What type of audit opinion would an auditor issue if financial statements are materially misstated?
(Financial statement issues)
- If none or immaterial, Unmodified (unqualified) opinion issued
- If item is material, but NOT pervasive, Qualified opinion issued
- If item is material AND pervasive, Adverse opinion issued
What type of audit opinion would an auditor issue if they can’t obtain sufficient appropriate audit evidence?
(Audit issues)
- If none or immaterial, Unmodified (unqualified) opinion issued
- If item is material, but NOT pervasive, Qualified opinion issued
- If item is material AND pervasive, Disclaimer of opinion issued
What is control risk?
Control risk is the risk that a material misstatement that could occur in a relevant assertion will not be prevented or detected (and corrected) on a timely basis by the entity’s internal control.
What is detection risk?
Detection risk is the risk that the auditor will not detect a material misstatement.
What is inherent risk?
Inherent risk is the susceptibility of material misstatement assuming there are no related internal control, policies, or procedures.
When should an auditor modify the basis of opinion paragraph of an audit report?
- Qualified and adverse opinions both require modification to the opinion and basis for opinion sections of the auditor’s report.
- Opinion section should be modified to reference the matter described in the basis for modified opinion section and depending on materiality of the issue, “except for” (qualified) or “do not present fairly” (adverse) language will be added to the opinion section.
- Basis for modification section will describe the matter giving rise to the report modification.
In a situation where an auditor ASSUMES responsibility for the work of another CPA and that CPA issues an UNMODIFIED OPINION, how will this effect the following:
- Opinion Type
- Auditor’s Responsibility Section
- Opinion Section
- Basis for Opinion Section
- Opinion Type - Baring that there are no issues with the work performed by the other CPA, the auditor will issue an UNMODIFIED OPINION, the same that the other CPA.
- Auditor’s Responsibility Section - NO CHANGE. If the auditor assumes responsibility and an UNMODIFIED OPINION is issued, there would be no change to this section.
- Opinion Section - NO CHANGE. If the auditor assumes responsibility and an UNMODIFIED OPINION is issued, there would be no change to this section.
- Basis for Opinion Section - NO CHANGE. If the opinion is an UNMODIFIED OPINION, there would be no change to this section.
In a situation where an auditor DIVIDES responsibility with the work of another CPA and that CPA issues an UNMODIFIED OPINION, how will this effect the following:
- Opinion Type
- Auditor’s Responsibility Section
- Opinion Section
- Basis for Opinion Section
- Opinion Type - Baring that there are no issues with the work performed by the other CPA, the auditor will issue an UNMODIFIED OPINION, the same opinion that the other CPA issued.
- Auditor’s Responsibility Section - If an UNMODIFIED OPINION is issued by the auditor, there would be no change to this section.
- Opinion Section - MODIFY. This section would be modified to reflect the division of responsibility between both auditors.
- Basis for Opinion Section - If an UNMODIFIED OPINION is issued by the auditor, there would be no change to this section.
In a situation where an auditor ASSUMES responsibility for the work of another CPA and that CPA issues an QUALIFIED OPINION, how will this effect the following:
- Opinion Type
- Auditor’s Responsibility Section
- Opinion Section
- Basis for Opinion Section
- Opinion Type - The auditor would need to determine whether the item is material to it’s financial statements. If the item (the matter for which the other CPA qualified their opinion) is immaterial, the auditor would issue an UNMODIFIED OPINION. If the item is material, the auditor would issue a qualified opinion.
- Auditor’s Responsibility Section - NO CHANGE. If the auditor assumes responsibility and an UNMODIFIED OPINION is issued, there would be no change to this section.
- Opinion Section - NO CHANGE. If the auditor assumes responsibility and an UNMODIFIED OPINION is issued, there would be no change to this section.
- Basis for Opinion Section - NO CHANGE. If the opinion is an UNMODIFIED OPINION, there would be no change to this section.
In a situation where an auditor DIVIDES responsibility with the work of another CPA and that CPA issues an QUALIFIED OPINION, how will this effect the following:
- Opinion Type
- Auditor’s Responsibility Section
- Opinion Section
- Basis for Opinion Section
- Opinion Type - The auditor would need to determine whether the item is material to it’s financial statements. If the item (the matter for which the other CPA qualified their opinion) is immaterial, the auditor would issue an UNMODIFIED OPINION. If the item is material, the auditor would issue a qualified opinion.
- Auditor’s Responsibility Section - If an UNMODIFIED OPINION is issued by the auditor, there would be no change to this section.
- Opinion Section - MODIFY. This section would be modified to reflect the division of responsibility between both auditors.
- Basis for Opinion Section - If an UNMODIFIED OPINION is issued by the auditor, there would be no change to this section.
When are negative confirmations most likely used?
Negative confirmations are used when:
- Combined assessed level of IR and CR is LOW
- Large # of small balances
- No reason to believe that confirmation recipients will ignore them
What are example internal control components for Control environment?
- Participation of those charged with governance
- Assignment of authority, responsibility, and accountability
- Human resource policies and practices
What are example internal control components for Risk assessment?
- Adoption of new accounting principles
- Incorporation of new technology
- New personnel
- Corporate restructuring
What are example internal control components for Information and communication systems?
- Proper presentation of transactions and related disclosures
- Measurement and recording of proper monetary values
- The way in which significant events are captured by the accounting system
What is an example of internal control components for Monitoring?
Internal audit function
What are example internal control components for Existing control activities?
- Authorization of transactions
- Segregation of duties
- Pre-numbering of documents
- Operating performance reviews
What opinion should an auditor issue if a material weakness is noted in an audit of ICFR?
[Integrated audit]
Auditor should issue an Adverse opinion.
In the Basis of Opinion paragraph, there is an additional paragraph where we explain what the material weakness is.
What are fraud risk factors for attitudes/rationalizations pertaining to misstatements from fraudulent financial reporting?
- Excessive interest by management in maintaining or increasing the entity’s stock price - management is obsessed with maintaining their stock price as this relates to their attitude. Since they want to keep stock price high, could result in management overstating revenue or profit.
- Management failing to correct known significant deficiencies on a timely basis - this reflects management attitude regarding significant deficiencies. If the significant deficiencies aren’t addressed, it could lead to fraudulent financial reporting.
What are fraud risk factors for incentives/pressures pertaining to misstatements arising from misappropriation of assets?
- Promotions, compensation, or other rewards inconsistent with expectations - rewards can relate to incentives or pressures.
- Note: This is included in the authoritative guidance AU-C 240.A75
What are fraud risk factors for incentives/pressures pertaining to misstatements from fraudulent financial reporting?
- New accounting, statutory, or regulatory requirements - new laws can put pressure on management which could result in misstatements from fraudulent financial reporting.
- Management has significant financial interest in the entity - management may own or have loans with entity, so they can feel pressure for ensuring that entity performs well. This could lead to fraudulent financial reporting.
What are fraud risk factors for opportunities pertaining to misstatements arising from misappropriation of assets?
- Large amounts of cash on hand or processed - if employees have access to cash it can be easily stolen.
- Inadequate physical safeguards over cash, investments, or inventory - if assets aren’t properly safeguarded, they can be stolen.
What are fraud risk factors for opportunities pertaining to misstatements from fraudulent financial reporting?
- Significant related-party transactions NOT in the ordinary course of business - these typically have a higher inherent risk b/c these may occur at terms totally different than had they occurred with an independent third party. Auditors will look at these with more scrutiny as there is an opportunity for management to potentially manipulate the numbers with the transaction.
- Significant bank accounts in tax-haven jurisdictions for which there appears to be no clear business justification.
- Ineffective board of directors or audit committee oversight over internal control - Board and Audit Committee are charged with overseeing the financial reporting process. If they aren’t properly performing their oversight responsibilities, then fraudulent financial reporting could occur.
- Inadequate monitoring of controls, including automated controls and controls over interim financial reporting - typically, when there is inadequate monitoring of controls, this leads to opportunity for fraud.
What type of procedure is sending a letter to the company’s outside attorney for information concerning pending or threatened litigation, claims, and assessments?
Sending a letter to the client’s attorney is inquiry of an external party.
What type of procedure is scanning the repairs and maintenance account for unusually large amounts?
Scanning the repairs and maintenance account for unusually large amounts is an analytical procedure.
