Audit 1 Disclaimer of Opinion- insufficient in scope

Material - conformity with GAAP-Qualified opinion (modify opinion paragraph) Material - Adherence to GAAS-Qualified opinion (modify scope and opinion paragraph) Highly material -conformity with GAAP- Adverse Opinion Highly material -Adherence to GAAS-Disclaimer of Opinion Qualified "Except For" GAAP 1. Non-GAAP change 2. Inadequate Disclosure 3. Unjustified departure from GAAP 4. Unreasonable Acctg. Estimate Adverse GAAP (Highly material) 1. Non-GAAP change 2. Inadequate Disclosure 3. Unjustified departure from GAAP 4. Unreasonable Acctg. Estimate Qualified "Except For" GAAS 1. Uncertainty 2. Scope Limitation Disclaimer GAAS (Highly material) 1. Uncertainty 2. Scope Limitation 3.Lack of Independence 4. Unaudited

Insufficient evidence to support uncertainty est. - qualified (GAAS) opinion or disclaimer (scope limitation) Modified Unqualified Opinion Modified Wording - Division of responsibility: with another auditor.(all 3 paragraphs) 2. Explanatory Paragraph a. justified departure from GAAP b. Going concern: (after opinion paragraph) c. To emphasize a matter F/S d. A justified lack of consistency- by a material change in GAAP between periods or a change in the method of the application of accounting principles. e. Req SEC regulation (S-K quarterly financial data omitted/ not reviewed). f. Supplementary information required by GAAP has been omitted or departs g. Other information in a doc with aud F/S is materially inconsistent with information appearing in the F/S. General Rule on Position of Explanatory Paragraph Qualified, Adverse, and Disclaimer of Opinion - explanatory paragraph b4 opinion paragraph. Exceptions The explanatory paragraph - either before or after the opinion paragraph. a. Justified GAAP departure b. Emphasis of a matter

When auditor accepts responsibility for other auditor work must review their documentation and meet with them to understand wk done. If other auditors had qualified opinion principal must decide if it is material and if they should make reference to it. Test going concern by: (ADMITS) 1. Analytical procedures 2. Debt compliance 3. Minutes 4. Inquiry of legal counsil 5.Third parties (details of financial support arrangemet) 6. Subsequent events
Conditions and events indicative of substantial doubt (FINE) 1. Financial difficulties 2. Internal matters 3. Negative trends 4. External matters Mitigating factors to going concern Plans to: 1. borrow money or restructur debt 2. Sell assets 3. Delay or reduce expenditures 3.Increase ownership equity

Explanatory Paragraph after Opinion Paragraph (internationat standards on auditing)

The wording in the explanatory paragraph under the ISAs is slightly different and includes the term "significant doubt:' rather than "substantial doubt."
ISA 570 requires the auditor to obtain written representations from management regarding its plans for future action. U.S auditing standards do not contain this requirement, although a sample going concern representation is included in the authoritative literature related to Management Representations.

If the auditor's doubts about the entity's abiiity to continue as a going concern are removed in a subsequent period, the explanatory paragraph of the prior period need not be repeated. Consistency
-Changes in estimates or error corrections do not affect the consistency -Corrections of an error in principle (cash method to accrual method) affect consistency d. If the year in which the change occurred is presented, the explanatory paragraph is required in subsequent years' reports. If is retroactive restatement, then the explanatory paragraph is not needed in subsequent years. e. Although a change in depreciation method (change in estimate) FS purposes, for purposes of the auditor's report, changes in depreciation method do require the addition of an explanatory paragraph. f. correction of material misstatement in the previously issued FS of an issuer, PCAOB standards require the addition of an explanatory paragraph (following the opinion paragraph) describing the situation and referring to the company's disclosure of the matter.

If there is no CF statement then mention this in the explainatory paragraph (middle) If the auditor was not able to become satisfied regarding the opening inventory, but otherwise was satisfied, he or she could issue an unqualified opinion on the year-end balance sheet and render a disclaimer of opinion on the statements of income, retained earnings, and cash flows.

Qualified Opinion
The nature of the scope limitation should be described in an explanatory paragraph (preceding the opinion paragraph) and should be referred to in both the scope and opinion paragraphs of the auditor's report.

Disclaimer of Opinion Modification to the introductory paragraph includes: a. Use of the words "were engaged to audit" instead of "have audited," and b. Deletion - auditor's responsibility. 2. Scope Paragraph (omitted) 3. Explanatory (Middle) Paragraph- Reasons for Disclaimer 4.Opinion - disclaimer of opinion on FS
"Unaudited" should be clearly marked on each page of the financial statements. Comparative FS UPDATING (CHANGING) PRIOR OPINIONS Format If the updated opinion differs from the previous opinion, the auditors should disclose the reason(s) in a separate explanatory paragraph preceding the opinion paragraph. The explanatory paragraph should disclose the:

DORCS - remember only Dorcs changes their mind 1. Date of the auditor's previous report
2. Opinion type previously issued 3. Reason for the prior opinion 4. Changes that have occurred 5. Statement that the "opinion ... is different."

SUBSEQUENT EVENTS A. Recognized (Type I) Events - Conditions Existing On or Before the Balance Sheet Date B. Nonrecognized (Type II) Events - Conditions Existing After the Balance Sheet Date
Significant business events, such as the purchase of a business or the sale of debenture bonds,occurring subsequent to the date of financial statements, require no adjustment to the statements, but may require significant additional disclosure.
When testing the issue of subsequent events, a candidate is expected to know the GAAP rules: Recognized (Type I) Event ----} Requires a financial statement adjustment Nonrecognized (Type II) Event ----} May require footnote disclosure

Auditor's Responsibility for Subsequent Events PRIME

1.Post balance sheet transactions: proper cutoff 2. Representation letter from management (CEO and CFO) regarding whether any events occurred 3. Inquiry of mgt to any maj changes.

4. Minutes of stockholders, directors, and other committee meetings should be read during the subsequent period

5.Examine latest available interim financial statements; compare them with the financial statements under audit.
Interim work
DETAIL WORK Confirms of: cash, AR, NR, etc. Cash reconciliations Special account analysis Physical inventory observation Fixed asset verification Tests of sales and payroll Internal control review

Cut offs
Year end inventory observation and cut off tests of cash, AR, inventory, AP, sales, etc. YE-WORK includes "PRIME" Review of subsequent AR collections Follow up on confirm request Search for unrecorded liabilities Subsequent events audit program: '- "PRIME" Report Obtain management representation letter (dated Feb 10) at last minute

SUBSEQUENT DISCOVERY OF FACTS EXISTING AT THE DATE OF THE AUDITOR'S REPORT (discovered after report is issued)
-ask client to issue revised financials or make necessary disclosures -if the effect on the FS can not be determined right away must notify SEC and others of lack of reliance If client refuses can notify board and other persons that report can no longer be relied upon. Auditor not required to audit other information but should read to make sure there are not material inconsistencies.

If the effect on the financial statements cannot be determined on a timely basis, providing notification that the financial statements and report should not be relied upon. In addition, the client should be advised to discuss with the SEC, stock exchanges, and appropriate regulatory agencies (where applicable) the new disclosures or revisions. supplementary information may either be presented as an explanatory paragraph following the opinion paragraph in the auditor's report on the financial statements or in a separate report. Supplimental information can be included in the report or may be a separate report.
-withhold if separate report or modify opinion on report if the information is materially mistated.

Certain entities are required by a designated standard setter to prepare specific information that is supplementary to the basic financial statements. In the absence of any separate requirement particular to the engagement, the auditor's opinion on the financial statements does not cover the required supplementary information. Reporting Accountant The reporting accountant may not report on the appiication of accounting principles to a "hypothetical transaction" (a transaction not involving facts or circumstances of a specific entity).
The following are grounds for Joint Trial Board sanctions: a. Violation of the bylaws or any rule of the Code of Conduct.

b. Declaration by a court of having committed fraud. c. Determination by the Joint Trial Board of guilt for any act discreditable to the profession, or conviction of a criminal offense that tends to discredit the profession.

d. Declaration by a court that the CPA is insane or incompetent. e. Suspension or revocation of a member's license to practice public accounting as a disciplinary measure by a government authority. f. Failure to cooperate with any Professional Ethics Division disciplinary investigation. g. Failure to comply with educational and remedial or corrective action determined to be necessary by the Professional Ethics Executive Committee within 30 days Reporting on Supplementary Information 1. Opinion Not Required An auditor is not required to audit required supplementary information, However, the audit report on the financial statements should include an explanatory paragraph with language to explain the following circumstances, as applicable: a. The required supplementary information is included and the auditor has applied the required procedures; b.The required supplementary information is omitted;
c. Some required supplementary information is missing and some is presented in accordance with the prescribed guidelines; d. The auditor has identified material departures from the prescribed guidelines; e. The auditor is not able to complete the required procedures; or f. There is substantial doubt about conformance of required supplementary information. This explanatory paragraph should inciude a disclaimer of opinion on the required supplementary information. if the auditor determines that the required information has not been presented as prescribed, and management refuses to make revisions, the auditor should describe the departure. Audit Chapter 2

ELEMENTS
The six interrelated elements of quality control are:

-Human resources -RECRUIT/STAFF/TRAINING/SUPERVISION

-Engagement/client acceptance and continuance-CLIENT REPUTATION -leadership responsibilities - TONE AT TOP

-performance of the engagement - AIM HIGH LEVEL OF PERFORMANCE/audit quality -Monitoring -Ethical requirements
"HELP MEn maintain good quality in my accounting and auditing practice.

human Resources

Examples include: a. Requiring timely identification of staffing requirements. b. Planning for the total personnel needs of all the firm's professional engagements. c. Requiring a background check on new personnel. d. Requiring supervisors to prepare performance evaluations. e. Requiring personnel to attend training. f. Consideration of continuity and periodic rotation of personnel. g. Consideration of opportunities for on-the-job training EngagementI Client Acceptance and Continuance (1) The firm should consider the reputation b. Undertakes only those engagements that the firm can reasonably expect to complete with professional competence.

c. Can comply with legal and ethical requirements.

Examples include: a. Reviewing the financial statements and credit rating of the proposed client. b. Inquiring of third parties as to the reputation of the proposed client. c. Evaluating the firm's ability to service the client properly. d. Periodically reevaluating clients for continuance, including consideration of significant issues that arose during the current or prior engagements. C. Leadership Responsibilities for Quality within the Firm - tone at the top emphasize quality D. Performance -software,supervision,use experts,quality review. Examples include: a. Designating individuals with expertise in matters related to the SEC. b. Referring questions to the appropriate group in the AICPA or state society. c. Developing and using standard audit forms, checklists, and questionnaires. d. Establishing procedures for reviewing engagement documentation and reports. e. Using passwords or other means of restricting access to engagement documentation. E. Monitoring - quality control system is relevant, adequate, operating effectively, and complied with in practice. -peer review- every 3 yrs -fail to take corrective action is subject to sanctions

F. Ethical Requirements - independence

Examples include: a. Maintaining records showing which personnel were previously employed by clients or have relatives holding key positions with clients. b. Notifying personnel as to the names of audit clients publicly held. c. Confirming with staff that prohibited relationships do not exist. d. Emphasizing independence of mental attitude in training and supervision.
Routine tax return preparation, tax planning, and employee personal tax services are not
prohibited by the Sarbanes-Oxley Act.

GAAS vs. Quality Control Standards GAAS - conduct of each individual audit engagement, whereas quality control standards - relate to the conduct of all professional activities of the firm's practice as a whole.
Deficiency in quality control for firm does not imply a lack of compliance with GAAS. SPECIAL REPORTS types: (i) OCBOA - Other comprehensive basis of accounting financial statements. (ii) Specified elements, accounts, or items in a financial statement. (iii) Compliance with contractual or regulatory requirements related to audited financial statements. (iv) Financial presentations to comply with contractual agreements or regulatory provisions. (v) Financial information presented in prescribed forms or schedules that require a prescribed form of auditor's report.
ISA 800 states that the auditor's report on a special purpose audit engagement should include the auditor's address. U.S. auditing standards do not include this requirement for special reports.
The use of a non-GMP method requires the auditor to modify the report to either a "qualified" or Iladverse" ~ opinion unless the non-GAAP method is an "OCBOA," in which case an unqualified opinion (on the OCBOA '" basis) is appropriate.

Reports on OCBOA Financial Statements -report title should include the basis of accounting

used. -explanatory paragraph stating the basis used. OCBOA Report - Prepared on a Basis to Comply with a Regulatory Agency (restricted use) to mgt
and directors

An audit of specified elements, accounts, or items of a financial statement may be performed:. -As a special engagement; or -In conjunction with an audit of financial statements Piecemeal Opinions Piecemeal opinions (expressions of opinion as to certain identified elements in the financial statements) should not be expressed when the auditor has expressed an adverse opinion or has disclaimed an opinion on the overall financial statements, as it would tend to overshadow or contradict the disclaimer or adverse opinion. (1) However, an opinion on specified elements may be expressed if it does not encompass so many items as to constitute a major portion of the financial statements. Such an opinion should not accompany the disclaimer or adverse opinion.

Special Report - Compliance with Aspects of Contractual Agreements or Regulatory Requirements Related to Audited Financial Statements -negative assuranace on this report - no assurance if adverse or disclaimer of opinion as a whole on this report. -restricted use -can be a separate report from FS
U.S. auditing standards allow the expression of negative assurance on compliance as a by-product of a financial statement audit. u.s. attestation standards allow for the expression of an opinion on compliance. A compilation is an attest engagement but not an assurance engagement.

A review is based on inquiry and analytical procedures performed by the CPA. A review is both an assurance engagement and an attest engagement. (Negative assurance)

SSARS Applicability -compilations - a report is not specifically required for compilations unless u want to state no assurance -reviews -does not apply to other services(consulting on financial matters, preparing tax returns, rendering manual or automated bookkeeping) -many adjusting entries could be considered preparation of financial statements, and SSARS would
apply. If compilation will not be used by third parties mgt must mention this in engagement letter. Requirements for auditor during compilation 1.Understanding of Client's Business-should understand the following a. Staff qualifications. b. Transaction types and frequency.

C. Accounting basis used to prepare the financial statements.

D. Form of the accounting records. E. Financial statements' form and content. The accountant's report in a compilation engagement should include the following:

a. Title
An appropriate title, such as ''Accountant's Compilation Report" or "Independent Accountant's Compilation Report. "

b. Addressee
The report should be addressed as appropriate. Introductory Paragraph The introductory paragraph should: (1) Identify the entity. (2) State that the financial statements have been compiled. (3) Identify the financial statements. (4) Specify the date or period covered by the financial statements. (5) State that the accountant has not reviewed or audited the financial statements and does not express an opinion or provide any assurance about whether the financial statements are in accordance with the applicable financial reporting framework. Management's Responsibility Paragraph This paragraph should state that management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework, and for designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the financial statements. e. Accountant's Responsibility Paragraph This paragraph should: (1) State that the accountant's responsibility is to conduct the compilation in accordance with SSARS issued by the AICPA; and (2) State that the objective of a compilation is to assist management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements. f. Signature of Accountant g. Date of the Accountant's Report This should be the date of the completion of the compilation. Additional Requirements compilations a. Each page of the statements should be marked "See Accountant's Compilation Report" or "See Independent Accountant's Compilation Report. " b.SSARS does not require that the compilation report be printed on the accountant's letterhead.

Compilation of personal financial statements -if omit certain disclosures must not be used to obtain credit or for any other purpose than developing a financial plan. Review Requirements
The performance requirements applicable to a review are:

Understanding with client must be established

L I

earn and/or obtain sufficient knowledge of the entity's business

nquiries should be addressed to appropriate individuals

Analytical procedures should be performed

Review-other procedures should be performed

CIient representation letter should be obtained from management Professional judgment should be used to evaluate results
Accountant (CPA) should communicate results
The inquiries are of internal personnel, not of external people or entities. The examiners frequently have incorrect responses stating, "Make inquiries of outside..," Corroberation or test of controls not required for a review. -no explanatory paragraph for going concern if adequately disclosed.

Client Representation Letter from Management Must be Obtained Contents of Letter

Management's representations should include: (1) Management's responsibility for the preparation and fair presentation of the financial statements and belief that they are fairly stated.
(2) Management's acknowledgment of its responsibility for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements. (3) Management's full and truthful responses to all inqUiries. (4) Representations about the completeness of information. (5) Information concerning subsequent events. (6) Acknowledgement of management's responsibility to prevent/detect fraud. (7) KnOWledge of any material fraud or suspected fraud. (8) Additional representations related to matters specific to the entity's business and industry.
When an accountant performing a compilation or review becomes aware of a GAAP departure, the report would be modified or the accountant would withdraw. An opinion would not be expressed. Fraud documentation could be made orally or written for review. Review procedures-analytical procedures, inquiry,minutes For quaterly information required by SEC that is omitted then need explanatory paragraph.

When a comfort letter is to be issued, the CPA is required to perform a review of interim financial information in accordance with auditing standards.
Note: Comfort letters are not required by or filed with the SEC, and they are not considered to

be part of the "registration statement" within the meaning of the Securities Act of 1933.
Positive assurance is provided with respect to: A. A CPA's independence. B. Compliance (as to form) of the financial statements with the SEC Act, assuming the financial statements are audited. Negative assurance is provided with respect to Unaudited financial statements, unaudited condensed interim financial statements, and capsule financial information, assuming a review of such information has been performed WebTrust Engagements WebTrust engagements provide assurance related to e-commerce. The CPA assesses a client's web site for predefined criteria that are designed to measure transaction integrity, information protection, and disclosure of business practices. SysTrust Engagements SysTrust engagements provide assurance with respect to the reliability of any

defined electronic system.

Attestation standards are a natural extension of GAAS but differ conceptually from GAAS in three ways: a. No reference is made to financial statements; b. No reference is made to generally accepted accounting principles; and c. Attestation standards provide levels of assurance below that provided by a GAAS audit. Statements on Standards for Attestation Engagements (SSAE) Statements on Standards for Attestation Engagements (SSAE) established by the AICPA provide information addressing the major attestation services: 1. Agreed-upon procedures (excluding letters to underwriters and consulting services under SSCS and with specific prohibition of any attest engagement concerning assertions of solvency or insolvency). 2. Financial forecasts and projections. 3. Pro forma financial statements. 4. Internal control over financial reporting. 5. Compliance (as a specific engagement, not as part of an audit for which a special report is issued, and not as an engagement performed under Government Auditing Standards). 6. Management's Discussion and Analysis. Page 90 and 91 stds for attestation services.
An easy way to remember the attestation standards is "TIPPY-PASSER."

1. Examination A positive opinion, high level of assurance, generally based on a variety of procedures, including search, verification, inquiry, and analysis.

2.Review (negative assurance) Moderate level of assurance, generally based on inquiry and analytical procedures.

3. Agreed-upon Procedures No assurance, but procedures and findings are listed. A sample agreed-upon procedures report will be shown later in the text. G. Written Assertion A written assertion is generally obtained in examination and review engagements. If no written assertion is provided by management, the outcome depends upon whether the client is also the responsible party. 1. If the client is the responsible party, failure to provide a written assertion constitutes a scope limitation. a. In an examination engagement, the report should be modified based on the scope limitation, and its use should be restricted. b. A review engagement subject to such a scope limitation is incomplete and the practitioner should withdraw.
HI-AM-SURE" you can perform these agreed-upon procedures. pg 95

Both financial forecasts and financial projections are appropriate for limited use.

Association with Prospective Financial Statements

A practitioner is associated with prospective financial statements primarily in one of three ways: 1. Compilation engagement

2. Examination engagement (the report is generally to be used by a third party) 3. Agreed-upon procedures engagement Note that a review of prospective financial statements is not allowed.