reports on audited financials and under a I'm gonna read with you
financial statements generally mean a complete set
general-purpose financial statements including the related notes
no surprise here balance sheet income statement statement
equity cash flows footnotes right other comprehensive income
letter B fair presentation in accordance with the applicable
Financial Reporting Framework you know i i really like to say
just up fair presentation in accordance with gap
that's what I really wanna say well let's
underscore a bunch of things here because I want them to pop out
as you're reading your review later on number one
where it says the financial statements underscore
adequately disclose you want adequate disclosure
go under number two and halfway down
underscore consistent we want consistent application
gap for comparatively purposes number three
the accounting estimates underscore that and then underscore
are reasonable draw an arrow are reasonable so accounting estimates are
reasonable
a number for go down to the end to that one
underscore relevant reliable
comparator all and understandable
in number five the second line underscore
understanding the effective material transactions and events
number six underscore the word terminology
and then in the next line appropriate you're using appropriate terminology
number seven go to the and about one in underscore fairly presented
and a number eight go down to the end of the first line
and underscore represent the underlying transactions
those are some all the items that you're
ultimately going to make sure lol ok what you just underscore
that there's adequate disclosures that there's consistency in the reporting
that accounting estimates are reasonable that the information is relevant
reliable comparatively understandable that we understand the effects
material transactions and events that the terminology is appropriate
that is fairly presented and it represents the underlying transactions
that's the ultimate goal is to make sure that that
is an unmodified previously known as unqualified
opinion well all that is achieved
let's go on to the next one on modified audit opinion
I like that encircle it as well
that's the big one some love you
took classes more than a year or two ago you probably recall it used to be called
in
on qualified now which is called on modified
me and next to it after you've highlighted in circle put
clean opinion this is the one that says
your clean your good now there are many
items here that we're going to look at there are various categories
what this opinion looks like and we're gonna see the report coming up in about
three pages
but let's highlight title by the way it's obviously going to be that your
independent because you're giving a test function
letter B highlight address typically it's addressed to those again
as required by the circumstances but let's be more
specific out in the margin a general rule
after the word who you address it to general
not to management and underscore not general as you're not addressing this to
management you're addressing it to the stakeholders shareholders
the Board of Directors or some other third party
see highlight
tree paragraph now by the way
in the intro we're going to see this in an illustration that's why we're not
highlighting everything else
we're going to identify the company we're going to state that the financials
have been audited
we're going to identify the title in each financial statement and the
specific dates appearance that were referring to
I letter D highlight management's responsibility for the financial
statements
now we're gonna give you a little Monica let's just take a moment to chat about
this
this report is incredibly long and there's always the possibility
that in a multiple choice or a task-based simulation
that they'll get down to 180 grady's up you know which one of these statements
would you say in this paragraph or in that paragraph
you know how would this be phrased is this phrase correct a wrong
the way with most frequently seen these kind of questions addressed
is they say a senior is reviewing
the audit opinion that a staff member had prepared
and made the following critique indicate whether these are correct or incorrect
true or false so you have to have a fundamental understanding
of how it flows now one way to do it is just simply memorize
I don't think that's going to be very efficient use a value
the brain matter up there so what we're going to do is we're gonna try to give
you
%uh a little demonic the kinda flows in the way it's not perfect by any means
but at least it will give you the flow love what's going on
so again with that in mind let's take a look we're going to introduce you to
mister diem
mister diam alright know here
what we're going to say is that again put in Minn are in the two bubbles
because that's gonna deal with
what management's responsibility is I and again it's going to be that they
have to again prepare
and fairly present the financials then in the second one
where it says the statement that this responsibility includes
design implementation
and maintenance that's the damn design implementation and maintenance
so if you're looking a member what with those words again by having the DMD I am
you say all the first one begins with the D that must be the design
the eye is implementation and the M is maintenance
the internal control relevant to the preparation a fair presentation the
financials
that are free of material misstatement whether due to
error a fraud or error now
let's go to the auditor's responsibility now the auditor
reports crime okay and that's how we're going to do it we're
we're gonna add an extra pain misspell crime but it's close
so hopefully it'll help first of all the again
the first published in are because it's the auditors responsibility
then the second bottle is in E
because what we have is we express an opinion
the third bubble is a p and that's because the auditor plans and performs
the audit
the fourth bubble as also a p
because an audit involves performing procedures
the fifth bubble is a I'll
because it's to obtain audit evidence the next bubble
is an are because its assessment up risk
a material misstatement the next bubble
is that T and we're going to stretch a little bit here I'm being honest with
you about that one
notices in making those risk assessments the auditor considers
internal controls relevant now by considering internal controls we
obviously have to
test them so above that would you write the word
test and put it in quotes we don't actually use the word test we say
consider internal control
but essentially that's gonna ultimately involve testing
internal controls so that's the T relevant to the entities
preparation and fair presentation at the financial
statements there's the ass so now you have reports
with 2 P's in order to design
audit procedures that are appropriate in
the circumstances but not for the purpose of expressing an opinion on the
effectiveness
%uh internal controls accordingly no such opinions expressed
that C is that the controls were not expressing an opinion on the control so
that's the sea
the new work crime or Crime
then of course the are is the reasonableness
a significant accounting estimates there's the
a made by management there's the AM
as well as a valuating the overall presentation there's the E
so you can be the same report scramble reports crime
but again within a rather than RI so mister jam reports cram
or Crime again it's just the way it kinda knowing the flow
it for whatever reason you get a question or task based simulation on it
all right let's go on to the next page and let's look at the next area
audit opinions highlight this and high flight number one
a statement that the financial statements present fairly
in all material respects
the financial position at the end the as at the balance sheet date
and the results of operations and
its cash flows for the period that ended in accordance with applicable
financial reporting standards our framework right now in this case
after you highlight all that underscore presents fairly
that's on the first line and then on the last line
underscore accordance with the applicable financial reporting framework
all law gap US gap
international standards and now the margin would you
note that this is an explicit statement were explicitly it's not implied
it's explicitly state I some other reporting
responsibilities now highlight that and then we'll just three
if the order addresses other reporting responsibilities in the orders report
in addition to gas these other reporting responsibility should be
underscore this addressed in a separate section
up the auditor's report subtitled report on other legal and regulatory
responsibilities or otherwise as appropriate okay so again
other reporting responsibilities are addressed in a separate section
letter H highlights signature on the auditor
letter I highlight auditors address letter j
highlight day the auditor's report now will get more into this one a little bit
later on
but for now put down the auditor's report should be dated
no earlier high like this then the day
on which the auditor has obtain sufficient appropriate
audit evidence now out in the margin
we're going to talk about something known as dual dating
right and that has nothing to do with my partner in crime P role in 20
having more than one day night I dual dating
we're going to talk about that when a little bit later now the very bottom we
have a passkey
I would also like you know put a star next we highlight the auditor's report a
shows the final date of the auditor's responsibility
for comparative statements the audit report a
for the most recent audit should use
okay next next we're going to introduce you to the actual reporting here it is
and by the way you can put down in the bubble mister damn
and then of course the bubbles going down reports
are E pp Oort
ass crime see are a
not and I a and E no
we have the independent auditor's report the report on the financial statements
we have audited the accompanying financial survey ABC
which comprise the balance sheet as of December 31st
x1 and the related statements income changes in stockholders equity cash
flows for the year than
and related notes to those financial statements the management responsibility
management is responsible there's %um in our for the preparation and fair
presentation at the financials in accordance
with accounting principles generally accepted in the United States of America
this includes years damn design
implementation and maintenance of internal controls
relevant to the preparation and the fair presentation to the financial statements
that are
free a material misstatement whether due to fraud
or error now the accounts responsibility reports
our responsibility is to express you can see the are in the e
an opinion on these financial statements based on our audit
we conducted our audit in accordance with auditing standards generally
accepted in the United States of America
those standards require that we plan and perform there's the first me
to obtain reasonable assurance not absolute about whether
financials are free of material misstatement an audit includes
performing
there's the second P procedures to obtain
there's the I'll audit evidence about the amounts and disclosures in the
financial statements
the procedure selected depend upon the auditors
judgment including the assessment of
risk there's the are a material misstatement
the financials whether due to fraud
or ever notice again that's going to be in your we're looking to see if there is
any
but we can ultimately guarantee there's no absolute assurance
in making the risk assessment the auditor considers
internal control now next to that that's the T
test wanted to write the word test in there because in considering internal
control
ultimately means testing I considering
internal control relevant to the entities preparation and fair
presentation at the financial
statements there's the S in order to design
audit procedures that are appropriate in the circumstances but not
for the purpose of expressing an opinion on the effectiveness
the internal controls there it is there's the sea
crime accordingly we do not express an
an audit includes valuating
again the appropriate the accounting policies used Ando
reasonableness there's the are up the
significant accounting estimates made by
management there's the M as well as a
valuating the overall presentation the financial statements
note also we believe that audit evidence we have obtained
is sufficient and appropriate
to provide a basis for are audit opinion that's an important statement right
there
now the opinion in our opinion the financial statements referred to above
present fairly
in all material respects the financial position
ABC Company at December 31st and the results operations and its cash flows
for the year ended
in accordance with accounting principles
generally accepted in the United States of America and then you sign off on
alright next let's highlight letter
L highlight auditors reports
on audits conducted in accordance with both gas
and another set %uh auditing standards
I and underscore and
another set auditing standards well
audits %uh issuers and circle the word issuers
and after circle that put down public company
and that equals PCA lb Public Company Accounting Oversight Board
PCA OP and then in brackets SEC
the Securities Exchange Commission now just reading
the PCL beyond standard number one requires audit reports to include a
reference to the standards
the Public Company Accounting Oversight Board notice would say we conducted our
audit in accordance
with the standards of the Public Company our Public Accounting Oversight Board
United States so that would be another standard setter
how bout audits non issuers circle non issuers
and then put equals private companies
right now we're just gonna re if
audit was conducted in accordance with to sets audit standards
in their entirety the auditor may indicate that the audit was conducted in
accordance with another set of auditing standards and here's the example
our responsibility is to express an opinion on these financial
based on our audit we conducted our audit in accordance with auditing
standards generally accepted in the United States of America
and underscore this and and your underscoring
and in accordance with International Standards on Auditing Standards
so you may have done it based on both international
and US auditing standards for a non-issue now one little pass key
always like to emphasize this one when it calms
to again the responsibility y'all know when you look at that
audit opinion that there's a reference to gas generally accepted auditing
standards and there's a reference to get
generally accepted accounting principles where are they well
easy way to remember gas is in the
scope paragraph you can see the S's I'm emphasizing
and as crazy as it sounds I got people responding on Facebook to me saying
you know I heard your voice during the exam that's scary I know
and they said I heard your voice in with that question popped up i sat there is a
gas in this scope paragraph
gap in the opinion I regret again
crazy as it sounds you'll notice I'll do anything to help you
remember tools that will help you pass the exam let's go back to our materials
letter M differences between the
auditor's report under US gas and international standards highlight his
first passengers we read
requirements in the international and not in the US
international ISA indicates that the description in the auditor's report
can either refer to the preparation and fair presentation at the financials
or the preparation financials
that give a true and fair view US does not include any reference to
true and Fairview that's the big difference I
let's take a look and just read letter B international require the introductory
paragraph
the auditor's report to refer to the summary of significant accounting
policies and
other explanatory information and letter C
international require the statement in the auditor's responsibility paragraph
that the auditing standards require that the auditor comply with
ethical requirements
next item number two let's highlight requirements and gas
not in the international so this is the flip-flop we just looked at
what international requires that more now we're gonna look at what US gas
requires that's more
and let's just read this together a requirement
that the description and management's responsibility for the financials
statements in the auditor's report should not be referenced
to a separate statement by management about such responsibilities
if such statement is included in a document contained in the audit report
and later be a requirement that such
fission appropriate audit evidence includes evidence
that the audit documentation has been review
so differences between the requirements
well international require the description
management responsibilities to include explanation
that management is responsible for such internal controls
as it determines is necessary to enable
the preparation financials that are free of material misstatement whether due to
error or fraud
or fraud and error sorry gas
requires the audit report to state that this responsibility includes the design
implementation and maintenance there's damn
right there our preference to diem US is that
DM while International is a little different there
all right now we're gonna turn our attention to a big picture here
and what I'd like to do is i'd like to chat just a little bit
with you about the idea that we could now be in a situation by the way this is
very prevalent with the big accounting firms
where they have a massively large company that they're gonna on it
and that company has divisions throughout the world
and therefore they need to retain
other accounting firms throughout the world to help them do the audit
so I may be a United States CPA firm
and I picked up a client who's here in the United States but they have
businesses in China Africa South America Australia
so I now have a relationship with another accounting firm
and therefore they're going to do some other work on those divisions
over in China Africa you're up South America
Australia and then send me the report we need to understand about this what we're
gonna call division responsibilities
and how do we handle it so let's take a look at some definitions
and then look at what do you do if you get their reports and you want to make
sure that
you're gonna take full responsibility for everything they did
or you're not gonna take responsibility for what they did
in total and you're going to make sure that they have some accountability
so let's look at some of the details associated with this issue
that's going now the definitions but I like a component a component isn't
entity
that's the starting point what is a component
auditor and lets highlight a component auditor is
auditor who performs work on the financial information
number three highlight group
engagement partner and then go down to the second line
this is the one responsible for the group audit engagement group Engagement
Team
highlight the group engagement team includes the
group engagement partner other partners and staff
who established the overall audit strategy
communication and component auditors perform work
all right number five group financial statements
group financials our financials that include the financial information
more than one component
let's look at letter C determining and highlight this as we read it determine
whether to make reference to the component auditor
in the auditors report and doubt it what a
let's highlight reference to the component auditor
should not be made unless the following
requirements are met and that highlight one into the component auditor has
performed an audit
in accordance with the relevant requirements have gas
or when required PCA lb why don't you have to highlight that
underscore gas and underscore PCA lb
and the number to highlight the component auditor
is not restricted use and I would underscore
not restricted use alright use
other different financial reporting framework maybe you're using
US gap in there using international standards so
in this case let I like that and down on the second line
over on the right highlight reference to the component auditor
should not be made in the auditor's report
on the group financials unless and then we're going to highlight
two items on the second line frameworks
are similar highlight that it underscore it
and by the way gap US Capitol papers are relatively similar
and the number two highlight the group in gage min team
has obtain sufficient appropriate audit evidence
to evaluate the appropriateness of adjustments needed
and then underscore audit evidence an underscore appropriateness
other adjustments so one you have to have the frameworks are relatively
similar
and then you have to be able to have evidence to support the adjustments
that bring into your US gap the next item highlight
making reference in the auditor's report
and let's highlight number one that the component was not
audited by the Auditor up the group statements but was audited by the
component water
an underscore f you highlighted that underscore audited by the component
auditor
number to highlight the magnitude apportion and then underscore portion
you want to tell them how big it was number three
when the component financials are presented using a different financial
reporting framework and we already talked about that it has to be similar
and you have to have another evidence to support the adjustments you made
the financial framework used and by the way highlight are underscored use a
different
using a different just that that little phrase
and then underscore framework used
and then be let I like that the auditor up the group financials
is taking responsibility for evaluating the appropriateness
up the adjustments and underscore taking responsibility
and underscore adjustments and finally in number four
look at the second line and let's highlight does not state
when the component auditor's report on the component financial
does not state that the audit was performed in accordance with gas
or PCA OB and even though you've started by highlighting we're gonna continue it
again so it wasn't in gas or PC a or b standards and the group in gauge when
partner has determined that the component auditor
performed additional procedures to meet the relevant
requirements of gas so they may be used international
auditing standards not US and therefore there may have been some differences
so therefore we have to do some additional items obviously you're going
to want to set out the relevant criteria the setup auditing standards used
I like that and then that additional audit procedures
were performed now with a number for I'd like you to again
underscore the word not in the second line does not
state underscore gas or PC a or b
so it's not gasser PCA OB and then underscore perform additional procedures
underscore that on the fourth line so what you gonna do
you're gonna talk about the same standards used and the additional
procedures that you just perform
and then finally letter D here modified
opinion issued by the component autre and just highlight it the opinion that
the component auditor
is modified or the report includes an emphasis that matter
or emphasis matter or other matters paragraph
the group auditor should determine the effect on the
audit report up the whole group so therefore they may have had some problem
or they may have wanted to promote something more or note something of
importance
you now have to consider how material that is to your overall
audit and then the next item is going to be our independent auditor's report
now go to the next portion of this which is on the next page
the opinion paragraph just know in our opinion based on
our audit and the report up the
other auditors so we can you make reference to in there is well right now
what happens if you want to assume responsibility
so let's highly assumption responsibility when the group engagement
partner decides to assume responsibility for the work on the component order
no reference to the component auditor
should be made so if you're assuming responsibility
no reference to the component water so
ft highlighted that underscore no reference to the component
order alright additional requirements when
assuming responsibility I like that and go down 2-1
a at the bottom significant do
individual financial significance now
a component that is significant dude
individual financial significance should be
on by group Engagement Team or
the component auditor
go to the next slide or next page excuse me significance due to a significant
risk %uh material misstatement now
to distinguish that backwards and significance do
individual financial significant make sure you underscores
financial significant so it was very significant financial IW
material dollar that'll what about
the risk material misstatement underscore that as well
go down to the third line the group in gauging team or the component auditor
should perform in
audit of the financial information and/or audit up the account balance
transactions or disclosures related
to the likely significant risk a material misstatement
and/or perform significant procedures related to the likely significant rest
the material misstatement so again you can't wash your hands and say well we're
gonna let somebody else do all the work in the heart area
for the big areas that's gotta be you you gotta take that responsibility on
you gotta look at it you gotta get your hands dirty n roll up your sleeves my
back
and let's take a look at number two components that are
not significant and underscored not significant but I like the group
engaging team should perform
analytical procedures for components that are not significant all right now
the types of opinions
but this is a nice little chart I've been using it for a number of years to
help candidates in
hopefully it's kinda visually help you understand where things fall
you have your unmodified opinion that you're clean
that's when everything is okay in your professional judgment
then if there's a problem problems way
you down so as problems start to weigh you down
you go down to the qualified opinions and then if they
really become very very heavy on your shoulders
they're very material or pervasive then we go down to another level
and then at the very very bottom you'll notice we have withdrawal
financial statements are false fraudulent deceptive or misleading
obviously you should never be associated with those kinda financials
you should withdraw from the engagement now a couple markings I'd like you to
put in the notes
on the left hand side would you please write down
at the top gap problem no no
you have a gap problem and its material you're going to use a qualified known as
an except for opinion so at the margin
materials material gap problem its qualified
and we're gonna learn that that's for accounting policies that they're not
following
that's going to be improper presentation lack of disclosures
bad estimates excedrin benefits material problem you go to that
now with it very material gap problem
known as pervasive right very material
and then underneath in brackets but pervasive very favorite word that they
like to use
then you'll go to an add verse opinion for those exact same items
but it's the level it's the LevelUp materially
its really now a material item and it's bothering you right now on the right
hand side
right down gas problem have a gas problem
no its material
right that word out then you go to a qualified that's typically
for insufficient evidence now it could be that the scope was limited or they
lost evidence in a fire or flood or was stolen or
the computer crashed but there's not enough evidence to support something
and its material you're gonna go down qualified now
its very material also known as pervasive but also going to use the word
significant here
then you go to disclaimer and that can also be for the same
again insufficient evidence but it can also be for a significant notice that
word
significant going concern uncertainty
so now we're really concerned about going this company may not be able to
stay in business
and then of course this one there's no such thing as material
it's very material right from the get-go is you lack independence
so again that would be there so these are the fundamentals
so again as we go through notice the choice except for
adverse is when its cap except for
disclaimer is when its gas I
so there's the fundamental rules that we're gonna see it's all based on
materiality and materiality persons very material
is your professional judgment all right let's go and take a look at the bottom
of this page
let's highlight unmodified me and next to that why don't you put
gap GAAP gap
and gas equal okay
there okay in your judgment there okay
and highlight unmodified opinion States
that the financial statements present there early
and underscore that it presents fairly
now to remind you again if they're doing what's acceptable according to cap
that's fine we gave you an example earlier about a contingency
again where it's probable that you can estimate you footnote
or if it's only possible you put know it and its Remo
with a few exceptions you completely ignore it also
could you violate gap yes and you could still get an unmodified opinion
if the reason for the violation gap was that you needed to violated in order to
properly present
in a fair manner the transactions of the company
academically I've heard that really well
never seen but again academically you gotta be aware it
we're gonna get into been very very shortly the emphasis
matter and other matter paragraphs this doesn't change the unmodified opinion
buddy highlights just kinda tells the reader
a don't miss this K gotta catch this item
so in certain circumstances the auditor may determine that it's necessary
had an additional communication to the auditor's report
with out modifying the auditor's opinion
sewing emphasis of matter or other matters paragraph
does not modified the unmodified any
this is done using an emphasis matters or other matters para
so after you highlighted that known as with out modifying
the auditors opinion alright
well scholars you're ready for your first couple multiple choice questions
on some other material we've covered
given a shot
all right in this question it states management believes and the auditor is
satisfied
that a material loss probably will occur
so it's probable when pending litigation is resolved
management is unable to make a reasonable estimate so it's probable but
not
reasonably estimate able the amount or
even to make an estimate of the range a potential loss
but you know that this is the proper accounting
when it's probable but cannot be estimated it is a footnote disclosure
and they fully disclose the situation in the notes
management does not make it a cruel which they can't
in the financials the auditor should express why don't they try to lead you
down the path
something's wrong here right that's what they're trying to do something's wrong
here
but the answer is everything is exactly as it should be
so the correct answer is letter D and
unmodified
all right in this question the group auditor decides not
to refer to the component auditor who audited a subsidiary
the group in this situation the group auditor
most likely would the correct answer is letter D
determine the type of work to be performed by the group auditor
on the financials the component so notice in this particular case it's not
that you needed permission
is your you don't need permission not to reference you need permission to mention
that
again it's not just about the engagement letter it's not a and purses
edit paragraph that's extra stuff you want to tell the public about
again in order for you to take responsibility I'm gonna wanna make sure
I understand everything about the reputation of this
auditor the independence at this order again
their professional competency and the steps that they're going to perform
so letter D was the correct answer
alright welcome back let's now turn to again
the next page take a look at some of these questions I first saw
what is the modification to the auditor's opinion let's highlight this
and no again I'm gonna read an order concludes that the financial statements
and whole are materially misstated which is a gap problem
or the auditor is unable to obtain appropriate evidence which is a gas
issue
so in this particular case what I'd like you to do is i'd like you underscore
in b1 underscore materially
misstated gap issue I
that means you're going down the capsid you're going down from
again qualified except for to an adverse depending on the level of materiality
or circle the word or an underscore
unable to obtain sufficient appropriate audit evidence
and based on that that a gas issue underscore that
alright types of modified opinions
there's the qualified thing
and qualified opinions bunch put down after
highlighted that gap or gas equals material
issue I again that could be the left or the right hand side of our decision tree
number to highlight adverse opinion now if you're in an adverse opinion
that's a gap problem right gap
and it's a very material issue
so qualified is gap or gas material issue
and adverse opinion is gap
very material issue all right number three disclaimer
opinion this is a gas problem generally accepted auditing standards
and its up very material issue also referred to as pervasive
significant and that was also the case with
adverse right now in our passkey
let's highlight something here when the auditor expresses an adverse our
disclaimer that's way down on the tree right
on the financials as a whole the
auditor's report should not and I'm gonna underscore that as well
not also include and unmodified opinion on a single financial
or on one or more specific elements and I'm good underscore
even though I've highlighted ongoing underscore unmodified him
on a single financial statement or one or more
specific elements I accounts or other items in the financial
issuing such an unmodified in the circumstances would contradict the
adverse
disclaimer opinion on the whole and out in the margin why don't you put down
no piecemeal opinions you're not allowed to say
I again these statements are not fair they are do not present fairly
however accounts receivable looks pretty good to me
now we're not going to allow that that would completely
undue the reader's understanding of what we're trying to say
I now what is the definition of pervasive
I prefer to that is very material as well its professional judgment in fact
why don't you next to the word pervasive right down very material
and circle the word Pervaiz
so pervasive means very material and again notice
it's your professional judgment again
and what we're staying right here is the pervasive effects of
are not confined to a specific element account so they're not confined to an
element
again if so confined represents a substantial proportion
and disclosures fundamental to the user's understanding may be missing
so that's the pervasive concept and that's going to be a professional
judgment call
all right now we're going to do is we're going to learn about to
add-ons you still haven't on
modified opinion I was still in the good clean opinions
but we want to emphasize something so what we're gonna learn is that there are
two ways of doing this
there's the emphasis of matter paragraph
or other matters para so emphasis or other
those are the two other types a paragraph that could be edited
but they do not affect the on modified
opinion it's still a good opinion that you're giving on these financials let's
go into this in
highlight as we read this whole first paragraph a
the at this is a matter and other matters paragraph and then
a emphasis matters paragraph ft highlighted that
underscore emphasis matter emphasises the big were there
because that's going to be distinguished from what you see on the next page which
is
other paragraph other matters paragraph I so here is the
emphasis matters paragraph and emphasis
matters paragraph is included in the auditor's report
when required by gas
or at the auditors discretion there's your judgment and emphasis
matters paragraph is used when referring to matters
that is and underscore this as well
appropriately presented or disclose so
everything's okay but we just want to make sure somebody doesn't
miss it in the financial statements and his
such importance that it is fundamental to the user's understanding of the
financial statements
the inclusion the emphasis matter paragraph and the auditor's report
and as you highlight underscoring to does
not affect the auditor's opinion you still get
and unmodified clean I
when are the reporting requirements how would it be done well let's emphasize
some things here
you place the emphasis immediately
highlight after the opinion paragraph so it goes
after your opinion and by the way even though you
highlighted underscore after the opinion letter B
highlight heading is emphasis of matter see
highlight describe the matter Andy
indicate that the auditors opinion is not modified
now incidently just so that you see in this kinda ties into what will get on
the next page
out in the margin write the word be four
and underscored and then underneath that
put other matters in quotes so it's
after the opinion but its be 4
the other matters paragraph so it's the opinion
the at this is matters other matters
that's the ordering that they will be all right now
use the emphasis matters paragraph and as you can see
we've got various items that we're going to be talking about
at this is a matter going concern
consistency issues changing
prior opinions and special-purpose framework and we're gonna see all these
over many many of the pages so again it's not just gonna be the next couple
pages were gonna jump around and cover these but as we do
you'll see each one of them pop up so now
into a circle the word required so what is the use required
well let's take a look at one through four and highlight each of them as we re
the auditor concludes that there is a substantial doubt
about the entities ability to continue as a
going concern for again reasonable period of time
by the way underscore going concern so not only is it highlighted
but going concern is underscored
number two to describe justified change in accounting principle
that has a material effect on the entity's financial statements
and underscore justified change in accounting principle
again known as the word justified
that's an important word in there again it was reasonable
and you work hard you agree with it
third one subsequently discovered facts leading to a change
in auditor's opinion I the owner may use
at this is a matter or other matters paragraph as appropriate
but underscore change in auditor's opinion usually its last year we had one
opinion
but now they fixed it so now we'll upgrade the opinion this year
and then finally number for the financial statements are prepared in
accordance
with an applicable special-purpose framework
other than the regulatory financial base is intended for general use
and underscore special-purpose framework so each of those items you
underscore the work that's in the menu over there to the side
alright let's take a look at be and what you circle
may be necessary and by the way what that really means
out on the margin put professional judgment an auditor
hen use an emphasis matter when referring to
any matter that and that highlight this appropriately presented
or disclose that the financials and is such importance
that is fundamental to the user's understanding so again
it is proper is properly shown it is properly
noted but you want to make sure people don't miss it and what could that be
four
well in one through four let's highlights is water to workers
in number one highlight uncertainty number two
major catastrophe number three
related party transactions and a number for
subsequent events okay that takes care
%uh lower again emphasis a matter paragraph now
let's go to let her be and highlight other matter
paragraph so again this is other matters
would you underscore again the words other
matters as opposed to emphasis of matter and
the second sentence i'd like you to highlight here other matter paragraphs
refer to matters other than those presented
or disclosed in the financial that are relevant
to the user's understanding so notice here
I would like you also
underscore other than those presented or disclose
so these are other items that you're not fighting in the financials
that you want to again tell people about and
would you please then also go down to
one b1 a and lets highlight
in AB and C the following a place the
other matters paragraph immediately after
the opinion paragraph and after
the any a person's matters paragraph so
underscore after the opinion and underscore
after any emphasis since that's so important
I suggest that out the margin you right the word
after and underscore and below the word after
you underscored opinion and
emphasis of matter so it's after both letter B
highlight use the heading other matters and then later see highlight describe
the matter being emphasized
and the location I when is the use
required and circle the word required well
in these next several items which also go on to the next page
we're just gonna highlight a couple of words in a one
over on the far right restricts the use
I like that and underscore restricts the use
number two in the middle highlight change
in audit opinion and underscore that remember you had a choice as we said
it could be an emphasis matter or it could be here
it's a choice number three but I like this passage
the financial statements the prior period were ordered by a predecessor
auditor
and the predecessors auditor's report is not reissue
highlight that and then to make sure that that jumps out when you're doing
your final review
underscore predecessor fact underscore
audited by predecessor and not reissue
okay number for let I like this current period financials are often presented
in comparative form with compiled
or review financial statements for the prior period or
in comparative form with prior periods statements that were not
audit review or compile I
let's talk about what we should underscore underscore the word
comparative in the first
line on the second one underscore compiled a review
and then at the end of that wine circle
or and then on the next line
at the way and not audited review to compile
solely comparator for you got this year audited and the last year
something less than that was done so you got one high standard
and then the other one had lower standards or absolutely nothing done it
all
that would be another matter being emphasized
other matter paragraph number five on the first line
at the end highlight identifies a material inconsistency
and other information and then
underscore material inconsistency
number six when the auditor chooses to report on supplemental information
presented with the financial statements in the auditor's report
rather than in a separate report
and underscore report on supplementary information
notice all he's your required and other matters paragraph
number seven to refer to required supplementary information
that a designated accounting standards setter requires to accompany
entities basic financials and underscore required supplementary information
so that you're referring to required supplementary information
number eight to restrict the use of the auditor's report
when special-purpose financials are prepared in accordance with contractual
or regulatory basis of accounting and underscore restrict the use
and underscore special-purpose financials and finally
a report on compliance is included in the auditor's report on the financial
statements
and again notice I'd like you to underscore compliance
write a letter B use may be necessary
and why don't you again circle
may be necessary number one to describe the reasons
why the auditor cannot withdraw from an engagement
when the auditor is unable to obtain sufficient appropriate audit evidence to
management imposed scope limitations
sec like to highlight law
regulation or generally accepted practices require or permit the order to
provide
further explanation up the auditor's responsibility
and three the auditor has been engaged report on
more than once said a financial statements when each set a financial
has been prepared in accordance with a different general-purpose framework
art that said let's go to auditors consideration
%uh entity's ability to continue as a going concern let's highlight that
and what other things I'd like to discuss with you
is a lot of times people say well
you know I'm in order all morning last year's financials
you know that was the cast ballots those were the receivables those were the
assets
those were the liabilities and the income same as what actually happened
last year
so why am I worried about whether they can go forward in a
that thats financial analyst job my job is to tell you what it was
not what it's going to be and going concern is dealing with what it's going
to be
so why is there an issue here the question isn't it
the answer is it goes to two items
valuation and classification valuation if a company worked
ultimately going to demise well
a lot of customers would pay the receivables they say just gonna go to
the lawyers
your inventory would have to be sold bare-bones bottom prices
your property plant and equipment its remaining useful life is now less than a
year
your intangibles are worthless think I've and Ron
the sixth or seventh largest company in the world but the vast majority of its
balance sheet was intangibles
and derivative and hedging activities literally
within a very short period went down 2-0 bankruptcy
and by the way if you're going to ultimately
value those things that lower amounts you have to write them off which means
the income statement in properly reflect those charge a lot
in addition to that on the liability side you may have long-term debt
that has a covenant a company that says if you declare bankruptcy
this becomes immediately do so the classification of it shouldn't be long
term it should be
current so valuation classification
by the reason why we're concerned about going concern let's go back and put that
down as a No
out in the margin put valuation and classification
now international standards require the order to consider the same period
that was used by management in making the assessment the entity's ability to
continue as a going concern
this period must be at least but not limited to 12 months
from the balance sheet day
so what are the procedures that you would do well
we have a little wave remembering these the procedures that you would do to
concern yourself here
is again a CPA admits there's a going concern problem so the CPA
admits a d am
hi he s
admits there's a problem the procedures you would do
develop some sort of judgment on this is analytical procedures
determine their debt compliance read
minutes the board of directors and other meetings said
make increase of their legal counsel talk to third parties
again who could be offering financial support and look at
subsequent events in other words it's a December 31st year and see what's
happening
in January February and March No
one other item here international standards
that the auditor should consider the going concern assumption throughout the
engagement
now conditions and events now
conditions and events that might say its okay this is when the client admits
which is up about they are online of i
and E so again
based on the procedures you performed
you may find that financial difficulties loan defaults
dividend arrangements deny love you so trade credit
get restructuring non-compliance with capital requirements
new financing sources drying up disposal of assets to try to keep their
liquidity up to speed the RI internal matters like work stoppage
labor difficulties substantial dependency on partial projects on
economic long-term commitments
significant revisions to their operations downsizing
the end negative trends recurring losses deficiencies in working capital
negative cash flows adverse financial ratios
any external matters legal proceedings
new legislation Lawson franchises
lost licenses loss patten's
again loss of customers even loss a critical personnel
now understand one thing again
when it comes to this I'm gonna give you one other
one thing I know I got completely wrong in my understanding when I first came
out of college
you know my original thought processes when you got
unmodified previously known as unqualified opinion
that basically the auditors were saying this is a good investment
and that's wrong that's not what it is
and unqualified unmodified opinion
just says that these statements present barely
the company's financial position that's all it says doesn't say it's good
investment it just says the present a fairly
so I could be auditing the company that stinks
and the financial statements basically say
we staying I can sit there and give them in unmodified opinion
that I agree that those statements clearly reflect that they stink
I'm not tell you it's a good company to invest in all I'm doing is telling you
that the statements fairly present the financial position of the company
so let's make a note of that down to the bottom what you put
on modified opinion unmodified opinion
does not equal a good investment and I modified opinion means they're
fairly presented doesn't mean it's a good investment
all right let's go
our next page mitigating factors that could ultimately mean that
alright this company is gonna continue well
plans to borrow money or restructure plans to sell assets
plans to delay again or reduce expenditures
plans to increase ownership equity those were all these things it's a
oh yeah we're gonna get outta this we're gonna survive this period now
international states that management has a responsibility to assess the entity's
ability to continue as a going concern
and requires the order to evaluate management's
assessment now let's go down to number five and I like you did
highlight on the second line the following the auditor is not precluded
from choosing to disclaim an opinion due to going concern
uncertainty so again that's another option
and number six highlight the wording
up the emphasis matter paragraph must include the terms
substantial doubt and going concern
notice this is an emphasis matter so out on the margin put after
and then you can read this and you'll know
the words that I would like to draw your attention on the third line
underscore substantial doubt about the entities
ability to continue as and underscore
going concern now incidentally just because international said you have to
be able to
be comfortable that you'll survive for at least a year that doesn't mean you
say
so i'd on the margin since I've seen that kind of question asked before
down don't say for one year
don't say for one
year
now just to give you an idea the our next page
number seven sample emphasis matter international standards
notice they include the term significant doubt
rather than substantial doubt I mean very minor change their nothing it's
gonna draw
too much attention what is the documentation required
well the conditions or events that gave rise to the substantial doubt
any mitigating factors that the auditor considered significant
audit work performed to evaluate management's plans
the auditors conclusion about whether substantial doubt remains
or is alleviated and the effects of the orders conclusion
on the evaluation the financial statements and related disclosures
notice in the next area comparison like you highly
percent international standards require the order to obtain
written representation for management regarding its plans for
future actions so international you gotta get a rep letter
miscellaneous one last point here in the owners judgment
the entities going concern disclosures are inadequate
a departure from Gap exist so let's talk about that one for sec
this company's things but they're not
indicating that in the financials well then that a lack of gas is it
so now we're on the capsid failure to properly report
in the body have the financials are in the footnote now you're into a gap
problem and the fact that they may not survive I would call that a
very material pervasive problem so now you're probably gonna go down into the
other side that that's a departure from Gap now
with that if you highlighted that draw narrowed down to the bottom of the page
because I
I want to continue what their on the next page
what we have here is we have a passkey again when it comes to going concern and
why don't you circle that
going concern notice if it's adequately disclose
the unmodified with an emphasis matters paragraph if there's
inadequate disclosure and why don't you put down
gap underneath that that's a gap problem then it's qualified or adverse
and if there's a significant going concern uncertainty
but everything is okay in the report that is a
gas problems pointcast next to that and of course your arrow came into that area
alright next item lack of consistency
high like this acceptable just by change in accounting principle
so high like that why and then underscore acceptable
justified so you changed an accounting thing but you had to
you wanted to right let I like this first passages we read
consistency deals with comparatively the financials
from year to year unless the auditor's report
explicitly states otherwise the audit report
implied that the financials Arkham parallel
between periods so it's implied by silence
so if they're is up failure to be consistent you have to explicitly stated
annual explicitly stated in an extra power
so let's talk a little bit about this now if it's
acceptable again acceptability of the change
well why why would that happen newly adopted accounting principle
is in accordance with the applicable framework the method of accounting for
the change is acceptable
the disclosure related to the change is adequate and the entity has
just by the alternative accounting practice Park
you gotta justify change now the effect
unacceptable change on the auditor's report effect
the changes immaterial no revision so why don't we just underscore
immaterial no revision emphasis on matters paragraph should be included in
the auditor's report
in the period of change accounting principle and all subsequent periods
until the new accounting principles applied
consistently all presented period so underscore
emphasis matters paragraph if the change in accounting principles accounted for
by a retroactive Restatement
the emphasis matter is only needed in the period of change
a change in accounting estimate that is inseparable from a change in accounting
principle should be described in the emphasis
matters paragraph as well
continuing on to the next page other changes
in accounting estimates or correction errors
do not affect consistency notice
here by the way I want you to underscore estimates and then correction of errors
and underscore do not affect consistency standard
right now what I'd like to do here
like to emphasize again you ever change
in accounting principle such as a change in estimate a change in estimate
is not an issue again we thought that assets were the last twelve years
we now realize they're only gonna last 10 or they're gonna last 15
change in estimate you just go for it prospectively that's not a problem
again change in estimate is not a consistency issue
now let's go back and re corrections have an error
in accounting principle again say from castro cruel
affect consistency and require an emphasis matter
by the way I want to emphasize something out in the margin
correction %uh error correction error
and underscore that is not
accounting principle change and the brackets from cash to a cruel
that's the correction error usually a prior period adjustment okay
now letter G a change in reporting entity that results in financial
statements that are in effect
those other different reporting any should be described in an emphasis
matter
that means we did consolidate last year and not this year or vice versa
notice also with an end to these financials include significant
investment accounts
for use of the equity method the auditors evaluation consistency should
consider
the consideration of the investi- the investing makes changes in accounting
principle that is material
to the investment entity the change should be described
in emphasis matter paragraph and finally if a material misstatement
in a previously issued financial is corrected an emphasis
matter describing the Restatement and referring to the company's disclosure
matter should be included in the auditor's report
now the next item alert
that restricts the use up the auditors written communication
high like that and the last sentence underneath there I'd like you to
highlight as well
in the audit report such language
is included in other matters paragraph so when you have
a restriction restricting the use and let's underscore that
restricting the use and then again in the paragraph you were just highlighting
the last sentence
other matters paragraph now in he won
a that's highly AB and C there
highlight measurement or disclosure criteria
that are suitable for only a limited number users
who have been adequate understanding of the criteria
so you're doing a specific type analysis
and only a few people with understand that would be again
restricting the use and that restrict uses an other
matters para another item would be measurement or disclosure criteria that
are available only two specific parties
and the third time you would have a restriction on use matters identified
during the audit engagement
that are not the primary objective the audit engagement commonly referred to as
byproduct reports those would have restrictions on the use
and that would be an other matters paragraph as well now what's the content
the alert
Welsh include the following: but I like a
a statement that the auditors written communication is intended solely for the
information in use
up the specified parties and let her be
identification at the specified parties for home
use is intended now note the rest
such as quickly give you a quick heads up for a byproduct
the specified party should only include management and those charged with
governance
when the order is requested at specific parties in addition to those identified
the auditor should obtain acknowledgement in writing from the
party
their understanding
and there
stage other specify parties are added
after the release the auditor should amend the written communication
at the party's or provide a written acknowledgement
management and the other parties at the party 7 added as
significant parties and that no procedures were performed
original date notice here
this report is intended solely for the information
and use I'll we list the party's and not intended to be used and should not be
used by anyone
other than those parties I the last item
Roman numeral six-year gap issues
qualified or adverse high like that and out in the margin to the left point gap
problem
and next qualified its you use that it's a material gap problem
and the next adverse put very material
and then in brackets pervasive so
it's very material in pervasive it's an adverse
now before that I typically have seen on exams over the years that I've been
helping candidates pass the exam
like you to make a note at the bottom number one gap
consistency change so
gap consistency change and then put in brackets unjustified
so the client changed gap
unjustified so gap consistency change unjustified
equals auditor disagrees the auditor disagreed with
number two inadequate disclosures
I that's a gap problem number three
departures last violation gap
so now you're not you're not only changing
out what you did in the top 1% but your departing from Gap
and it's not just the fights on justified brackets
so within on justified departure violation gap
that's different than the one up above the one up above was just changing from
one
the gap to another gap but you couldn't justify why you changed missus
unjustified violation gap now remember if you violate gap
in order to properly and fairly present that's justified that's okay
that's on modified and then last but not least unreasonable
accounting estimate and unreasonable
accounting estimate that would also be a okay now
with that you're ready to try some or multiple choice questions
good luck
alright when financial statements contained a departure from US gap
be caused due to unusual circumstances
the statements with otherwise be misleading so this is justified
and you are always allowed to violate cap if it's justified in order to fairly
present
so the correct answer is it's an unmodified opinion
academically that's the right answer in the real world
I haven't seen it in 30
and auditor concludes that there is some
scheduled out about an entity's ability to continue as a going concern for a
reasonable period of time
at the end to these financials adequately disclose the financial
difficulties
both in the balance sheet the income statement and in the footnotes
the auditor's report is required to include an emphasis on matters paragraph
that specifically uses the phrase
how about this one reasonable period but not to exceed one year
now that's an international standard about getting confirmation
how about the term going concern absolutely
have to include the going concern and the term substantial doubt
so letter C is the correct answer
alright welcome back
now what we're going to do is turn to our next page and we're going to start a
discussion at the qualified
adverse opinion now remember this is on the left hand side
the decision tree qualified would be a material problem
in Gap adverse would be
very material per based problem in gap
and then remember if the financial statements ultimately are deemed to be
false
fraudulent deceptive or misleading what we do
we got to withdraw from the engagement I let's take a look and read some
this first of all again we have the cap issues
and if there's an immaterial problem it's an unmodified
if this material it's gonna be qualified
and it's very material and pervasive it's gonna be your
adverse opinion known as qualified
is material but not pervasive adverse
is both very material and pervasive so what's the nature of a material
misstatement
well again you're looking for and trying to make determinations as to the
appropriateness of the accounting policies
not only are they using the right accounting policies but are they
applying
the application of those accounting policies and the appropriateness of the
financial statement presentation
or the appropriateness of the adequacy of the disclosures in the footnotes
up those financial statements of course we also have things like the
appropriateness of the policies
in detail and that is the accounting policies
are again are they not in accordance with again
financials are they not representing the underlying transactions
do they not again yet he has not complied
with changes in accounting policies those would be the appropriateness of
the application the policy was
they didn't apply it properly it wasn't consistently applied
or they made error in the application
on our next page now the appropriateness the presentation
we're looking to see if the financials do not include
all required disclosures the disclosures are not presented in a
horton's with the framework the financials do not provide the
disclosures
needed and the information that is required to be present in such as a
statement of cash flows
has not been included or disclosed in the financials
now based on this I'd like you to make a little notation
the margin I out in the margin right down
make sure make shore
omission does not make financial statements
false fraudulent
deceptive misleading
I so make sure the omission does not make the financials
false fraudulent deceptive or misleading because if that's the case what happens
that's right because if that's the case you ultimately do what
you might want to try an hour a venue withdrawal let's go onto
letter ap now we're gonna start highlighting again it's been a while
I know you're missing it so let's get started with highlighters
I the form and content the auditor's report
now before we go down to f1
because we're missing something I just like to emphasize this
point no change in underscore no change
and then underneath that bullet point number one
intro paragraph bullet point number two
management responsibility paragraph solos
first paragraphs don't change so what does change
well what does changes
f1 let's now highlight this modification up the
auditors responsibility paragraph when the auditor expresses a qualified
adverse opinion here's your gap problem again
the auditor's responsibility paragraph should be amended
to state that the auditor believes that the audit evidence
obtain a sufficient an appropriate to provide a basis
for the auditors modified I
underscore auditors modified audit opinion because you're modifying it to
the except for or the adverse
I thats number two highlight basis
for modification paragraph now
the basis for modification paragraph
should be placed immediately be
or the opinion paragraph and should use
heading basis for qualified opinion or
basis for adverse opinion as appropriate so first of all
circle the word be four underscore the word basis for qualified opinion
underscore basis for adverse opinion alright later a highlight a description
of the qualification
other financial fact a any misstatement
that relates to a specific amount in the financials
letter B an explanation of how
disclosures armistead their is a material misstatement
related to a narrative disclosure and see
highlighted description of the nature omitted information
and inclusion up until mid and or inclusion the omitted information
when practicable if they're is an omission
other information that is required to be present or disclose
so essentially you're gonna give you're gonna talk about the number that's wrong
but no that's wrong commission that's wrong
right
to the next page highlight opinion paragraph now we're gonna
two different types right the option is one or the other and by the way
the qualified opinion is when when its material
and wanted to write that down material gap
alright and what is it go down to the third line and high like this
except for the affects the matters described in the basis for the qualified
opinion paragraph the financials are
presented fairly in all material respects in accordance with applicable
financial reporting framework
why don't you underscore the word except for
and underscore presents fairly all right now
let highlight adverse opinion paragraph
and when do you have that
when it's and let's put this down in your notes very material slash pervasive
gap
right now with the highlighter on the second line
highlight because I love the significance
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 and underscore after
highlighted that underscore because I'll and then underscore
not presented fairly
alright on our next page we have a sample other qualified opinion
and by the way when we have qualified circle qualified
and above it what are we gonna put material
gap problem
I let's go down under auditor's responsibility
no you might want to underscore
the very last sentence in the auditor's responsibility
we believe that the audit evidence we have obtained a sufficient and
appropriate to provide a basis for
our qualified underscore the word qualified audit opinion
the basis for the qualified opinion
we give you some again reasons the company's financials do not disclose
blah blah blah blah
and it's required according to accounting in the United States okay so
they
into something and it's immaterial capital mission now
in the next paragraph the opinion in our opinion except for
underscore the word except for except for the omission
the information described in the basis for qualified opinion paragraph right
about
the financial statements referred to above present
fairly underscore present fairly in all material
respects the financial position ABC December 31st
x1 x0 and the results of its operations
and its cash flows for the year ended in accordance with accounting principles
generally accepted in the United States
I the next page we have another qualified opinion
but this one is due to a material misstatement as opposed to the other one
which was
inadequate disclosure I so this one is material misstatement so once again
we're gonna circle qualified opinion underscore
material misstatement and then above put material
gap problem once again in the auditor's responsibility the last sentence we
believe that our audit evidence we've obtained a sufficient and appropriate to
provide
a basis for our qualified underscore that
then you have your basis for the qualified opinion
the reasons and you can read that over and then once again in the opinion
paragraph
our opinion underscore except for
the effects at the matter described in the basis
for qualified opinion paragraph the financial statements referred to above
underscore present barely so again same thing
just a different reason for it gap material problem
all right let's go to the next page now this is it
had burst opinion this is a adverse opinion
and that means it's what very material
and by the way circle adverse so it's very material slash pervasive gap
problem
I let's go down and take a look at that last sentence
we believe that the audit evidence we have obtained a sufficient and
appropriate
for us to provide a basis for our adverse
underscore the word adverse now the basis for the adverse opinion you can
see the paragraph there
and then in the opinion paragraph in our opinion because I love
underscore that the significance of the matter discussed in the basis for
adverse opinion paragraph
the consolidated statements referred to above and underscored
not present fairly financial position at ABC Company
and its subsidiaries as in December 31st x1
or the results of its operations or cash flows
for the year then ended so that again that's the bad opinion right
alright moving on let's now go to the next
page and let I like gas issues
generally accepted auditing standard issues qualified opinion or disclaimer
now out in the right-hand margin why don't you put gas problems
and over by qualified except for put material
if it's a material audit problem insufficient evidence
and then next to the disclaimer
category put very material and that
term that you'll see is pervasive or significant
pervasive or significant a lot of times
just when we're dealing with this on the next on the next line
letter a qualified or disclaimer let's put some bullet points down
you know between the two of them what we're really dealing with when dealing
with uncertainty
so why did you write that down we're dealing with scope limitations
we're dealing with independence and also the concept maybe
unaudited up
that one in brackets
now a little discussion is necessary here
because again things that are a lot of common sense
street smarts if you will don't apply here
what we're going to find out and you want you're gonna see that they'll try
to test you on this
they're gonna say the client would not allow you to look at a very material
account they would let you audit
you like you would let me look at that
I know why because it's wrong and it's probably a really big number that's
wrong therefore
I know that these statements are wrong on the issue in adverse opinion
well just like the game show not allow
again you're not going to issue an adverse opinion because
you don't know they're wrong you suspect their role
but it's an uncertainty it was a scope limitations
so you're on the auditing side the problem not the accounting side
the problem so when you're on the auditing side the problem
make sure that you stay between
except for and Disclaimer of course
you believe the scope limitation was because there's false fraudulent
deceptive or misleading information in these financials
and they don't want you to find out about it then what right then you have
to
withdraw from the engagement alright let's go back to our materials
as you
see again in a little chart below as well same thing is the same up above
when you have been
immaterial issue gas issue its
unmodified when its material it's going to be qualified
when it's very material in pervasive it's gonna be a disclaimer
so qualified is because you are unable to obtain sufficient
appropriate audit evidence on which to base an opinion
and you the auditor conclude that the possible effects of the undetected
misstatement could be material but not
barry materials last for days disclaimer of opinion
the disclaimer should be expressed when the auditors unable to obtain sufficient
appropriate evidence on which to base an opinion and the auditor concludes that
the possible effects
have any undetected misstatement or again our material
and/or pervasive as well as by the way
remember independence you lack independence disclaimers also require
I let's go on
next page and let's go to let her be but I like 'cause
over Scotland and number one highlight circumstances
and under that third line let I like limitation may exist
when auditor was not engaged at the beginning of the year
when opening inventory should have been observed when circumstances prevent the
water from performing a specific procedure
the auditor should determine whether it's possible to perform alternative
procedures let's chat about those for just a moment
personal why do I need to be hired at the beginning of the year
as long as I'm hired before the end of the year I can
audit the ending inventory I can confirm the receivables I can do my test work
got lotsa time to do whatever I have to what's so important at the beginning of
the year
oh wait a minute cost sold
cost of goods sold is what beginning inventory
know that that number was right plus purchases during the year
minus ending inventory people's cost
that's all so you may not be able to prove into cost that's all
a major element in the income statement so that's the first one the second item
is
alternative audit procedures when it comes to alternative audit procedures
such as again confirming receivables maybe you weren't allowed to do it they
didn't have any information
all on the Internet whatever you ultimately might be able to come up with
alternative audit procedures
let me give you an example let's just say that we have a website
the website is www
love you CPA's ha hotties
Dakar and again where the company
auditing that business now they have a whole bunch
receivables but were not able to confirm it for whatever the reason now
an alternative audit procedure would be to in January
see if the people listed in December actually paid
and what i do is i happen to find an interesting one my partner in crime I
other national instructor Peter all Intel
and I noticed that peter pay off his
fifteen thousand dollar be to that website for Hardy CPA's
love you baby what does that prove well it has proved that peace a lonely guy
by the way I'm sure he'll get even with me in his lectures
but the bottom line is also proves that that was a valid receivable
back on December 31st so it's an alternative audit procedure
that got me to the same conclusion that I would have gone hike
sent out a confirmation and received back that information so alternative
audit procedures
day be able to resolve the issue may let's move on
insider ASCII on the second line would you underscore performing alternative
procedures
hopefully that that kinda emphasized and now back up
where you highlighted circumstances and be one out in the margin
put down cost about salt
C %uh GS right cards equals income statement I
beginning inventory would be your cards cost gotshall
which equals the income statement problem and then of course another issue
could be time constraint they could say
you only have two weeks to get everything done we gotta go to the SEC
and report by two weeks from today well at a time constraint
for you to be able to get confirmations back talk to lawyers
investigate things to subsequent events except circumstances could do it another
reason there's a school
limitation is number two management management could intentionally create
the scope limitations
and if you would go down to the third line way over on the right hand side
highly management will not remove the limitation the auditor should
communicate with those charged with governance
and determine whether it's possible to perform alternative
procedures so again personal
management Scott limits should be reported and then
secondly figure out if you can find another way to skin the cat
an alternative water procedure I now
under two let's go to letter A and I want you to go down to the third line
undetected I like this undetected misstatement could be both material and
pervasive then the auditor should
either disclaim an opinion or withdrawal
from the engagement now out in the margin would you write exam track
and underscore once again when they limit your scope
you believe that there's some suspicious items going on
it is a disclaimer or withdrawal the exam track
underneath that put never adverse opinion
never adverse opinion now what are some of the
limitations that they could put on you well from
a where you just highlighted right arrow down to the bottom
and let's put what somebody items could be
let's put our number one confirm accounts receivable denied
confirm accounts receivable tonight the second one consolidated
sub in denied consolidated some info tonight
the third one audit restrictions buildings we can go into people we can
speak to
audit restrictions a fourth one adequate
records the next one no
management Rep letter signed
and finally quiet lawyers denied we can talk to them
now incidently summer those again can be circumstances some those could be
managed
like inadequate records that could be just management doesn't like to keep
records they're just not into paperwork
or it could be that they had the records but there was a computer crash
there was a fire there was a that there was an earthquake something happened
so that there for the record just aren't there anymore again
they may be innocent as far as what happened but the bottom line is
you can audit Scott limitation it's an audit problem
therefore its obviously going to be down in the disclaimer category
right moving on to the next page international standards require the
order to withdraw from an audit
when the auditors on able to obtain sufficient appropriate audit evidence 22
management impose
scope limitations and the auditor concludes that possible effect
undetected
misstatement could people material and pervasive US cap requires the order to
consider withdrawal from the engagement under
the circumstances so it's not mandatory it's more considered
under US standards let's go on
a look at the form and content of the report number one
let's highlight modification the introductory paragraph disclaimer
only this is for a disclaimer notice
again on the second line highlight auditor was engaged to audit
the financials on others we didn't audit we were engaged
to audit incidently out in the margin next
put no change underscore that
no change to the management responsibility paragraph no change
underscored to management responsibility para management still responsible no
matter what
K never too late I like modification the
auditor's responsibility paragraph now if it's a qualified
and when was it qualified once again let's put this down
that emphasize this one more time a qualified opinion was what
a material gas problem so while we put down material
gas problem and go to the second line if you've written that down
and way at the end highlight auditor believes that the
audit evidence obtained is sufficient and appropriate to provide a basis for
the
auditors qualified opinion now
disclaimer when is that that's when you have a very material
also known as pervasive also known as significant
gas problem and then go down to the bottom here
the second paragraph line-item down brand new sentence there
and highlight because of the matters described in the basis for disclaimer
opinion I you gonna put that in however we work
not able to obtain sufficient appropriate audit evidence
to provide a basis for our audit opinion so
after you've highlighted that underscore because I'll and underscore
not able to obtain sufficient appropriate
audit evidence I where does this
go where it is the basis for the modification the basis for modification
again highlight that should be placed immediately
be for circle before the opinions highlighted
encircled before the opinion and of course we have our opinion paragraphs
I let's go on to the next slide what do the opinion paragraphs look like well
it's a qualified opinion
again let's go to the second line highlight that
and on the second line way over on the end let's highlight the following
in the auditor's opinion except for the possible effects
up the matters described in the basis for the qualified
in the financials are presented fairly in all
material respects in accordance with the applicable
financial reporting framework and course just
emphasize that underscore except for
and underscore presented fairly a letter B what happens if it's a disclaimer of
opinion
but I like that in a number 12 will highlight
because of the significance up the matters described in the basis for
disclaimer of opinion paragraph
the auditor has not been able to obtain sufficient appropriate audit evidence to
provide a basis for an audit opinion and
accordingly the order does not express
and opinion on the financials
and therefore less underscore because I love
in b1 and number two
underscore does not express and opinion
I notice when it auditor is not independent
but is required by law to report
on financials the auditor should disclaim an opinion and shit
specifically state that the owner is
not independent so by the way why don't we just put down
underscore not independent disclaim an opinion now an exam track
another one that I like to show you
put-down exam trick on the bottom here and then over on the left
right no audit work equals
the sign no
audit opinion no audit work equals no audit opinion and underneath no audit
opinion in brackets put not
even up bad opinion close the brackets
not even up bad opinion underscore not
and put that in quotes I let's chat about that let's say
you don't do enough work or you don't do any work at all
but you now you know that that company
has bad financials without even doing any work you can smell it can ship
you're not allowed to express an adverse opinion
that's an opinion and an opinion requires audit work
one way or the other you gotta have audit work to support your opinion
so when you don't have the audit work yet can't express that opinion
what do you do when you don't do anyone at work the disclaimer that
they stay limited your skull for whatever the reason scope limitations
weather was circumstance or management
it's a disclaimer other any it's not an adverse opinion
all right let's move on
on our next page we have a qualified opinion
and it was inability to obtain appropriate audit evidence
inability to obtain evidence and what is this
this is a qualified so it's a material
we put on the top this after you circle qualified opinion
it is a material gas problem
and let's take a look if you go down
under auditor's responsibility the last sentence we believe that the audit
evidence we have obtained
is sufficient and appropriate to provide a basis for our
qualified underscore that you have the
qualified opinion basis information
here was the problem and then in the opinion in our opinion
except for underscore that the possible effects on the matters described in the
basis for qualified
paragraph the financial statements referred to above present fairly
underscore that in all material respects
the financial position at ABC Company at December 31st x1
and the results of operations and cash flows for the year that ended in
accordance
with accounting principles generally accepted in the United States of America
I on the next page we have a disclaimer
why do you have a disclaimer because you have a very
material also known as pervasive
also known as significant gas problem
so circle after you write that down circle disclaimer
I notice here underscore we were engaged to on we tried
auditor responsibility paragraph our responsibility is to express an opinion
on the financial statements based on conducting
the audit in accordance with auditing standards generally accepted in the
United States
underscore this because of right now
just reading the matters described the basis for disclaimer
opinion paragraph however we were not
able to obtain sufficient appropriate audit evidence
underscore that then you have the paragraph basis for disclaimer opinion
why there was a problem
and then that's good disclaimer of opinion paragraph
because I love the significance of the matter described in the basis of
disclaimer
paragraph we were not able to obtain sufficient appropriate audit evidence to
provide a basis for
our audit opinion accordingly and underscore we do
not express an opinion on these financial
state alright once you've done that let's go on to their
next page
now we're going to talk a little bit about uncertainties
let's emphasize something here with uncertainties
I this is sort of like going concern but it might not be as
significant is that when there are no material misstatements insufficient
evidence has been provided
again this is from the auditors point of view you're good
I no gas issues unmodified opinion
how about there is a material misstatement relating to the uncertainty
well then it's a gap problem so put the word gap
and thats adverse qualified or adverse
now it there's insufficient evidence regarding the uncertainty
then it's a gas problem write the word gas then it's qualified
or disclaimer and what we've done here is put a nice little summary chart this
is a great little thing to be looking at the last minute or two
before you say alright I'm done with this chapter I nailed it take a look
you have your group audits where you gonna make reference or
again assume responsibility you're going concern
and notice by the way where it's inadequate disclosures
what is your point gap next to that that's gap problem significant going
concern
uncertainty that's a gas problem you're just not sure you don't know
again when you deal with misstatement
that is a gap problem when you deal with scope limitations
that gas problems make those notes and then when you deal with uncertainty
again when you have a material misstatement up and uncertainty
that's a gap problem when you have it insufficient evidence
that is a gas problem nice ways to take a look in
emphasize those great little summary chart that we provided to help you
to put it all together after you're done I
after you had a chance to review that you're ready to try some
for which of the following events where auditor issue a report
that omits any reference to consistency when would you do that
well again when everything is okay and when is everything okay
go to letter C a change in the useful like that's a change in
estimate and changes in estimates are not changes in principal
there's no change in consistency its prospective only
so letter C is
which of the following phrases wouldn't auditor
most likely include in the auditor's report when expressing a qualified
opinion
due to inadequate disclosures now inadequate disclosures
is a gap problem well
what you're gonna do as you're going to use the term except
for so you have except for
and the only 1i can find that in his letter C except for the omission
up information described in the basis for qualified opinion paragraph which
would have gone before it
you would have your except for qualified opinion
in this question it states and auditor concludes that a client's illegal act
which has a material effect on the financial
has not been properly accounted for gap problem depending on pervasiveness
how material they're immaterial or just material depending on the pervasiveness
up the effect on the financials the auditor should express either
when you're dealing with cap issues what are the choices qualified opinion
or adverse opinion
in this question it states when call
buying an opinion due to an inability to obtain sufficient
appropriate audit evidence gas problem
an auditor should refer to the situation in
is that management's responsibility no
would you mention it in the basis for your qualified
paragraph absolutely you would mention it in that
paragraph so the correct answer is