in greater detail later):
Materiality of
Problem
V.
Conformity
with GAAP
Adherence
to GAAS
None or immaterial
=
Unqualified
Unqualified
Material
=
Qualified Opinion
(modify opinion
paragraph)
Qualified Opinion
(modify scope and
opinion paragraphs)
Highly Material
=
Adverse Opinion
Disclaimer of Opinion
AUDITOR'S REPORT: OPINION DECISION TREE
UNQUALIFIED OPINION
QUALIFIED
QUALIFIED
"EXCEPT FOR"
"EXCEPT FOR"
GAAP
GAAS
1. Non-GAAP Change
2. Inadequate Disclosure
3. Unjustified Departure from GAAP
4. Unreasonable Acctg. Estimate
1. Uncertainty
2. Scope Limitation
ADVERSE
DISCLAIMER
GAAP
GAAS
1. Non-GAAP Change
2. Inadequate Disclosure
3. Unjustified Departure from GAAP
4. Unreasonable Acctg. Estimate
1. Uncertainty
2. Scope Limitation
3. Lack of Independence
4. Unaudited
WITHDRAW
False, Fraudulent, Deceptive or Misleading
PASS KEY
A candidate must be able to identify the types of opinions available for GAAP issues (Qualified-"Except for" & Adverse) and
for GAAS issues (Qualified-"Except for" & Disclaimer).
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Auditing & Attestation 1
VI.
Becker CPA Review
UNQUALIFIED OPINION
UNQUALIFIED OPINION
QUALIFIED
QUALIFIED
"EXCEPT FOR"
"EXCEPT FOR"
GAAP
GAAS
1. Non-GAAP Change
2. Inadequate Disclosure
3. Departure from GAAP
4. Unreasonable Acctg. Estimate
1. Uncertainty
2. Scope Limitation
ADVERSE
DISCLAIMER
GAAP
GAAS
1. Non-GAAP Change
2. Inadequate Disclosure
3. Departure from GAAP
4. Unreasonable Acctg. Estimate
1. Uncertainty
2. Scope Limitation
3. Lack of Independence
4. Unaudited
WITHDRAW
False, Fraudulent, Deceptive or Misleading
UNCERTAINTIES
A.
UNCERTAINTY
1.
Unqualified
Uncertainty
2.
General
An uncertainty involves a matter for which conclusive audit evidence concerning its
outcome is not currently available and will not be available until such time in the future
when the matter is resolved. (Note the use of the word "conclusive"; existing
conditions and events to date may provide some audit evidence; see below.)
Uncertainties include (but are not limited to) contingencies listed in SFAS 5.
Management's Responsibility
Management must analyze the existing conditions, and in accordance with GAAP,
either:
3.
a.
Estimate the effect of future events on the financial statements and record and
present this estimate, or
b.
Determine that a reasonable estimate cannot be made and make the required
disclosures to that effect.
Auditor's Responsibility
The auditor's responsibility involves an assessment of whether the audit evidence that
is or should be available is sufficient to support management's analysis and
conclusions regarding presentation or disclosure of the uncertainty in the financial
statements (that is, management's assertion regarding the uncertainty).
a.
A1-18
If management's analysis is supported and properly reported or disclosed, the
auditor issues an unqualified opinion with no reference to the uncertainty in the
audit report.
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Auditing & Attestation 1
b.
If the auditor is unable to obtain sufficient audit evidence involving an uncertainty
and its presentation or disclosure in the financial statements, the auditor should
consider the need to express a qualified (GAAS) opinion or to disclaim an
opinion due to a limitation in scope.
c.
If the auditor concludes that the financial statements are materially misstated due
to a departure from GAAP related to an uncertainty, the auditor should express a
qualified (GAAP) or adverse opinion. GAAP departures related to uncertainties
include inadequate disclosure, use of inappropriate accounting principles, and
use of unreasonable accounting estimates.
PASS KEY
A commonly tested area is the concept of uncertainty. The chart below will assist in your mastering this area.
Uncertainty
B.
GAAP & Evidence
Auditor
agrees with
management
No Evidence
Auditor unable
to obtain
evidence
Non-GAAP
Auditor
disagrees with
management
Unqualified
Qualified
(GAAS)
or
Disclaimer
Qualified (GAAP)
or
Adverse
MODIFIED UNQUALIFIED OPINION
There are several situations in which an auditor must modify the standard unqualified report
to explain or emphasize a matter. This modification, however, does not constitute a qualified
opinion. Variations of the auditor's standard report will occur in several situations.
1.
Modified Wording
Division of responsibility: The auditor's opinion is based in part on the report of another
auditor.
2.
Explanatory Paragraph
a.
Necessary and justified departure from GAAP: Due to unusual circumstances, a
GAAP departure prevents the financial statements from being misleading.
b.
Going concern: There is substantial doubt about the entity's ability to continue as
a going concern.
c.
To emphasize a matter regarding the financial statements, the auditor may add
an explanatory paragraph.
d.
A justified lack of consistency is caused by a material change in GAAP between
periods or a change in the method of the application of accounting principles.
e.
Required SEC regulation S-K quarterly financial data has been omitted or has
not been reviewed.
f.
Supplementary information required by GAAP has been omitted or departs
materially from GAAP, or the auditor is unable to complete prescribed
procedures or to remove substantial doubts about the presentation of such
information.
g.
Other information in a document containing audited financial statements is
materially inconsistent with information appearing in the financial statements.
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Auditing & Attestation 1
Becker CPA Review
PASS KEY
You will probably have questions involving the "modified" unqualified opinion. We will cover each of these examples later. It
is important to note, however, that this still represents an unqualified opinion. The additional language is used to highlight the
above circumstances.
C.
GENERAL RULE ON POSITION OF EXPLANATORY PARAGRAPH
1.
Unqualified opinion:
The explanatory paragraph generally would follow the opinion paragraph.
2.
Qualified, adverse, and disclaimer of opinion:
The explanatory paragraph generally would precede the opinion paragraph.
3.
Exceptions:
The following are exceptions to the general rules above. The explanatory paragraph
may be placed either before or after the opinion paragraph.
D.
a.
Justified GAAP departure
b.
Emphasis of a matter
RELIANCE ON WORK OF OTHER AUDITORS—OPINION BASED IN
PART ON REPORT OF ANOTHER AUDITOR
When part of an examination, such as the audit of a subsidiary, has been performed by
another auditor, the principal auditors must decide whether their own participation
permits them to act as the principal auditor and, if so, whether reference should be
made to the other auditor. This decision is a matter of professional judgment and
should be based on the materiality of the portions examined by each of the auditors along
with their knowledge of the overall financial statements. After a decision is reached to act as
the principal auditor, they must further decide whether to refer to the other auditor in their
report or to assume responsibility for the report themselves.
OPINION BASED IN
PART ON REPORT OF
ANOTHER AUDITOR
Modified
Unqualified
Another CPA
Justified
Non-GAAP
Going Concern
Emphasis Matter
1.
Responsibilities
Regardless of the decision of the principal auditor:
Consistency
Other
2.
a.
The other auditors remain responsible for their own work and report, and
b.
The principal auditor must always be satisfied regarding the reputation and
independence of the other auditor.
Division of Responsibility (reference in report)
When the principal auditor decides to mention the work done by other auditors, the
report will express a division of responsibility. The principal auditor will mention this
division in all three paragraphs.
A1-20
a.
The name of the other auditor is not mentioned unless that auditor gives express
permission and the report of the other auditor is presented.
b.
The work done by the other auditors is expressed in terms of percentages, total
assets, total revenue, or other appropriate criteria, and is set forth in the
introductory paragraph.
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Auditing & Attestation 1
c.
Sample Report—Division of Responsibility
INDEPENDENT AUDITOR'S REPORT
We have audited the consolidated balance sheets of ABC Company as of December 31, 20X1 and 20X0, and the related
consolidated statements of income, retained earnings, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements based on our audit. We did not audit the financial statements of B Company, a wholly owned subsidiary,
whose statements reflect total assets of $_____ and $_____ as of December 31, 20X1 and 20X0, respectively, and
total revenues of $_____ and $_____ for the years then ended. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for B
Company, is based solely on the report of the other auditors.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of ABC Company as of (at) December 31, 20X1 and 20X0,
and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
(Name)
(Date)
3.
Assumption of Responsibility (no reference to other CPA)
When the principal auditor accepts responsibility for the work performed by another
auditor, the principal auditor does not refer to the other auditor in the auditor's report.
a.
Additional Investigation of the Other Auditor Step
If the principal auditors decide not to make reference, they must assure
themselves of the independence, professional competency, and reputation of the
other auditor. The principal auditors should:
(1)
Visit with the other auditor and discuss the audit procedures.
(2)
Review the audit program, audit documentation, and evaluation of internal
control performed by the other auditor. (Note that PCAOB rules contain
specific additional requirements regarding documentation that the principal
auditor must obtain, review, and retain.)
If the other auditor's opinion is qualified, the principal auditors must decide
whether the subject of the qualification is material in relation to the consolidated
statements, and, if not, they need not make reference in their report to the
qualification.
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A1-21
Auditing & Attestation 1
E.
Becker CPA Review
NECESSARY/JUSTIFIED DEPARTURE FROM GAAP
Rule 203 of the AICPA Code of Professional Conduct states that the auditor may not
express an opinion indicating that the financial statements of an entity are presented
fairly if they are not in conformity with generally accepted accounting principles. The
exception to this rule occurs under unusual circumstances, when adherence to GAAP
would make the financial statements more misleading than they would be under another
accounting treatment. In these cases, the auditor expresses an unqualified opinion and adds
an explanatory paragraph either before or after the opinion paragraph.
DEPARTURE FROM A
PROMULGATED
ACCOUNTING
PRINCIPLE
Modified
Unqualified
Another CPA
Justified
Non-GAAP
1.
Going Concern
Explanatory Paragraph
The explanatory paragraph should contain a description of the departure, its
approximate effects (if possible), and the reasons why adherence to the generally
accepted principle would make the financial statements misleading.
Emphasis Matter
Consistency
Other
Note: If the auditor does not agree with the departure from a generally accepted
accounting principle, an unqualified opinion is no longer appropriate. The auditor
would express a qualified or adverse opinion. This is covered in more detail later.
F.
GOING
CONCERN
Modified
Unqualified
Another CPA
Justified
Non-GAAP
Going Concern
Emphasis Matter
Consistency
Other
A1-22
THE AUDITOR'S CONSIDERATION OF AN ENTITY'S ABILITY TO CONTINUE AS A
GOING CONCERN
On every audit engagement, the auditor is responsible for evaluating aggregate audit
evidence to determine whether there is substantial doubt about the entity's ability to continue
as a going concern for a reasonable period of time. If there is a substantial doubt, the
auditors would state their concerns in an explanatory paragraph after the opinion paragraph
of their unqualified report. The going concern period (i.e., the "reasonable period of time")
should not exceed one year from the date of the financial statements being audited.
1.
Procedures
The auditor examines information that is contrary to the basic principle of going
concern. The auditor should perform the following procedures:
a.
Analytical procedures
b.
Debt compliance: the auditor should review the terms of debt and loan
agreements
c.
Minutes: the auditor should review minutes from stockholder and board of
director meetings
d.
Inquiry of client's legal counsel
e.
Third parties: the auditor should confirm the details of financial support
arrangements
f.
Subsequent events review
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Becker CPA Review
2.
Auditing & Attestation 1
Conditions and Events
Based on the procedures performed, the auditor identifies conditions and events that
may be indicative of substantial doubt.
3.
a.
Financial difficulties: loan defaults, dividend arrearages, denial of usual trade
credit, debt restructuring, noncompliance with capital requirements, new
financing sources or methods, disposal of substantial assets
b.
Internal matters: work stoppages, labor difficulties, substantial dependence on a
particular project, uneconomic long-term commitments, significant revision of
operations
c.
Negative trends: recurrent losses, working capital deficiencies, negative cash
flows, adverse financial ratios
d.
External matters: legal proceedings, new legislation, loss of a key franchise,
license, or patent, loss of a principal customer or supplier, natural disasters
Mitigating Factors
The auditor looks for mitigating factors.
a.
Plans to borrow money or restructure debt
b.
Plans to sell assets
c.
Plans to delay or reduce expenditures
d.
Plans to increase ownership equity
Note that mitigating factors must include not just intent but the ability to carry out the
planned procedures. Can the plans be effectively implemented?
4.
Alleviation of Doubt
After considering management's plans, the auditor may decide that substantial doubt
(about the entity's ability to continue as a going concern for a reasonable period of
time) has been alleviated. In such cases, the auditor should still consider the need for
disclosure of the conditions and events that initially gave rise to the substantial doubt.
5.
Modified Unqualified vs. Disclaimer
Although the general rule in going concern cases is to add an explanatory paragraph to
the unqualified opinion, the auditor is not precluded from choosing to disclaim an
opinion in cases involving uncertainties. The decision between an unqualified opinion
with an explanatory paragraph and a disclaimer of opinion is based on the auditor's
judgment.
6.
Sample Report—Explanatory Paragraph after Opinion Paragraph
(Introduction, scope, and opinion paragraphs unchanged)
a.
The wording of the explanatory paragraph must include the terms "substantial
doubt" and "going concern."
[Same Introduction]
[Same Scope Paragraph]
[Same Opinion Paragraph]
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.
As discussed in Note Z to the financial statements, the Company has suffered recurring losses from operations and has had
a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note Z. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
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A1-23
Auditing & Attestation 1
7.
Becker CPA Review
Documentation Requirements
When the auditor believes there is substantial doubt about the ability of the entity to
continue as a going concern for a reasonable period of time, the following items should
be included in the audit documentation:
8.
a.
The conditions or events that gave rise to the substantial doubt,
b.
Any mitigating factors that the auditor considers significant,
c.
Audit work performed to evaluate management's plans,
d.
The auditor's conclusion about whether substantial doubt remains or is
alleviated, and
e.
The effect of the auditor's conclusion on the evaluation of the financial
statements and related disclosures, and on the resulting auditor's report.
Miscellaneous
a.
If, in the auditor's judgment, the entity's disclosures are inadequate, a departure
from GAAP exists. This may result in either a qualified or adverse opinion.
b.
If the auditor's doubts about the entity's ability to continue as a going concern are
removed in a subsequent period, the explanatory paragraph of the prior period
need not be repeated.
c.
The auditor should communicate going concern issues with those charged with
governance.
PASS KEY
A commonly tested area is the concept of going concern. The chart below summarizes the effects of uncertainties and going
concern issues on the auditor's report.
Uncertainty
Going Concern
GAAP & Evidence
Auditor
agrees with
management
No Evidence
Auditor unable
to obtain
evidence
Non-GAAP
Auditor
disagrees with
management
Adequate
GAAP
Disclosure
Inadequate
GAAP
Disclosure
Unqualified
Qualified
(GAAS)
or
Disclaimer
Qualified (GAAP)
or
Adverse
Modified
Unqualified
(Disclaimer not
prohibited)
Qualified
(GAAP)
or
Adverse
EMPHASIS
OF A
MATTER
G.
Modified
Unqualified
Another CPA
Justified
Non-GAAP
Going Concern
Emphasis Matter
Consistency
Other
A1-24
EMPHASIS OF A MATTER
The auditor may wish to emphasize a particular matter but still express an unqualified
opinion.
1.
Items to Emphasize
a.
A related-party transaction
b.
A significant subsequent event
c.
The entity is a component of a larger business enterprise
d.
Accounting matters (other than changes in accounting principles) that affect the
comparability of the financial statements
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2.
Auditing & Attestation 1
Explanatory Paragraph
Emphasis of a matter is not required, but the auditor may choose to emphasize a
matter by adding an explanatory paragraph to the report. When added, an explanatory
paragraph may either precede or follow the opinion paragraph, and it does not result in
qualification of the report. A phrase such as "with the foregoing (following) explanation"
should not be used in the opinion paragraph if such an explanatory
paragraph is included in the auditor's report.
LACK OF
H.
Modified
Unqualified
Another CPA
Justified
Non-GAAP
LACK OF CONSISTENCY (ACCEPTABLE/JUSTIFIED CHANGES IN
ACCOUNTING PRINCIPLE)
CONSISTENCY
Consistency deals with the comparability of the financial statements from year to year. It is
implicit (implied) in the auditor's standard report that the comparability (consistency) of the
financial statements has not been materially affected by changes in accounting principles.
1.
Acceptability of Accounting Changes
When evaluating the acceptability of an accounting change, the auditor should consider
whether:
Going Concern
Emphasis Matter
Consistency
Other
a.
The change is to an acceptable principle,
b.
The method of accounting for the change is acceptable, and
c.
Management is justified in the change.
The auditor satisfied with all three concerns may express an unqualified opinion with an
explanatory paragraph. If any of the three conditions is not met, the auditor would
generally express a qualified opinion (covered later).
2.
Effect of an Acceptable Change on the Auditor's Report
If a change in GAAP has occurred between accounting periods and the effect is
material, the auditor should add an explanatory paragraph to the unqualified report.
The explanatory paragraph, which comes after the opinion paragraph, describes the
change and refers the reader to the appropriate note in the financial statements. This
does not constitute a qualified opinion.
a.
If the effect of a change in GAAP is immaterial, no revision to the report is
necessary.
b.
Changes in accounting estimates or corrections of errors (i.e., mathematical
mistakes, oversights, etc.) do not affect the consistency standard and would not
affect the auditor's report.
c.
Corrections of an error in principle (e.g., from cash method to accrual method) do
affect consistency and would require a consistency modification.
d.
If the year in which the change occurred is presented, the explanatory paragraph
is required in subsequent years' reports. If the change was treated as a
retroactive restatement, then the explanatory paragraph is not needed in
subsequent years.
e.
Although a change in depreciation method is accounted for as a change in
estimate for financial reporting purposes, for purposes of the auditor's report,
changes in depreciation method do require the addition of an explanatory
paragraph.
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A1-25
Auditing & Attestation 1
VII.
Becker CPA Review
THE QUALIFIED OPINION—GAAP PROBLEMS
UNQUALIFIED OPINION
QUALIFIED
QUALIFIED
"EXCEPT FOR"
"EXCEPT FOR"
GAAP
GAAS
1. Non-GAAP Change
2. Inadequate Disclosure
3. Departure from GAAP
4. Unreasonable Acctg. Estimate
1. Uncertainty
2. Scope Limitation
ADVERSE
DISCLAIMER
GAAP
GAAS
1. Non-GAAP Change
2. Inadequate Disclosure
3. Departure from GAAP
4. Unreasonable Acctg. Estimate
1. Uncertainty
2. Scope Limitation
3. Lack of Independence
4. Unaudited
WITHDRAW
False, Fraudulent, Deceptive or Misleading
A.
NON-GAAP CHANGE IN ACCOUNTING PRINCIPLE (GAAP ISSUE: QUALIFIED OR
ADVERSE)
As previously stated, a change from one generally accepted accounting principle to another
generally accepted accounting principle creates a consistency modification to the unqualified
opinion. The auditor can express an unqualified opinion as long as the auditor is satisfied
that:
1.
The method of accounting for the change is acceptable;
2.
The change is to an acceptable principle; and
3.
Management is justified in the change.
If any one of these conditions is not met, the auditor would express either a qualified or
adverse opinion, depending on the materiality of the item. An explanatory paragraph(s)
should appear before the opinion paragraph to describe the non-GAAP accounting change
and the financial impact (if possible). The qualified or adverse opinion would be expressed
each year that the financial statements initially reflecting the change are presented.
PASS KEY
When selecting the type of opinion to render because of a lack of consistency, it is important to determine if the change is
acceptable/justified or unacceptable/unjustified.
• GAAP = Acceptable/Justified
=
Modified Unqualified
• Not GAAP = Unacceptable/Unjustified
=
Qualified or Adverse
A1-26
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B.
Auditing & Attestation 1
INADEQUATE DISCLOSURE (GAAP ISSUE: QUALIFIED OR ADVERSE)
The third standard of reporting states the following: "Informative disclosures in the financial
statements are to be regarded as reasonably adequate unless otherwise stated in the report."
1.
Material Matters
In order for financial statements to be in conformity with GAAP, they must include
adequate disclosure of all material matters. Material matters include the form, content,
and arrangement of the financial statements and the accompanying notes. Auditors
must depend on their knowledge of the particular circumstances and their professional
judgment when deciding if an item should be disclosed.
2.
Failure to Disclose
An entity's failure to disclose information that is required by GAAP will generally result
in:
a.
Expression of a qualified or adverse opinion (depending on materiality) and
b.
Inclusion of such information, if practical, in the auditor's report. Generally, the
missing information is disclosed in an explanatory paragraph preceding the
opinion paragraph.
(1)
3.
"If practical" is construed to mean that the information is reasonably
available from the client's records. However, the auditor is not required to
actually prepare a financial statement and include it in the report.
Reason for Omission
The auditor must consider the reasons for the omission of any required information.
When the auditor believes that the omitted items cause the financial statements to be
deceptive, misleading, or fraudulent, the auditor must insist that management correct
the defect. If management refuses to correct the defective financial statements, the
auditor should consider withdrawing from the engagement.
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A1-27
Auditing & Attestation 1
4.
Becker CPA Review
Sample Report—Qualified Opinion Due to Inadequate Disclosure
QUALIFIED OPINION
DUE TO DEPARTURE FROM GAAP
INDEPENDENT AUDITOR'S REPORT
Intro
We have audited the accompanying balance sheets of ABC Company as of December 31, 20X1 and 20X0, and the
related statements of income, retained earnings, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
Scope
ABC Company's financial statements do not disclose several long-term leasing agreements for the right to use
computer equipment. The leasing agreements qualify as capital leases with a total lease obligation of $_____
over the next five years. In our opinion, disclosure of this information is required by generally accepted
accounting principles.
Middle
(Name)
Opinion
In our opinion, except for the omission of the information discussed in the preceding paragraph, the financial
statements referred to above present fairly, in all material respects, the financial position of ABC Company as of (at)
December 31, 20X1 and 20X0, and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of America.
(Date)
5.
Special Situation—No Statement of Cash Flows
The explanatory paragraph should disclose the fact that management has not
presented a statement of cash flows, which is a requirement of GAAP.
a.
Introductory Paragraph
No mention of the statement of cash flows should be made in the introductory
paragraph because the auditor did not examine the statement.
b.
Scope Paragraph
No modification to the scope paragraph is necessary.
c.
Middle Paragraph
When practical, the auditor is required to disclose the missing information and
related financial effects in the explanatory paragraph. However, the auditor is
not required to prepare a statement of cash flows in the event the client chooses
not to present one.
d.
Opinion Paragraph
The "except for" terminology is used to describe the omission, and the later
reference to the company's cash flows is deleted.
A1-28
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Becker CPA Review
6.
Auditing & Attestation 1
Sample Report—No Statement of Cash Flows
INDEPENDENT AUDITOR'S REPORT
(Name)
Opinion
In our opinion, except that the omission of a statement of cash flows results in an incomplete presentation as
explained in the preceding paragraph, the financial statements referred to above present fairly, in all material
respects, the financial position of ABC Company as of December 31, 20X1 and 20X0, and the results of its operations
[delete reference to statement of cash flows] for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
Middle
The Company declined to present a statement of cash flows for the years ended December 31, 20X1 and 20X0.
Presentation of such statement summarizing the Company's operating, investing, and financing activities is
required by generally accepted accounting principles.
Scope
We conducted our audits in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
Intro
We have audited the accompanying balance sheets of ABC Company as of December 31, 20X1 and 20X0, and the
related statements of income and retained earnings [delete reference to statement of cash flows] for the years then
ended. These financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
(Date)
C.
UNNECESSARY DEPARTURE FROM A GENERALLY ACCEPTED ACCOUNTING
PRINCIPLE (GAAP ISSUE: QUALIFIED OR ADVERSE)
If the financial statements are not prepared in accordance with generally accepted accounting
principles and the effect on the financial statements is material, the auditor would issue either
a qualified opinion or an adverse opinion. In deciding which opinion is appropriate, the
auditor would consider the materiality of the departure, the pervasiveness (how many
accounts are affected), and the significance of the items affected as they relate to the
financial statements taken as a whole.
1.
Format
When issuing a qualified opinion due to a departure from GAAP, the auditor will
describe, in an explanatory paragraph, the departure from GAAP and, if practical, the
financial impact of the departure. The explanatory paragraph should precede the
opinion paragraph.
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A1-29
Auditing & Attestation 1
2.
Becker CPA Review
Sample Report—Qualified Opinion Due to Departure from GAAP
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying balance sheets of ABC Company as of December 31, 20X1 and 20X0, and the
related statements of income, retained earnings, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements based on our audits.
Intro
We conducted our audits in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
Scope
Opinion
(Name)
Middle
The Company had previously recorded its land at cost but adjusted the amounts to appraised values during
the year, with a corresponding increase in stockholders' equity in the amount of $XXX. In our opinion, the new
basis on which the land is recorded does not conform with generally accepted accounting principles.
In our opinion, except for the effects of the change in recording appraised values as described above, the
financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as
of [at] December 31, 20X1 and 20X0, and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of America.
(Date)
D.
UNREASONABLE ACCOUNTING ESTIMATES (GAAP ISSUE: QUALIFIED OR
ADVERSE)
Usually, the auditor is able to become satisfied regarding the reasonableness of
management's estimates by considering various types of audit evidence, including the
historical experience of the entity.
1.
A1-30
If the auditor concludes that management's estimate is unreasonable and that its effect
is to cause the financial statements to be materially misstated, a qualified or an
adverse opinion should be expressed.
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Becker CPA Review
Auditing & Attestation 1
VIII. THE ADVERSE OPINION—GAAP PROBLEMS
An adverse opinion states that the financial statements taken as a whole do not present fairly the
financial position or results of operations or cash flows in conformity with United States generally
accepted accounting principles.
ADVERSE OPINION
UNQUALIFIED OPINION
QUALIFIED
QUALIFIED
"EXCEPT FOR"
"EXCEPT FOR"
GAAP
GAAS
1. Non-GAAP Change
2. Inadequate Disclosure
3. Departure from GAAP
4. Unreasonable Acctg. Estimate
1. Uncertainty
2. Scope Limitation
ADVERSE
DISCLAIMER
GAAP
GAAS
1. Non-GAAP Change
2. Inadequate Disclosure
3. Departure from GAAP
4. Unreasonable Acctg. Estimate
1. Uncertainty
2. Scope Limitation
3. Lack of Independence
4. Unaudited
WITHDRAW
False, Fraudulent, Deceptive or Misleading
A.
IN GENERAL
As previously stated, there are four situations in which an auditor expresses an adverse
opinion:
1.
2.
Non-GAAP Change—Auditor Disagrees
a.
Client changes to an unacceptable accounting principle,
b.
Client changes to a generally accepted principle and the change is unjustified, or
c.
The method of effecting an accounting change is not GAAP.
Inadequate Disclosure
When the financial statements and related notes do not present all the necessary
information in accordance with GAAP.
3.
Departure from GAAP (Not Necessary and Not Justified)
When the financial statements are not prepared in accordance with generally accepted
accounting principles.
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Auditing & Attestation 1
4.
Becker CPA Review
Unreasonable Accounting Estimate
When management's estimate is unreasonable, causing the financial statements to be
materially misstated.
Note: In each of these four situations, the auditor must choose between expressing a
qualified or an adverse opinion. In making this decision, the auditor considers the magnitude
of the problem, the overall effect on the financial statements, and the materiality of the effects
as they relate to the financial statements taken as a whole.
In which of the following circumstances would an auditor be most likely to express an adverse opinion?
a.
EXAMPLE
b.
c.
d.
Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue as a
going concern.
The chief executive officer refuses the auditor access to minutes of the board of directors' meetings.
Tests of controls show that the entity's internal control structure is so poor that it cannot be relied upon.
The financial statements are not in conformity with the FASB Statements regarding the capitalization of leases.
Solution: Choice "d" is correct. An adverse opinion states that the financial statements do not present fairly the
financial position in conformity with generally accepted accounting principles (GAAP). Financial statements that are not
in conformity with the FASB Statements regarding capitalization of leases do not present fairly the financial position in
conformity with GAAP.
Choice "a" is incorrect. An adverse opinion states that the financial statements do not present fairly the financial
position in conformity with generally accepted accounting principles (GAAP). Possible inability to continue as a going
concern is not a departure from GAAP.
Choice "b" is incorrect. An adverse opinion states that the financial statements do not present fairly the financial
position in conformity with generally accepted accounting principles (GAAP). When the CEO refuses the auditor access
to minutes of board of directors' meetings, a client-imposed scope limitation exists, and the auditor would express a
disclaimer of opinion.
Choice "c" is incorrect. An adverse opinion states that the financial statements do not present fairly the financial
position in conformity with generally accepted accounting principles (GAAP). When tests of controls show that the
entity's internal control structure is so poor it cannot be relied upon, the auditor will need to design the nature, timing,
and extent of further audit procedures accordingly.
B.
FORMAT OF REPORT
When the auditor expresses an adverse opinion, all the substantive reasons and the financial
impact (if possible) related to the adverse opinion should be set forth in a separate
explanatory paragraph(s) preceding the opinion paragraph. If the financial impact is not
readily determinable, the auditor's report should so state.
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Becker CPA Review
C.
Auditing & Attestation 1
SAMPLE REPORT—DEPARTURE FROM GAAP
[Same Intro Paragraph]
[Same Scope Paragraph]
Intro Scope
INDEPENDENT AUDITOR'S REPORT
As discussed in Note Z to the financial statements, the Company carries its property, plant, and equipment
accounts at appraisal values, and provides depreciation on the basis of such values. Further, the Company
does not provide for income taxes with respect to differences between financial income and taxable income
arising because of the use, for income tax purposes, of the installment method of reporting gross profit from
certain types of sales. Generally accepted accounting principles require that property, plant, and equipment be
stated at an amount not in excess of cost, reduced by depreciation based on such amount, and that deferred
income taxes be provided.
(Name)
Opinion
In our opinion, because of the effects of the matters discussed in the preceding paragraphs, the financial
statements referred to above do not present fairly in conformity with accounting principles generally accepted in
the United States of America, the financial position of ABC Company as of December 31, 20X1 and 20X0, or the
results of its operations or its cash flows for the years then ended.
Middle
Because of the departure from generally accepted accounting principles identified above, as of December 31,
20X1 and 20X0, inventories have been increased $____ and $____ by inclusion in manufacturing overhead of
depreciation in excess of that based on cost; property, plant, and equipment, less accumulated depreciation, is
carried at $____ and $____ in excess of an amount based on the cost to the Company; and deferred income
taxes of $___ and $___ have not been recorded; resulting in an increase of $___ and $___ in retained earnings
and in appraisal surplus of $___ and $___, respectively. For the years ended December 31, 20X1 and 20X0, cost
of goods sold has been increased $___ and $___, respectively, because of the effects of the depreciation
accounting referred to above and deferred income taxes of $___ and $___ have not been provided, resulting in
an increase in net income of $____ and $____, respectively.
(Date)
Note: The order of the statements in the opinion paragraph has been changed: "In conformity
with..." precedes "...the financial position of ABC Company..." Also, the phrase "in all material
respects" has been omitted.
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Auditing & Attestation 1
IX.
Becker CPA Review
QUALIFIED OPINION—GAAS PROBLEMS
UNQUALIFIED OPINION
QUALIFIED
QUALIFIED
"EXCEPT FOR"
"EXCEPT FOR"
GAAP
GAAS
1. Non-GAAP Change
2. Inadequate Disclosure
3. Departure from GAAP
4. Unreasonable Acctg. Estimate
1. Uncertainty
2. Scope Limitation
ADVERSE
DISCLAIMER
GAAP
GAAS
1. Non-GAAP Change
2. Inadequate Disclosure
3. Departure from GAAP
4. Unreasonable Acctg. Estimate
1. Uncertainty
2. Scope Limitation
3. Lack of Independence
4. Unaudited
WITHDRAW
False, Fraudulent, Deceptive or Misleading
A.
UNCERTAINTY (GAAS ISSUE: QUALIFIED OR DISCLAIMER)
1.
2.
If the auditor is unable to obtain sufficient audit evidence to support management's
assertions about the nature of a matter involving an uncertainty and/or its presentation
or disclosure in the financial statements, the auditor should consider the need
a.
To express a qualified opinion, or
b.
To disclaim an opinion because of a scope limitation.
A qualification or disclaimer of opinion because of a scope limitation is also appropriate
if sufficient audit evidence related to an uncertainty does or did exist but was not
available to the auditor for reasons such as management's record retention policies or
a restriction imposed by management.
PASS KEY
Remember to determine if there is evidence supporting management's reporting of the uncertainty. When an uncertainty is
properly reported according to GAAP and the auditor has evidence to support such disclosure, an unqualified opinion is
issued.
A1-34
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Becker CPA Review
B.
Auditing & Attestation 1
SCOPE LIMITATION (GAAS ISSUE: QUALIFIED OR DISCLAIMER)
1.
General
When the auditor is unable to complete the audit fully, the scope of the audit has been
limited. Examples of conditions that restrict scope include the following items.
2.
a.
Time constraints.
b.
Inability to obtain sufficient appropriate audit evidence, such as:
(1)
Inability to observe inventory.
(2)
Inability to confirm receivables.
(3)
Inability to obtain audited financial statements of a consolidated investee.
(4)
Restrictions on the use of auditing procedures.
(5)
Inadequacy of accounting records.
c.
Refusal of management to provide written representation and/or to acknowledge
its responsibility for the fair presentation of the financial statements in conformity
with GAAP.
d.
Refusal of client's attorney to respond to inquiry.
Causes
Restrictions of scope may be imposed by:
a.
Circumstances
For example, an auditor was not engaged at the beginning of the year, when
opening inventory should have been observed. If the auditor was not able to
satisfy himself regarding the opening inventory, but otherwise was satisfied, he
or she could issue an unqualified opinion on the year-end balance sheet and
render a disclaimer of opinion on the statements of income, retained earnings,
and cash flows.
(1)
Alternative Audit Procedures
If an auditor did not observe ending inventories or confirm accounts
receivable, but was able to become satisfied as to inventories or accounts
receivable by applying alternative procedures, and there were no other
significant scope limitations, the auditor may issue an unqualified opinion
and need not make reference to the omission or the use of alternative
procedures.
b.
Client
For example, a client doesn't want to pay for the extra cost of observing
inventory or auditing a foreign subsidiary. The auditor may not be able to obtain
sufficient appropriate audit evidence regarding these items. A qualified opinion
or a disclaimer of opinion would be issued.
3.
Qualified Opinion or Disclaimer of Opinion
The auditor must express a qualified opinion or disclaim an opinion when, due to a
scope limitation, the auditor is unable to perform all the tests necessary to complete an
audit. The determination of whether to render an opinion is left to the auditor's
judgment. When significant limitations are imposed by the client, the auditor should
disclaim an opinion.
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Auditing & Attestation 1
4.
Becker CPA Review
Qualified Opinion
The nature of the scope limitation should be described in an explanatory paragraph
(preceding the opinion paragraph) and should be referred to in both the scope and
opinion paragraphs of the auditor's report. The auditor's report should focus on the
effects on the financial statements, not on the limitation itself. The auditor should not
use wording such as "except for the limitation on the scope of our audit."
QUALIFIED
OPINION DUE
TO SCOPE
LIMITATIONS
5.
Sample Report—Qualified Opinion Due to Scope Limitation
INDEPENDENT AUDITOR'S REPORT
Intro
Scope
Middle
Opinion
We have audited the accompanying balance sheets of ABC Company as of December 31, 20X1 and 20X0, and the
related statements of income, retained earnings, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements based on our audits.
Except as stated in the following paragraph, we conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
We did not observe the taking of physical inventory as of December 31, 20X1. The Company's records do not
permit adequate retroactive tests of inventory quantities.
In our opinion, except for the effects of such adjustment, if any, as might have been disclosed had we been able
to observe the physical inventory taken as of December 31, 20X1, the financial statements referred to above
present fairly, in all material respects, the financial position of ABC Company as of [at] December 31, 20X1 and 20X0,
and the results of its operations and its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
(Name)
(Date)
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Becker CPA Review
X.
Auditing & Attestation 1
DISCLAIMER OF OPINION—GAAS PROBLEMS
UNQUALIFIED OPINION
QUALIFIED
QUALIFIED
"EXCEPT FOR"
"EXCEPT FOR"
GAAP
GAAS
1. Non-GAAP Change
2. Inadequate Disclosure
3. Departure from GAAP
4. Unreasonable Acctg. Estimate
1. Uncertainty
2. Scope Limitation
ADVERSE
DISCLAIMER
GAAP
GAAS
1. Non-GAAP Change
2. Inadequate Disclosure
3. Departure from GAAP
4. Unreasonable Acctg. Estimate
1. Uncertainty
2. Scope Limitation
3. Lack of Independence
4. Unaudited
WITHDRAW
False, Fraudulent, Deceptive or Misleading
A.
REASONS FOR A DISCLAIMER OF OPINION:
1.
B.
The auditor does not express an opinion on the financial statements. The auditor may
elect to disclaim an opinion under any of the following circumstances:
a.
Uncertainty
b.
Scope limitation
c.
Lack of independence
d.
Unaudited financial statements
2.
An auditor may decline to express an opinion whenever he or she is unable to form or
has not formed an opinion as to the fairness of presentation of the financial statements
in conformity with GAAP.
3.
A disclaimer is appropriate when the auditor has not performed an audit sufficient in
scope to support an opinion on the financial statements.
REPORT
1.
Introductory Paragraph
Modification to the introductory paragraph includes:
2.
a.
Use of the words "were engaged to audit" instead of "have audited," and
b.
Deletion of the reference to the auditor's responsibility.
Scope Paragraph (Omitted)
The auditor should exclude the scope paragraph of the auditor's standard report, since
describing the characteristics of an audit may tend to overshadow the disclaimer. The
auditor should not identify the procedures that were performed.
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A1-37
Auditing & Attestation 1
3.
Becker CPA Review
Explanatory (Middle) Paragraph
a.
Reasons for Disclaimer
When disclaiming an opinion because of a scope limitation, the auditor should
state all of the substantive reasons for the disclaimer in a separate paragraph or
paragraphs. The auditor should also state that the scope of the audit was not
sufficient to warrant the expression of an opinion. For example:
b.
(1)
The auditor was not independent (e.g., is related to the client or has a
financial interest in the client). A lack of independence can only result in a
disclaimer of opinion.
(2)
There are significant client-imposed restrictions.
Statements Not in Accordance with GAAP
The auditor should also disclose any reservations regarding fair presentation in
conformity with GAAP.
4.
Opinion Paragraph
A disclaimer of opinion is given on the financial statements taken as a whole.
C.
SAMPLE REPORT—DISCLAIMER OF OPINION
DISCLAIMER OF OPINION
[No Scope Paragraph]
The Company did not make a count of its physical inventory in 20X1 stated in the year-end financial statements of
December 20X1 as $_______. The Company's records do not permit the application of alternative procedures to
ascertain the value of the inventory.
EXAMPLE
(Name)
(Date)
A1-38
Disclaimer
Since the Company did not take a physical inventory count and we were not able to apply other auditing procedures
to satisfy ourselves as to inventory quantities, the scope of our work was not sufficient to enable us to
express, and we do not express, an opinion on these financial statements.
No Scope Middle
We were engaged to audit the accompanying balance sheets of ABC Company as of December 31, 20X1 and 20X0,
and the related statements of income, retained earnings, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. [delete reference to auditor's responsibility]
Intro
INDEPENDENT AUDITOR'S REPORT
An auditor most likely would issue a disclaimer of opinion because of
a. Inadequate disclosure of material information.
b. The omission of the statement of cash flows.
c. A material departure from generally accepted accounting principles.
d. Management's refusal to furnish written representations.
Solution: Choice "d" is correct. Management's refusal to furnish written representations constitutes a scope limitation.
The auditor may express a disclaimer for scope restrictions.
Choice "a" is incorrect. Inadequate disclosure is a GAAP problem that would result in a qualified or adverse
opinion.
Choice "b" is incorrect. Omission of the statement of cash flows is a departure from GAAP that would result in a
qualified or adverse opinion.
Choice "c" is incorrect. A material departure from GAAP would result in a qualified or adverse opinion.
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D.
Auditing & Attestation 1
UNAUDITED FINANCIAL STATEMENTS
1.
Association with Financial Statements
Association occurs when an accountant either:
2.
a.
Consents to the use of his or her name in connection with the financial
statements, or
b.
Has prepared the financial statements, even if the accountant's name is not
used.
Sample Report – Disclaimer of Opinion: Lack of Independence
An accountant who is "associated with" financial statements but is not independent
should disclaim an opinion.
We are not independent with respect to XYZ Company, and the accompanying balance sheet as of December 31,
20XX and the related statements of income, retained earnings, and cash flows for the year then ended were not audited
by us and, accordingly, we do not express an opinion on them.
Disclaimer
[No Title or Addressee]
[No Introductory Paragraph]
[No Scope Paragraph]
(Name)
(Date)
3.
Disclaimer on Unaudited Financial Statements of a Publicly Held Company
An accountant who is associated with the financial statements of a public entity without
auditing or reviewing them should issue a disclaimer of opinion.
a.
The accountant must read the financial statements for obvious errors.
b.
The disclaimer may accompany the unaudited financial statements or it may be
placed directly on them.
c.
"Unaudited" should be clearly marked on each page of the financial statements.
d.
If the client refuses to correct an obvious error, the auditor should add a
paragraph modifying the disclaimer to describe, in a separate explanatory
paragraph, the nature and effect of the departure from GAAP. If the client
refuses to accept the modified disclaimer, the auditor should withdraw from the
engagement.
PASS KEY
When exam questions indicate that the financial statements are false, fraudulent, deceptive or misleading, that management
refuses to correct them, and that modification of the CPA's report is not sufficient to correct the item, the CPA should consider
withdrawing from the engagement.
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A1-39
Auditing & Attestation 1
Becker CPA Review
SUMMARY
1. UNCERTAINTY
Evidence
No evid.-mat'l
No evid.-v.mat'l
Type of
Opinion
Introductory
Paragraph
Scope
Paragraph
Middle
Paragraph
Opinion
Paragraph
Ending
Paragraph
Unqualified
Qualified
Disclaimer
Standard
Standard
Modified
Standard
"Except"
Omitted
No
Yes
Yes
Fair GAAP
Except for
Disclaimer
No
No
No
Modified
Modified
Standard
Omitted
Modified
Standard
Yes
No
No
Disclaimer
Modified…fair GAAP
Fair GAAP
No
No
No
Standard
Standard
No
Fair GAAP
Use to highlight
Standard
Standard
Middle OR
ending
paragraph
Fair GAAP
Middle OR
ending
paragraph
Standard
Standard
Standard
No
Yes
Yes
Fair GAAP
Except for
Because…not fair
Use to highlight
No
No
Standard
Standard
Standard
Standard
No
Yes
Yes
Middle OR
ending
paragraph
Fair GAAP
Except for
Because…not fair
Fair GAAP
No
No
No
Middle OR
ending
paragraph
Standard
"Except"
Omitted
None
No
Yes
Yes
None
Fair GAAP
Except for
Disclaimer
Disclaimer
No
No
No
No
2. ANOTHER AUDITOR
Not Accepted
Disclaimer
Divided
Unqualified
Fully Accepted
Unqualified
3. GOING CONCERN
Unqualified
4. EMPHASIS OF MATTER
Unqualified
5. CONSISTENCY
Unqualified
Standard
GAAP
Qualified
Standard
Not GAAP-mat’l
Not GAAPAdverse
Standard
very mat’l
6. ACCOUNTING/DISCLOSURES ARE NOT GAAP
Immaterial
Unqualified
Standard
Material
Qualified
Standard
Very Material
Adverse
Standard
Necessary/
Unqualified
Standard
justified
7. SCOPE LIMITATION
Immaterial
Material
Very Material
8. INDEPENDENCE
A1-40
Unqualified
Qualified
Disclaimer
Disclaimer
Standard
Standard
Modified
None
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Becker CPA Review
Auditing & Attestation 1
REPORTS ON COMPARATIVE FINANCIAL STATEMENTS
I.
INTRODUCTION
COMPARATIVE
FINANCIAL
STATEMENTS
The fourth standard of reporting requires the expression or the disclaimer of an opinion regarding
the financial statements "taken as a whole." Taken as a whole applies not only to the current
period statements but also to any prior statements presented for comparison. Since the report date
for the audit of the most recent financial statements is generally used, the auditor should update the
report(s) on financial statement(s) previously issued. Update can mean reaffirm, or change,
because of changed conditions or information coming to the auditor's attention during the current
examination (see "III" below). A continuing auditor is one who has examined the current
statements and those of at least the immediately preceding period. A continuing auditor need not
report on prior-period statements if only summarized data are presented. However, the auditor
should be specific as to which statements are being presented and reported on.
II.
REPORTING WITH DIFFERENT OPINIONS
The auditor's current year report will cover all financial statements for all years presented. It is quite
possible that different opinions will have been issued for the different years presented. Some
examples of varying opinions are included below.
A.
SAMPLE REPORT—UNQUALIFIED PRIOR YEAR WITH CURRENT YEAR QUALIFIED
[Same Intro Paragraph]
[Same Scope Paragraph]
Opinion
In our opinion, except for the effects on the 20X1 financial statements of not capitalizing certain lease
obligations as described in the preceding paragraph, the financial statements referred to above present fairly, in all
material respects, the financial position of ABC Company as of December 31, 20X1 and 20X0, and the results of its
operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the
United States of America.
Middle
The Company has excluded, from property and debt in the accompanying 20X1 balance sheet, certain lease
obligations that were entered into in 20X1, which in our opinion, should be capitalized, in order to conform with
generally accepted accounting principles. If these lease obligations were capitalized, property would be
increased by $____, long-term debt by $_____, and retained earnings by $____ as of December 31, 20X1, and
net income and earnings per share would be increased (decreased) by $_____ and $_____ respectively, for the
year then ended.
Intro Scope
INDEPENDENT AUDITOR'S REPORT
(Name)
(Date)
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Auditing & Attestation 1
B.
Becker CPA Review
SAMPLE REPORT—UNQUALIFIED CURRENT YEAR WITH DISCLAIMER ON PRIOR
YEARS' STATEMENTS OF INCOME, RETAINED EARNINGS, AND CASH FLOWS
[Same Intro Paragraph]
Because of the matter discussed in the preceding paragraph, the scope of our work was not sufficient to
enable us to express, and we do not express, an opinion on the results of operations and cash flows for the
year ended December 31, 20X1.
Opinion
In our opinion, the balance sheets of ABC Company as of December 31, 20X2 and 20X1, and the related statements
of income, retained earnings, and cash flows for the year ended December 31, 20X2, present fairly, in all material
respects, the financial position of ABC Company as of December 31, 20X2 and 20X1, and the results of its operations
and its cash flows for the year ended December 31, 20X2, in conformity with accounting principles generally accepted
in the United States of America.
Middle
We did not observe the taking of the physical inventory as of December 31, 20X0, since that date was prior to
our appointment as auditors for the Company, and we were unable to satisfy ourselves regarding inventory
quantities by means of other auditing procedures. Inventory amounts as of December 31, 20X0, enter into the
determination of net income and cash flows for the year ended December 31, 20X1.
Scope
Except as explained in the following paragraph, we conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that we plan and perform our audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
Intro
INDEPENDENT AUDITOR'S REPORT
(Name)
(Date)
PASS KEY
When the examiners indicate that the prior year's financial statements were not audited and that the current year's financial
statements are being audited, the auditor is in essence facing a scope limitation. The beginning balances may no longer be
ascertainable and therefore a disclaimer of opinion on the statements of income, retained earnings, and cash flows may be
required.
A1-42
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III.
Auditing & Attestation 1
UPDATING (CHANGING) PRIOR OPINIONS
UPDATED
OPINION
EXAMPLE
If, during the current examination, the auditor becomes aware of evidence that affects
the prior statements and the opinion that was expressed, the auditor should update the opinion in
the current year's report.
A previous report that was qualified due to a departure from GAAP would no longer be appropriate in the event of the
restatement of the prior year's financial statements.
A.
FORMAT
If the updated opinion differs from the previous opinion, the auditors should disclose the
reason(s) in a separate explanatory paragraph preceding the opinion paragraph. The
explanatory paragraph should disclose the:
D
1.
Date of the auditor's previous report
O
2.
Opinion type previously issued
R
3.
Reason for the prior opinion
C
4.
Changes that have occurred
S
5.
Statement that the "opinion…is different."
PASS KEY
Remember, only "DORCS" change their mind.
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A1-43
Auditing & Attestation 1
B.
Becker CPA Review
SAMPLE REPORT—AMENDED OPINION DUE TO RESTATEMENT OF PRIOR
FINANCIALS
INDEPENDENT AUDITOR'S REPORT
Intro
[Same Intro Paragraph]
[Same Scope Paragraph]
Scope
In our report dated March 1, 20X1, we expressed an opinion that the 20X0 financial statements did not fairly present
financial position, results of operations, and cash flows in conformity with generally accepted accounting principles
because of two departures from such principles: (1) the Company carried its property, plant, and equipment at appraisal
values, and provided for depreciation on the basis of such values, and (2) the Company did not provide for deferred
income taxes with respect to differences between income for financial reporting purposes and taxable income. As
described in Note X, the Company has changed its method of accounting for these items and restated its 20X0
financial statements to conform with generally accepted accounting principles. Accordingly, our present
opinion on the 20X0 financial statements, as presented herein, is different from that expressed in our previous
report.
Middle
(Name)
(Date)
A1-44
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of
ABC Company as of December 31, 20X1 and 20X0, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the United States of America.
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Becker CPA Review
IV.
Auditing & Attestation 1
REPORT OF A PREDECESSOR AUDITOR—PRESENTED
Predecessor auditors may reissue their report on financial statements as long as the report is still
appropriate. However, the current presentation of the prior period statements or the occurrence of
subsequent events may make the previous report inappropriate. In deciding whether to reissue
their report, the predecessor auditors should:
(i)
Read the statements for the current period;
(ii)
Compare the statements audited with the current period statements;
(iii)
Obtain a letter of representation from the successor auditor. The representation letter should
state whether, in the successor auditor's opinion, the examination revealed any matters that
might have a material effect on, or require disclosure in, the statements reported on by the
predecessor auditor. In reissuing the report, the predecessor auditor should not refer to the
report or work of the successor auditor.
(iv)
Obtain a letter of representation from management. The representation letter should state
whether management's previous representations need to be modified and whether there
have been any subsequent events requiring adjustment to or disclosure in the reissued
financial statements.
A.
DATE OF REPORT
1.
Unrevised
Use the original report date in any reissue of a previous report, since the predecessor
auditor has limited knowledge of the former client's current status.
2.
Revised
Dual date (covered later) in the event that the predecessor auditor revises the report.
V.
REPORT OF A PREDECESSOR AUDITOR—NOT PRESENTED
When the successor auditor does not present the predecessor auditor's report, the successor
auditor should indicate in the introductory paragraph:
(1)
That the statements were examined by other auditors in prior periods. The predecessor
auditors should not be named unless the practice of the predecessors was acquired by or
merged with that of the successor;
(2)
The date of the predecessor auditor's report;
(3)
The type of opinion expressed by the predecessor auditor; and
(4)
The substantive reason(s) for other than an unqualified report.
In addition, if the prior period statements were restated, the successor auditor should mention in the
introductory paragraph that the predecessor auditor reported on the financial statements of the prior
period before restatement. If the successor auditor audits the restatement adjustment, a paragraph
indicating approval of the restatement may be added, if that is the case.
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A1-45
Auditing & Attestation 1
EVENTS OCCURRING AFTER YEAR-END
SUBSEQUENT
EVENTS
I.
Becker CPA Review
SUBSEQUENT EVENTS
Events or transactions that occur after the balance sheet date, but before the financial statements
are issued, are known as subsequent events. A subsequent event may require adjustment to the
financial statements or may require disclosure of an event without adjustment to the financial
statements.
A.
TYPE I EVENTS—CONDITIONS EXISTING ON OR BEFORE THE BALANCE SHEET DATE
An adjustment to the financial statements is usually required if the condition existed at the
date of the financial statements. A trade receivable existing at the date of the financial
statements that subsequently becomes uncollectible because of bankruptcy of the customer
requires an adjustment to the financial statements.
B.
TYPE II EVENTS—CONDITIONS EXISTING AFTER THE BALANCE SHEET DATE
Significant business events, such as the purchase of a business or the sale of debenture
bonds, occurring subsequent to the date of financial statements, require no adjustment to the
statements, but may require significant additional disclosure. These types of events may
require only disclosure by a note to the financial statements or could require complete
supplemental disclosure such as pro forma financial statements. However, they rarely
require an actual adjustment to the financial statement for the period. The auditor exercises
judgment as to whether or not mentioning the subsequent event would cause the financial
statements to be misleading.
PASS KEY
When testing the issue of subsequent events, a candidate is expected to know the GAAP rules:
A1-46
•
Type I Event
→
Requires a financial statement adjustment
•
Type II Event
→
May require footnote disclosure
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Becker CPA Review
C.
Auditing & Attestation 1
AUDITOR'S RESPONSIBILITY FOR SUBSEQUENT EVENTS
The period between the date of the financial statements and the date of the auditor's report is
called the subsequent period. During this period, the auditor has an active responsibility to
investigate certain subsequent events. During the subsequent period, the auditor should
perform, as necessary, one or more of the following procedures to assure that proper cutoffs
have been made, to aid in the evaluation of year-end assets and liabilities, and to determine
the existence of subsequent events that may require adjustment to, or disclosure in, the
financial statements. The auditor evaluates whether such events require adjustment to or
disclosure in the financial statements.
1.
Post balance sheet transactions: Review for proper cutoff and to better evaluate yearend balances.
2.
Representation letter should be obtained from management (usually the CEO and
CFO) regarding whether any events occurred during the subsequent period that require
adjustments to or disclosure in the financial statements.
3.
Inquiry.
a.
b.
D.
Inquire of and discuss with management whether:
(1)
Any material contingent liabilities or commitments existed at the date of the
balance sheet or currently exist;
(2)
Any significant change in capital stock, long-term debt, or working capital
has occurred since the balance sheet date;
(3)
Any material unusual adjustments have been made during the subsequent
period; and
(4)
There have been any changes in items that had been accounted for on an
indefinite basis.
Inquire of client's legal counsel concerning litigation, claims, and assessments.
4.
Minutes of stockholders, directors, and other committee meetings should be read
during the subsequent period.
5.
Examine latest available interim financial statements; compare them with the financial
statements under audit.
AUDITOR'S RESPONSIBILITY AFTER THE ORIGINAL DATE OF THE AUDITOR'S
REPORT
The auditor has no active responsibility to make any inquiries or to perform any further
auditing procedures to discover subsequent events after the original date of the auditor's
report. If, however, the auditor becomes aware of any information relating to subsequent
events, the auditor should consider whether it is necessary to adjust the financial statements
or the related disclosures.
1.
Report Date
a.
If adjustments or disclosures are made after the original date of the auditor's
report, the auditor may dual date the report to extend responsibility only for the
particular subsequent event. The original date of the report is retained for the
rest of the financial statements.
(1)
Example of dual dating: "January 21, 20X2, except for Note 2, as to which
the date is February 3, 20X2."
b.
Alternatively, a later date may be used for the report, but this extends the
auditor's responsibility for all subsequent events to this later date.
c.
If adjustments are made to the financial statements without any footnote
disclosure, the original date of the report should be used.
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A1-47
Auditing & Attestation 1
E.
Becker CPA Review
AUDIT TIMING
The following chart shows the timing for a typical audit.
AUDIT - TIME BUDGET OF 2,000 HOURS
FACTS: The year end is Dec 31, 20X1. The report is due Feb 15, 20X2.
JUNE 1
I
N
1,600 Hrs
TO
W
T
O
E
R
R
K
I
M
DETAIL WORK
Confirms of: cash, AR, NR, etc.
Cash reconciliations
Special account analysis
Physical inventory observation
Fixed asset verification
Tests of sales and payroll
Internal control review
OCT 20
DEC 27 – JAN 3
80
CUTOFFS
Client closes books
JAN 15 – FEB 10
300
Auditor IS responsible
(Feb 10 = date of auditor's report)
YE – WORK
includes “PRIME”
Year end inventory observation and
cut off tests of cash, AR, inventory,
AP, sales, etc.
Review of subsequent AR collections
Follow up on confirm request
Search for unrecorded liabilities
Subsequent events audit program:
"PRIME"
Auditor is NOT responsible
FEB 15 Report submitted 20
REPORT
Obtain management representation letter
(dated Feb 10) at last minute
SUBSEQUENT DISCOVERY
OF FACTS
II.
SUBSEQUENT DISCOVERY OF FACTS EXISTING AT THE DATE OF THE AUDITOR'S
REPORT (DISCOVERED AFTER REPORT IS ISSUED)
Usually, an auditor has no obligation to make continuing inquiries after the date of the report.
However, if an auditor becomes aware of material information that would have affected the report,
and that persons are currently relying or are likely to rely on the financial statements covered by the
report, the auditor should take appropriate action.
A.
AUDITOR ACTION
Upon discovering, after issuance of the report, information (confirmed by the auditor) that
materially affects the report and other persons' reliance on it, the auditor should advise the
client to immediately disclose the new information and its impact on the financial statements
to persons currently relying or likely to rely on the financial statements. This may be
accomplished by:
1.
A1-48
Advising the client to issue revised financial statements (along with a new audit report)
describing the reasons for revision; or
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Becker CPA Review
Auditing & Attestation 1
2.
Advising the client to make the necessary disclosures and revisions to any imminent
financial statements (accompanied by an auditor's report for a subsequent period); or
3.
If the effect on the financial statements cannot be determined on a timely basis,
providing notification that the financial statements and report should not be relied upon.
In addition, the client should be advised to discuss with the SEC, stock exchanges, and
appropriate regulatory agencies (where applicable) the new disclosures or revisions.
Regardless of which disclosure method above is used, the auditor must become satisfied that
appropriate steps have been taken by the client.
B.
IF CLIENT REFUSES TO FOLLOW PROCEDURES
If the client refuses to proceed as above, the auditor should notify each member of the board
of directors of such refusal, and of the fact that the auditor will take additional steps to prevent
further reliance on the auditor's report and the financial statements.
1.
2.
Additional Steps to Prevent Further Reliance
a.
Notify the client that the auditor's report must no longer be associated with the
financial statements;
b.
Notify, if applicable, any regulatory agencies having jurisdiction over the client
that the auditor's report should no longer be relied on; and
c.
Notify persons known to be relying or likely to rely on the financial statements
that the auditor's report should no longer be relied on.
Notification
Any notification to parties other than the client should be as precise and factual as
possible, and should contain a description of the effect that the discovered information
would have had on the auditor's report on the financial statements.
If the client has refused to cooperate, and as a result the auditors were unable to
conduct an adequate investigation of the information, the auditors' disclosure need only
state that information has come to their attention and that, if the information is true,
their report should no longer be relied on or be associated with the financial
statements.
The auditors should use their professional judgment in the circumstances described
above, and it may be advisable to consult legal counsel.
III.
OMITTED AUDIT PROCEDURES DISCOVERED AFTER SUBMISSION
OF THE AUDIT REPORT
OMITTED AUDIT
PROCEDURES
Omitted audit procedures may be discovered (after the audit report has been submitted) during a
firm's internal inspection program or during peer review.
A.
AUDITOR ACTION
1.
The auditor should determine whether other audit procedures tended to compensate
for the omitted audit procedures. If so, no further action is necessary.
2.
If, on the other hand, the omitted audit procedures impair the auditor's ability to support
the previously issued opinion, and there are people relying (or likely to rely) on the
report, then the auditor should promptly undertake to apply the omitted procedures (or
alternative procedures).
3.
If facts emerge that would have affected the auditor's report, the auditor should
proceed as described under subsequent discovery of facts.
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A1-49
Auditing & Attestation 1
Becker CPA Review
REPORTING ON OTHER INFORMATION
INFORMATION ACCOMPANYING
THE BASIC FINANCIAL
STATEMENTS
I.
INFORMATION ACCOMPANYING THE BASIC FINANCIAL STATEMENTS IN A CLIENTPREPARED DOCUMENT
Frequently, audited financial statements are incorporated into other documents, such as annual
reports to shareholders or reports by charitable organizations to the general public. The fourth
standard of reporting requires that an auditor's report contain a clear-cut indication of the character
of the examination and the degree of responsibility the auditor is taking.
A.
AUDITOR'S RESPONSIBILITY
Generally, an auditor's responsibility with respect to other information in a document within
which the report appears does not extend beyond the financial information identified in the
report. The auditor should, however, read the other information.
1.
Material Inconsistency
The document may contain information that is materially inconsistent with the financial
statements. The auditor should determine whether the financial statements or the audit
report require revision. If they do not require revision (i.e., they are correct as is), the
auditor should request that the other information be revised to eliminate the material
inconsistency. If the information is not revised appropriately, the auditor should
consider:
Modified
Unqualified
Another CPA
Justified
Non-GAAP
Going Concern
Emphasis Matter
Consistency
a.
Revising the report to include discussion of the material inconsistency;
Other
b.
Withholding the use of the report; or
c.
Withdrawing from the engagement and consulting with legal counsel.
2.
Material Misstatement of Fact
Other information may include a material misstatement of fact that is not a material
inconsistency related to financial statement data. If the client refuses to take corrective
action, the auditor should use professional judgment and discuss the matter with the
client and the client's legal counsel. If these discussions do not resolve the situation,
the auditor should notify the client in writing and consult legal counsel.
B.
REPORTING IS PERMITTED (BUT NOT REQUIRED)
If auditing procedures have been applied to other information included in documents
containing audited financial statements, the auditor may report on such information.
1.
Reporting
The auditor expresses an opinion on whether the information is fairly stated in all
material respects in relation to the financial statements taken as a whole. The report
must also include a description of the character of the auditor's work and the degree of
responsibility assumed.
A1-50
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II.
Auditing & Attestation 1
REQUIRED SUPPLEMENTARY INFORMATION
A.
GENERAL
REQUIRED
SUPPLEMENTARY
INFORMATION
Certain entities are required to prepare specific information that is
supplementary to the basic financial statements. An auditor now has certain responsibilities
concerning both information outside the financial statements and supplementary information
required by GAAP (e.g., the FASB or GASB) that accompanies the financial statements.
B.
LIMITED PROCEDURES
The auditor should perform the following limited procedures on supplementary information
accompanying the financial statements:
C.
1.
Inquire of management how the supplementary information was prepared, including
changes from prior years and significant assumptions.
2.
Determine if the supplementary information is consistent with management's
responses, audited financial statements, and other knowledge.
3.
Consider whether the client representation letter should refer to the supplementary
information.
REPORTING ON SUPPLEMENTARY INFORMATION
1.
Opinion Not Required
An auditor is not required to audit supplementary information, and the auditor's report
on the financial statements would not include a reference to such information.
However, the report should be expanded in situations in which:
Modified
Unqualified
Another CPA
Justified
Non-GAAP
a.
Required supplementary information is omitted;
Going Concern
b.
The information is not in compliance with GAAP requirements for proper
measurement or presentation;
c.
The auditor is not able to complete required procedures; or
d.
There is substantial doubt about conformance of required supplementary
information.
Emphasis Matter
Consistency
Other
If the auditor determines that the required information has not been presented as
prescribed, and management refuses to make revisions, the auditor should disclose
the departure in the report on the financial statements, using an explanatory paragraph.
2.
Opinion Permitted
The auditor may choose to apply certain auditing procedures to the supplementary
information during the audit. In such cases, the auditor is permitted to express an
opinion indicating whether the supplementary information is fairly stated in all material
respects in relation to the financial statements taken as a whole. The report would also
include a description of the character of the auditor's work and the degree of
responsibility assumed.
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A1-51
Auditing & Attestation 1
D.
Becker CPA Review
POSSIBLE NEED FOR DISCLAIMER
A disclaimer on the supplementary information should be included in the auditor's report on
the financial statements when either:
1.
Supplementary information that is not clearly distinguished from the basic financial
statements is not marked "unaudited," or
2.
The entity indicates that procedures were performed without indicating that the auditor
does not express an opinion on the supplementary information.
SEGMENT
INFORMATION
III.
SEGMENT INFORMATION
A.
GENERAL
Promulgated GAAP requires that annual financial statements of public companies contain
segment information about (i) products and services, (ii) geographic areas, and (iii) major
customers.
B.
REPORTING
The segment information presented is part of the financial statements, and the auditor is
responsible for reporting on the fairness of the information presented. The auditor's standard
report implies that the segment information is presented fairly, and generally there would be
no reference in the report to the segment information. Professional judgment is exercised in
determining what is material to the financial statements taken as a whole.
1.
Material Misstatement
If the auditor does find a material misstatement or omission (e.g., the company refuses
to disclose the required segment information) and it is not corrected, the auditor should
issue either a qualified or adverse opinion.
2.
Scope Limitation
If the auditor is unable to apply necessary auditing procedures, a qualified or disclaimer
of opinion would be issued.
A1-52
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Becker CPA Review
IV.
Auditing & Attestation 1
AUDITOR-SUBMITTED DOCUMENTS (ASD)
A.
B.
C.
D.
AUDITORSUBMITTED
DOCUMENTS
When an auditor submits a document containing audited financial statements to
a client or others, the auditor has a responsibility to report on all information in
the document. Information accompanying the financial statements might include the
following.
1.
Additional details or explanations
2.
Consolidating information
3.
Historical summaries
4.
Statistical data
The auditor must indicate in the report whether the accompanying information is fairly stated
in all material respects in relation to the basic financial statements taken as a whole. The
report should also describe the character of the auditor's examination and the degree of
responsibility the auditor is assuming.
1.
The measurement of materiality is the same as that used in forming an opinion on the
basic financial statements taken as a whole.
2.
The report on the accompanying information may be included in the auditor's report on
the financial statements or may appear separately within the document.
The auditor should consider the effect of any modifications in the auditor's standard report
when reporting on accompanying information.
1.
If the auditor expressed a qualified opinion, any effect on the accompanying
information should be described.
2.
If the auditor expressed an adverse opinion or disclaimer of opinion on the basic
financial statements, the auditor should not express an opinion on any accompanying
information in an ASD.
SUPPLEMENTARY INFORMATION REQUIRED BY GAAP
1.
2.
If an ASD includes supplementary information required by GAAP, the auditor may:
a.
Express an opinion, if he or she has been engaged to examine such information,
b.
Report on whether the information is fairly stated in all material respects in
relation to the financial statements taken as a whole, if appropriate audit
procedures have been applied, or
c.
Disclaim an opinion on the information.
Note that the auditor's report would need to be expanded if:
a.
The required supplementary information is omitted or departs materially from
GAAP guidelines,
b.
The auditor is unable to perform required procedures, or
c.
The auditor is unable to determine whether the information conforms to GAAP
guidelines.
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A1-53
Auditing & Attestation 1
Becker CPA Review
CONDENSED FINANCIAL STATEMENTS
V.
CONDENSED FINANCIAL STATEMENTS
A.
Condensed financial statements are presented in considerably less detail than complete
financial statements and do not present all required disclosures under GAAP. They are
generally derived from audited financial statements.
B.
Condensed financial statements should be so marked to prevent users from erroneously
assuming that they contain all required disclosures.
C.
Because condensed financial statements do not include all disclosures necessary for
complete financial statements, the auditor's report on condensed financial statements will
differ from the standard auditor's report. The auditor must indicate:
D.
1.
That the auditor audited and expressed an opinion on the complete financial
statements;
2.
The date of the auditor's report on the complete financial statements;
3.
The type of opinion expressed; and
4.
Whether the information in the condensed financial statements is fairly stated, in all
material respects, in relation to the financial statements from which it has been derived.
If a client-prepared document states that condensed financial statements have been derived
from audited financial statements, no reference to the auditor's name shall be allowed unless:
1.
The audited financial statements are enclosed in the same document, or
2.
The document incorporates the audited financial statements by reference to
information filed with a regulatory agency (such as the SEC), or
3.
The auditor's report on the condensed financial statements is included within the
document.
SELECTED
FINANCIAL DATA
VI.
A1-54
SELECTED FINANCIAL DATA
A.
Selected financial data (SFD) are not a required part of the basic financial statements and
are the responsibility of management.
B.
If the auditor is engaged to report on SFD, his or her report should be limited to data that are
derived from audited financial statements.
C.
If management presents SFD that includes both data derived from the audited financial
statements and other data (such as square footage of facilities), the auditor's report should
specifically identify the data that is being reported on.
D.
Generally, an additional paragraph is added to the standard auditor's report (following the
opinion paragraph). The auditor must indicate whether the selected financial data is fairly
stated, in all material respects, in relation to the financial statements from which it has been
derived.
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Becker CPA Review
VII.
Auditing & Attestation 1
REPORTS ON THE APPLICATION OF ACCOUNTING PRINCIPLES
A.
ACCOUNTING PRINCIPLES ARE CONSTANTLY EVOLVING
APPLICATION OF
ACCOUNTING PRINCIPLES
There may be different interpretations regarding application of accounting principles to new
transactions and financial products.
B.
THE REPORTING ACCOUNTANT
1.
2.
C.
D.
A reporting accountant is an accountant in public practice who prepares a written report
(or provides oral advice) on:
a.
The application of accounting principles to specific transactions, whether
completed or proposed, or
b.
The type of opinion that may be rendered on a specific entity's financial
statements.
The reporting accountant may not report on the application of accounting principles to a
"hypothetical transaction" (a transaction not involving facts or circumstances of a
specific entity).
PROCEDURES FOR REPORTING ACCOUNTANT
1.
Obtain an understanding of the form and substance of the transaction(s),
2.
Review applicable GAAP, and
3.
If appropriate, consult with other professionals or experts, or perform additional
research.
REPORTING ACCOUNTANT AND CONTINUING ACCOUNTANT
The reporting accountant should also consult with the continuing accountant of the entity to
ascertain all the available facts relevant to forming a professional judgment.
E.
REPORTING ACCOUNTANT'S REPORT
The accountant's report should include:
1.
A brief description of the nature of the engagement.
2.
A statement that the engagement was performed in accordance with AICPA standards.
3.
An identification of the specific entity, a description of the transaction(s), including
relevant facts, circumstances, and assumptions, and a statement about the source of
the information.
4.
A statement describing the appropriate accounting principle(s) (including the country of
origin) to be applied or type of opinion that may be rendered and, if appropriate, the
reasons for the conclusion.
5.
A statement that the preparers of the financial statements, who should consult with
their continuing accountants, are responsible for proper accounting treatment.
6.
A statement that any difference in the facts, circumstances, or assumptions presented
may change the report.
7.
A separate paragraph at the end of the report restricting its use to specified parties.
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A1-55
Auditing & Attestation 1
Becker CPA Review
VIII. REPORTING ON FINANCIAL STATEMENTS PREPARED FOR USE IN OTHER COUNTRIES
When auditing the financial statements of a U.S. entity prepared in conformity with
accounting principles generally accepted in another country, the auditor should perform the
procedures that are necessary to comply with the general and fieldwork standards of U.S.
generally accepted auditing standards. (The auditor may also be requested to comply with the
general and fieldwork standards of the other country.) The auditing procedures under U.S. GAAS
may need to be modified, however, if the assertions embodied in financial statements are different
from those prepared in conformity with U.S. GAAP. This may require the auditor to perform
additional procedures. The auditor should also obtain an understanding of the accounting
principles generally accepted in the other country.
OTHER
COUNTRIES
There are several reporting options for financial statements prepared for use in a foreign country,
depending on the intended distribution. The auditor should obtain an understanding of, and written
management representations regarding, the purpose and uses of the financial statements.
A.
DISTRIBUTION OUTSIDE U.S. ONLY
For distribution only outside the U.S. (or with limited distribution to specific knowledgeable
parties within the U.S.), the auditor may use either:
1.
The report of the other country, or
2.
A U.S.-style report modified to report on the accounting principles of another country.
a.
Introductory Paragraph Modification
"We have audited the accompanying [financial statements] which, as described
in Note X, have been prepared on the basis of accounting generally accepted in
[Country]."
b.
Possible Scope Paragraph Modification
If the auditor is requested to comply with the auditing standards of another
country: "We conducted our audit in accordance with standards generally
accepted in the United States and in [Country]."
c.
Opinion Paragraph Modification
"…in conformity with accounting principles accepted in [Country]."
B.
MORE THAN LIMITED DISTRIBUTION WITHIN THE U.S.
For more than limited distribution within the U.S., the auditor's report should be the U.S.
standard report modified as appropriate for a departure from U.S. GAAP. This report may
include a separate paragraph expressing an opinion on conformity with the GAAP of the
other country.
The auditor may also issue both this U.S. standard report modified for a GAAP departure for
distribution in the U.S. and 1. or 2. in A., above, for distribution outside the U.S.
A1-56
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Becker CPA Review
Auditing & Attestation 1
Opinion Writing Format Summary
Audit
Opinion
Comparative
Different
Updated
Opinion
Opinion
Address
Owners
Owners
Owners
Service
Audited
Audited
Audited
Balance sheet
Income statement
Retained earnings
Cash flows
Balance sheet
Income statement
Retained earnings
Cash flows
Balance sheet
Income statement
Retained earnings
Cash flows
Any date
Both years
Both years
GAAS
GAAS
GAAS
Worked on
Period
Standards
Procedures
Findings
Sign and date
Responsible
Audit
Plan
Material
Examine
Assessing
Made
Responsible
Accd U.S. GAAS
Perform
Misstatement
Evidence
Acct. Princ.
Management
R
A
P
M
E
A
M
R
A
P
M
E
A
M
R
A
P
M
E
A
M
R
A
P
M
E
A
M
Opinion
Fair U.S. GAAP
Both
opinions
Both
opinions
CPA
When sufficient appropriate audit
evidence has been obtained
Same
Same
Date
Opinion
Reason
Changes
Statement
“Opinion…is diff.”
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A1-57
Auditing & Attestation 1
Becker CPA Review
APPENDIX: GAAP SOURCES FOR NONGOVERNMENTAL ENTITIES
The literature pertaining to GAAP has, over time, expanded to include volumes of statements, opinions,
and other pronouncements from a variety of sources. This profusion of documents may be viewed as a
hierarchy that can best be understood by analogy to a house — the house of GAAP.
The
House of GAAP
Other Accounting Literature
FASB Concepts Statements; APB Statements; AICPA Issues Papers;
International Accounting Standards Committee Statements; GASB
Statements, Interpretations, and Technical Bulletins; pronouncements of
other professional associations or regulatory agencies; AICPA Technical
Practice Aids; and accounting textbooks, handbooks, and articles
Category D consists of items that
indicate wide-spread industry practice
or explanations and special
applications of GAAP.
AICPA
Accounting Interpretations
and Implementation Guides
Category C consists of pronouncements
that have not been offered for public
comment and that have been issued by
experts in accounting.
AICPA
Accounting Standards
Executive Committee
Practice Bulletins*
Category B consists of pronouncements
that have been offered for public
comment and have been issued by
experts in accounting.
AICPA
Industry Audit
and Accounting
Guides*
Category A consists of pronouncements
issued by authoritative entities. They
may include the SEC if the company is
publicly-traded (Staff Accounting
Bulletins or SABs rules and interpretation
releases of the SEC).
The foundation of GAAP consists of
the Financial Accounting Concepts
issued by the FASB.
1959-72 →
Prevalent
industry
practices
FASB
Emerging Issues Task
Force
Consensus Positions
AICPA
Statements
of Position*
Accounting
AICPA
Principles Board
Accounting
Opinions –
Research
APBO
Bulletins
(From AICPA)
1938-59
Questions and
Answers
published by
FASB staff
Financial
Accounting
Standards
Board
FASB
Statements
1973 →
EITF
D Topics
FASB
Technical
Bulletins
FASB
FASB
FASB
Statement 133
Staff
Interpretations Implementation
Positions
Issues
1973 →
1973 →
2004 →
The House of GAAP rests on a foundation of basic concepts and broad
principles that underlie financial reporting: going concern assumption,
substance over form, neutrality, accrual basis, conservatism, and
materiality. The foundation also includes objectives of financial reporting,
qualitative characteristics of accounting information, elements of financial
statements, and recognition and measurement in financial statements.
*AICPA Industry Audit and Accounting Guides and AICPA Statements of Position are included in Category B only if the FASB
has cleared the pronouncements. AICPA Practice Bulletins are included in Category C only if cleared by the FASB. If
not cleared by the FASB, AICPA Industry Audit and Accounting Guides and AICPA Statements of Position are included in
Category D.
NOTE: If the accounting treatment of a transaction or event is not specified by a pronouncement in "Category A" (first
floor), the auditor should consider whether one or more sources in Category (B), (C), or (D) is relevant to the circumstances.
The auditor should be prepared to justify a conclusion that another treatment is generally accepted.
If there is a conflict between accounting principles relevant to the circumstances from one or more sources in Category
(B), (C), or (D), the auditor should follow the treatment specified by the source in the more authoritative category – for example,
follow Category (B) treatment over Category (C) – or be prepared to justify a conclusion that a treatment specified by a source
in the less authoritative category better presents the substance of the transaction in the circumstances.
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SIMULATION
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IMPORTANT NOTE TO STUDENTS:
Please check the Becker KnowledgeBase (http://www.beckercpa.com/knowledgebase) regularly for
supplemental materials, errata postings, software downloads, and other information provided to assist
you in the successful preparation for your CPA Examination.
While every effort is made to ensure the accuracy of the material contained in these textbooks, when
updates, corrections or clarifications are necessary they are posted within the Course Updates shown
above. Below is an example of the Financial Course Updates page. Students are encouraged to sign up
for automatic email notification of course updates by clicking on the "Notify Me by Email if this Answer is
Updated" button located at the bottom of each answer page.
Unlimited academic support questions including suspected errata items can be submitted using the Ask
Becker a Question tab. Please refer to the document "Introducing the New Becker KnowledgeBase!"
located under Important Announcements for more detailed instructions on how to use this system.
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AUDITING & ATTESTATION 1
Correct Answer
First Choice Answer
MC Question Number
Class Questions Answer Worksheet
NOTES
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Grade:
Multiple-choice Questions Correct / 23 = __________% Correct
Detailed explanations to the class questions are located in the back of this textbook.
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NOTES
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CLASS QUESTIONS
1. CPA-02304
The fourth standard of reporting requires the auditor's report to contain either an expression of opinion
regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be
expressed. The objective of the fourth standard is to prevent:
a. An auditor from expressing different opinions on each of the basic financial statements.
b. Restrictions on the scope of the audit, whether imposed by the client or by the inability to obtain
evidence.
c. Misinterpretations regarding the degree of responsibility the auditor is assuming.
d. An auditor from reporting on one basic financial statement and not the others.
2. CPA-02370
The auditor's standard report should include reference to the United States as the country of origin of:
I. The accounting principles used to prepare the financial statements.
II. The auditing standards the auditor followed in performing the audit.
a.
b.
c.
d.
I only.
II only.
Both I and II.
Neither I nor II.
3. CPA-02302
Harris, CPA, has been asked to audit and report on the balance sheet of Fox Co., but not on the
statements of income, retained earnings, or cash flows. Harris will have access to all information
underlying the basic financial statements. Under these circumstances, Harris may:
a. Not accept the engagement because it would constitute a violation of the profession's ethical
standards.
b. Not accept the engagement because it would be tantamount to rendering a piecemeal opinion.
c. Accept the engagement because such engagements merely involve limited reporting objectives.
d. Accept the engagement but should disclaim an opinion because of an inability to apply the
procedures considered necessary.
4. CPA-02787
Management believes and the auditor is satisfied that a material loss probably will occur when pending
litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of
the potential loss, but fully discloses the situation in the notes to the financial statements. If management
does not make an accrual in the financial statements, the auditor should express a(an):
a.
b.
c.
d.
Qualified opinion due to a scope limitation.
Qualified opinion due to a departure from GAAP.
Unqualified opinion with an explanatory paragraph.
Unqualified opinion in a standard auditor's report.
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5. CPA-02483
The introductory paragraph of an auditor's report contains the following sentences:
We did not audit the financial statements of EZ Inc., a wholly-owned subsidiary, which statements reflect
total assets and revenues constituting 27 percent and 29 percent, respectively, of the related
consolidated totals. Those statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for EZ Inc., is based solely on the report
of the other auditors.
These sentences:
a.
b.
c.
d.
Indicate a division of responsibility.
Assume responsibility for the other auditor.
Require a departure from an unqualified opinion.
Are an improper form of reporting.
6. CPA-02544
A principal auditor decides not to refer to the audit of another CPA who audited a subsidiary of the
principal auditor's client. After making inquiries about the other CPA's professional reputation and
independence, the principal auditor most likely would:
a. Add an explanatory paragraph to the auditor's report indicating that the subsidiary's financial
statements are not material to the consolidated financial statements.
b. Document in the engagement letter that the principal auditor assumes no responsibility for the other
CPA's work and opinion.
c. Obtain written permission from the other CPA to omit the reference in the principal auditor's report.
d. Contact the other CPA and review the audit programs and audit documentation pertaining to the
subsidiary.
7. CPA-02764
When financial statements contain a departure from GAAP because, due to unusual circumstances, the
statements would otherwise be misleading, the auditor should explain the unusual circumstances in a
separate paragraph and express an opinion that is:
a.
b.
c.
d.
Unqualified.
Qualified.
Adverse.
Qualified or adverse, depending on materiality.
8. CPA-02389
An auditor concludes that there is substantial doubt about an entity's ability to continue as a going
concern for a reasonable period of time. If the entity's financial statements adequately disclose its
financial difficulties, the auditor's report is required to include an explanatory paragraph that specifically
uses the phrase(s):
a.
b.
c.
d.
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"Reasonable period
of time, not to exceed
one year"
Yes
Yes
No
No
"Going concern"
Yes
No
Yes
No
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9. CPA-02417
For which of the following events would an auditor issue a report that omits any reference to consistency?
a. A change in the method of accounting for inventories.
b. A change from an accounting principle that is not generally accepted to one that is generally
accepted.
c. A change in the useful life used to calculate the provision for depreciation expense.
d. Management's lack of reasonable justification for a change in accounting principle.
10. CPA-02469
Which of the following phrases would an auditor most likely include in the auditor's report when
expressing a qualified opinion because of inadequate disclosure?
a.
b.
c.
d.
Subject to the departure from generally accepted accounting principles, as described above.
With the foregoing explanation of these omitted disclosures.
Except for the omission of the information discussed in the preceding paragraph.
Does not present fairly in all material respects.
11. CPA-02539
An auditor concludes that a client's illegal act, which has a material effect on the financial statements, has
not been properly accounted for or disclosed. Depending on the materiality of the effect on the financial
statements, the auditor should express either a(an):
a.
b.
c.
d.
Adverse opinion or a disclaimer of opinion.
Qualified opinion or an adverse opinion.
Disclaimer of opinion or an unqualified opinion with a separate explanatory paragraph.
Unqualified opinion with a separate explanatory paragraph or a qualified opinion.
12. CPA-02376
A scope limitation sufficient to preclude an unqualified opinion always will result when management:
a.
b.
c.
d.
Prevents the auditor from reviewing the audit documentation of the predecessor auditor.
Engages the auditor after the year-end physical inventory is completed.
Requests that certain material accounts receivable not be confirmed.
Refuses to acknowledge its responsibility for the fair presentation of the financial statements in
conformity with GAAP.
13. CPA-02834
When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the
situation in the:
a.
b.
c.
d.
Opening (introductory)
paragraph
No
Yes
Yes
No
Scope
paragraph
No
No
Yes
Yes
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14. CPA-02452
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
a. The auditor is unable to determine the amounts associated with an employee fraud scheme.
b. Management does not provide reasonable justification for a change in accounting principles.
c. The client refuses to permit the auditor to confirm certain accounts receivable or apply alternative
procedures to verify their balances.
d. The chief executive officer is unwilling to sign the management representation letter.
15. CPA-03040
When reporting on comparative financial statements, an auditor ordinarily should change the previously
issued opinion on the prior-year's financial statements if the:
a. Prior year's financial statements are restated to conform with generally accepted accounting
principles.
b. Auditor is a predecessor auditor who has been requested by a former client to reissue the previously
issued report.
c. Prior year's opinion was unqualified and the opinion on the current year's financial statements is
modified due to a lack of consistency.
d. Prior year's financial statements are restated following a pooling of interests in the current year.
16. CPA-04614
Comparative financial statements include the prior year's statements that were audited by a predecessor
auditor whose report is not presented. If the predecessor's report was unqualified, the successor should:
a. Add an explanatory paragraph that expresses only limited assurance concerning the fair presentation
of the prior year's financial statements.
b. Express an opinion only on the current year's financial statements and make no reference to the prior
year's financial statements.
c. Indicate in the auditor's report that the predecessor auditor expressed an unqualified opinion on the
prior year's financial statements.
d. Obtain a letter of representations from the predecessor auditor concerning any matters that might
affect the successor's opinion.
17. CPA-04612
As of August 13, a CPA had obtained sufficient appropriate audit evidence with respect to fieldwork on an
engagement to audit financial statements for the year ended June 30. On August 27, an event came to
the CPA's attention that should be disclosed in the notes to the financial statements. The event was
properly disclosed by the entity, but the CPA decided not to dual date the auditor's report and dated the
report August 27. Under these circumstances, the CPA was taking responsibility for:
a. All subsequent events that occurred through August 27.
b. Only the specific subsequent event disclosed by the entity.
c. All subsequent events that occurred through August 13 and the specific subsequent event disclosed
by the entity.
d. Only the subsequent events that occurred through August 13.
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18. CPA-03107
On February 25, a CPA issued an auditor's report expressing an unqualified opinion on financial
statements for the year ended January 31. On March 2, the CPA learned that on February 11, the entity
incurred a material loss on an uncollectible trade receivable as a result of the deteriorating financial
condition of the entity's principal customer that led to the customer's bankruptcy. Management then
refused to adjust the financial statements for this subsequent event. The CPA determined that the
information is reliable and that there are creditors currently relying on the financial statements. The
CPA's next course of action most likely would be to:
a. Notify the entity's creditors that the financial statements and the related auditor's report should no
longer be relied on.
b. Notify each member of the entity's board of directors about management's refusal to adjust the
financial statements.
c. Issue revised financial statements and distribute them to each creditor known to be relying on the
financial statements.
d. Issue a revised auditor's report and distribute it to each creditor known to be relying on the financial
statements.
19. CPA-04611
An auditor concludes that a substantive auditing procedure considered necessary during the prior year's
audit was omitted and there are persons currently relying on the auditor's report. The auditor most likely
would promptly apply the omitted procedure if:
a. A substantive approach to identified risks at the relevant assertion level was used.
b. The auditor's working papers will be subject to postissuance review in connection with a peer review
program.
c. The results of other procedures that were applied tend to compensate for the one omitted.
d. The omission of the procedure impairs the auditor's present ability to support the previously
expressed opinion.
20. CPA-04617
What is an auditor's responsibility for supplementary information, such as the disclosure of pension
information, which is outside the basic financial statements but required by the GASB?
a. The auditor should apply substantive tests of transactions to the supplementary information and verify
its conformity with the GASB requirement.
b. The auditor should apply certain limited procedures to the supplementary information and report
deficiencies in, or omissions of, such information.
c. The auditor's only responsibility for the supplementary information is to determine that such
information has not been omitted.
d. The auditor has no responsibility for such supplementary information as long as it is outside the basic
financial statements.
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21. CPA-03173
What is an auditor's reporting responsibility concerning information accompanying the basic financial
statements in an auditor-submitted document?
a. The auditor should report on all the accompanying information included in the document.
b. The auditor should report on the accompanying information only if the auditor participated in its
preparation.
c. The auditor should report on the accompanying information only if the auditor did not participate in its
preparation.
d. The auditor should report on the accompanying information only if it contains obvious material
misstatements.
22. CPA-02714
In connection with a proposal to obtain a new audit client, a CPA in public practice is asked to prepare a
report on the application of accounting principles to a specific transaction. The CPA's report should
include a statement that:
a. The engagement was performed in accordance with Statements on Standards for Accounting and
Review Services.
b. Responsibility for the proper accounting treatment rests with the preparers of the financial statements.
c. The evaluation of the application of accounting principles is hypothetical and may not be used for
opinion-shopping.
d. The guidance is provided for management's use only and may not be communicated to the prior or
continuing auditor.
23. CPA-04630
A U.S. entity prepares its financial statements in conformity with accounting principles generally accepted
in another country. These financial statements will be included in the consolidated financial statements of
its non-U.S. parent. Before reporting on the financial statements of the U.S. entity, the auditor practicing
in the U.S. should:
a. Notify management of the U.S. entity that the auditor is required to disclaim an opinion on the
financial statements.
b. Receive a waiver to report on the U.S. entity from the appropriate accountancy authority in the other
country.
c. Obtain written representations from management of the U.S. entity regarding the purpose and uses of
the financial statements.
d. Communicate with the auditor of the non-U.S. parent regarding the level of assurance to be provided.
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