BUS 425 Auditing Tad Miller 1/24/2018 Intro, objectives, assertions, reporting. 1 AUDITING Write the definition of auditing.

Size: px

Start display at page:

Download "BUS 425 Auditing Tad Miller 1/24/2018 Intro, objectives, assertions, reporting. 1 AUDITING Write the definition of auditing."

Florence Tyler
5 years ago
Views:

1 BUS 425 Auditing Tad Miller 1/24/2018 Intro, objectives, assertions, reporting 1 AUDITING Write the definition of auditing. Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria. 2 ATTESTATION Describe the relationships between assurance, attestation and auditing. Not the definitions but the relationships. Auditing is a subset of attestation which is a subset of assurance. 3 LINES OF BUSINESS What three lines of business or three services are typically provided by public accounting firms? Auditing or assurance services Tax Consulting or advisory services 4 GAAP V GAAS What do each of these acronyms stand for: GAAP, GAAS, FASB & PCAOB GAAP GAAS FASB generally accepted accounting principles generally accepted auditing standards Financial Accounting Standards Board PCAOB Public Companies' Accounting Oversight Board

2 5 GAAP V GAAS For public companies required to file with the Securities Exchange Commission, which organization has primary responsibility for issuing accounting principles and which organization has primary responsibility for issuing auditing standards? GAAP - FASB or Financial Accounting Standards Board GAAS - PCAOB or Public Companies' Accounting Oversight Board 6 AUDIT OBJECTIVE AU-C 200 Write the objective of AU-C Section 200. The overall objectives of the auditor, in conducting an audit of financial statements, are to Obtain reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud of error, thereby enabling the auditor to express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework; Report in the financial statements, and communicate as required by GAAS, in accordance with the auditor s findings, 7 AU-C 315 Write the objective of AU-C 315. The objective of the auditor is to identify and assess the risk of material misstatement, whether due to fraud or error, at the financial statement and relevant assertion levels through understanding the entity and its environment including the entity s internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement. 8 AU-C 500 Write the objective of AU-C 500. The objective of the auditor is to design and perform audit procedures that enable the auditor to obtain sufficient, appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor s opinion.

3 9 OBJECTIVE OF REPORTING Write the objective of AU-C 700 The objectives of the auditor are to Form an opinion on the financial statements based on an evaluation of the audit evidence obtained Express clearly that opinion on the financial statements through a written report that also describes the basis for that opinion 10 INDEPENDENCE Write the operational definition of independence we are using. A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing or other attestation services. 11 THE AUDITOR'S RESPONSIBILITIES The second paragraph of the Auditor s Responsibility section of the standard audit report states An audit involves performing procedures to obtain evidence about 1)..Amounts in the financial statements 2)..Disclosures in the financial statements An audit also includes evaluating 3)..The appropriateness of accounting policies 4)..The reasonableness of significant estimates made by management 5)..The overall presentation of the financial statements 12 MANAGEMENT ASSERTIONS List three management assertions for transactions. occurrence completeness accuracy classification cutoff 13 MANAGEMENT ASSERTIONS List three management assertions for account balances. existence completeness valuation and allocation rights and obligations

4 14 MANAGEMENT ASSERTIONS To which management assertion does the following question relate? Auditors obtain evidence to ensure that all transactions recorded in the sales journal were actually shipped to customers. (1) Is it a Transaction or a Balance (2) assertion Occurrence 15 MANAGEMENT ASSERTIONS To which management assertion does the following comment relate? Auditors obtain evidence to ensure accounts payable were actually credited for all purchases that were made. (1) Is it a Transaction or a Balance (2) assertion Completeness 16 MANAGEMENT ASSERTIONS To which management assertion does the following comment relate? Even though the market value of inventory is significantly less than cost, the client continues to report inventory at cost on the balance sheet. (1) Is it a Transaction or a Balance (2) assertion valuation and allocation 17 MANAGEMENT ASSERTIONS To which management assertion does the following comment relate? Auditors take a sample of inventory quantities from the clients accounting records and then count those items in the warehouse. They do this to ensure that the actual number of items in the warehouse agree with the number of items in the accounting records. (1) Is it a Transaction or a Balance (2) assertion existence 18 MANAGEMENT ASSERTIONS To which management assertion does the following question relate? Auditors observe a sales order, shipping document and invoice for which there is no corresponding entry in the sales journal. (1) Is it a Transaction or a Balance (2) assertion completeness 19 MANAGEMENT ASSERTIONS To which management assertion does the following question relate? The sales order indicates the customer ordered 8 units at $150 per unit; the shipping document indicates 8 units were shipped; the invoice is for $120 indicating 8 units at $15; and the entry in the sales journal is for $120. (1) Is it a Transaction or a Balance (2) assertion accuracy 20 AUDIT OPINIONS List the four different audit reports that an auditor might issue. For each type of report indicate the type of problem, if any, that would cause the auditor to issue such a report. The type of problem can be a one or two word answer. Finally, use an asterisk to indicate which or the reports constitute opinions. * Unqualified no problem *Adverse -GAAP * Qualified - scope or evidence OR GAAP Disclaimer - scope or evidence

5 21 REPORTING STANDARDS During your audit you do not find any instances where the accounting principles the company used differed from the accounting principles they used in the preceding year. Please indicate the opinion you would issue. If you believe it is necessary to modify your report, briefly describe where in the report you would communicate this situation to investors. what type of report would you issue? unmodified would you modify the first paragraph? yes no would you modify the management s responsibility section? yes no would you modify the auditor s responsibility section? yes no would you modify the opinion paragraph? yes no would you add an explanatory paragraph? yes no if you would add an explanatory paragraph, where would it be placed? before after 22 AUDIT REPORTS What type of opinion would you issue if you the client's financial statements contain a significant uncertainty. The uncertainty is properly disclosed in the footnotes but you believe it is necessary to further emphasize the matter. what type of report would you issue? unmodified would you modify the first paragraph? yes no would you modify the management s responsibility section? yes no would you modify the auditor s responsibility section? yes no would you modify the opinion paragraph? yes no would you add an explanatory paragraph? yes no if you would add an explanatory paragraph, where would it be placed? before after 23 AUDIT REPORTS What type of opinion would you issue if you believe the client's financial statements are fairly presented but you also believe the client will go bankrupt within the next year. what type of report would you being issue? unmodified would you modify the first paragraph? yes no would you modify the management s responsibility section? yes no would you modify the auditor s responsibility section? yes no would you modify the opinion paragraph? yes no would you add an explanatory paragraph? yes no if you would add an explanatory paragraph, where would it be placed? before after

6 24 AUDIT REPORTS Because of pervasive errors, the client's financial statements do not conform to GAAP. 1. Which audit report would you issue? Adverse 2. Would you modify the 1 st sentence of the introductory paragraph? If so describe the modifications. 3. Would you modify the auditor s responsibility section. If so, are the modifications minor or major? 4. Would you modify the opinion paragraph. If so describe the modifications. 5. Would you include any explanatory paragraph(s). If so where would the additional paragraph be located? Which audit report would you issue? Adverse Would you modify the 1 st sentence of the introductory paragraph? I No Would you modify the auditor s responsibility section. Yes - minor Would you modify the opinion paragraph. The financial statements do not present fairly Would you include any explanatory paragraph(s). Yes between the Auditor s Repsonsibility and Opinion 25 AUDIT REPORTS You are unable to obtain sufficient evidence to support an opinion and therefore unable to complete your audit. 1. Which audit report would you issue? Disclaim an opinion 2. Would you modify the 1 st sentence of the introductory paragraph? If so describe the modifications. 3. Would you modify the auditor s responsibility section. If so, are the modifications minor or major? 4. Would you modify the opinion paragraph. If so describe the modifications. 5. Would you include any explanatory paragraph(s). If so where would the additional paragraph be located? Which audit report would you issue? Disclaim an opinion Would you modify the 1 st sentence of the introductory paragraph? Yes We were engaged to audit the financial statements.. Would you modify the auditor s responsibility section. Yes Major Would you modify the opinion paragraph. Yes We do not express an opinion on these financial statements Would you include any explanatory paragraph(s). Yes between the Auditor s Repsonsibility and Opinion

7 26 AUDIT REPORTS From the portions of the audit report are list below please tell me what type of report is being issued? qualified the nature of the problem insufficient evidence no problem don't comply with GAAP We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as of December 31, 20X1, and the related statements of income, changes in stockholders' equity, and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with GAAP; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with GAAS. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statement s. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Basis for Opinion The Company has stated inventories at cost in the accompanying balance sheets. Accounting principles generally accepted in the United States of America require inventories to be stated at the lower of cost or market. If the Company stated inventories at the lower of cost or market, a write down of $XXX and $XXX would have been required as of December 31, 20X1 and 20X0, respectively. Accordingly, cost of sales would have been increased by $XXX and $XXX, and net income, income taxes, and stockholders' equity would have been reduced by $XXX, $XXX, and $XXX, and $XXX, $XXX, and $XXX, as of and for the years ended December 31, 20X1 and 20X0, respectively. Opinion In our opinion, except for the effects of the matter described in the Basis for Opinion paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1, and the results of its operations and its cash flows for the years then ended in accordance with GAAP. 27 AUDIT REPORTS From the portions of the audit report are list below please tell me what type of report is being issued? Unqualified the nature of the problem insufficient evidence no problem don't comply with GAAP We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as of December 31, 20X1, and the related statements of income, changes in stockholders' equity, and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with GAAP; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with GAAS. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statement s. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1, and the results of its operations and its cash flows for the year then ended in accordance with GAAP.

8 28 AUDIT REPORTS From the portions of the audit report are list below please tell me what type of report is being issued? Qualified the nature of the problem insufficient evidence no problem don't comply with GAAP We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as of December 31, 20X1, and the related statements of income, changes in stockholders' equity, and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with GAAP; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with GAAS. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statement s. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Basis for Opinion ABC Company's investment in XYZ Company, a foreign affiliate acquired during the year and accounted for under the equity method, is carried at $XXX on the balance sheet at December 31, 20X1, and ABC Company's share of XYZ Company's net income of $XXX is included inabccompany's net income for the year then ended.we were unable to obtain sufficient appropriate audit evidence about the carrying amount of ABC Company's investment in XYZ Company as of December 31, 20X1 and ABC Company's share of XYZ Company's net income for the year then ended because we were denied access to the financial information, management, and the auditors of XYZ Company. Consequently, we were unable to determine whether any adjustments to these amounts were necessary. Opinion In our opinion, except for the possible effects of the matter described in the Basis for Opinion paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1, and the results of its operations and its cash flows for the year then ended in accordance with GAAP.

Chapter 17. Auditors Reports. McGraw-Hill/Irwin. Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 17. Auditors Reports. McGraw-Hill/Irwin. Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 17 Auditors Reports McGraw-Hill/Irwin Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Audit Report Providing an independent and expert opinion on the fairness of financial