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Auditing Notes Chapter 1
Auditing Notes Chapter 1
Primary assertion: whether statements are "presented fairly" in accordance with GAAP.
PROFESSIONAL STANDARDS
Auditing Standards:
GAAS: Generally Accepted Auditing Standards
GAGAS: Generally Accepted Government Auditing Standards
PCAOB: The Public Company Accounting Oversight Board
GAAS
General Standards
T - Training
I - Independence (in appearance and fact)
P - Professional Care
Standards of Fieldwork
P - Planning and Supervision
I - Internal Control, Entity, and Environment
E - Evidence
Standards of Reporting
A - Accounting = GAAP -- Must State (Explicit)
C - Consistency -- Silence is OK (Implicit)
D - Disclosure -- Silence is OK (Implicit)
O - Express Opinion -- Must State (Explicit)
Taken as a whole applies equally to a complete set of financial statements, and to an individual financial statement, such
as a balance sheet.
- Different opinions are okay
- One statement opinions are okay
Types of Opinions:
Decision Tree
Unqualified Opinion
Withdraw
Unqualified Opinion
• Management`s Responsibility:
a. Probable and reasonably estimable = record
b. Only probable, and not estimable = disclose
• Auditor`s Responsibility
a. If supported and properly recorded or disclosed, then issue unqualified opinion with no reference to
uncertainty.
b. If unable to obtain sufficient evidence, then scope limitation = GAAS problem. Issue qualified or disclaim
opinion.
c. If financial statement is materially misstated due to a departure from GAAP = GAAP problem. Issue
qualified or adverse opinion.
1. Unqualified Opinion:
a. Explanatory paragraph generally would follow the opinion paragraph
2. Qualified, adverse, and disclaimer of opinion:
a. Explanatory paragraph generally would precede the opinion paragraph
3. Exceptions:
a. The explanatory paragraphs can be either before or after the opinion paragraph, if:
i. Justified GAAP departure
ii. Emphasis of a matter
1. Division of responsibility (modified unqualified): opinion based in part on another auditor`s report.
a. The principal auditor will mention this division in all three paragraphs.
i. Name of the other auditor is not mentioned unless that auditor gives express permission and
the report of the other auditor is presented.
ii. The work done by other auditor is expressed in terms of percentage, total assets, or other
appropriate criteria in the introduction paragraph.
Becker Auditing – 2008 Edition Chapter 1 3
b. Assumption of responsibility (no reference of other CPA)
i. The principal auditor should:
1. Visit the other auditor and discuss the procedure.
2. Review the audit program, audit documentation, and evaluation of internal control
performed by the other auditor.
c. Treat the other CPA just like your staff:
R – Reputation
I – Independent
P – Professional Competency
P – Program Steps
A – Analytical procedures
D – Debt compliance: auditor should review terms of debt and loan agreements
M – Minutes: auditor should review minutes from stockholder and board of director meetings
T – Third parties: the auditor should confirm the details of financial support arrangements
N – Negative Trends: recurrent losses, working capital deficiencies, negative cash flows
E – External Matters: Legal proceedings, new legislation, loss of a franchise, license, or patent
d. Mitigating Factors:
i. Plans to borrow money, restructure debt, to sell assets, delay or reduce expenditures, to
increase ownership equity.
e. Alleviation of Doubt:
If, in the auditor`s judgement, the entity’s disclosures are inadequate, a departure from GAAP exists. This may
result in either a qualified or adverse opinion.
1. Non-GAAP Change
2. Inadequate Disclosure
3. Unjustified Departure from GAAP
4. Unreasonable Accounting Estimate
Adverse GAAP
1. Non-GAAP Change
2. Inadequate Disclosure
3. Unjustified Departure from GAAP
4. Unreasonable Accounting Estimate
• Format of the report: When the auditor expresses an adverse opinion, all reasons and financial impact should be
set forth in explanatory paragraph BEFORE the opinion paragraph. If financial impact is not determinable, the
auditor should state in report.
• Not ``except for`` in opinion paragraph, but instead it is ``because of the effects of the matters discussed in
preceding paragraphs``
Qualified ``Except For`` GAAS
1. Uncertainty
2. Scope Limitation
Becker Auditing – 2008 Edition Chapter 1 7
The Qualified Opinion – GAAS Problems
1. Uncertainty (GAAS ISSUE: Qualified or Disclaimer)
a. If auditor is unable to obtain sufficient evidential matter to support managements assertions = scope
limitation.
b. Qualified or disclaimer opinion
c. This also implies if the evidence does or did exist but was not available to the auditor for reasons such as
management`s record retention policies.
d. Note: 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.
1. Uncertainty
2. Scope Limitation
3. Lack of Independence
4. Unaudited
1. Reporting with different opinions: When comparing current year with preceding year, they both have different
opinions
a. Unqualified Prior Year with Current Year Qualified
i. Same Intro Paragraph
ii. Same Scope Paragraph
iii. Middle Paragraph – may be required, depending on the issue if it is qualified or disclaimed
iv. Opinion Paragraph – ``except for`` and specifically state which year the problem originated from
in the prior paragraph
b. Unqualified Current Year with Disclaimer on Prior Year`s Statements
i. Same Intro Paragraph
ii. Scope Paragraph – ``Except For``
iii. Middle Paragraph – may be required depending on the issue
iv. Opinion Paragraph – state all the types of statements you are rendering opinions for along with
the year they represent (current or preceding)
v. Prior year`s statements were not audited and the current year`s statements are being audited, the
auditor is in essence facing a scope limitation
1. Subsequent Events: Events or transactions that occur after the balance sheet date, but before the issuance of
the financial statements. This may require adjustment to the statements or disclosure of the event.
a. Type I Events: Conditions Existing On or Before the Balance Sheet Date
i. Looking back for $$$
ii. Usually requires an adjustment to the statements if the condition existed at the date of statements
b. Type II Events – Conditions Existing After The Balance Sheet Date
i. Footnotes looking forward
ii. Sale or purchase of significant holdings may require disclosures, but no adjustments.
iii. They rarely require an actual adjustment to the financial statement for the period.
• P – Post balance sheet transactions. Review for proper cut-off and to better evaluate
year-end balances
• R – Representation letter should be obtained from management regarding whether any
events occurred during the subsequent period that require adjustments to or disclosure
• I – Inquiry:
o Inquire and discuss with management:
Any material contingent liabilities or commitments exist
Significant change in capital stock, long term debt, or working capital
Any material unusual adjustments
Changes in items that had been accounted for on an indefinite basis
o Inquire of client’s legal counsel concerning litigation, claims, assessments
• M – Minutes of stockholders, directors, or committee meetings
• E – Examine latest available interim financial statements and compare with current
• D – Disassociate
• A – Alert Agencies
• R – Relying Parties
2. Notification
a. Notification to parties other than client should be precise and factual, and include
description of the effect on the financial statements
b. If client refused to cooperation and thus the auditor could not investigate, then
notification should only include that the information has come to their attention,
and if it is true, then their reports should no longer be relied on.