1. Becker CPA Review
AUDIT 1
Version 2015

2. THE BASICS The Independent Audit Function
Objective is to express an opinion on whether the F/S are presented fairly, in all material respects, in accordance with the applicable financial reporting framework (GAAP, IFRS)
Adds credibility due to independence & objective view – for stockholders & outsiders

3. THE BASICS - Responsibilities
Company’s management
Financial statements (preparation & fair presentation)
Internal control (design, implementation & maintenance)
Access to information & persons within the entity needed to complete the audit
Auditors
Expression of opinion (attest function)

4. Preparation & Fair Presentation
Requires:
Identification of the applicable framework
Preparation & presentation in accordance with the applicable framework
Adequate description of the framework in the financial statements

5. Performance
Reasonable assurance – high, but not absolute, level of assurance
Plan & supervise the work
Determine and apply materiality levels
Identify and assess risks of material misstatement
Obtain sufficient audit evidence
Inherent limitations
Judgment & uncertainty – estimates (intangibles, impairment, asset life, warranties, lawsuits)
Fraud
Errors
Timeliness – achieve a balance between benefit & cost (direct efforts to areas most expected to contain errors)

6. Professional Standards
Auditing standards:
Generally Accepted Auditing Standards - Clarity
Generally Accepted Government Auditing Standards
Public Company Accounting Oversight Board
Sarbanes-Oxley Act of 2002
Issuers – entities subject to the SEC
5 full time, financially literate members
Public accounting firms must register with the PCAOB in order to audit
Firms are subject to inspection, disciplinary proceedings, and sanctions
Standards replace SAS

7. Professional Standards
International Standards on Auditing
The International Auditing and Assurance Standards Board (IAASB)
A standard setting board of the International Federation of Accountants (IFAC)
Establishes international standards on auditing
In the USA, the Auditing Standards Board is working to converge its standards with the standards of the IAASB, the CLARITY project.

8. Professional Standards
Standards for Engagements other than audits:
Statements on Standards for Attestation Engagements
Statements on Standards for Accounting & Review Services (Reviews & Compilations)

9. Professional Standards
Other guidelines:
AICPA Code of Professional Conduct
Quality Control Standards
Securities and Exchange Commission (Acts of 33 & 34). PCAOB standards are not effective until they are approved by the SEC)
The Sarbanes-Oxley Act of 2002 – PCAOB
International Federation of Accountants (IFAC) Code of Ethics for Professional Accountants

10. GAAS Hierarchy
A. Statements on Auditing Standards – published by the AICPA & PCAOB Auditing Standards
SAS – for audits of non-issuers
PCAOB standards – for audits of issuers

11. GAAS Hierarchy B. Interpretative publications (recommendations)
Sas interpretations. AICPA guides, and AICPA Statement of Position
C. Other publications – no authoritative like articles, textbooks, etc.

12. GAAS Overall objective:
To obtain reasonable assurance about whether the financial statements are free from material misstatements
To report on the financial statements
Conduct of the audit:
Professional skepticism
Comply with ethical requirements (independence)
Exercise professional judgment
Obtain sufficient appropriate audit evidence
Compliance with generally accepted auditing standards (“SAS”)

13. REPORTS ON AUDITED FINANCIAL STATEMENTS

14. Forming an opinion
Fair presentation, in all material respects, in accordance with the applicable financial reporting framework
Adequately disclose financial policies & framework
Consistent
Estimates are reasonable
Information is relevant, reliable, comparable, & understandable
Terminology is appropriate
Financial statements represent the underlying transactions and events that achieves fair presentation

15. Unmodified Report – Clean Opinion
Title: Independent Auditor’s Report
B. Addressee: to the Company, its stockholders and/or its board of directors, not management

16. Unmodified Report C. Introductory paragraph
Identify the entity been audited
Statement that the F/S were audited
Identify the title of each financial statement
Specify the dates or periods covered by each financial statement

17. Unmodified Report D. Management Responsibility Paragraph Heading:
Management’s Responsibility for the Financial Statements
Includes:
An explanation that management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework
A statement that this responsibility includes the design, implementation and maintenance of internal control relevant to the preparation & fair presentation of financial statements that are free from material misstatement, whether due to fraud or error

18. Unmodified Report E. Auditor’s Responsibility Paragraph Heading:
Includes:
A statement the responsibility is to express an opinion based on the audit
A statement that the audit was conducted in accordance with US GAAS
A statement that those standards require that the auditor plan & perform the audit to obtain reasonable assurance about whether the F/S are free from material misstatement
A description of the audit
A statement whether the auditor believes that the evidence is sufficient and appropriate o provide a basis for the opinion.

19. Unmodified Report F. Opinion Paragraph Heading: Opinion Includes:
A statement that the financial statements present fairly, in all material respects, the financial position of the entity as of the balance sheet date and the results of operations and its cash flows for the period then ended, in accordance with the applicable financial reporting framework
Identification of the applicable financial reporting framework and its origin

20. Unmodified Report
G. Other Reporting Responsibilities
Heading:
Report on Other Legal and Regulatory Requirements
Reason for use and title of the first paragraph:
If the auditor addresses other reporting responsibilities in the auditor’s report in addition to GAAS
Report on the Financial Statements – this title should be used for the first paragraph of the report

21. Standard Report – Other Issues
H. Signature of the auditor – Either printed or signed
I. Auditor’s address – should name the city and state where the auditor practices
J. Auditor's report – date on which the auditor has obtained sufficient appropriate audit evidence
Exception – dual dating due to subsequent events
For comparative financial statements, the completion date of the most recent audit is used.
(EXAMPLE PAGE #15)

22. PASS KEY Remember GAAS – auditor’s responsibility paragraph
GAAP – Opinion paragraph
Public Company Accounting Oversight Board
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)

23. Audits of Group of Financial Statements
The auditor must determine whether to make reference to any component auditors in the auditor’s report on the group of financial statements
The group engagement team must understand for each component auditor:
Independence
Competence
Program steps

24. Audits of Group of Financial Statements (Page #19)
Making reference to the component auditor
The component’s F/S are prepared using the same financial reporting framework (or similar) as the group F/S, or adjustments have been made to convert.
The component auditor has performed an audit in accordance with GAAS or PCAOB
The component auditor’s report is not restricted
Wording changes to the Auditor’s Responsibility first paragraph
Component was not audited by the auditor
Was audited by a component auditor
Include the magnitude of the portion audited by the component auditor
Modify Opinion paragraph
Wording changes to the Opinion paragraph
“and the report of the other auditors”

25. Audits of Group of Financial Statements (Page #19)
When the group engagement partner decides to assume responsibility for the work of a component auditor, No reference to the component auditor should be made
Additional requirements
Significant components – the group engagement team or the component auditor should perform an audit
Not Significant components – the group engagement team should perform analytical procedures

26. TYPES OF OPINION (2 of 2) UNMODIFIED
Unmodified (standard) – F/S present fairly, in all material respects. GAAP & GAAS = OK
2. Unmodified with Emphasis-of-Matter and Other-Matter Paragraphs – special circumstances not affecting the opinion

27. Types of Opinion (2 of 2)
Modified Opinions 1. Qualified opinion (except for) – except for the effects of the matters, the F/S present fairly… (material issue) 2. Adverse opinion – do not present fairly…(very material issue) 3. Disclaimer of opinion – auditor does not express an opinion because was not able to perform an audit sufficient in scope (very material issue)

28. UNMODIFED OPINIONS – With Additional Paragraphs
Emphasis-of-Matter Paragraphs – used when required by GAAS or at the auditor’s discretion. The matter is appropriately presented or disclosed. Does not affect the auditor’s opinion. Report requirements:
Place the paragraph immediately after the opinion paragraph
Use the heading Emphasis-of-Matter
Describe the matter and the location of disclosures in the financial statements
Indicate that the auditor’s opinion is not modified

29. UNMODIFED OPINIONS – With Additional Paragraphs
Use of Emphasis-of-Matter Paragraphs –Required when:
Substantial doubt about the entity’s ability to continue as a going concern
To describe a justified change in accounting principle
Subsequently discovered facts lead to change in audit opinion
The financial statements are prepared in accordance with an applicable special purpose framework

30. UNMODIFED OPINIONS – With Additional Paragraphs
Use of Emphasis-of-Matter Paragraphs –May be necessary when:
An uncertainty related to the outcome of unusually important litigation or regulatory action
A major catastrophe
Significant related party transactions
Unusually important subsequent events

31. UNMODIFED OPINIONS – With Additional Paragraphs
B. Other-Matter Paragraphs – used when required by GAAS or at the auditor’s discretion. Refer to matters other than those presented or disclosed. Does not affect the auditor’s opinion. Report requirements:
Place the other-matter paragraph after the opinion paragraph and after any emphasis-of-matter paragraph
Use the heading Other-Matter
Describe the matter
Indicate that the auditor’s opinion is not modified

32. UNMODIFED OPINIONS – With Additional Paragraphs
Use of Other-Matter Paragraphs –Required when:
To alert that restrict the use of the auditor’s report
Subsequently discovered facts lead to a change in audit opinion. An Emphasis-of-Matter could be used instead
The F/S of the prior year were audited by others and the report is not presented
Current period F/S are audited and presented in comparative format with prior year not audited
Prior to the audit report date, the auditor identifies a material inconsistency in other information and management refuses to make the revision
When the auditor chooses to report on supplementary information in the auditor’s report

33. UNMODIFED OPINIONS – With Additional Paragraphs
Use of Other-Matter Paragraphs –Required when:
To refer to required supplementary information that a designated accounting standards setter requires to accompany the basic financial statements
To restrict the use of the auditor’s report when special purpose financial statements are prepared in accordance with a contractual or regulatory basis of accounting
A report on compliance is included in the auditor’s report on the financial statements

34. UNMODIFED OPINIONS – With Additional Paragraphs
Use of Other-Matter Paragraphs – May be necessary when:
To describe the reasons why the auditor cannot withdraw from an engagement when the auditor is unable to obtain sufficient appropriate audit evidence due to a management imposed scope limitation
Law, regulation, or generally accepted practice require or permit the auditor to provide further explanation of the auditor’s responsibilities
The auditor has been engaged to report on more than one set of F/S when each set has been prepared with a different framework

35. Emphasis-of-Matter due to GOING CONCERN
Determine whether there is substantial doubt
The going concern period should not exceed 1 year from the B/S date
Procedures include:
Analytical procedures
Debt compliance
Minutes
Legal letter
Subsequent events

36. GOING CONCERN Conditions: Mitigating factors: Financial difficulties
Internal matters (huelgas, productos)
Negative trends
External matters (loss of key, natural disasters)
Mitigating factors:
Plans to borrow or restructure
Plan to sell assets
Plans to delay or reduce expenditures
Plans to increase ownership equity

37. GOING CONCERN
If there is substantial doubt, the auditors should state their concerns in an Emphasis-of-Matter paragraph.
The auditor is not precluded form issuing a Disclaimer of Opinion
The auditor should evaluate conditions and events and then look for mitigating factors.
Documentation should include the conditions, mitigating factors, audit work performed, conclusion and effect on the auditor’s report.
(EXAMPLE PAGE # 27)

38. Emphasis-of-Matter due to LACK OF CONSISTENCY
Only used when management is justified in the change
In accordance with framework
Acceptable
Disclosures are appropriate
Principle is preferable
An Emphasis-of-Matter paragraph

39. Other-Matter – Restricts the Use
When: Example: page #31
Measurement or disclosure criteria that are suitable for only a limited number of users
Measurement or disclosure criteria that are available only to specified parties
Matter identified during an audit that are not the primary objective of the audit engagement (a by-product)
Communication should include a statement that the report is intended solely for the information & use of the specified parties
Identification of the specified parties

40. QUALIFIED AND ADVERSE OPINIONS

41. Reason for a Qualified or Adverse Opinion
When the auditor concludes that misstatements, individually or in the aggregate, are:
Material = Qualified opinion
Very material (pervasive) = Adverse opinion

42. Reason for a Qualified or Adverse Opinion
Examples:
Departure from GAAP
Non GAAP change
Inadequate disclosure
Unreasonable accounting estimate

43. Qualified Opinions – Form & Content
The Auditor’s Responsibility paragraph is modified – “We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.”
A Basis for Modification paragraph should be placed immediately before the opinion paragraph and should use the heading Basis for Qualified Opinion or Basis for Adverse Opinion and should include:
A description and quantification of the departure from GAAP

44. Qualified & Adverse Opinions – Form & Content
Opinion Paragraph – when the auditor expresses a qualified or adverse opinion, the opinion paragraph should have the heading Qualified Opinion or Adverse Opinion
Qualified Opinions –the opinion paragraph should state that, in the auditor’s opinion, except for the effects of the matters discussed in the basis for qualified opinion paragraph, the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.
Example: Page #35 & 36

45. Qualified & Adverse Opinions – Form & Content
Adverse Opinions – the opinion paragraph should state that, in the auditor’s opinion, because of the significance of the matters described in the basis for adverse opinion paragraph, the financial statements are not presented fairly in accordance with the applicable financial reporting framework.
EXAMPLE: Page #37

46. QUALIFIED AND DISCLAIMER OPINIONS

47. Reason for a Qualified or Disclaimer Opinion
When the auditor has a scope limitation. A scope limitation occurs when the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the F/S as a whole are free from material misstatement
Material = Qualified opinion
Very material (pervasive) = Disclaimer opinion

48. Qualified or Disclaimer – Scope Limitation
Unable to obtain sufficient evidential matter (inventories, A/R, Representation letter, etc.) and NO alternative procedures
May be imposed by:
Circumstances (consider alternative procedures)
Client
Must express a qualified or disclaimer

49. Qualified Opinion – Scope Limitation Form & Content
The Auditor’s Responsibility paragraph should be amended to state that the auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the auditor’s qualified audit opinion
A Basis for Modification paragraph should be placed immediately before the opinion paragraph and should use the heading Basis for Qualified Opinion

50. Qualified Opinion – Scope Limitation Form & Content
The opinion paragraph should have the heading Qualified Opinion. This paragraph should state that in the auditor’s opinion, except for the possible effects of the matters describe in the basis for qualified opinion paragraph, the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework
Example: Page #42

51. Disclaimer Opinion – Scope Limitation Form & Content
The introductory paragraph is amended to state that the auditor was engaged to audit the financial statements
The Auditor’s Responsibility paragraph should be amended as to the auditor’s responsibility and the scope of the audit
A Basis for Modification paragraph should be placed immediately before the opinion paragraph and should use the heading Basis for Disclaimer of Opinion

52. Disclaimer Opinion – Scope Limitation Form & Content
The opinion paragraph should have the heading Disclaimer of Opinion. This paragraph should state that:
Because of the significance of the matters described in the basis for disclaimer opinion paragraph, the auditor has not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion
Accordingly, the auditor does not express an opinion on the financial statements
Example: Page #43

53. Reports on Comparative Financial Statements

54. Comparative Financial Statements
The auditor’s current year report will cover all F/S for all years presented.
Different opinions for the different years presented
Unmodified prior with current year qualified (#45)
Disclaimer of opinion when the prior year’s financial statements were not audited (#46)

55. Comparative Financial Statements
Changing prior opinions
Disclose reasons in a emphasis-of-matter or other-matter paragraph that discloses:
Date of the previous report
Opinion type previously issued
Reason for prior opinion
Changes that have occurred
Statement “opinion … is different (Page #48)

56. Report of a Predecessor - Presented
In deciding whether to reissue their report, the predecessor auditors should:
Read current period F/S
Compare to prior years
Obtain letter of representation from successor auditor and management

57. Report of a Predecessor – Not Presented
Indicate in an other-matter paragraph:
That the statements were examined by other auditors
The date of that report
The type of opinion expressed
Reasons for other than unqualified report
The nature of any emphasis-of-matter paragraph included in the predecessor auditor’s report

58. Prior Period Not Audited
Reviewed or compiled – other-matter paragraph:
The service performed (review or compilation)
The date of the report
A description of any material modification
A statement that the service was less in scope than an audit
Not audited, reviewed or compiled – other-matter paragraph:
Indicate that the auditor did not audit, review, or compile the prior period financial statements & that the auditor assumes no responsibility for them

59. Events Occurring After Year End SUBSEQUENT EVENTS

60. Events Occurring after Y/E
Subsequent events – occur after the balance sheet date, but before the F/S are issued
Type 1 – Conditions existing on or before balance sheet. An adjustment is usually required ($$$)
Type 2 – Conditions existing after the balance sheet date. May require significant additional disclosure (Disclosure).

61. Auditor’s Responsibility
Procedures (during field work) include:
Review cutoff
Obtain representation letter
Inquiry:
Contingent liabilities
Significant changes in capital, liabilities and working capital
Unusual adjustments after the B/S
Obtain legal letters
Review minutes
Examine latest interim financial statements

62. Auditor’s Responsibility
The auditor has no active responsibility to perform any other procedures after field work. 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 disclosures.

63. Report Date
No subsequent events or before field work is completed – last day of field work
Subsequent event after field work
A later date may be used, but this extends the auditor’s responsibility for all subsequent events to this later date (IFRS requirement).
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.

64. Subsequent Discovery of Facts
Auditor action:
Advise the client to disclose the new information and its impact to persons currently relying. This may be accomplished by:
Advising the client to issue revised F/S
Advising the client to make the necessary disclosures and revisions to any imminent financial statements
Advising the client to notify users that the report should not be relied upon.

65. Subsequent Discovery of Facts
If client refuses:
Notify each member of the board of directors of such refusal, and of the fact that the auditor will take additional steps:
Notify client that the report must no longer be associated
Notify regulatory agencies
Notify persons known to be relying or likely to rely on the F/S
It may be advisable to PRAY and consult legal counsel

66. Omitted Audit Procedures
Auditor action:
Analyze if other audit procedures tended to compensate
Promptly undertake to apply the omitted procedures
If after performing the audit procedures, the financial statements are found to be in error, follow the Subsequent discovery of facts procedures

67. Reporting on Other Information

68. The auditor may disclaim an opinion on Other Information (optional)
Other Information in Documents Containing Audited Financial Statements (1 of 2)
Auditor’s responsibility is to read the other information. If a material inconsistency is found and the client refuses to adjust:
Include in the report an other-matter paragraph describing the material inconsistency
Withhold the use of the report
Withdraw from the engagement
The auditor may disclaim an opinion on Other Information (optional)
The auditor includes an other-matter paragraph disclaiming an opinion on the other information

69. Reporting on Supplementary Information
Outside the basic financial statements
An auditor is not required to audit supplementary information.
An auditor may be engaged to report on supplementary information. The objectives are:
Evaluate presentation in relation to the financial statements
To report on whether the information is fairly stated, in all material respects, in relation to the financials.

70. Reporting on Supplementary Information
Audit procedures:
Inquire management regarding purpose & criteria
Determine whether the info. complies with criteria
Obtain understanding of methods used
Compare & reconcile information to the financials
Inquire regarding assumptions
Evaluate appropriateness and completeness of information
Obtain written representations from management
Other matter paragraph or separate report. Example page 60

71. Required Supplementary Information
Limited procedures:
Inquire how was prepared (methods, assumptions)
Determine if information is consistent with management responses, financial statements, and other knowledge
Obtain written management representations regarding supplementary information
An auditor is not required to audit supplementary information.

72. Required Supplementary Information
Opinion not required – should include an other-matter paragraph, with language to explain the following circumstances, as applicable:
The required information is included & the auditor has applied the required procedures
The information is omitted
Some required information is missing
There are material departures from guidelines
The auditor is not able to complete procedures
There are unresolved doubts about conformance of information
The other-matter paragraph should include a disclaimer.

73. Required Supplementary Information
Opinion Permitted – same as for Reporting on Supplementary Information in Relation to the Financial Statements as a Whole.
Audit procedures:
Inquire management regarding purpose & criteria
Determine whether the information complies with criteria
Obtain understanding of methods used
Compare & reconcile information to the financials
Inquire regarding assumptions
Evaluate appropriateness and completeness of information
Obtain written representations from management

74. Application of Accounting Principles
Reporting accountant:
Prepares a written report or provides oral evidence on :
The application of accounting principles to specific transactions
The type of opinion that may be rendered on a specific entity’s F/S
May not report on the application of accounting principles to a “hypothetical transaction”

75. Application of Accounting Principles
Procedures for Reporting Accountant:
Obtain understanding
Review applicable financial reporting framework (ie. GAAP)
If appropriate, consult with other professionals or experts
Consult with the continuing accountant to ascertain all the available facts relevant to forming a professional judgment

76. Application of Accounting Principles
Reporting Accountant’s report should include:
Description of the nature of the engagement
A statement that was performed in accordance with AICPA
An identification of entity and transaction (s)
Conclusions
A statement that preparers are responsible
A statement that differences in information presented may change the report
A separate paragraph restricting the use
If the reporting accountant is not independent, a statement indicating the lack of independence

77. Reporting on F/S for Use O/S USA
The auditor should obtain an understanding of:
The purpose of the financial statements
Whether the framework is a fair presentation
The intended users
The steps taken by management to determine whether the applicable financial reporting framework is acceptable in the circumstances
The auditor should comply with GAAS and the auditing standards of the other country

78. Reporting on F/S for Use O/S USA
Distribution outside USA or with limited distribution to specific parties within USA – may use either:
The report of the other country
A USA style report modified to report on the accounting principles of another country

79. Reporting on F/S for Use O/S USA
More than limited distribution within the USA
The auditor’s report should be the US report with an emphasis-of-matter paragraph that:
Identifies the financial reporting framework
Refers to the note in the financial statements
Indicates that the framework differs from accounting principles generally accepted in the United States of America
Example page #66

80. Questions?