AUD NOTES 2011/2012 (12 pages) shared by: biggs

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Here's my study guide for AUD -- not comprehensive ... (I'm in audit so at the time, I didn't find it necessary to memorize a lot of the things).

========== THANK YOU for sharing biggs! *** TO HELP YOU PASS, PREPARE YOUR OWN NOTES *** If you have notes you would like to share, please contact CPAnet here: http://www.cpanet.com/home/contact_cpanet.asp#contactGAAS = General standards T = Training I = Independence P = Professional Care Fieldwork Standards P = Planning & Supervision I = Internal control, entity, & environment (sufficient understanding, "NET") E = Evidence (support auditor's OPINION, not FS which is management's responsibility) Reporting Standards A = Accounting is GAAP (must state) C= Consistency (silence = OK) D = Disclosure (silence = OK) O = Opinion expressed (must state) to prevent misinterpretation of degree of responsibility of auditor Opinion Reports -Title ("independent") -Addressee (NOT to management); address firm that engaged you, even if others will be relying on the fs -Introductory (FS were audited; responsibility of management; auditor's responsibility to express opinion) -Scope (PLANNED and PERFORMED to provide REASONABLE ASSURANCE that fs are free of MATERIAL MISSTATEMENT; examined evidence on TEST BASIS; assessed accounting principles and significant estimates made by MANAGEMENT; audit provides reasonable basis for opinion) -Opinion -Firm name -Report date (dated on which appropriate, sufficient audit evidence to support opinion is obtained) -GAAS = refer to in scope paragraph -GAAP = refer to in opinion paragraph Modified Unqualified Opinions -Division of responsibility: opinion based in part on another auditor's report => mention in all 3 pargraphs or do not refer to them if you accept responsibility for them -Explanatory Paragraph (JUSTIFIED departure from GAAP or lack of consistency, going concern, emphasize matter, required supplementary info omitted, other info in a document containing audited FS is materially inconsistent) Position of explanatory Paragraph -unqualified opinion = after opinion par. -qualified/adverse/disclaimer = before opinion par. -exception: justified GAAP departure or emphasis of matter = either before or after -Going concern: modified unqualified OR disclaim; explanatory paragraph must include "substantial doubt" and "going concern" but DO NOT SAY "for 1 year" -Lack of consistence (change in accounting principle, not estimate) -GAAP = justified = modified unqualified -Non-GAAP = unjustified = qualified or adverse -Scope limitation (DOUBLE WHAMMY) => mention in BOTH scope and opinion paragraphs

-Disclaimer = OMIT scope paragraph; in intro, "were engaged to audit" as opposed to "have audited" and delete reference to auditor's responsibility. **Exam trick: No audit work = NO audit opinion (disclaim) -may report on just one FS item, considered "limited reporting objectives" as long as you were not restricted from access to all underlying fs info -auditor's standard report should include reference to US as being origin of both accounting principles used to prepare fs and the auditing standards followed -if substantial doubt of an entity's going concern from a prior year is removed the following year and comparative fs is being presented, the explanatory paragraph from prior year should not be repeated -when unable to obtain adequate evidence for beginning inventory, can issue unqualified for BALANCE SHEET but must disclaim INCOME STATEMENT -when qualifying opinion based on scope limitation, indicate the qualification pertains to POSSIBLE EFFECTS ON THE FS (and not to the scope limitation itself) -no statement of cash flows = qualified Reports on comparative financial statements -prior year fs not audited and current year is being audited = scope limitation (beg. Balances not ascertainable) = DISCLAIMER on I/S, RE, SCF -update/changed opinion when NOW in conformity with GAAP = DORCS change their mind D= Date of previous report O = Opinion previously issued R = Reason for prior opinion C = Changes that have occurred S = Statement that "opinion...is different" -report of predecessor auditor presented; previous auditor should: read current period fs/ compare/ obtain REP LETTER FROM NEW AUDITOR; obtain rep letter from MANAGEMENT -if not presenting predecessor auditor's report, new auditor should include in INTRO: statements examined by other auditors in previous period but do not name them; date of previous report; type of opinion expressed previously; substantive reason for other than unqualified report Subsequent Events -Recognized (Type 1 event) => Requires $ fs adjustment -Nonrecognized (Type 2 event) => May require disclosure (condition exists AFTER balance sheet date) P = Post balance sheet transactions R = rep letter I = Inquiry M = Minutes E = Examine latest available interim fs; compare to fs under audit -If adjustments/disclosures made after original date of auditor report, may dual date to extend responsibility ONLY FOR THE PARTICULAR SUBSEQUENT EVENT -if discover we missed some subsequent events after report is issued; first determine if anyone is relying on the fs. adivse client to issue revised fs; if effect cant be determined, notify that fs/report should not be relied on. If client refuses to follow procedures, disassociate, alert agencies, and alert relying parties -omitted audit procedures discovered after submission of audit report: determine if other procedures compensate for the omitted ones, if so, no action necessary; otherwise, promptly apply omitted/alternative procedures; if facts emerge that would have affected the report, should proceed as described under subsequent discovery of facts Reporting on other information -When info is MATERIALLY INCONSISTENT with FS........ **if audited fs requires revision => modify report if management refuses to make revision **if other information requires revision => if management refuses to make changes, communicate with those with governance and revise audit report to include Description of the inconsistency; withhold use of report, or withdraw

-2 objectives if engaged to report on supplementary info: evaluate presentation in relation to fs as a whole and report on whether the suppl info is FAIRLY STATED IN ALL MATERIAL RESPECTS IN RELATION TO THE FS AS A WHOLE -obtain rep letter!!!!! -required supplementary info, if not engaged to give opinion on it, limited required procedures (i.e. inquire, determine if consistent with mgmt responses, fs, etc, REP LETTER) + explanatory pargraph -report on "application of accounting principles" => may not give opinion on application of acctg principles for a HYPOTHETICAL TRANSACTION ("not involving facts & circumstance); statement that ultimate responsibility lies with the fs prepareres; any differences in fact/circumstance may change the report -"auditor submitted document" (ASD) => responsibility to report on ALL info in the document Professional responsibilities AICPA code of conduct -responsibilities (professional care) -Public interest -integrity OBJECTIVITY ( for ANY service) & INDEPENDENCE (attestation only) -due care-no negligence -scope and nature of servies Independence - rule 101 Covered member => ANY direct financial interest (regardless of materiality) or MATERIAL INDIRECT interest Independence is not impaired in a financial institution client by: fully collateralized car loans, cash/CC balance under $10,000 (anything in ordinary course of business) Independence IS impaired by employment relationships: CLIENT => CPA firm Spouse/immediate family => client in key position CPA firm => client Interested in job offer at client Independence IS impaired by business relationships (member makes management decisions for attest client); same country club OK; honorary trustee for nonprofit OK A/R > 1 yr = independence impaired; actual or threatened litigation = independence impaired Confidential client information - rule 301 = do not disclose without client consent Exceptions: subpoena/summons; quality review; inquiry by ethics division; Your defense team PROHIBITED: -Contingent fees (unless fixed by courts/tax matters/etc) -Failure to return records to client -false advertising/misleading -commission/referral fees -misleading firm name SARBANES OXLEY Acctg firmcannot provide following services to public clients: bookkeeping; actuarial; management/HR functions; internal audit, etc. Tax services permissible if PRE-APPROVED by audit committee =>all must be approved But preapproval not required not non-audit services under 5% oftotal revenue from the audit client during the fiscal year Not prohibited by SOX: routine tax return prep. Tax planning. Employee personal tax service -lead partner/reviewing partner must rotate off every 5 yrs -cannot have employed the issuer's CEO,CFO,Controller, etc for 1 yr period before audit -may not provide tax services to audit clients related to confidential/aggressive tax positions -may not provide tax services to officers/family of audit client; other employees ok Other reports Quality Control Standards (AICPA) H = Human resources (includes work is assigned to personnel with degree of technical training reqd; CPE) E = Engagement/Client Acceptance/Continuance (mgmt lacks integrity, can reasonably expect to complete) L = Leadership Responsibility for Quality at the firm (tone at the top) P = Performance (supervision, confidentiality, consult with experts) M = Monitoring (onoing, peer review

under AICPA, QRP review for public company) E = Ethical req (maintain public confidence in profession, independence annually, SOX) Do not confuse between GAAS (conduct of each individual audit engagement) and Quality Control Standards (conduct of all profiessional activities of the firm as a whole).....Failed quality control does not equal failed GAAs OTHER REPORTS OCBOA REPORTS OCBOA financial statements (nonGAAP): cash receipts&disbursements; tax; governmental; price level -if nonGAAP is uses, must qualify or adverse opinion UNLESS OCBOA--->then unqualified is OK In the report: use non-GAAP titles (cash basis, statement of A&L arising from CASH TRANSACTIONS, Income tax basis, statutory basis) Explanatory pargraph: basis of presentation and refer to footnote for it, that it is non GAAP basis Opinion- "fair on OCBOA basis used" If prepared on basis to comply with regulatory agency = RESTRICT USE SPECIAL REPORTS Express opinion on specified elemt/accounts/items in an fs If element/account/item is pervasive ie net income, stockholders equity, must audit complete set of fs If overall fs opinion is adverse/disclaimer. Cannot express piecemeal opinion on major item If specific element/account/item is prepared to comply with contract or agreement => RESTRICT USE COMPLIANCE OF CONTRACTUAL/REGULATORY AGREEMENTS:AUDITED FS -if fs as a whole was NOT adverse/disclaimer.........MAY ONLY issue negative assurance on compliance (we are not lawyers to give legal opinion) -RESTRICT USE General rule: RESTRICT when are in COMPLIANCE with a CONTRACT COMPILATIONS AND REVIEWS -compilation= no assurance= present info that is representation of management into form of fs -review=limited assurance=INDEPENDENCE REQD -SSARS=for non-public companies for reviews/compilations (although when doing reviews of interim fs for PUBLIC COMPANIES, SAS applies, not SSARS) -if perform more than one service, issue report on highest one COMPILATIONS -disclose lack of independence; A = AICPA/ SSARS (in accordance with) L = Limited to presenting info that is repr. Of mgmt A = Not AUDITED R = Not REVIEWED D = DISCLAIMER OF OPINION, no assurance -compiled fs that omit GAAP disclosures still acceptable if: -otherwise in conformity with GAAp -reason for omission was not to deceive -compilation report warns user of missing disclosures; restrict SSARS not reqd for personal finanicla statements if NOT USED TO OBTAIN CREDIT REVIEW OF FS -objective is to determine whether material modifications are necessary for info to be in conformity with GAAP U = understanding with client established L = learn sufficient knowledge of entity & business I = inquiries*********** (inquire only within company, not outside) A = analytical procedures****************** ratios/comparisons; looking for predictable patterns R = review (in conformity with GAAP or OCBOA?) C = client rep letter******************* (reqd, whereas engagement letter strongly recommended) P = professional judgement A = accountant (CPA) should communicate results ******NO TESTS OF CONTROLS/ NO AUDIT TESTING (often trick questions) !!! Not rewd to assessfraud unless auditor becomes aware of it; not reqd to communicate with predecessor auditor (judgement)

Reporting for Reviews: AICPA/SSARS; representations of m review consists principally of inquiries; analytical procedures applied; SUBSTANTIALLY LESS IN SCOPE THAN AN AUDIT; DISCLAIMER; "not aware of any material modifications that should be made to be in conformity with GAAP" (limited assurance) DO NOT ISSUE QUALIFIED OR ADVERSE OPINION; if aware of GAAP departure, modify report or withdraw/ NO OPINION.....DID NOT AUDIT!!!! CHANGE IN ENGAGEMENT From audit to compilation or review, change must be justified....or consider withdrawing COMPARATIVE FINANCIAL STATEMENTS Service upgrade (current period reviewed, prior period compiled) = the report on prior period should be updated and issued as the last pargraph on current period's report Downgrade (current period compiled, prior period reviewed) = issue compilation report and add paragraph to report on current period (that no review procedures performed after date of review report); OR reissue prior period review report (combined or presented separately) **whenever prior accountants are asked to reissue their prior report (audit, review, compilation), they should read new fs and obtain rep letter from neeew accountants **if predecessor report not issued, make reference to report of predecessor OR perform that level of service themselves Differences between review of issuer/nonissuer -SSARS = nonissuers; SAS = nonissuers (interim FS); PCAOB = issuers (interim FS) -I/C evaluation = not reqd for SSARS; general undetstanding reqd -Communication w/predecessor auditor = not reqd for SSARS; Required for SAS and PCAOB Letters for Underwriters: Comfort letter...from CPA to underwriter before registration of client securities. Dateof last report to date of registration. Doe snot update opinion. NOT reqd by SEC; restricted; negative assurance Attest Engagements: practitioner is engaged to issue on an examination/review/cpmpilation/agreed upon procedures; or an assertion that is the responsibility of management (SSAE...."in conformity with AICPA") -WebTrust: assurance for e-commerce -SysTrust: assurance to reliability of electronic system Note: standards for SSAE: internal control is omitted from fieldwork; RESTRICT USE when reporting on agreed upon procedures; Examination: positive assurance; high level of assurance (search, verification, inquiry, analysis) Review = negative assurance; moderate level of assurance (generally based on inquiry/analytical procedures) Agreed upon procedures: no assurance but procedures and findings are listed --Written assertions: generally obtained in examination and review; if none is provided by mgmt, outcome depends on whether the client is also the responsible party. -client is responsible: scope limitation = withdraw -client not responsible: may still issue report if appropriate procedures are performed and sufficient evidene obtained. RESTRICT REPORT -Agreed upon procedures: conditions: I = Indpeendence A = Agreement of parties on procedures/criteria M = Measurability and consistency S - Sufficiency of procedures U = Use of report RESTRICTED R = Responsibility for subject matter (client) or able to provide evidence that third party is responsible E = Engagements to perform agreed upon procedures on prospective financial statements Reqd elements of report: statement that procedures performed were agreed to by specified parties identified in report; statement of restrictions on use of report; certain addtl items for prospective financial info (ASSUMPTIONS)

Prospective financial statements -Forecasts: general and limited use; based on EXPECTED conditions/courses of action -Projections: limited use only; "what if" Association with prospective fs: compilations: no assurance/ examination: opinion/ Agreed upon procedures: disclaimer (SUMMARY OF SIGNIFICANT ASSUMPTIONS**) -PRO FORMA STATEMENTS: Not prospective financial statements....check for math accuracy/ DO NOT EVALUATE I/C Engagement Acceptance & Understanding the Assignment As part of pre=acceptance, consider and document: -firm's ability to meet deadlines firms ability to staff engagement -independence -integrity of client mgmt MUST communicate with predecessor auditor; however client permission needed; if unwilling...may be scope limitation 0BEFORE accepting, inquire to old cpa about: info that may bear on mgmt integrity; disagreements with mgmt over accounting principles or auditing procedures; predecessor's understanding as to reason for auditor change; communication to mgmt; audit committee regarding fraud, illegal acts, internal control -AFTER acceptance: make SPECIFIC inquiries to predecessor about matters that may affect the audit; review predecessor's audit documentation (workpapers => evidence) Planning and Supervision Plan audit to be responsive to inital assessment of risk of material misstatement, but should be prepared to REVISE AUDIT STRATEGY/PLAN BASED ON RESULTS OF AUDIT PROCEDURES Materiality: consider qualitative and quantitative judgement; when assessing materiality; use SMALLEST LEVEL OF MISSTATEMENT that could be material to any one of the financial statements Reqd to communicate planned scope/timing of audiiit with thhhose charged with governance WRITTEN audit plan is REQUIRED Management Assertions C = Completeness O = Cutoff V = Valuation, allocaction; accuracy E = Existance/occurance R = Rights and dobligations U = Understandability For transactions; accountbalances. And presentation and disclosure --Role of internal auditors....obtain understanding; assess COMPETENCE AND OBJECTIVITY; consider: to whom internal audit reports...the higher the level, the more objectivity can be assumed; -For any items requiring JUDGEMENT AND ASSESSMENT, audit bears responsibility, CANNOT use internal auditors -For assertions related to material fs amounts with high risk of material misstatement/high degree of subjectivity, internal audit's work alone CANNOT eliminate direct testing Internal control COSO FRAMEWORK C = Control environment (overall tone at the top) R = Risk assessment (mgmt identification of risk) I = Information and communication systems (means of recording transactions, communicating responsibilities) M = Monitoring (assessment of IC over time) E = Existing control activities Segregate duties: A = Authorization R = Record Keeping C = Custody Tests of controls procedures; Inquiry, observation, inspection, observation, walkthroughs When to perform tests of controls: when IC is assumed to be operating effectively(strong) or USE OF IT...when heavily IT, cannot rely on substantive testing alone Audit evidence hierarchy: -Personal observation/knowledge -External evidence -Internal evidence -Oral evidence Timing of test of controls: when performed at one particular time, only provides evidence that controls operated effectively at that time. Controls tested throughout period provide

evidence of operating effectiveness throughout hte period. If only tested during interim period, must be supplemeneted by additional evidence for remaining period (rollforward) SUBSTANTIVE TESTING: Interim testing: only use if RMM is low; more reliable if tested at or near period end Audit documentation: Requirements: -indicate that acctg records = (reconcile) with fs -enough detail for an "experienced auditor" to be able to understand -demonstrate compliance with fieldword standards of GAAS (PIE): Report release date: date auditor grants client permission to use report Document retention (keeping wp's): SAS rules (nonissuers): 5 years/ PCAOB rules (issuers): 7 yr Documentation Completion date: SAS: 60 days/ PCAOB: 45 days Permanent file: contracts, pension plans, leases, stock options, bylaws, meeting minutes, bond indentures, internal info, articles of incorporation Current file: audit plan/ fs and auditors report, WORKING TB, rep letteres, confirms, Summaries of significant findings Audit evidence: valid & relevant Analytics: expectations: compare to prior periods/ anticipated results from budgets and forecasts/ relationships among data within current period/ industry norms/ relationship of financial data with nonfinancial info Identifying related party transactions: compensating balance arrangements, loan guarantees, unusual nonrecurring transactions near year end, transactions based on terms significantly different from market terms, nonmonetary exchanges Identify contingencies: review minutes, invoices from lawyers, IRS correspondence, review bank confirms for hidden bank loans etc, review status of long term leases, subsequent events, client rep letter, inquiry letter toattorneys LEgal letters: refuse to respond: scope limitation = qualify/disclaim; refuse to PERMIT INQUIRY = disclaim ***note: mgmt is primary source of info for contingencies, lawyers just corroborate -limitations on response: replies may be limited to matters which they've given substantial attention; confidentiality limitation Sample deviation rate + Allowance for sampling risk = Upper deviation rate If upper deviation rate is less than or equal to TOLERABLE DEVIAION RATE....may rely on control