Audit Notes CH 1 & 2

Chapter 1 & 2
 Subsequent to the audit report, the auditor discovers a significant omission in applying
an audit procedure…
 The auditor should first- assess the importance of the omitted procedures to the
CPA’s present ability to support the opinion. Did other audit procedures
compensate for the omitted procedure? If yes, no further work is need. If no,
apply the necessary audit procedures in order to support prior opinion.
*Auditor need not apply the omitted procedure if the results of other procedures
compensated for the omitted procedure.
 A CPA’s independence is impaired if they are able to make management decisions on

behalf of the client (i.e. contractual business relationship). Also, any direct or material
indirect interest in the client impairs the CPA.
 Standard audit report:

 Scope: reference to PCAOB standards
 Opinion: reference to GAAP
 Obtaining evidence about subsequent events: examples

1. Significant changes in long-term debt after year end (search unrecorded liab.)
2. Significant changes in capital stock/working capital after year end
3. Material contingent liabilities existed near year end
 Going concern  auditor’s responsibility: consider the adequacy of disclosure of the

inability to continue within the next year.
 Going concern audit procedures:

1. Read minutes
2. Analytical procedures
3. Review debt/loan agreements
4. Inquiry legal counsel
5. Review subsequent events
6. Confirm 3rd party debt arrangements
 Going concern mitigating factors:

1. Leasing rather than purchasing
2. Restructuring (extend loan due date), plans to borrow money
3. Delay or reduce expenditures
4. Increase in stockholder’s equity
5. Disposing assets
 A CPA is NOT required to comply with SSARS or issue a report when proposing
monthly/correcting journal entries to the F/S or preparing a working trial balance,
since these services do not render significant work in preparing the F/S.
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Chapter 1 & 2
 Financial forecast = general or restricted use

 Financial projection = restricted use
 A CPA would normally NOT restrict use of a review report.
 Primary purpose of a second auditor’s review is to ensure the F/S are presented in
accordance with GAAP.
 Management representation letter is required for review engagements, and not

required for compilations.
 Gaining an understanding of the client’s business transactions would be performed in

BOTH reviews & complilations.
 Review engagement requirements:

1. Understanding with the client (of engagement)
2. Learn/obtain knowledge of entity’s business
3. Inquiries (internal personal only)
4. Analytical procedures
5. Review other procedures
6. Client representation letter
 Adverse opinion: opinion paragraph:

 Includes a direct reference to a separate paragraph that discloses the basis for
the opinion given. ("In our opinion, because of the effects of the matters
discussed in the preceding paragraphs, the financial statements DO NOT
present fairly....")
 Qualified [GAAS] opinion: opinion paragraph:

 “Qualification pertains to the possible effects on the financial statements and not
to the scope limitation itself.”
 Questions regarding “explicitly & implicitly:”

 Explicitly = actually stated in audit report (i.e. “examination on a test basis…”,
“conformity with GAAS”)
 Implicitly = not stated unless needed (i.e. consistency, disclosures)
 Making reference to another auditor does not use an explanatory paragraph.
 When management does not provide reasonable justification that a change in

accounting principle is preferable and it presents comparative F/S, the auditor should
express a qualified opinion each year that the F/S initially reflecting the change are
presented.
2
Chapter 1 & 2
 When prior-period financial statements are restated in the current period to conform
with GAAP, the auditor's updated report on the prior-period financial statements
should express an unqualified opinion concerning the restated financial statements.
 When subsequently discovered information or an omitted procedure is found both to

be reliable and to have existed at/after the date of the auditor's report, the auditor
should:
1. FIRST, Assess the importance of the new information or omitted procedure to
the CPA’s present ability to support the opinion. For omissions: Are there other
audit procedures that can compensate for the omitted procedure? If not, apply
alternative procedures to satisfy the opinion previously given. If the CPA is unable
to, go to #3.
2. SECOND, Determine whether there are persons relying or likely to rely on the
financial statements who would attach importance to the information
3. If yes, request management to disclose newly discovered information and notify
those relying on the F/S
 After issuing the report, an auditor has no obligation to make continuing inquiries
concerning audited financial statements unless information that existed AT the report
date and may affect the report comes to the auditor's attention.
 The CPA’s report on the application of accounting principles should include a statement
that should “any facts or circumstances differ from those presented to the accountant,
the accountant's conclusions may change.”
 If an auditor chooses to report on information accompanying the basic financial

statements in a client-prepared document, the report should include a description of
both the character of the audit work performed and the degree of responsibility
assumed.
 There is NO requirement that the auditor's report on supplementary information

required by GAAP be restricted. Supplementary information must be clearly marked
unaudited and distinguished from the F/S or else disclaim opinion.
 A review engagement may involve reporting on only one financial statement, provided
the scope of the engagement was not restricted.
 Compilation report should state:

─ "A compilation is limited to presenting in the form of financial statements
information that is the representation of management."
 Review report should state:

─ “A review consists of inquiries of company personnel and analytical procedures
applied to financial data.”
─ “It is substantially less in scope than an audit…”
3
Chapter 1 & 2
 If an accountant decides that the change is justified, the report should NOT make
reference to the original engagement in the auditor’s report.
 In a review of a nonissuer's financial statements, the successor accountant may

decide (but is not required) to communicate with the predecessor accountant.
 A compilation in accordance with SSARS does NOT require analytical procedures.
 An accountant who is not independent with respect to an entity may compile financial
statements for such an entity and issue a report. However, the last paragraph of the
report should disclose this lack of independence.
 Compilations:
─ Auditors should generally only obtain understanding of entity and industry, and
read F/S to consider whether they are appropriate in form and free from
obvious material errors.
 An accountant is required to comply with the provisions of the Statements on Standards

for Accounting and Review Services (SSARS) when generating financial statements of a
non-issuer. SSARS provide standards with respect to compilations and reviews of
financial statements.
 A review of the interim financial information of a publicly held company is conducted in

accordance with PCAOB standards.
 A comfort letter is a letter from the independent auditor to the named underwriter
just before the registration of the client's securities. When issuing letters for
underwriters, commonly referred to as comfort letters, an accountant may provide
negative assurance concerning the conformity of the entity's unaudited condensed
interim financial information with generally accepted accounting principles (GAAP).
 Examination of projected F/S:

─ “…Included such procedures as we considered necessary to evaluate both the
assumptions used by management and the preparation and presentation of the
projection."
─ Included in a separate paragraph that describes the limitations on the usefulness
of the presentation: "...there will usually be differences between the forecasted and
actual results... that may be material."
 Attestation engagements use SSAE rules. Attest services report on:

1. Financial projections
2. Internal control
3. Compliance with laws, contracts
4. Computer systems
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Chapter 1 & 2
5. MD&A information, other supplementary info
 A report on agreed-upon procedures should include a list of the procedures performed

(or reference thereto) and the related findings. This report must be restricted.
 There is NO requirement to restrict report when reporting on an assertion about the

subject matter instead of reporting directly on the subject matter.
 For user - service (paychex) auditor questions, in considering whether the service
auditor's (Paychex auditor) report is satisfactory for the user auditor (client auditor);
the user auditor should make inquiries concerning the service auditor's
reputation.

Audit Notes CH 1 & 2

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Chapter 1 & 2

 A CPA’s independence is impaired if they are able to make management decisions on

 Standard audit report:

 Obtaining evidence about subsequent events: examples

 Going concern  auditor’s responsibility: consider the adequacy of disclosure of the

 Going concern audit procedures:

 Going concern mitigating factors:

 Financial forecast = general or restricted use

 A CPA would normally NOT restrict use of a review report.

 Management representation letter is required for review engagements, and not

 Gaining an understanding of the client’s business transactions would be performed in

 Review engagement requirements:

 Adverse opinion: opinion paragraph:

 Qualified [GAAS] opinion: opinion paragraph:

 Questions regarding “explicitly & implicitly:”

 Making reference to another auditor does not use an explanatory paragraph.

 When management does not provide reasonable justification that a change in

 When subsequently discovered information or an omitted procedure is found both to

 If an auditor chooses to report on information accompanying the basic financial

 There is NO requirement that the auditor's report on supplementary information

 Compilation report should state:

 Review report should state:

 In a review of a nonissuer's financial statements, the successor accountant may

 A compilation in accordance with SSARS does NOT require analytical procedures.

 An accountant is required to comply with the provisions of the Statements on Standards

 A review of the interim financial information of a publicly held company is conducted in

 Examination of projected F/S:

 Attestation engagements use SSAE rules. Attest services report on:

5. MD&A information, other supplementary info

 A report on agreed-upon procedures should include a list of the procedures performed

 There is NO requirement to restrict report when reporting on an assertion about the

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