Acct 4240 auditing
Download
1 / 69

ACCT 4240: Auditing - PowerPoint PPT Presentation


  • 134 Views
  • Uploaded on

ACCT 4240: Auditing. Audit Reports Other Than Unqualified. Three Conditions Requiring a Departure from an Unqualified Audit Report.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'ACCT 4240: Auditing' - fai


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Acct 4240 auditing
ACCT 4240: Auditing

Audit Reports Other Than Unqualified


Three conditions requiring a departure from an unqualified audit report
Three Conditions Requiring a Departure from an Unqualified Audit Report

The scope of the audit has been restricted. (Auditor has not accumulated sufficient evidence to conclude whether financial statements are stated in accordance with GAAP.)

Restrictions imposed by the client, for example:

Unable to observe inventories.

Unable to confirm material receivables.


Three conditions requiring a departure from an unqualified audit report1
Three Conditions Requiring a Departure from an Unqualified Audit Report

Circumstances beyond either the client’s or the auditor’s control

Unable to observe inventories.

Unable to confirm material receivables.

The financial statements have not been prepared in accordance with GAAP.

The auditor is not independent.


Audit reports other than unqualified
Audit Reports Other than Unqualified

A Qualified Opinion

An Adverse Opinion

A Disclaimer of Opinion


Qualified opinions
Qualified Opinions

The auditor must conclude that the overall financial statements are fairly presented.

Qualified opinions can result from two conditions:

A limitation on the scope of the audit.

Failure to follow GAAP.

If the auditor believes the condition being reported on is highly material, a disclaimer or an adverse report must be used.

Not material

Somewhat material

Very material

Standard Opinion

Qualified Opinion

Adverse Opinion


Qualified opinions1
Qualified Opinions

A qualified opinion is considered to be the least severe type of departure from an unqualified report.

A qualified report can take the form of a qualification of both the scope and the opinion, or of the opinion alone.

When a qualified report is issued, the term except for must be used in the opinion paragraph. Except for cannot be used with any other type of opinion.

Explanatory paragraphs always are inserted before the opinion paragraph.


Qualified opinion scope limitations
Qualified Opinion—Scope Limitations

Examples of scope limitations include:

Failure to observe client’s ending inventories, because of client’s requests or a late appointment of the auditor by the client.

Failure to confirm accounts receivable, because of client’s requests or missing or incomplete customer records.

Other situations where inadequate accounting records exist.


Qualified opinion scope limitations1
Qualified Opinion—Scope Limitations

Scope Limitation

Yes

Perform procedures and issue standard report*

Are alternative procedures available?

No

Is the restriction a significant limitation?

Yes

Issue a disclaimer ofopinion

No

* Assuming that no

departures from GAAP

are noted

Issue a qualified opinion


Adverse opinion
Adverse Opinion

Used only when the auditor believes the overall financial statements are so materially misstated or misleading that they do not present fairly the financial position or the results of operations and cash flows in conformity with GAAP.

The adverse opinion can be given only when the auditor has specific knowledge of the absence of conformity with GAAP.


Disclaimer of opinion
Disclaimer of Opinion

A disclaimer is issued whenever the auditor has been unable to satisfy himself that the overall financial statements are fairly presented.

Two conditions may lead to a disclaimer:

A severe limitation on the scope of the audit.

A nonindependent relationship between the auditor and the client.

A disclaimer is distinguished from an adverse opinion in that it can arise only from a lack of knowledge by the auditor.


Circumstances concerning comparative financial statements
Circumstances Concerning Comparative Financial Statements

Different opinions on the financial statements

Most often occurs in first-year audit with disclaimer on income statement and unqualified on balance sheet.

Updating an opinion

Opinion or report may be different than previously reported (on comparative financial statements) and auditor must explain the change in the report. Add paragraph just before opinion paragraph explaining the change.


Comparative statements
Comparative Statements

The SEC requires two years of balance sheets and three years of income statements and statements of cash flows.

The auditor updates previous reports when issuing a new report.

The updated report carries the same date as the current report.








Special reports
Special Reports Statements

Reports on financial statements prepared in accordance with a comprehensive basis of accounting other than generally accepted accounting principles.

Reports on specific elements, accounts, or items of financial statements.

Reports on compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements.

Reports on audited financial information presented in prescribed forms or schedules that require a prescribed form of auditors’ report.


Quarterly information
Quarterly Information Statements

Form 10-Q required by SEC.

Quarterly information is in more condensed form.

Quarterly reports are not audited but must be reviewed by an independent accountant.

If the company states in the 10-Q that the statements have been reviewed, the auditor must include a report.


Management s assessment of controls
Management’s Assessment of Controls Statements

The Sarbanes-Oxley Act requires each annual report of an issuer to contain an "internal control report", which:

states the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting;

contains an assessment, as of the end of the issuer's fiscal year, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting.


Management s assessment of controls1
Management’s Assessment of Controls Statements

Each issuer's auditor must attest to, and report on, the assessment made by the management of the issuer.

The attestation should be performed in accordance with standards for attestation engagements.

An attestation engagement should not be the subject of a separate engagement.


Overview internal disclosure controls
Overview: Internal/Disclosure Controls Statements

Source: Deloitte & Touche


Internal control financial reporting
Internal Control: Financial Reporting Statements

Notes

Financial Reporting Controls

Cash Flow

Income Statement

Balance Sheet

Financial Statements

Source: Deloitte & Touche


Internal control
Internal Control Statements

Authorization of Transactions

Safeguarding of Assets

Financial Reporting

Assets Compared to Accounting Records

Accounting Records

Source: Deloitte & Touche


Internal control1
Internal Control Statements

FCPA/ Attest

Disclosure Controls

Certify/ Report on Evaluation

Laws and Regulations

Operations

Source: Deloitte & Touche


Missing link
Missing Link Statements

The “weakest link” is a compliance

program and infrastructure to

measure and monitor the

effectiveness and alignment

between corporate governance and business unit/functional control activities to provide a basis for certification.

Source: Deloitte & Touche


Audit scope pre 404 vs post 404
Audit Scope: StatementsPre 404 vs. Post 404

Source: Deloitte & Touche


Pcaob auditing standard no 2 and section 404
PCAOB Auditing Standard No. 2 StatementsAnd Section 404

Section 404 of the Act requires the management of a public company to (1) assess the effectiveness of the company’s internal control over financial reporting; and (2) include in the annual report management’s assessment about whether the internal control is effective.

Section 404 also requires (1) auditors to attest to and report on management’s assessment of internal controls; and (2) the PCAOB establish professional standards governing the auditor’s attestation.


Benefits of the new internal control reporting
Benefits of the New StatementsInternal Control Reporting

Enhance companies’ internal control over financial reporting by enabling more timely identification and remediation of weaknesses.

Through the creation of an ongoing management requirement, companies will learn from their evaluation process and remediate identified deficiencies on an ongoing basis, which should result in more reliable financial reporting and greater investor confidence.

Internal control over financial reporting is intended to provide reasonable assurance about the reliability of financial reporting.

Cost of compliance with Section 404 (significant for many public companies).


Roles and responsibilities internal control over financial reporting
Roles and Responsibilities Statements—Internal Control over Financial Reporting

Management: Designs and implements the system of internal control over financial reporting; evaluates the effectiveness of the company’s internal control over financial reporting and provides a public report on that assessment; prepares the financial statements.

Audit Committee: Has responsibility for oversight of the company’s financial reporting process.

Independent Auditor: Performs an audit of internal control over financial reporting and issues a report on management’s assessment of internal control over financial reporting and on the effectiveness of internal control over financial reporting; also performs an audit of the company’s financial statements.


What management s report will include
What Management’s Report StatementsWill Include

Under the SEC rules, management’s report on internal control over financial reporting should include the following information:

Statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting.

Statement identifying the framework used by management to evaluate the effectiveness of internal control over financial reporting.

Management’s assessment of the effectiveness of the company’s internal control over financial reporting as of the end of the company’s most recent fiscal year, including an explicit statement as to whether that control is effective and disclosing any material weakness identified by management in that control.

Statement that the registered public accounting firm that audited the financial statements included in the annual report has issued an attestation report on management’s internal control assessment.


PCAOB Auditing Standard No. 2: StatementsAn Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements

AS No. 2 required three integrated reports on:

Financial statements audited by registered public accounting firms.

Management’s assessment of the effectiveness of internal control over financial reporting (Section 404).

The effectiveness of internal control over financial reporting over financial reporting based on the auditor’s attestation of internal control.

AS No. 2 was effective beginning June 17, 2004.


The independent auditor s opinion
The Independent Auditor’s Opinion Statements

The content of the auditor’s report is prescribed by the PCAOB standard. The most common opinions on the effectiveness of internal control over financial reporting will be:

Unqualified Opinion. An opinion that internal control over financial reporting is effective: no material weaknesses in internal control over financial reporting exist as of the fiscal year-end assessment date.

Adverse Opinion. An opinion that internal control over financial reporting is not effective: one or more material weaknesses exist as of the fiscal year-end assessment date.

Disclaimer of Opinion. A report stating that restrictions on the scope of the auditor’s work prevent the auditor from expressing an opinion on the company’s internal control over financial reporting.


Report of Independent Registered Public Accounting Firm Statements

1. Introductory

Paragraph

2. Scope

Paragraph

3. Definition

Paragraph

6. Inherent

Limitations

Paragraph

5. Explanatory

Paragraph*

4. Opinion

Paragraph

7. Signature

8. City and

State or

County

9. Date

*The explanatory paragraph is required only when the auditor’s opinion is other than unqualified and may also be placed after the opinion paragraph when the auditor issues two separate reports on the audit of financial statements and internal controls, thus making reference to opinion on the financial statement audit in the report on the internal control audit.


Source: Release No. 2004-001, pages 116 Statements−137, Appendix A—Illustrative Reports, available at pcaobus.org.


Source: Release No. 2004-001, pages 116 Statements−137, Appendix A—Illustrative Reports, available at pcaobus.org.


Source: Release No. 2004-001, pages 116 Statements−137, Appendix A—Illustrative Reports, available at pcaobus.org.


Suitable internal control framework example coso
Suitable Internal Control Framework Statements(Example: COSO)

Source: Deloitte & Touche


Framework of integrated financial and internal control reporting ificr

Framework of Integrated Financial and Internal Control Reporting (IFICR)

Integrated financial and internal control reporting (IFICR)

Demanded by the capital markets (investors)

Required by policymakers (SOX), regulators (SEC), standard setters (PCAOB)

Overseen by the board of directors (the audit committee)

Prepared by management (executive certifications)

Audited by the independent auditors

Submitted to shareholders and filed with the SEC in the form of:

Executive certifications of financial statements and internal controls

Management’s assessment of internal control over financial reporting (ICFR)

Audit report on financial statements (Form 10-K)

Audit report on ICFR




Other overriding causes of the financial crisis
Other Overriding Causes (cont.)of the Financial Crisis

Greedy and incompetent executives

Subprime mortgage crisis

Falling asset pricing, including houses

Highly leveraged financials

Inactive credit markets

Credit-driven rather than equity-driven markets

Government policies promoting home ownership

Securitization of mortgage-backed assets

Inadequate risk assessment of business transactions

Lack of transparency of public financial information

Failure of accounting standards to properly measure fair value of financial instruments


Overriding effects of financial crisis
Overriding Effects of Financial Crisis (cont.)

Results in a global crisis that will take time

Encourages regulatory reforms

Creates significant risk to GDP growth

Causes a global economic meltdown

Increases likelihood of bankruptcy

Causes unemployment

http://www.youtube.com/watch?v=SwRFoxgEcHc&feature=related (VIDEO)



The auditor is independent. (cont.)

The auditor previously expressed an unqualified opinion on the prior year's financial statements.

Only single-year (not comparative) statements are presented.

The conditions for an unqualified opinion exist unless contradicted in the factual situations.

The conditions stated in the factual situations are material.

No report modifications are to be made except in response to the factual situation.

Assume the following facts about the auditor:


Situation 1 (cont.)

Burgandy's consolidated financial statements show that during the year just ended, the company incurred a net loss of $400 million and at year end had a shareholders' deficit of $125 million. The current ratio has been steadily declining and is below that required in a loan agreement. Company officials believe that Burgandy's existing financial resources are adequate to finance operations during the next fiscal year, as disclosed in a note to the financial statements.


Situation 2 (cont.)

The chief financial officer of Fine Concrete Company will not permit you to confirm accounts receivable from a major customer. You are unable to use alternative procedures to satisfy yourself. The amount of the receivable is material in relation to the financial statements.


Situation 3 (cont.)

Two weeks after year end, Regal Wholesale, Inc., sold the franchise for the appliances it has sold for the past twenty years. Regal plans to dispose of its appliance inventory and convert its facility to a retail outlet for pottery.


Situation 4 (cont.)

Management of Marks Corporation has declined to include a statement of cash flows among its basic financial statements. Cash has increased for the past five years, and Marks's liquidity exceeds the average of the industry.


Situation 5 (cont.)

Drug Development Corporation is a defendant in litigation. The nature of the company's business and its primary product lines inherently subject the company to the hazards of product liability litigation. The company is currently a defendant in several product liability lawsuits. At this time, the company's legal counsel is unable to determine whether the outcome of the litigation will have a material impact on the company. Accordingly, no provision has been made in the consolidated financial statements for any liability that may result, but notes include the litigation information.


Situation 6 (cont.)

Seigel Corporation has provided for depreciation primarily by the declining-balance method on substantially all property acquired prior to the current year. At the beginning of the period, the company adopted the straight-line method for financial statements purposes for all new property acquired. The new method conforms with that prevalent in the industry. The effect of the change for the current year was to increase net earnings by an amount material in relation to net income.


More practice
More Practice (cont.)


Situation 7 (cont.)

In auditing the long-term investments account, an auditor is unable to obtain

audited financial statements for an investee located in a foreign country. The auditor concludes that sufficient competent evidential matter regarding this investment cannot be obtained.


Situation 8 (cont.)

Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. However, the financial statement disclosures concerning these matters are adequate.


Situation 9 (cont.)

A principal auditor decides to take responsibility for the work of another CPA

who audited a wholly owned subsidiary of the entity and issued an unqualified opinion. The total assets and revenues of the subsidiary represent 17 percent and 18 percent, respectively, of the total assets and revenues of the entity being audited.


Situation 10 (cont.)

An entity issues financial statements that present financial position and results of operations, but it omits the related statement of cash flows. Management discloses in the notes to the financial statements that it does not believe the statement of cash flows to be a useful financial statement.


Situation 11 (cont.)

An entity changes its depreciation method for production equipment from the straight-line method to a units-of-production method based on hours of utilization. The auditor concurs with the change although it has a material effect on the comparability of the entity's financial statements.


Situation 12 (cont.)

An entity is a defendant in a lawsuit alleging infringement of certain patent rights. However, the ultimate outcome of the litigation cannot be reasonably estimated by management. The auditor believes there is a reasonable possibility of a significant material loss, but the lawsuit is adequately disclosed in the notes to the financial statements.


Situation 13 (cont.)

An entity discloses in the notes to the financial statements certain lease obligations. The auditor believes that the failure to capitalize these leases is a departure from generally accepted accounting principles.


Key themes of as no 5
Key Themes of AS No. 5 (cont.)

  • Audit opinion on only the effectiveness of ICFR.

  • Consideration of the work of previous audits.

  • Reliance on the work of others.

  • Use of a risk-based approach for focusing on risk areas.

  • Use of a top-down approach for focusing on materiality and what does matter.

  • Consideration of size and complexity.

  • A principles-based approach of reducing unnecessary prescriptive audit standards.

  • More congruence with SEC Interpretive Guidance.


  • AS No. 2 was criticized for escalating Section 404 compliance costs by:

  • Promoting a bottom-up and control-based approach to testing ICFR.

  • Requiring extensive control documentation of the process-level controls, and less focus on entity-level controls and assessment of risk related to significant controls.

  • The top-down, risk-based approach promoted in both the SEC’s Interpretive Guidance and AS No. 5 is designed to refocus both management and auditors on controls that matter and risks that threaten the integrity and reliability of financial reports.


Definitions
Definitions compliance costs by:

  • The SEC’s Interpretive Guidance and AS No. 5 provide the following definitions of significant deficiency and material weakness of ICFR:

  • A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.

  • A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.[1]

[1] Public Company Accounting Oversight Board (PCAOB). 2007. Auditing Standard No. 5: An Audit of Internal Control over Financial Reporting That Is Integrated with an Audit of Financial Statements. Available at: www.pcaob.org/Rules/Rules_of_the_Board/Auditing_Standard_5.pdf.


Conventional Audit compliance costs by:

Integrated Audit

Integrated Audit of Internal Control over Financial Reporting and Financial Statements

Mandatory or Voluntary Audit of Internal Controls

Audit of Financial Statements

Integrated Audit

Internal Control Audit

Financial Statement Audits


Source: Excerpt from PCAOB AS No. 5. Public Company Accounting Oversight Board (PCAOB). 2007. Auditing Standard No. 5. An Audit of Internal Control over Financial Reporting That is Integrated with an Audit of Financial Statements (May 24). Available at: pcaobus.org/Rules/Rules_of_the_Board/Auditing_Standard_5.pdf.


Next time
Next Time Accounting Oversight Board (PCAOB). 2007. Auditing Standard No. 5.

Materiality and Risk


ad