AUDIT REPORTS

1. GAAP explicitly stated in the OPINION PARA - the report should identify
whether the F/S comply with GAAP.
2. GAAS explicitly stated in the AUDITORS RESPONSIBILITY PARA
3. Consistency (implicit) the report should identify when a/cing prins were not
consistent. No mention is made in the auditors report of consistency of a/cing
principles, unless there is an inconsistency, so no reference to that issue implies
consistency.
4. Disclosure (implicit) the report should only identify when disclosure is
inadequate.
5. Opinion (explicit) the auditor should express an opinion on the F/S as a
whole.

UNMODIFIED CLEAN/STD
The first sentence of the report (in the intro para) states the nature of the
engagement, the specific F/S involved in the audit and the period covered.
In order to issue an unmodified opinion, the auditor must be confident that no MM
exist in the F/S.
For an entitys F/S to be presented fairly and in conformity with GAAP, the
principles selected should reflect transactions in a manner that presents the F/S
within a range of acceptable limits.
Use of more than one costing method for different inventories is not prohibited by
GAAP.
Only a remote likelihood of a loss resulting from uncertainty.
In accordance with GAAS is mentioned in the AUDITORS RESPONSIBILITY
para of the report.
In accordance with GAAP/AFRF is mentioned in the OPINION para.

UNMODIFIED: EMPHASIS OF MATTER (need to disclose)

Mandatory/Required: - MUST be included:
GC - When there is a substantial doubt for GC issue and disclosure of the
uncertainty is adequate, the auditor would issue an unmodified report with an
emphasis-of-matter paragraph describing the GC matter. The paragraph should
include the phrases substantial doubt and going concern.
Inconsistency - When there is an inconsistency in a/cing principles used when
a material change in a/cing principle has been properly a/ced for by the entitys

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 F/S (with adequate disclosure and justification that the adopted principle is
preferable). Inconsistency may include:
A change in R/Entity resulting from including or excluding entities from
CFS not accompanied by a change in ownership.
A change from one acceptable principle to another preferable acceptable
a/cing principle.
Wording: Emphasis of Matter
As discussed in NOTE X to the CFS, the company changed its
method of a/cing for Goodwill in 20xx. Our opinion is not modified
with respect to this matter. Notice that the auditor does not explicitly
state that they concur with the change and that it is a/ced for and
disclosed properly. This is assumed because of the unmodified opinion.
A sgf change in a/cing principle investee a/ced for using equity method.
A change in a/cing estimate that is inseparable from a change in a/cing
principle (change in depreciation method or UEL).
Adjustments to correct a material misstatement in previously issued F/S
say, a change in classification of an item on the F/S, if material, may
represent a change in a/cing principle or a correction of an error (e.g.
reclassifying CFs from operating activities to investing activities due to a
mistake in previous years F/S).
The concept of consistency includes changes in a/cing principles and
restatements to previously issued F/S.
An emphasis of matter para related to a change in a/cing principle should
normally be included in subsequent periods until the new principle is
applied in all periods presented. Where the change is unjustified, the
auditor should express a qualified opinion each year that the F/S initially
reflecting the change are presented.
Where a change is a/ced for by a retrospective adjustment of the F/S the
emphasis of matter para related to the change is only required in the
period of the change.

Misleading - When strict adherence to GAAP or AFRF would cause the F/S to
be misleading, use of other a/cing principles is permitted. The auditor may issue
an unmodified opinion, but should include a separate EMPHASIS OF MATTER
paragraph describing the departure and explaining that unusual circumstances
which make it appropriate.
Special purpose frameworks for general use - When the F/S are prepared in
accordance with special purpose frameworks such as cash basis, tax basis, reg
basis or contractual basis.
Regulatory basis intended for general use.
Different opinion on Revised statements although an OTHER MATTER
PARA may be used:

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 Qualified to Unmodified - Where an auditor expressed a qualified
opinion on the prior years F/S because of a lack of adequate disclosure
and then expresses an unmodified opinion on the restated F/S of the prior
year with an emphasis-of-matter paragraph describing the circumstance.
Adverse to Unmodified - A material restatement of the F/S to correct a
previous material misstatement.
Omission, misstatement or auditor inability to review interim F/S required
by SEC- when dealing with annual F/S, omission, misstatement, or auditor
inability to review the quarterly info all lead to an inclusion of an EOM in the
annual audit report. Be aware that the info is to be reviewed, not audited.
Therefore, its misstatement will not lead to a qualified or an adverse opinion.
Not required/Mandatory but the Auditor MAY add:
Litigation - An uncertainty regarding possible future results of a litigation may
result either in an unqualified opinion with an emphasis-of-matter paragraph or a
disclaimer.
RP - Entity had sgf transactions with RP
Subsequent event unusually important
Major casualty having a major effect.

UNMODIFIED: OTHER PARA (not required to be disclosed but just want to

mention it).
This is a paragraph that refers to a matter other than those presented or disclosed in the
F/S that, in the auditors judgement, is relevant to users understanding of the audit, the
auditors responsibilities, or the auditors report. The other-matter paragraph should be
presented after the opinion paragraph and after any emphasis-of-matter paragraph.

1. Comparative Statements where PY was audited by Predecessor auditor

2 ways to handle that:
Either the predecessor auditor agrees to reissue the audit report in which
case he needs to do more work and get representation letters from both
client and the successor auditor; or
If the predecessor auditor does not agree to reissue the audit report then
you add an OTHER MATTER para in ur current report, indicating that
o PY audited by other auditors (no need to mention name)
o Date of predecessors report
o Type of opinion
o If modified, then reasons why modified.
2. Different levels of service - Prior period F/S not audited, reviewed or compiled
the auditors report should include an OTHER MATTER para indicating the ff:
The service performed in the prior period

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 The date of the report on that service
A description of any material modifications noted in the report.
3. SI - If issuing a combined report on any SI, then add other matter para.
4. RSI when the F/S are accompanies by RSI.
5. Special purpose frameworks such as Compliance with Contractual
Agreements or Regulatory Requirements for restricted use F/S so
prepared that are restricted to internal use. In that case, the auditor will include
another para after the Other Matter Para, titled
Restricted Use Relating to the Other matter
Wording: The communication related to compliance with the aforementioned
indenture described in the Other Matter Para is intended solely for the
information and use of the BOD and mgt of X co and ABC bank and is not
intended to be and should not be used by anyone other than those specified
parties.
6. Mgt unwilling to correct material inconsistencies - If Mgt is unwilling to make
changes to correct material inconsistencies identified prior to the report release
date, the auditor should include other-matter para describing the material
inconsistency.

MODIFIED REPORT QUALIFIED OPINION EXCEPT FOR

A Qualified opinion is given under 2 main circumstances:
Due to Scope limitation due to insufficient audit evidence. This will range from
qualified for scope to disclaimer (when it is both material and pervasive).
Due to GAAP departure e.g. inadequate disclosure, unjustified a/cing change.
This will range from qualified to adverse.

MODIFIED REPORT QUALIFIED FOR SCOPE LIMITATION

The auditor is expressing one or more reservations (specifically about scope limitation
where the auditor was unable to perform a desired audit procedure) while still
concluding that the F/S, taken as a whole, are fairly stated and that, except for the
specific matter referenced, the auditor has obtained sufficient, appropriate audit
evidence as a reasonable basis for the auditors conclusions.
The auditor should express a qualified opinion where the auditor is unable to obtain
sufficient, appropriate audit evidence, and the auditor concludes that the possible effect
on the F/S, if any, could be material, but not pervasive.
Pervasive means:
Effects that are not confined to specific elements, a/cs or items of the F/S
Effects that, if so confined, represent or could represent a substantial
portion of the F/S; or
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 Regarding disclosures, are fundamental to users understanding of the
F/S.
The choice btw a qualified opinion and a disclaimer of opinion arises when a
scope limitation has occurred. If both material and pervasive then a disclaimer
may be issued.
Departure from GAAP would result in either a qualified or an adverse opinion, not
a disclaimer. E.g. mgts refusal to provide adequate note disclosure regarding RP
transactions is a GAAP departure.
The professional stds require that if the auditor is not independent then he can
only issue a disclaimer.
Circumstances resulting in scope limitation lack of sufficient audit evidence.
Circumstances beyond the control of the entity e.g. the entitys a/cing
records have been destroyed.
Circumstances related to the nature and timing of the auditors work
1. The auditor determines that CR is too high, entitys controls are
ineffective and that substantive tests alone cannot provide sufficient
audit evidence.
2. The auditor is unable to obtain audited F/S of an investee (a/ced for
using the equity method)
3. Timing of the auditors appointment does not permit the auditor to
observe physical counting of inventories.
Limitations imposed by mgt - Mgt prevents the auditor from requesting
external confirmation of certain a/c balances. The auditor should request
that mgt remove any such limitation.
o If mgt refuses the auditor should communicate the matter to those
charged with governance and determine whether it is possible to
perform alternative procedures to obtain sufficient appropriate audit
evidence.
o If unable to obtain sufficient appropriate audit evidence and the
effects are both material and pervasive then the auditor should
withdraw from the audit or issue a disclaimer of opinion.

Effect of a Qualification for a scope limitation on the Auditors report.

No effect on the introductory para or mgts responsibility section.
Auditors responsibility section modify the last sentence to state, We
believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our qualified audit opinion.
Add a Basis for opinion paragraph before the opinion para.
Opinion para Label the opinion para Qualified Opinion Wording used -
Except for the possible effects of the matter described in the Basis for
Qualified opinion paragraph, the F/S referred to above present fairlyThe

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 opinion para indicates that the exception is due to the possible effects
on the F/S.
Note if the Q ass about where a scope limitation is mentioned specifically
then that limitation is only mentioned in Basis para and Opinion para. The
auditors responsibility is modified but does NOT refer to the scope
limitation.

MODIFIED REPORT DISCLAIMER OF OPINION

Given when a scope limitation is viewed as both material and pervasive, under the
following circumstances:
Circumstances resulting in a scope limitation (see notes above) which are not
only material but pervasive such that then disclaimer becomes appropriate.
The CEO is unwilling to sign a mgt repn letter represents a scope limitation that
would likely result in a disclaimer of opinion.
The auditor is unable to determine the amounts associated with illegal acts
committed by the clients mgt and/or determine if senior mgt is involved.
Extreme doubt exists about the integrity of mgt, fairness of F/S, and
representations of mgt would result in a disclaimer if the auditor still retains the
client
Effect of a disclaimer of opinion on the Auditors report
Minor effect on the introductory para We were engaged to audit..
instead of we have audited.
No effect on the mgt responsibility section
Auditors responsibility section major differences.
A disclaimer report omits the scope para (2nd para in the auditors
responsibility that describes an audit) and 3rd para (sufficient and
appropriate evidence) and instead adds a separate para with the ff
Wording: Our responsibility is to express an opinion on these F/S
based on conducting audit in accordance with GAAS. Because of the
matter described in the Basis for Disclaimer of Opinion para,
however, we were not able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion.
Add a Basis for Disclaimer of Opinion para
Wording: We could not observe the taking of the physical inventory
as of December 31, 2001, due to the refusal of the client to permit our
presence, and we were unable to satisfy ourselves regarding
inventory quantities by means of other auditing procedures.
Opinion para with heading - Disclaimer of Opinion. Disclaim an
opinion in the following words: Because of the significance of the
matter described in the Basis for Disclaimer of Opinion Para, we
have not been able to obtain sufficient appropriate audit evidence to
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 provide a basis for an audit opinion. Accordingly we do not express
an opinion on these F/S. This para remains but it indicates that the
scope of work was insufficient to support an opinion.
Expressions of opinion as to certain identified items in F/S (referred to as
piecemeal opinions) should not be expressed when the auditor has issued a
disclaimer opinion or adverse opinion as such piecemeal opinions tend to
overshadow or contradict the disclaimer or adverse opinion.

QUALIFIED OPINION FOR MISSTATEMENT

Opinion choice for a misstatement:
Qualified opinion when misstatements are material but not pervasive.
Adverse opinion when misstatements material and pervasive to the F/S.
Given under the following circumstances:
GAAP departure inadequate disclosure, omission of F/S e.g. SCF.
Effect of a Qualification for a Misstatement on the Auditors Report
No effect on Intro para and Mgt responsibility section
Auditors responsibility section modify the last sentence to state, We
believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our qualified audit opinion.
Add a Basis for Qualified Opinion para with such a title before the
opinion para. The auditor should include a description and quantification of
the financial effects of the misstatements (when practicable); likewise, the
auditor should include the omitted info (when practicable).
Qualify the opinion para - using wording such as: in our opinion, except
for the effects of the matter described in the Basis for Qualification Opinion
Para, the F/S referred to above present fairly label it Qualified opinion
paragraph.

QUALIFIED OPINION ADVERSE OPINION

Here the auditor expresses a conclusion that the F/S taken as a whole are not
fairly stated. That is, taken as a whole, they are misleading.
One main underlying cause is when the auditor concludes that misstatements
are material and pervasive to the F/S. e.g. capitalization of capital leases.
Effect on the Auditors Report
No effect on intro para or mgts responsibility section;
Auditors responsibility modify to basis for our adverse opinion
Add a Basis for Adverse Opinion para before the opinion para to
describe the effects of the misstatement.

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 Opinion para modify with the following wording In our opinion,
because of the significance of the matter discussed the in the Basis
for Adverse Opinion para, the F/S referred to above do not present
fairly...

CONSISTENCY OF F/S
The concept of consistency includes changes in a/cing prins and restatements to
previously issued F/S, correction of errors and changes in principle inseparable
from changes in estimates.
The auditor should evaluate the consistence btw all periods presented, as well as
the consistency of the earliest period covered by the auditors opinion with the
previous period.
The auditor need not comment explicitly on consistency when there is no
material change in a/cing principle or restatement. Any immaterial effect on
comparability need not be mentioned. Only material matters are relevant to the
auditors report.
If a change in a/cing principle has occurred and the auditor concurs with the
change it is not necessary for the auditor to concur explicitly with the change.
While the auditor must believe that the change is justified, it is not necessary to
explain it in the report.
A change in estimate does not result in a consistency modification.
4 specific matters should be evaluated when the entitys F/S include a material
change in a/cing principle.
1. Whether the adopted principle is in accordance with the AFRF
2. Whether the method of a/cing for the effect of the change is in accordance
with the AFRF
3. Whether the disclosures about the change are adequate
4. Whether the entity has justified that the alternative adopted is preferable.
When those 4 criteria are met and the change has a material effect on F/S then
the auditor should include an emphasis-of-matter para to describe the change
and reference the footnote disclosure applicable to the change. The auditor
should state that the auditors opinion is not modified regarding the matter.
If a change in a/cing principle is a/ced for by retrospective adjustment of
the F/S the emphasis-of-matter para related to the change is only reqed in
the period of change.
An emphasis-of-matter para related to a change in a/cing prin should
normally be included in all periods until the new principle is applied in all
periods presented.
When those 4 criteria have not been met and change has a material effect on the
F/S the auditor should evaluate and consider whether the auditors report
should be modified. The auditor should continue to express his/her exception

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 with the F/S for the year of change as long as they are presented and reported
on.
Restated F/S due to correction of material misstatement in prior year F/S
Just for the current year the auditor should include an emphasis-of-matter
para.
If the F/S disclosures relating to the restatement are not adequate the
auditor should evaluate the inadequacy of disclosure and consider
whether the auditors report should be modified.
Note: a change from a/cing principle that is not in accordance with the
AFRF to one that is in accordance is a correction of a misstatement.

GROUP FINANCIAL AUDIT

Division of responsibility is explicit if the group engagement partner decides to
reference the component auditor. In that case, the report should clearly state that
the component was not audited by the group engagement auditor but the
component auditor.
Auditors responsibility section modified to identify the component
audited by other auditors (no need to give name) and magnitude of the
F/S involved (% and $ amounts).
Opinion paragraph modified to say, In our opinion, based on our
audit and the report of other auditors the CFS are prepared.

Whether to reference the component auditor(s) there are 3 reqs that determine
whether a reference to component auditors is permitted:
The components F/S must use the same framework as the group
The component auditor has complied with GAAS or PCAOB
The component auditor has issued an audit report on the
components F/S (and that report is not restricted as to use).

Regardless of whether the component auditor is referred to, the group

engagement partner must be satisfied as to the independence and professional
reputation of the other CPA.
If the group engagement auditor decides to reference the component auditor, he
will make inquiries about the professional reputation and independence of the
component auditor.
If the group engagement auditor decides NOT to reference the component
auditor then he must take full responsibility for the work of the component
auditor. He will then contact the component auditor and review the audit
programs and audit documentation pertaining to the subsidiary. In deciding not to
reference the component auditor the group engagement partner should consider

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 materiality and the type of work to be performed and evaluate the work of the
auditor.
When the component auditor does not meet independence requirements, or
other reservations are there, the work of the component auditor should NOT be
used and the team should obtain sufficient and appropriate evidence regarding
the component on their own.
The group engagement team is responsible for determining the materiality levels
applicable to the components to be audited by the component auditor.

OPENING BALANCES INITIAL AUDITS

Consent and acknowledgement letter the predecessor auditor may request
such a letter form an entity to document the entitys authorization regarding
communication with the successor auditor. Such a letter is not reqed by
AICPA.
Successor auditor acknowledgment letter the predecessor auditor may
request a successor auditor acknowledgment letter before allowing the
successor auditor to use the predecessors audit documentation. Such a letter is
not reqed by AICPA, however.
After accepting the audit engagement, the auditor may inquire of the
predecessor auditor about issues related to the consistency of F/rep over time,
but that is not reqed before accepting the audit engagement. B4 is RIDC.
When the prior years F/S are not being presented, the CPA need not refer to
them or include the predecessor auditors report.
Even if auditor is unable to gather evidence regarding opening balances due to
mgt retention policy this scope limitation will only affect current years I/S and
CFs not the B/S.

OTHER INFO (add other matter para to describe the material inconsistency or
clarify that the auditor provides no assurance on the OTHER INFO)
Includes financial summaries/highlights, management reports on operations,
employment data, quarterly data, financial ratios. Does not include press
releases and web site info.
When audited F/S are presented containing other info, the auditor should read
the other info to determine that it is consistent with the audited F/S. If they
are consistent no need to mention no news is good news.
If there is a material inconsistency = the auditor cannot give a qualified opinion
(adverse, disclaimer or except for) because the F/S are prepared fairly, but can
REVISE the report to include a separate OTHER MATTER para
describing the material inconsistency.

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 Where it is a misstatement of fact (i.e. other info incorrectly presented that
is unrelated to matters appearing in audited F/S), the auditor may choose
to include an OTHER MATTER para containing a disclaimer of opinion to
be clear that the auditor provides no assurance on the other info.
Withhold the opinion and just give audited F/S
Withdraw from the engagement.

SUPPLEMENTARY INFO (OTHER MATTER PARA)

For the auditor to report on SI the SI must accompany the entitys F/S or the
audited F/S must be made readily available to users.
Same materiality limits as the one in F/S.
Form of report - 2 ways to report:
Either a separate report on SI (with the report on the audited F/S), or
Issue combined report with audited F/S in which case add OTHER
MATTER para to Audit Report stating that the accompanying info is
fairly stated in all material respects in relation to F/S as a whole.
If there is a material misstatement, talk to mgt, if they do not agree to
revise it, then the auditor may EITHER:
o Modify the opinion on the SI, or
o Withhold a separate report on it.
o The auditor is PROHIBITED from reporting on the SI if the
auditor expressed an adverse opinion/disclaimer on the F/S.
Auditor can report if the auditor expressed a qualified opinion.
If the auditor is asked to give an opinion relating to other info, the auditors
opinion will be based on whether the info is fairly stated in all material respects in
relation to the basic F/S taken as a whole. Before accepting the engagement, the
auditor should determine:
Whether the SI was derived from the underlying records used to prepare
the F/S
The SI relates to the same period as the F/S
The auditor served as the auditor of the F/S and
Either an unmodified or qualified opinion was expressed on the F/S, must
have not issued an adverse opinion or disclaimer of opinion; and
For the auditor to report on SI the SI must accompany the entitys F/S or
the audited F/S must be made readily available to users.
Then in order to express an opinion on SI, additional procedures include:
Inquire of mgt about the purpose of the SI and the criteria used to prepare
and the sgf assumptions used.
Obtain an understanding of the methods used and consistency

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 Compare & reconcile the SI to the F/S or underlying records.
Evaluate the appropriateness and completeness of the SI in relationship to
the audited F/S and
Obtain appropriate written representations from MGT regarding: its
responsibility for SI, its belief that it is fairly presented, its consistency, its
sgf assumptions and availability of the audited F/S if they do not
accompany the SI.

REQUIRED SUPPLEMENTARY INFO (RSI)

Info that is required to be disclosed by FASB or GASB along with audited F/S.
The auditor should apply certain limited procedures not only read but also
review procedures which include: inquire of mgt, get mgt repn letter, ask about
sgf assumptions, compare for consistency with audited F/S, mgt responses and
other knowledge obtained during the audit.
The auditor should include other-matter para in the audit report to report
exceptions only. If it is consistent no reference no news is good news.
If the auditor decides to include the RSI (say consolidated w/sheets) then if the
auditor decides to audit he needs to report in all cases i.e. comment
appropriately on the RSI (whether RSI is presented, and whether or not it is
presented in acc with the prescribed guidelines, omitted, material departures).
The RSI cannot affect the auditors opinion on the F/S, since it is outside of F/S.
If he decides not to carry out audit procedures then NO ASSURANCE is given on
the RSI. i.e. Issue a DISCLAIMER. The other-matter para commenting on the
RSI specifically includes a disclaimer of opinion (or any other assurance) .
Wording: We do not express an opinion or provide any assurance on the
info because the limited procedures do not provide us with sufficient
evidence to express an opinion or provide any assurance.

SEGMENT INFO REQUIRED

Segment info is =/> 10% foreign operations, export sales, major customers. This
is part of basic F/S. If it is omitted or contains a MM then GAAP departure and so
qualified/adverse opinion.

ALERT TO RESTRICT REPORT

The standard states that the auditors objective is to restrict the use of the
auditors written communication by including an alert when the potential exists for
that communication to be misunderstood if taken out of the context of its intended
use. Main purpose to prevent misunderstanding.
Comes at the end of the report AFTER all other paras.

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 Content of the alert one sentence usually that the written communication is
intended solely for the use of the specified parties (and either identify or refer to
those parties).
Distribution of the auditors written communication the auditor is not
responsible for enforcing the distribution of the auditors written
communication after its release. The purpose of the alert is to appropriately
communicate such restricted distribution.
Examples of restricted use reports
Report on I/C sgf deficiencies noted in an audit
A required communication with the audit committee
Report on compliance with aspects of contractual agreements.
Agreed-upon procedures reports are required to be restricted unlike
audit, review or compilation reports which may be restricted
Where the report is a by-product of the main engagement.
Wording used The purpose of report/letter/presentation/communication is
solely to describe the purpose of the auditors written communication,
such as to describe the scope This is an integral part of an audit
performed in accordance with Accordingly, this report/letter/..is not
suitable for any other purpose.

F/S USING ANOTHER COUNTRYS FRAMEWORK

The auditor should still comply with GAAS, except for requirements related to the
form and content of the auditors report. In this case, the auditor may report either
using a U.S. form of report or using the report form and content associated with
the other country.
Provided that the F/S prepared in conformity with another countrys GAAP are
for use only outside the U.S, the auditor may issue either
A U.S form of report revised to reference the F/Rep Framework of the
other country and the name of the country (in ALL 4 SECTIONS), or
The report form of the other country identify the other country in the
report.
For use both outside and inside the USA
A U.S form of report, modified to include an EMPHASIS OF MATTER
para that:
o Identifies the F/Rep framework used
o Refers to the NOTE in the F/S describing the framework
o Indicates that such a framework differs from the US GAAP.

CONDENSED/SUMMARY F/S
Condensed F/S are not GAAP F/S but a shortened and summarized version.

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 Specifically, the auditor must indicate whether the info is consistent in all material
respects in relation to the complete GAAP F/S.
An auditors report on Condensed F/S should indicate:
The auditor has audited and expressed an opinion on the COMPLETE F/S
The date of the auditors report
The type of opinion expressed
Specifically, whether the info in the condensed F/S is consistent, in
all material respects, with the audited F/S.
An auditor cannot express assurance on summary F/S unless the auditor has
also been engaged to audit the F/S as a whole.
With regard to summary F/S the auditor has only 2 opinion choices
unmodified or adverse. That is the Summary F/S are either consistent or not
consistent with the audited F/S.
When the summary F/S are unaccompanied by the audited F/S, the audited F/S
should be readily available to users of the summary F/S.
When the auditors report on the audited F/S contains an adverse opinion or a
disclaimer of opinion, the auditor should either withdraw from the engagement to
report on the summary F/S (when withdrawal is possible) or disclaim an opinion
on the summary F/S.

QUARTERLY REVIEW OF INTERIM F/S

This usually relates to PCAOB
Auditor gives limited/negative assurance whether material modification should
be made for such info to conform with GAAP.
Auditor referred to as Independent Accountant
Obtain signed engagement letter which will indicate that a review consists
principally of AP and making inquiries about the interim F/S.
Obtain mgt representation letter which includes the ff statements:
Responsible for DIM of I/C
No subsequent events have occurred
We have made available to you all financial data.
Like a normal review do ff audit procedures:
Inquiry of management about GC issues, Subsequent issues, litigation
issues,
AP
Read BOD minutes (its a public co)
Read the F/S and notes
Obtain knowledge a/cing principles and practices of the entitys industry
Have a general understanding of the clients b/s transactions and a/cing
records.

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 When planning the interim review, the accountant should consider the
results of any audit procedures performed with respect to the current
years F/S to update knowledge about entitys b/s and I/C.
SEC requires that when an auditors review report on interim F/S is included in a
registration statement, the prospectus must include a statement indicating that
the accountants review report is NOT A PART of the registration statement.
When unaudited F/S are presented in comparative form with audited F/S in a
document filed with the SEC, such statements should be marked as unaudited
and need not be referred to in the auditors report.
A prospectus refers to an independent accountant as an Expert in auditing and
accounting.
The accountant can review a condensed interim report.
The review report will include a description of the procedures for a review.

SPECIAL REPORTS
SPECIAL PURPOSE FRAMEWORKS (NOT GAAP but not supposed to be GAAP)
Special purpose framework is a financial reporting framework other than GAAP
and uses one of the following bases - Cash basis, tax basis, contractual basis,
regulatory basis; or other basis that uses a definite set of logical,
reasonable criteria.
Matters to consider when accepting such an engagement:
1. The purpose for which the F/S are prepared
2. The intended users of the F/S
3. The steps taken by mgt to determine that the framework is acceptable in
the circumstances.
Restricted distribution of report to specified users:
Contractual basis
Regulatory basis (not intended for general distn)
Not restricted for distn to specified users:
Cash basis
Tax basis
Regulatory basis intended for general use.
Audit Report
Title still includes INDEPENDENT but also includes OCBOA instead of
Non issuer.
Intro para replace B/S and I/S with statement of assets and liabilities
from cash transactions and related statement of revenue collected
and expenses paid for the year ended
Managements responsibility responsible for the preparation and fair
presentation of F/S in acc with the cash basis of a/cing described in

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 NOTE x; this includes determining that the cash basis of a/cing is an
acceptable basis for the preparation of the F/S in the circumstances.
Auditors responsibility NO EFFECT AS STILL DONE IN ACC WITH
GAAS.
Opinion para again replace B/S and I/S with statement of assets and
liabilities from cash transactions and related statement of revenue
collected and expenses paid for the year ended in acc with the
cash basis of a/cing described in NOTE X.
Basis of Accounting Emphasis of Matter para
Mention the NOTE X and that the F/S are prepared in acc with cash basis
of a/cing, which is a basis of accounting other than GAAP. Our opinion is
not modified with respect to this matter.

Remember the auditor does not justify or describe the basis of a/cing just says
to refer to the NOTE in the F/S which gives all the details.

REPORTS ON SPECIFIC TRANSACTION OR SPECIFIC F/S

Specific transaction is a completed or proposed transaction or group of related
transaction or a financial reporting issue involving facts and circumstances of a
specific entity.
A reporting accountant is an accountant, other than a continuing accountant, who
prepares a written report or provides oral advice on the application of the
requirements of an AFRF to a specific transaction or the type of report that may
be issued on a specific entitys F/S.
Generally, the reporting a/cant should consult with the continuing CPA to obtain
info relevant to the transaction.
Provide concluding comments and reference continuing a/cant; - a statement
indicating that

The engagement was performed following stds established by

the AICPA.
Responsibility for proper a/cing treatment rests with the
preparers of the F/S and
Any difference in the facts, circumstances, or assumptions
may change the report. (stated esp when a/cant is being asked as
part of a proposal to become the new auditor fo the client).
Preparers should consult with their continuing accountants
Restrict the distribution of the report to the specified users The
report is intended solely for the info and use of specified
parties.

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REPORT ON SINGLE F/S, SPECIFIC ELEMENTS, A/CS OR TRANSACTIONS
When an auditor is engaged to audit a specific element of the F/S, in conjunction
with an engagement to audit the F/S, the report on the specific element should
include the date of the audit report on the F/S and the type of opinion
expressed.ie. report on such data should refer to the audit report on the F/S.
An auditor may report on one basic F/S and not the others, provided that access
to info for all statements is not limited and that all procedures considered
necessary are performed.
Still follow GAAS if practicable.
The auditor may express an opinion on a single F/S without regard to the
materiality of any particular element of that F/S.
To audit a specific element the auditor need not have audited the complete F/S,
unless, the specified element is based upon the entitys net income or
stockholders equity then the auditor should audit complete F/S.
The opinion on the specified element may be expressed in a report that also
issues an opinion on the F/S, as long as the opinion is either unmodified or
qualified. But if it is a disclaimer or adverse opinion, then the report will be
presented separately so as to prevent the prohibited piecemeal opinion.
Incomplete presentation The auditor should include an emphasis-of-matter
para that
States the purpose for which the presentation is prepared (and refers to a
note in the F/S that describes the basis of presentation).
Indicates that the presentation is not intended to be a complete
presentation.
Remember reporting on just a single F/S or specific element involves limited
reporting objectives but not a limitation on the scope of audit procedures.
The selected data should be limited to data derived from the audited F/S.

REPORT ON COMPLIANCE (more like an Agreed-upon Procedure)

Agreed-upon procedures report = therefore
Procedures are agreed upon together
Reports findings,
Indicate that the procedures may not be sufficient for the purpose
intended.
Restrict distribution
Issues disclaimer that cannot give any assurance.
The auditor can issue a separate report on compliance, or combine the report on
compliance with the audit report on the F/S.
Where a disclaimer has been issued on audited F/S, then the auditor should only
report on compliance if there were identified instances of non-compliance.
If the auditor finds noncompliance thru out the audit, the auditor should
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 Issue a qualified opinion if non-compliance has a material effect on F/S
and the act has not been properly a/ced for or disclosed. Depending on
materiality, the auditor may decide to issue an adverse opinion on the F/S.
Issue a disclaimer if precluded by the client from obtaining sufficient
appropriate audit evidence to evaluate whether noncompliance that could
be material to the F/S has, or is likely to have, occurred.
Withdraw from engagement if the client refuses to accept the auditors
report as modified for the circumstances described above. The auditor
should indicate the reasons for withdrawal, in writing, to those charged
with governance.
When financial info is presented in a printed form that prescribes the
wording of the independent auditors report and the form is not acceptable
to the auditor then AUC-800 suggests that the auditor RE-WORD/EDIT the
report as necessary or attach a separate report to the financial information.

SERVICE ORGANIZATIONS USER AUDITORS

The user auditor is obligated to obtain an understanding of the services
provided to its client (the user entity) by a service orgn, including its ICFR
relevant to the audit sufficient to assess RMM and to design audit
procedures which are responsive to those risks.
If planning to place reliance on service auditor then the user auditor should first
satisfy himself about his professional competence and independence by making
inquiries concerning service auditors professional reputation and performing
certain procedures which include:
Visiting the service auditor and discussing the audit procedures and
results
Reviewing the audit programs of the service auditor
Reviewing the working papers of the service auditor.
Not required to review the engagement letter of service auditor.
Complementary user entity controls are controls that mgt of service orgn
assumes will be implemented by user entity.
For an efficient audit the user auditor may review the service auditors report on
controls place in operation. No need to prepare memo of a/cing system.
Reference to the Service auditors report in the USER AUDITORS REPORT
Only in a modified opinion report if the reference would be helpful to
understanding the user auditors modification. The user auditor should
indicate that such reference does not change the user auditors
responsibility for that opinion.

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 There should be no reference to the service auditor in the user
auditors report containing an unmodified opinion. Remember the
service auditor did not examine any portion of the F/S under audit and
therefore cannot be responsible for any portion of the audit. No division
of responsibility is permitted.

SERVICE ORGANIZATIONS SERVICE AUDITOR

There are 2 types of engagements and two types of reports:
1. SOC 1 - Type 1 report report on mgts description of a service orgns
system and the suitability of the design of controls. In other words,
whether the control policies and procedures are implemented/suitably
designed and placed in operation.
Type 1 reports (SOC1) are primarily to assist F/S auditors as
they relate to ICFR and so least related to SysTrust.
2. SOC 2 - Type 2 report report on mgts description of a service orgns
system and the suitability of the design and operating effectiveness of
controls. In other words, whether the policies and procedures are suitably
designed and working effectively to provide reasonable assurance of
achieving the stated control objectives. They relate more directly to the
SysTrust principles than they do to I/C.
Note: for type 2 report the period should be same for description
(type 1) and testing (type 2) since TYPE 2 covers BOTH DESIGN &
EFFECTIVENESS.
3. SOC 3 Report General use SysTrust reports regarding the controls at
the service orgn related to security, availability, processing integrity,
confidentiality or privacy. These are a short form report (i.e. no description
of TOC and results) and may be used in a service orgns marketing
efforts. This is the only report which is available for general use and
not restricted to specified users.
These reports should be restricted to the service orgn, user entities, and the user
entities independent auditors.
Whether TYPE 1 or TYPE 2, should always include a section on inherent
limitations.
The service auditor must be independent of the service orgn but not necessarily
independent of all applicable user entities.

COMFORT LETTERS (AU-C)

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 Requested by and addressed to Underwriters & signed by Independent
auditor. The letter to the underwriter is provided by the a/cant to the underwriter
(or dealer) and this report is NOT considered to be a part of the registration
statement filed by the underwriter with the SEC. If the underwriter makes any
reference to the a/cants report, it is imp that the CPA be referred to as expert in
a/cing and auditing.
If F/S audited by predecessor auditor are being included in the SEC registration
statements filing then the predecessor auditor is required to:
Read pertinent portions of the document
Obtain a letter of representation from the successor auditor.
Dated shortly before the effective date of the registration in connection with
issuance of securities.
Not required by SEC.
In this letter, the a/cant may express an opinion on whether audited F/S conform
to all of the SEC requirements for these statements.
Provides due diligence defense to underwriters regarding a securities offering
However, the underwriter must include in the SEC filing certain capsule info
about the co for the period AFTER the B/S date of the last audit. The comfort
letter should give negative assurance on any condensed interim financial info
and capsule financial info that has not been audited. Wording: Nothing came to
our attention
Opinion - is expressed with positive assurance, on whether the audited F/S &
schedules included in the registration statement, comply with the form required
by SEC. Note: comfort letters are not required by law, and are not filed with,
the SEC.

EXAM NOTES:
ADDRESSEE - When a CPA audits the F/S of a co that is not his/her client then
the report is addressed to the company that hired the CPA.
INDEPENDENT Auditor can only issue DISCLAIMER. 1 para stating disclaimer
We do not express an opinion because we are not independent for XYZ co.
Remember - do not give reasons for lack of independence. No paras for
Intro, Mgt Resp, Auditors resp.

SCOPE LIMITATION - Important point to note: preventing auditor to review

working papers of predecessor auditor, engaging an auditor after y/end stock
take is complete, and requests that certain material A/R not be confirmed are all
scope limitations but may not result in a modified opinion if other procedures can
make up for it.

20
 When a scope limitation is involved e.g. not able to observe stock-take
and/or confirming A/R, yet the auditor has used alternative auditing
procedures to obtain adequate assurance that the associated a/cs are
properly stated, the audit report is not modified.
Scope limitation could be as a result of :
1. Restrictions imposed by the client
2. Inability to obtain sufficient appropriate audit evidence
3. Inadequacy in the a/cing records
Scope limitation would not result from reliance placed on the report of
another auditor.
MGT REPN LETTER - However, if mgt refuses to give a written representation
about its responsibility for the fair presentation of the F/S in conformity with
GAAP, then such a situation will always result in a modified opinion.
PRO FORMA - A CPA cannot issue a written report on a specific transactions
consistency with GAAP for a hypothetical transaction when that clients financial
statements are audited by other auditors. A hypothetical transaction is a
transaction of financial reporting issue that does not involve facts of
circumstances of a specific entity.
AICPA - Accounting Trends and Techniques, which is issued annually,
summarizes the disclosures of 600 industrial and merchandising corporations.
Statement of cash flows omitted would result in inadequate disclosure and so
GAAP departure in the Audit report INTRO para remove SCFs from list of
F/S audited, and give an qualified opinion with a basis for para.
PIECEMEAL - Can give different opinions on diff statements e.g. disclaimer on
I/S and unmodified on B/S. Expressions of opinion as to certain identified items in
F/S (referred to as piecemeal opinions) should not be expressed when the
auditor has issued a disclaimer opinion or adverse opinion as such piecemeal
opinions tend to overshadow or contradict the disclaimer or adverse opinion.
CPAs name on the report - Sometimes a client will include the name of the
CPA firm in a report on F/S that were not audited or reviewed by the CPA. By
naming the CPA, the client has now associated them with the F/S, and it is
critical for the CPA to demand that the client EITHER:
Remove the CPAs name from the clients report, OR
Mark each page of the F/S UNAUDITED. No opinion expressed on
them.

COMFORT LETTERS
When a broker-dealer or other financial intermediary (other than an
underwriter/similar) requests a comfort letter but does not provide the
required representation letter, a/cants should not provide a comfort letter
but may provide another form of letter.

21
 When issuing comfort letters an a/cant may provide negative assurance
concerning the conformity of the entitys unaudited summary interim
financial information with GAAP. i.e. review of summary interim F/S.
Cannot give negative assurance on compliance with the requirements of
SEC 1933 as it is a legal matter on which negative assurance is not
presented.
An auditor must be independent to issue comfort letter.

SPECIAL REPORTS SPECIFIED ELEMENTS/A/CS/ITEMS OF A F/S

An independent auditor may undertake an engagement to express an opinion on
one or more specified elements, accounts or items of a financial statement as a
separate engagement the result of which is a special report whose distribution
is restricted to named parties involved. This restriction is required due to the
nature of the report and the potential for the report to be taken out of the context
in which the auditor's report was intended to be used. Engagements to audit a
schedule of accounts receivable or a schedule of royalties are examples of
engagements on specified items or accounts in financial statements.

If the auditor is engaged to report on the selected financial data, the

auditors report should be limited to data that are derived from audited F/S
which may include data that are calculated from amounts presented in the
F/S, such as working capital.
SPECIFIC ITEM when issuing a report on a specific F/S item, the
measurement of materiality should be related to the item. As the
materiality threshold is lower for a single item than it would be for an
overall auditing, the examination/attention given to single item is more
extensive than it would be if the F/S taken as a whole were being audited.

OMITTED PROCEDURE - An auditor would be required to apply an omitted

procedure after the audit report issuance date if the auditors report is
unsupported as a result of the omitted procedure. After the report release date,
the auditor has not responsibility to carry out any retrospective review of the audit
work performed unless it impairs its present ability to support the previously
expressed opinion.
IMMATERIAL MISSTATEMENTS - If misstatements are collectively not
material, and therefore do not cause the F/S to be materially misstated, the
auditor can issue a std report with an unmodified opinion and no disclosure
would be required in the notes to the F/S.
PROFIT PARTICIPATION
Hardy may accept this engagement only if Hardy also performs procedures on
Gold's financial position and results of operations. If the auditor does not audit
the complete set of statements, (s)he should determine whether it is feasible to
(1) audit the profit participation and (2) perform procedures on interrelated items.

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 If a specified element, account, or item is, or is based upon, an entity's net
income or the equivalent, the auditor should perform the procedures needed to
express an opinion on financial position and results of operations. The reason for
this is the profit participation interrelates with the balance sheet and income
statement accounts.

AUDIT DOCUMENTATION - of nature, timing and extent of audit procedures

performed does not need to include copies of client invoices.

Can provide copies of audit documentation to a regulator, however, the

letter to the regulator should outline the purpose of the regulatory request
as understood by the CPA.
If the CPA is not required by law, regulation or contract to provide a
regulatory access to the attest documentation, but intends to provide such
access, the letter should include a statement that mgt of the entity has
authorized us to provide u access to our attest documentation for /
For audit documentation, the retention period should not be shorter than 5
years from the report release date.
In determining the actual retention of engagement material, a/cant should
consider the nature of the engagement and the firms circumstances.

COMPILATION - An auditor may draft an entitys F/S based on info from mgts
financial system. This would be referred to as a compilation engagement and
would be allowed as independence is not a requirement.
OPINION - When mgt refusers to acknowledge their responsibility for the fair
presentation of the F/S in conformity with GAAP, the auditor cannot determine if
the F/S are in acc with GAAP and cannot issue an unmodified opinion.
AUDIT EVIDENCE - Processing data in an EDP system or manual system would
least influence the auditors consideration.
S.404 of SOX requires that the audit report attest to and report on, the I/C
assessment made by mgt. This I/C assessment will not be the subject of any
other separate engagement.
OTHER SERVICES - Advising a client regarding selection of computer software
is a consulting service (refer to SSCS - Statements on Stds for Consulting
services.

Advocating a clients position before the IRS is a tax advisory service,

refer to SSTS Statements on Stds for Tax Services).

LITIGATION lack of sufficient evidence is a scope limitation that may result in a

qualified opinion. Other factors such as inability to estimate the amount of loss,
entitys lack of experience with such litigation and lack of insurance coverage for
possible losses from such litigation cud still result in unmodified opinion EOM.
The opinion para indicates that the opinion modification is based on the
possible effects of the matter on the F/S, and not due to the scope
limitation itself.
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 A disclaimer of opinion, not a qualified opinion, is generally required when
there is a client-imposed limitation, particularly when there is such a
history of litigation.
When the information is adequately disclosed and there is no scope
limitation or departure from GAAP a qualified opinion is inappropriate.
Assurance Services Executive Committee was established by AICPA to identify,
develop and communicate new assurance opportunities to CPAs.
GC auditor would issue a qualified opinion if info about the entitys ability to
continue as a GC is not disclosed, because thats a GAAP departure.
If the effects of the adverse financial conditions will cause a bankruptcy
filing or negative trends and recurring operating losses appear to be
irreversible and mgt has no plans to mitigate it then it is likely that the
auditor will issue a EOM/disclaimer.
Review of compliance with debt agreements may reveal that the company
is not in compliance due to financial difficulties.
Recurring working capital shortages are considered a negative trend
indicating GC difficulties.
Reading the BOD minutes may bear on the GC status of the client.
Inspecting the documents to verify whether any assets are pledged as
collateral title documents have ltd info on gc issues.
A disclaimer may be appropriate but an except for qualified opinion is
never appropriate if disclosure is adequate.
GC emphasis of matter para states specifically substantial doubt
about the entitys ability to continue as a GC

SEGMENT INFO when segment info is included, the auditor should audit the
segment info and if the info is adequate and in acc with GAAP, then do not make
any reference to the segment info in the auditors report.
Materiality of segment info related to F/S taken as a whole.
Segment info is part of basic F/S, if there is a MM which the client refuses
to correct then it is a GAAP departure and will result in a qualified/adverse
opinion.
COMPARATIVE STATEMENTS when these are presented, the term taken as
a whole used in the audit report refers to the F/S of the current period and those
of the periods presented.
Whenever comparative F/S are being presented, auditors update their
PY audit report to determine that it is still appropriate, irrespective of the
opinion issued.
When a client is presenting comparative (two-year) F/S the auditor should
issue ONE report that on both presented years.
A comparative report in which a predecessor examined the preceding year
and has ceased operations must state that the predecessor has
ceased operations.
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 When unaudited F/S are presented comparatively with audited F/S, the
unaudited F/S should be clearly marked as unaudited and either, the
report should be reissued or a separate para should be included defining
the responsibility of the auditor.
An a/cant should not issue a report on comparative F/S when statements
of one or more, but not all, of the periods presented omit substantially all
of the disclosures required by an AFRF.

SERVICE AUDITORS REPORT includes the ff:

Description of scope and nature of the auditors procedures.
Id of parties for whom the report is intended
Reference to covered applications
Does not include statement of inherent risk limitations present in
the service organizations.
SERVICE ORGN when an auditor is to conduct an audit of a service orgn, he
should consider in the planning stages regarding I/C - obtain an understanding of
the effect of the user orgn upon the service orgn.
When a service orgn is involved, and is to be relied upon, the most
efficient approach is for an auditor to obtain that orgns service auditor
report on its I/C. usually a type 2 on both design and effectiveness would
be appropriate.
ENGAGEMENT LETTER is not required for agreed upon procedures of special
elements, accounts or items of F/S.
RESTATED F/S if qualified in prior period, then the auditors updated report on
the PY F/S should indicate that the statements have been restated and should
express an unmodified opinion with respect to the restated F/S. An EOM para
should also be added which will disclose date of the auditors previous report, the
type of opinion expressed and the reasons for the opinion and that the updated
opinion differs from the previous opinion.
I/C Integrated audit PCAOB - If mgt intends to include a statement asserting that
cost exceeds benefit of correcting material weaknesses in I/C then, the auditor
should not express an opinion or can even issue a disclaimer on the assertion.
GAS audit the audit should be designed to provide reasonable assurance that
the F/S are free of MM resulting from violations of laws and regulations that have
a direct and material effect on the determination of F/S amounts.
Governmental auditing includes audits of efficiency, economy,
effectiveness and also COMPLIANCE.
Auditor can NEVER ADD A FOOTNOTE TO THE F/S as F/S and footnotes are
the representations of mgt. He should modify the report to disclose any
reservations.
CONSISTENCY change in a/cing estimates (i.e. change in UEL) and changes
in principle with an immaterial effect (even if expected to be material in the

25
 future), do not result in an EOM on consistency. As per GAAP, change in
estimate may require disclosure in the footnotes in the F/S by mgt.
During the first audit. the auditor should adopt procedures that are
practicable and reasonable to assure that the a/cing prins are applied
consistently btw the current and the PY.
An auditors report on F/S that are prepared in acc with special purpose
framework should state that the disclosed basis of a/cing has been applied
consistently. The report does not give an opinion regarding the
appropriateness of the basis used.
Changes in the accounting for the reporting entity that are not the
result of a transaction or event result in the addition of an
emphasis-of-matter paragraph to the audit report. Examples here
include presenting consolidated financial statements in place of
individual entity financial statements, changing specific
subsidiaries that make up a group, and changing entities included
in combined financial statements). Changes in the accounting for
a reporting entity that are the result of a transaction or event do
not result in the addition of an emphasis-of-matter paragraph to
the audit report; examples here are the creation, cessation, or
complete or partial purchase or disposition of a subsidiary or other
business unit
GROUP AUDIT When the report of a group auditor makes reference to the
examination made by another auditor, the other auditor may be named if:
1. Express permission to do so is given and,
2. The report of the other auditor is presented together with the report of the
group auditor. Remember, the report of component auditor is only required
to be presented if he is named.
The perform additional procedures step applies when the group engagement
partner decides not to make ref to the component auditor because he assumes
responsibility for the work of the component auditor. A sgf component is one
identified by the group engagement team that is of financial sgf to the group or
that due to its nature, is likely to include sgf risks of MM of the group F/S.
When the group engagement partner finds it impractical to review the work of
another auditor, he /she will make reference to the examination of the component
auditor and issue an unmodified report.
If the principal auditor decides to make reference to component CPA he or she is
not required to review the work done by the component auditor nor visit the other
CPA and discuss the results. Just making inquiries regarding the professional
reputation independence of the other auditor is reqed in any case.
ILLEGAL ACTS when mgt refuses to disclose illegal activities which were
identified by the independent auditor, then a simple disclaimer will not suffice,

26
 since the lack of disclosure represents a GAAP departure which results in a
qualified opinion or an adverse opinion.
INTERIM REPORTS when dealing with the annual F/S, omission,
misstatement or auditors inability to review the quarterly info will all lead to
inclusion of EOM para in the annual audit report. Be aware that the info is to be
reviewed, not audited. Therefore, its misstatement will NOT lead to a qualified or
adverse opinion.
When planning a review of audit clients interim F/S, considering results of
auditor procedures performed with respect to the current years F/S would
help the a/cant to update the knowledge about entitys b/s and I/C.
Inadequate disclosure is a GAAP departure which would result in a
modification of the CPAs report on a review of the interim F/S. An
uncertainty, lack of consistency and reference to another a/cant would not
require modification of the a/cants report.
AUDIT PROCEDURES - Results of confirmation of receivables as well as results
of other audit procedures are not disclosed in a note to the F/S. matters related
to the scope of the audit are not referred to in the F/S. Therefore a reader of an
auditors report to a F/S cannot be referred on it. Matters that would be disclosed
in F/S are: subsequent events, sale of a discontinued operation, pro forma
effects of a b/s combination.
NEGATIVE ASSURANCE may be provided in the ff cases:
1. Letters required by security underwriters for SEC registration statements.
i.e. capsule info in comfort letters.
2. Specified elements.
3. Review engagements.
4 criteria for TRUST SERVICES PRINCIPLE include:
1. Policies the entity has defined & documented policies.
2. Communications has communicated to authorized users
3. Procedures the entity utilizes procedures to achieve the objvs
4. Monitoring the entity monitors the system and takes action to maintain
compliance with its defined policies.
Type 1 reports (SOC1) are primarily to assist F/S auditors as they relate to ICFR
and so least related to SysTrust. SOC 2,3,4 relate more to SysTrust.
Segregation of duties is a control activity over a specific type of transaction.
I/C opinion is for the as of date, which is at y/end accordingly, if a material
weakness is clearly eliminated prior to y/end an unqualified opinion is
appropriate.
When an auditor issues an unqualified opinion on an entitys I/C, it is implied that
financial records are sufficiently reliable to permit the preparation of F/S.
SUITABLE CRITERIA this requirement of availability actually has two parts not
only should it be available but also understandable to users. Criteria should be
made available in one or more of the ff ways:
1. Publicly

27
 2. Included with the subject matter or in the assertion
3. Included in the CPA report
4. Well understood by most users e.g. distance btw A and B is 20 feet.
5. Available only to specified parties.
Suitable criteria for use in attestation engagement should be CROM
Complete, relevant, objective and measurable.
PREDECESSOR AUDITOR can only be named if his permission is taken and
his report is issued (like component auditor).
AGREED UPON PROCEDURES an accountant will most likely perform
mathematical computations. Does not involve evaluation of the competence or
objectivity of another party or obtaining an understanding about a particular
subject, and /or reading the work of others solely to describe their findings, as
these are overly subjective and possibly open to varying interpretations.
OTHER INFO - When an auditor submits a document that contains information in
addition to audited financial statements to a client or to others, his responsibility
is not limited to the audited financial statements, but rather includes reporting
on all the information included in the document. AU-C 725.A5 states, Although
an auditor has no obligation to apply auditing procedures to supplementary
information presented outside the basic financial statements, the auditor may
choose to modify or redirect certain of the procedures to be applied in the audit of
the basic financial statements so that the auditor may express an opinion on the
supplementary information.... If such audit procedures are applied, the auditor
may refer to the additional information in the opinion. If audit procedures
are not applied, the auditor may disclaim an opinion on the additional
information. But, in either case, the auditor should refer to or report on the
additional information in the report.
SI in footnotes attached to the F/S should be clearly marked as
UNAUDITED.
When the basic F/S are accompanied by info presented for supplementary
analysis purposes, the a/cant should clearly indicate the degree of responsibility,
if any, he or she, is taking with respect to such info.
Evaluation of IT risk should be performed as part of the top-down approach, not
separately.
Dont forget
Qualified report only results from GAAP departure or material scope limitation.
Litigation, GC, lack of consistency unless inadequately disclosed or unjustified
will result in a GAAP departure and therefore qualification.
When an auditors report on F/S is prepared in acc with special purpose
framework, the ff must be disclosed:
F/S prepared on a basis of a/cing other than GAAP
An opinion as to whether the F/S are presented fairly in conformity with
the basis of a/cing described.

28
 An opinion as to whether the disclosed basis of a/cing has been applied in
a manner consistent with the preceding period.
No opinion is given on appropriateness of method.
Reissue predecessor does not review working papers of successor auditor just
should read the F/S and obtain a letter from successor auditor.
Preparing prospective F/S is also an attest engagement.
SSARs applies when a CPA prepares, compiles or reviews F/S of a NON
ISSUER. Reviewing interim F/S for SEC relates to an ISSUER so PCAOB!!
REASONABLENESS of a/cing estimates is EXPLICITLY referred to in the
Auditors report.
PCAOB reports refer to GAAP for F/S but refer to PCAOB not GAAS for auditing.
Group audits not rely due to lack of independence /other reservations
PERFORM ADDITIONAL PROCEDURES.
Rely then decide whether to reference or not
Agreed-upon procedures an accountant will most likely perform mathematical
computations. Does not involve evaluation of the competence or objectivity of
another party or obtaining an understanding about a particular subject, and /or
reading the work of others solely to describe their findings, as these are overly
subjective and possibly open to varying interpretations.
Combined Report on I/C for GAS will not have the statement whether any of
the sgf deficiencies described in the report are so severe as to be MW.
Will have statement that the purpose of the audit is not to provide
assurance on I/C, NOT - no assurance is provided.
Will include a description of the scope the auditors work in obtaining an
understanding of I/C and in assessing CR.
Any sgf deficiencies identified during the audit
Also ID and discussion of the implications of those sgf deficiencies that
are considered to be material weaknesses.
A description of deficiencies in I/C not significant enough to be sgf
deficiencies, or a reference to a separate letter to mgt that reported these
conditions.
Negative assurance can be given on the ff:
Comfort letters
Review engagements
Agreed upon procedures for specified elements
Report on compliance with contractual agreements
Report on compliance with regulations.
Forecasts/projections an auditor should not be associated with
forecasts/projections which do not disclose assumptions.
Omission, misstatement or auditor inability to review interim F/S required
by SEC, a std report is still issued with an EOM PARA - when dealing with
annual F/S, omission, misstatement, or auditor inability to review the quarterly
info all lead to an inclusion of an EOM in the annual audit report. Be aware that

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 the info is to be reviewed, not audited. Therefore, its misstatement will not lead to
a qualified or an adverse opinion.
Reference to another accountant is not considered a modification to the
report. Remember only change is in intro and opinion para including shared
responsibility. There is no EOM or OMP.
Litigation requires qualified opinion when there is lack of sufficient evidence.
GC READ BOD MINS!!!!!!
SEGREGATION OF DUTIES IS A CONTROL ACTIVITY over a specific type of
transaction NOT AN ENTITY LEVEL CONTROL.
Review engagement involves both responsible party and intended users.
A MATERIAL GAAP DEPARTURE unless MISLEADING CANNOT RESULT IN
AN UNMODIFIED REPORT EVEN IF PROMINENTLY AND ADEQUATELY
DISCLOSED!!!
LACK OF DISCLOSURE OF ILLEGAL ACTIVITIES IS ALSO A GAAP
DEPARTURE SO AUDITOR CANNOT ISSUE DISCLAIMER!!
REPORT ON APPLICATION OF A/CING PRINS TO HYPOTHETICAL
TRANSACTIONS In such circumstances, the auditor should:
obtain the prospective clients permission,
contact the prospective clients current a/cant
follow the procedures outlined for predecessor/successor auditors to
determine that she/he is aware of all pertinent info.
Consult with the continuing CPA to ascertain all the available facts
relevant to forming a professional judgement.
Initial audit auditor is reqed to adopt procedures that are practicable and
reasonable to assure that a/cing prins are applied consistently btw current and
the PY.
An auditor who is not independent can only issue a DISCLAIMER.
F/S that omit substantially all disclosures should include that the F/S are not
designed for those who are uninformed about the omitted disclosures.
Service orgn report on I/C is not ordinarily distributed to all s/hs as it is restricted
in use. ONLY TYPE 2 REPORT (ON EFFECTIVENESS OF I/C) provides the
user auditor a basis for REDUCING THE ASSESSMENT OF CR.
A review report cannot be issued if mgt does not provide a representation letter.
This restricts procedures and so no report issued.
Remember inconsistency is not considered a departure from GAAP unless
unjustified/misleading.
ASEC was developed to identify, develop and communication new assurance
opps to CPAs.
Tolerable misstatement amounts are ordinarily less than materiality amounts.
Reviews of interim F/S to be submitted to SEC under PCAOB REQUIRE an
understanding of I/C. (note review of interim usu refers to ISSUERs). The
understanding of I/C should be sufficient to identify types of potential
misstatements and to allow the auditor to select appropriate I & AP.

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 Consider the results of the audit procedures performed with respect
to CY F/S.
Reviews under SSARs regarding NONISSUERS does NOT REQUIRE an
understanding of I/C.
Perform AP and inquiries.
Foregoing is not allowed.
Qualified ONLY issued for material SCOPE LIMITATION or GAAP
DEPARTURE!
Client imposed scope limitations lead to qualified, disclaimer or withdrawal.
Inadequate records
Refuses permission to contact lawyer
Refuses to provide mgt representation.
Preparation of F/S requires no assurance is provided OR if mgt does
not allow then a/cant will issue a disclaimer that indicates that NO
ASSURANCE IS PROVIDED TO ACCOMPANY THE F/S.
An audit in accordance with GAS is a compliance audit in which the auditor
provides reasonable assurance that the F/S are free of MM resulting from
violations of laws and regulations that have a direct and material effect on the
determination of F/S amounts.
Overall audit strategy is concerned with REPORTING OBJECTIVES of an
engagement and determining the SCOPE of the audit.
IESBA allows contingent fee if appropriate safeguards are applied.
UNRECORDED SALES means that sales are understated and so GP is
understated which will result in lower GP ratio.
FICTITIOUS SALES means that sales are overstated means that GP is also
overstated by same amount and therefore will result in higher GP ratio.
With respect to planning a y/end audit, it is an acceptable practice to carry out
parts of the audit at interim dates.
A specialist may use assumptions that may be inconsistent with those used by
the client.
A/P normally includes invoice verification but should not include purchasing,
receiving and cash custodianship and disbursement.
Subsequent events which have a sgf direct effect on the F/S should be disclosed
in the notes to the F/S (if type 2 event).
ALL fraud regarding senior mgt (whether material or immaterial) should be
reported DIRECTLY TO THE AUDIT COMMITTEE. All fraud that is
consequential should be communicated to mgt and to the audit committee.
When a specialist takes physical inventory of the client, the auditor must still
ensure that it conducts the same audit tests and procedures as it would have if
the clients employees took the physical inventory.
Improper revenue recognition is an example of FF/rep.
Increase consideration i.e. focus on mgts selection and application of a/cing
princs is an overall response to increased risk of RMM.

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 NEGATIVE ASSURANCE is allowed for SPECIFIED ELEMENTS.
ANY AUDIT can NEVER have negative assurance.
Cannot say in an attestation engagement report on I/C that no material
weaknesses were identified.
Unclaimed checks are given to internal auditor to detect fictitious employees.
Sgf deficiencies and material weaknesses must be recommunicated if not
corrected by mgt.
SAS applies to comfort letters.
SSARs relates to compilations
SSAEs apply to assurance on investment performance statistics.
Delays in the prepn of financial reports may suggest mgt override as
inappropriate entries are probably being made by the clients mgt.
Flowchart helps to assemble I/C FINDINGS into a single chart. Cannot depict the
WHOLE ORGNAL STRUCTURE IN A SINGLE CHART. A flowchart is a
symbolic representation of a system or series of sequential processes. It depicts
the orgn and recordkeeping system rather than the flow of operations..
A payroll distribution is not required but if the various phases of payroll work are
not sufficiently segregated to afford effective I/C i.e. I/C looks weak then auditor
may choose to conduct a payroll observation to detect any such irregularities.
Walkthrus are to evaluate design effectiveness of controls.
The auditors primary objective in reviewing materials purchasing cycle is to
evaluate the reliability of the info generated as a result of the purchasing process.
To prevent direct manufacturing labor from being charged to manufacturing o/h,
there should be a comparison of daily j/es with factory labor summary.
The Foreign Corrupt Practices Act prohibits illegal foreign payments and require
PLCs to devise and maintain adequate control.
The auditor should perform TOCs of those controls that the auditors plans to use
to support a conclusion that controls operate effectively.
Important control activity over acquisitions of PPE is using a budget to forecast
and control acquisitions and retirements. Analyzing monthly variances will not
control authorized expenditures.
Billing is an example of a recording function THE ACCOUNTING DEPT DOES
THE BILLING. DATA PROCESSING IS A RECORDING FUNCTION.
Purchases are not supposed to be made by the user dept but by a SPECIAL
purchasing dept.
Supervisor cannot distribute payroll checks to employees otherwise he can
prepare checks to fictitious employees and divert them to him/herself.
Proper classification is required in MANUFACTURING ORGNS because what
needs to inventoried and what not is imp.
Any limitation on scope regarding AUD #4 reporting on previous material
weakness precludes an opinion i.e. disclaimer.
Treasurer in sales revenue cycle will authorize uncollectible writeoffs since it is
an authn function.

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 Payroll is a record-keeping function.
Service auditors report will include a statement on inherent limitations. It is an I/C
report under attestation stds SSAE of AICPA. Opinion type 2 includes:
That the description fairly presents the system that was designed and
implemented thruout the period
That the controls related to the stated control objectives were suitably
designed to provide reasonable assurance that the control objvs would be
achieved if the controls operated effectively thruout the period.
That the controls tested operated effectively thru out the period.
SOC 1 and SOC 2 are restricted use reports. SOC 3 is general use.
Mgt specifies the control objectives to be tested should cover a reporting period
of at least six months.
Comfort letters are restricted in distribution.
Negative assurance is given on whether there has been any change during a
specified period in capital stock, increase in lterm debt or any decrease in F/S
items.
Auditor has to be independent.

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