Lecture 17 Notes

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Accounting & Financial Management
AFM 451
James Wainberg

Lecture 17: Completing the Audit & Forming an Opinion (Ch. 4 & 16) The Association Framework  Association is the term used within the accounting profession to indicate a PA’s involvement with an enterprise or with information issued by that enterprise.  It can arise in 3 ways: o The PA associates with information issued by enterprise o The enterprise claims (without PA knowledge) an association with PA and information disclosed o An assumption made by third party users that PA is somehow involved with the enterprise’s info disclosure  Association with Financial Statements o As a PA you are associated with F/S when:  you consent to the use of your name in connection with the statements, or  you have prepared or performed some other services with respect to the statements, even if your name is not used in any written report. o Note: Auditors need to apply professional judgement and professional skepticism when associating themselves with F/S in any type of engagement. o Auditors also need to clearly warn users about any limitations and to the extent of that association Sufficient Documentation  The standards require that all decisions and conclusions reached during the course of the audit be well documented in the working papers so that an experienced auditor can understand the significant professional judgments that have been made. Overall Evaluation of Audit Evidence and Misstatements  The ENGAGEMENT PARTNER reviews these working paper files to make a FINAL EVALUATION of the adequacy of the work done throughout the audit. Keval Shah Chapters 4 & 16 – AFM 451 1  PROFESSIONAL JUDGMENT is applied to evaluate o Whether the evidence documented adequately addresses the risks identified, o Whether the identified and likely misstatements that remain uncorrected by management could have a material impact or be misleading to users. o Professional Judgment: The application of relevant training, knowledge and experience within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of actions that are appropriate in the circumstances of the audit engagement. o Professional Skepticism: Auditor attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence  If the adjustments are immaterial, we are not going to force the point – it is usually a negotiation – the partner comes up with the full amount that is required in terms of what they WANT adjusted (wishlist)…but they also understand that throughout this period there may have been releases of info to the public regarding the earnings numbers  they may be unwilling to make small adjustments esp if they are not material  The partner has to evaluate whether they can still live with not getting everything that they want  If at any point during the audit the evidence findings suggest that the materiality or risk assessments need revision then the auditors must determine if it is necessary to go back and PERFORM ADDITIONAL PROCEDURES to respond to that REVISED MATERIALITY or risk. o Partner has to decide whether to continue with more evidence or live at a point  The final evaluation stage is the LAST chance for the team to get it right so this is an important decision for the audit partner.  Once the partner is satisfied with the ADEQUACY of evidence, any REMAINING UNCORRECTED misstatements must be discussed with the auditee management and any necessary adjustments approved by them.  The audit standards require that all identified and likely MISSTATEMENTS (except those that are “clearly trivial”) must be accumulated in a summary of misstatements and discussed with management.  Example (Exhibit 16-1): While each individual error is less than the materiality of $10,000, when accumulated their total exceeds materiality, so some action is required to correct them. Otherwise, the F/S are materially misstated.  Ideally, management would correct every misstatement BUT management has reasons to resist against this: o One change may affect many accounts – may even affect mgmt. bonus Keval Shah Chapters 4 & 16 – AFM 451 2 o In some cases, mgmt. may NOT agree that the misstatement exists Overall Evaluation of Evidence to Form an Opinion  The financial statements, including note disclosure, are the responsibility of management. o Any adjustments uncovered in the audit will be presented to the auditee so that formal entries can be made to the accounting records.  Adjusting entries are labelled as “PROPOSED” because they are subject to management’s approval o Management is ALSO responsible for approving the wording of note disclosure.  Auditors evaluate the UNCORRECTED MISSTATEMENTS to see how these will affect the F/S  Evaluation of Misstatement Materiality o The accumulated audit evidence is the main basis for deciding if the amount of uncorrected misstatement is material o Recall: Auditors consider MATERIALITY at:  The planning stage  While performing the audit  Final stage, when forming the audit opinion o At the final stage, auditor considers:  Individual and aggregate misstatements discovered  Their nature and cause  Whether they indicate a possibility of further misstatements, and how they quantitatively and qualitatively affect F/S o Known Misstatements: The TOTAL amount of actual monetary error found in a sample during the audit o Likely Misstatements: The PROJECTION of a known misstatement identified in a representative sample to a whole populations – those that PROBABLY exist, based on audit evidence examined o Further Possible Misstatement: Those that could exist OVER and ABOVE the total of known and likely misstatements because of the fundamental limitations in auditing (i.e. sampling and non-sampling risks) Levels of Assurance:  The amount of credibility provided by the accountants and auditors  Highest level of assurance = Standard UNMODIFIED Report a.k.a. CLEAN OPINION. “In our opinion, the F/S present fairly, in all material respects”  Positive Assurance: The opinion sentence is sometimes called POSITIVE ASSURANCE because it is a forthright and factual statement of the PA’s opinion based on the audit. A high, but NOT ABSOLUTE level of assurance. (Also known as reasonable assurance) Keval Shah Chapters 4 & 16 – AFM 451 3  Negative Assurance (Moderate Assurance): Typical in the review report of UNAUDITED F/S. “Based on my review, nothing has come to my attention that causes me to believe that these F/S are not, in all material respects, in accordance with Canadian GAAP o Called negative because it uses the phrase “NOTHING has come to my attention” o Auditing standards PROHIBIT the use of this  can be used in REVIEWS  No Assurance: Engagements in which no assurance is provided are NOT assurance engagements. The PA provides ZERO assurance credibility because there is no INDEPENDENT VERIFICATION of the data provided by the client) o Example: Compilation engagements (the practitioner is NOT expression a conclusion on the reliability of the F/S)  Standard Unmodified Opinion Report Contains o Introductory Paragraph  Declares that an audit has been conducted and identifies the F/S o Management Responsibility Paragraph  Gives notice of mgmt. responsibility to prepare F/S in conformity with a fair presentation reporting framework  Includes designing, implementing and maintaining internal control o Auditor Responsibility Paragraphs  Also referred to as the SCOPE paragraphs  General description of the audit work in addition to the reference to Canadian auditing standards o Opinion Paragraphs  Usually one long sentence – conclusions about the the F/S Writing an Audit Opinion - GAAS Reporting (Review)  Unmodified opinion report o The audit did not call attention to anything wrong with the audit work or financial statements  Unmodified with explanatory or emphasis paragraph o The F/S are fairly stated however the auditor feels it important to draw attention to information in a footnote or disclosure  Modified opinion report o The F/S are materially misstated due to misstatement in one particular account balance, class of transaction or disclosure that does not have pervasive effect on the financial statements. o A deficiency in the SCOPE of the audit can lead to a modified opinion, if the scope limitation effects can be isolated or to a DISCLAIMER of opinion, if the effects could have PERVASIVE impact on the F/S overall Keval Shah Chapters 4 & 16 – AFM 451 4  Adverse opinion report o The F/S’s are not fairly stated and/or that they contain a departure from GAAP  Disclaimer of opinion o Auditor is unable to express an opinion  The FIRST decision is whether the audit team has obtained SAAE providing reasonable assurance that F/S as a whole are free from material misstatements due to fraud or error  Opinion formation also includes DECIDING if any uncorrected misstatements are material, either individually or in aggregate o If there is a material misstatement that can be isolated in specific items in the F/S, a qualified opinion can be provided, but if the misstatements are pervasive, ADVERSE opinion is required  The auditor must also decide whether the applicable reporting framework chosen by mgmt. is acceptable. Applicable reporting framework can be: o SPECIAL PURPOSE o GENERAL PURPOSE  Applicable reporting frameworks can also be classified as either: o Fair Presentation Frameworks o Compliance Frameworks  Most common re
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