Study Guide – AUD (2024)​ ​ ​ ​ ​ ​ ​ ​ ​

Mnemonics List
A1 – Audit Reports
M1: Professional Standards
Audits
●​ Statements on Auditing Standards (SAS)
○​ Used for nonissuers (private companies)
○​ Set by AICPA Auditing Standards Board (ASB)
●​ PCAOB Auditing Standards (AS)
○​ Used for issuers (public companies)
○​ Set by the Public Company Accounting Oversight Board (PCAOB)
●​ Generally Accepted Government Auditing Standards (GAGAS)
○​ Used for government organizations
○​ Set by Governmental Accountability Office (GAO)

Other Engagements
●​ Statements on Standards for Attestation Engagements (SSAE)
○​ Provide guidance for attestation engagements
○​ Set by AICPA
○​ Applies to examinations, reviews, or assertions on a third party subject matter
●​ Statements on Standards for Accounting and Review Services (SSARS)
○​ Provide guidance for unaudited services and information for nonissuers (private companies)
○​ Set by AICPA Accounting and Review Services Committee
○​ Applies to preparation/review of financial statements or forecasts for private companies

Guidelines
●​ Code of Professional Conduct
○​ Provides guidelines to the members of the AICPA for behavior in the conduct of their business.
○​ Also provides assurance to the public that the profession maintains high standards.
●​ Statements on Quality Control Standards (SQCS)
○​ Provides guidance to CPA firms about policies and procedures designed to ensure the firm
complies with professional standards and regulatory requirements.

●​ GAAS Hierarchy
1.​ AICPA SAS (nonissuers/private) and PCAOB AS (issuers/public)
■​ Most authoritative
■​ Auditor should use professional judgment
■​ Specific language is used to clarify the auditors level of responsibility:
○​ “Must” or “Required” = Unconditional statement; auditor MUST do this.
 ○​ “Should” = Presumptively mandatory requirement; must be able to justify
departure and document in writing.
○​ “May,” “might,” and “could” = Not an imposed requirement; only a
recommendation
2.​ Interpretive Publications
■​ Recommendations for how auditing standards should be applied, but not considered to
be auditing standards.
■​ Auditing interpretations of SAS and PCAOB AS, collectively known as GAAS.
■​ AICPA Audit and Accounting Guides
■​ Auditing Statements of Position (SOP)
3.​ Other Auditing Publications
■​ Not authoritative, but may be helpful.
■​ Journal of Accountancy
■​ Professional Journals
■​ Textbooks
■​ CPE courses

Notes from MCQs

○​
 M2: Audit Engagements
●​ The Audit Process
1.​ Engagement Acceptance
2.​ Assess Risk and Plan Response
3.​ Perform Procedures and Obtain Evidence
4.​ Form Conclusions
5.​ Reporting
●​ Purpose of an Audit
○​ To provide financial statement users with an opinion on whether the statements are presented
fairly, in all material aspects, in accordance with the applicable reporting framework (such as
GAAP).
○​ Auditors reports give credibility to financial statements.
●​ Management Responsibilities
○​ Preparing financial statements in accordance with their applicable framework.
○​ Designing, implementation, and maintaining internal controls.
●​ Auditors Responsibilities
○​ Expressing an opinion on the financial statements
○​ Maintaining professional skepticism
○​ Complying with ethical requirements
○​ Exercising professional judgment
○​ Obtaining sufficient and appropriate evidence
○​ Complying with GAAS

●​ Maintaining Professional Skepticism

○​ Professional skepticism is having a questioning mind.
■​ Trust, but verify.
○​ Be alert for:
■​ Evidence that contradicts other evidence
■​ Information that calls into question the reliability of documents
■​ Possible fraud
■​ Need for additional audit procedures
■​ Evidence that may impact initial risk assessment
○​ Professional skepticism may be hard to meet due to unconscious human bias, such as developing
inappropriate levels of trust or confidence in management.
●​ Complying with Ethical Requirements
○​ Auditors should meet ethical requirements, such as being independent in both fact and
appearance.
●​ Exercising Professional Judgment
○​ Audits often require interpretation of both ethics and GAAS, as well as other informed decisions.
○​ Professional judgment may be necessary for materiality, risk, drawing conclusions, etc.
●​ Obtaining Sufficient and Appropriate Evidence
 ○​ Reduces risk to an acceptable low level.
○​ Enables the auditor to draw reasonable conclusions and form an opinion.
●​ Complying with GAAS
○​ GAAS provides a set of guidelines and principles for planning, performing, and reporting on audit
engagements.
○​ In certain audit engagements, auditors may conduct audits with both GAAS as well as some
other form of standards.

●​ Reasonable Assurance and Inherent Limitations of an Audit

○​ In order to express an opinion, auditors obtain reasonable assurance that financial statements
are free from material misstatement, whether from error or fraud.
○​ Reasonable assurance is a high, but not absolute, level of assurance.
○​ In order to obtain reasonable assurance, the auditor must:
1.​ Plan the work and properly supervise any assistants
2.​ Determine and apply the appropriate level of materiality levels
3.​ Identify and assess risks of material misstatement, whether due to error or fraud; and
4.​ Obtain sufficient appropriate audit evidence
○​ Absolute assurance is unable to be obtained due to limitations such as:
■​ The nature of reporting (subjective decisions, such as allowance for accounts receivable)
■​ The nature of audit procedures (management may not provide complete information)
■​ Timeliness of financial reporting and balance of cost and benefit.
●​ Nature and Scope of the Engagement
○​ Auditors may be hired to perform an audit for a single period or multiple periods.
○​ An audit may be on the complete financial statements, a single financial statement, or specific
elements, accounts, or items on a financial statement.
○​ Nonissuers have a choice of either:
■​ A financial statement audit only, OR
■​ An integrated audit (two opinions are rendered)
●​ Audit of both the financial statements, as well as the effectiveness of internal controls.
○​ Issuers must have auditors perform integrated audits, where two opinions are rendered.
●​ Objectives of the Financial Statement Audit
○​ To obtain reasonable assurance about whether the statements as a whole are free from material
misstatement, whether from error or fraud, which enables auditors to express their opinions.
○​ To report on the financial statements and communicate as required by GAAS based on their
findings.
●​ Objectives of the Audit of Internal Controls over Financial Reporting
○​ Required for issuers; optional for nonissuers.
○​ To express an opinion on the effectiveness of the company’s internal controls over financial
reporting.
○​ To obtain reasonable assurance about whether material weaknesses exist as of the date
specified in management's assessment.
○​ If an audit of internal control is done, an audit over the financial statements must also be done.
●​ Objectives of the ERISA Plan Financial Statements Audit
○​ Audits of Defined Benefit Plans (Employee Retirement Income Security Act of 1974)
○​ To form an opinion on the ERISA plan financial statements based on evidence obtained.
○​ To express a clear opinion on the plan through a written report.
○​ To appropriately communicate to management and those charged with governance the auditors
findings.
 M3: Forming an Audit Opinion
●​ Considerations when Forming an Audit Opinion
○​ Sufficient appropriate audit evidence was obtained as required by GAAS.
■​ Nonissuer - SAS
■​ Issuer - PCAOB AS
○​ Financial statements are fairly presented, in all material respects, in accordance with the
applicable framework, such as GAAP.
○​ The selected framework provides guidance on how transactions and events should be recorded.
■​ For example, a building account should be reported at cost - accumulated depreciation if
using GAAP.
■​ Appropriate disclosures and policies should also be present.

Types of Opinions
●​ Unmodified (Nonissuers) and Unqualified (Issuers)
○​ Best opinion possible
○​ States that financial statements are presented fairly, in all material respects, in accordance with
the applicable financial reporting framework.
○​ Issued when sufficient appropriate audit evidence is obtained, no material misstatements are
present, and the applicable framework is followed.
●​ Modified Opinions
○​ Auditors are unable to obtain sufficient appropriate audit evidence to express opinions (audit
issues), OR
○​ Auditors conclude that financial statements are materially misstated (financial statement issues).
■​ For example, inaccurate numbers or missing disclosures.
○​ Qualified Opinion (financial statement issues)
■​ Financial statements contain misstatements.
■​ Material, but NOT pervasive.
■​ Not the best, but not the worst opinion.
■​ For example, the client reports the building at fair value, and deny’s correcting the report.
○​ Qualified Opinion (audit issues)
■​ Auditors are unable to gather sufficient appropriate audit evidence.
■​ Material, but NOT pervasive.
■​ Not the best, but not the worst opinion.
○​ Disclaimer of Opinion
■​ Auditors are unable to gather sufficient appropriate audit evidence.
■​ Therefore, auditors deny offering an opinion.
■​ Material AND pervasive.
■​ Worst opinion (audit issues)
○​ Adverse Opinion
■​ Financial statements contain misstatements.
■​ Material AND pervasive.
 ■​ Worst opinion (financial statement issues)

○​

○​

●​ Pervasive
○​ Have far-reaching effects across several accounts, or
○​ If specific to only one account, it:
■​ Represents a significant portion of the financial statements, or
■​ Has issues with disclosures that are fundamental to the users’ understanding.

●​ Notes from MCQs

○​ Emphasis-of-matter, other-matter, and explanatory paragraphs are used by auditors to add
additional communications to the auditor’s report without changing the auditor’s opinion.
■​ Nonissuers = emphasis-of-matter and other-matter
■​ Issuers = explanatory
 M4: Unmodified (Unqualified) Opinion
Nonissuers - Unmodified
●​ Unmodified opinions (nonissuers)
○​ Sufficient appropriate audit evidence has been obtained and
○​ Financial statements are fairly presented with respect to the applicable framework.
●​ Required sections (“OBRA”)
○​ Opinion​​ ​ ​ ​ ​ ​ ​ ​ (First section)
○​ Basis for Opinion​ ​ ​ ​ ​ ​ ​ (Second section)
○​ Responsibilities of Management for the Financial Statements​ ​ (Anywhere after second
section)
○​ Auditor's Responsibilities for the Audit of the Financial Statements​ (Anywhere after second
section)
○​ GAAP, GAAS, GAAP, GAAS
●​ Opinion includes:
○​ Name of client.
○​ Statement that the financials have been audited.
○​ Title of each financial statement and reference to the notes.
○​ Dates or periods covered by the financials.
○​ A statement that the financials are presented fairly in accordance with the applicable
framework.
○​ Identification of the applicable framework, and the country of origin (such as GAAP).
●​ Basis for opinion includes:
○​ Statement that the audit was conducted with GAAS, and the country of origin (such as the US).
○​ Reference to the auditor’s responsibilities section of the report.
○​ Statement that the auditor is required to be independent and meet ethical standards.
○​ Statement as to whether the auditor believes that the evidence obtained is sufficient and
appropriate.
●​ Responsibilities of Management for the Financial Statements
○​ Explanation that management is responsible for preparation of financial statements.
○​ Statement that management is responsible for internal controls.
○​ When required, evaluation of whether there are conditions that raise substantial doubt on going
concern.
○​ Reference the framework used (such as GAAP)
●​ Auditor's Responsibilities for the Audit of the Financial Statements
○​ Statement that the objectives of the auditor are to gain reasonable assurance, issue a report and
give an opinion.
○​ Statement about what reasonable assurance is.
○​ Statement that not detecting fraud is a higher risk than not detecting errors (collusion, forgery,
etc.).
○​ Statement on what considers a misstatement to be material.
○​ Description of auditor’s responsibilities to:
 ■​ Exercise professional judgment
■​ Identify and assess risks
■​ Obtain an understanding of internal controls
■​ Evaluate appropriateness of policies used and overall presentation of financials
■​ Conclude whether there are conditions that raise substantial doubt as a going concern
(GAAS requires)
○​ Statement that the auditor is required to communicate findings with those charged with
governance.
○​ Examine on a test basis.
○​ Reference the use of GAAS throughout.

●​ Other reporting structures:

○​ Title - clearly indicate that it is an independent report (“Independent Auditor’s Report”)
○​ Addressee - addressed to those charged with governance (typically NOT management)
○​ Signature of the auditor’s firm
○​ City and State where the auditor’s report is issued
○​ Date of the auditor’s report - the date the auditor had obtained sufficient appropriate audit
evidence

●​ Audits in accordance with two sets of standards

○​ For example, auditing a governmental entity will require the use of both GAAS and GAGAS.
○​ Done if auditors are engaged by a client to do so.
○​ Both auditing standards are referenced in the Basis for Opinion and Auditor’s Responsibilities
sections.
●​ Audits in accordance with GAAS and PCAOB standards
○​ If the auditor follows PCAOB standards when not required, the auditor must:
■​ Follow GAAS standards in addition to PCAOB
■​ Use the report required by the PCAOB
■​ Amend the PCAOB (issuer) report to state the audit was also done with GAAS

●​ Key Audit Matters (KAMs) Section

○​ Optional section.
○​ Added when the client requests auditors to do so.
○​ Provides visibility into the more complex areas or areas that require judgment in the audit.
○​ KAMs are selected from the matters communicated to those with governance.
○​ When deciding KAMs, auditors consider:
■​ Areas with higher assess risk
■​ Areas requiring significant judgment
■​ Significant events or transactions
○​ KAMs section can be added anywhere after the second section (Basis for Opinion).
○​ Must include the heading “Key Audit Matters”.
○​ Must include the definition of what key audit matters are.
 ○​ Order of KAMs listed is a judgment decision.
○​ KAMs should NOT include matters giving rise to:
■​ A qualified opinion (this will be referenced in the Basis for Opinion section).
■​ Substantial doubt existing about an entity's ability to continue as a going concern.
○​ KAMs are PROHIBITED from being communicated for adverse and disclaimer opinions.

Issuers - Unqualified
●​ Unqualified opinions (issuers)
○​ Sufficient appropriate audit evidence has been obtained and
○​ Financial statements are fairly presented with respect to the applicable framework.
●​ Required sections
○​ Opinion on the Financial Statements​ ​ (First section) integrated audit
○​ Basis for Opinion​ ​ ​ ​ (Second section)
○​ Critical Audit Matters​ ​ ​ ​ (Anywhere after second section)
●​ Opinion on the financial statements includes:
○​ Name of client
○​ Statement identifying each financial and any related schedules
○​ Dates or periods covered by financials
○​ Statement indicating that an audit occurred
○​ Statement about if the financials are presented fairly and follow the applicable framework
(opinion)
○​ Reference GAAP
●​ Basis for Opinion includes:
○​ Statement that financials are responsibility of management.
○​ Statement that auditors responsibility is to express an opinion.
○​ Statement that the auditor is registered with the PCAOB in the U.S. and is required to be
independent.
○​ Statement that audit was conducted with standards of PCAOB.
○​ Statement that standards require reasonable assurance to be obtained.
○​ Statement that the audit included:
■​ Assessing risk
■​ Examining, on a test basis, evidence regarding amounts and disclosures
■​ Evaluating accounting principles and significant estimates
■​ Evaluating overall presentation of financials
○​ Statement that the auditor believes a reasonable basis for their opinion.

●​ Critical Audit Matters:

○​ Appears when an unqualified or qualified opinion is rendered.
○​ CAMs provide more visibility into the more challenging areas of the audit.
○​ To be considered a critical audit matter, ALL three criteria must be met:
 1.​ Matter that was communicated or required to be communicated to the audit
committee.
2.​ Relate to accounts or disclosures material to the financial statements.
3.​ Involve challenging, subjective, or complex auditor judgment.
○​ Identification of CAMs (“IPAD”)
■​ Identify each CAM in the report
■​ Describe the principal considerations that led to considering it a CAM
■​ Describe how the CAM was addressed
■​ Refer to the relevant financial statement accounts and disclosures
○​ If no CAMs were identified, auditors should still give the definition of a CAM, and state that there
were no CAMs determined.
○​ CAMs are omitted when a disclaimer or adverse opinion is given.

●​ Other reporting structures:

○​ Title - must include the title “Report on Independent Registered Public Accounting Firm”
○​ Addressee - must be addressed to the shareholders and board of directors
○​ Signature of the auditor’s firm
○​ Tenure - statement containing the year in which the auditor began serving as the auditor
○​ City and State from which the report was issued
○​ Report date - on or after the date sufficient appropriate audit evidence has been obtained.

●​ Points to Remember
○​ The auditor’s opinion appears before the basic financial statements and footnote disclosures.
○​ Opinion section is the first section that appears in both nonissuer and issuer reports.
○​ Nonissuers
■​ GAAP referenced in Opinion and Management Responsibilities sections
■​ GAAS referenced in Basis for Opinion and Auditor’s Responsibilities sections
○​ Issuers
■​ GAAP referenced in Opinion section
■​ GAAS referenced in Basis for Opinion section

●​ Reporting for smaller reporting companies vs larger companies

○​ Unless indicated otherwise, issuers are generally large or accelerated filers.
○​ Large accelerated and accelerated filers are required to have an integrated audit (two opinions).
■​ Fairness of financial statements
■​ Operating effectiveness of internal control
○​ Smaller reporting companies (less than $100 million in annual revenue) are only required to
have one opinion.
■​ Fairness of financial statements
○​ Basis for Opinion section is updated to state:
■​ The company is not required to have nor was asked to perform an audit over its internal
controls.
 ■​ The auditor is required to gain an understanding of internal controls, but is not stating an
opinion on them.

●​ Form AP (Audit Participants)

○​ The auditor of an issuer must file form AP with the PCAOB for each audit issued:
■​ By the 35th day after the audit report is filed with the SEC.
■​ If the audit report is included with a registration statement, this form must be filed within 10
days.
○​ Include details such as:
■​ Name of firm
■​ Name of issuer
■​ Date of audit report
■​ End date of financial statements
■​ Name of engagement partner
■​ Participation of other audit firms
○​ Optional inclusions:
■​ Engagement partner’s full name, and/or
■​ Statements that the auditor is responsible for the audits and did their work in accordance
with PCAOB standards. In addition, the auditor should include total audit hours the other
audit firm participated in.

●​ Notes from MCQs

○​ Consistency is implicitly stated, and will be addressed in an emphasis-of-matter paragraph if
there are inconsistency issues.
 M5: Modified Opinions Due to Financial Statement Issues
●​ Modified opinion (financial statement issues)
○​ The auditor is able to gather sufficient appropriate audit evidence, but finds a material
misstatement.
○​ Qualified = Material but NOT pervasive.
○​ Adverse = Material AND pervasive.

○​

●​ Financial Statement Issues

○​ Not following selected framework (such as GAAP)
■​ Ex) Client should have capitalized leases, but they didn’t.
■​ Exception - Client departs from GAAP, but the auditor agrees with the departure because the
financials would have been misleading had GAAP been followed. An unmodified or
unqualified opinion could be given here. (Rare occurrence)
○​ Inappropriate accounting principles
■​ Ex) Client does not want to consolidate financials even though they control 50% of another
entity.
○​ Unreasonable estimates
○​ Providing inadequate disclosures
■​ Ex) Client is not willing to include disclosures in financial statements.
○​ Incorrect numbers
■​ Ex) Client purchased $10,000 of furniture on account, but only wants to recognize a $1,000
liability.
○​ No reasonable justification for a change in accounting principle.
■​ Ex) Client changes from FIFO to LIFO without providing a valid reason.
○​ Client presents its financial position and results but omits the statement of cash flows.
■​ This would result in a qualified opinion.
■​ Complete set of financial statements include:
●​ Balance sheet
●​ Statement of Income (or comprehensive income)
●​ Statement of changes in equity
●​ Cash flow statement
●​ Disclosures (aka footnotes)
■​ This would be acceptable IF the client asks for only one financial to be given an opinion on.
 ○​

●​ Nonissuer report changes for Qualified opinions

○​ Opinion → Qualified Opinion
■​ Opinion sentence adds the wording: “Except for… as described in the Basis for Qualified
opinion section…”
○​ Basis for Opinion → Basis for Qualified Opinion
■​ Add paragraph describing departure from framework and quantify effects (if possible)
following the opinion section.
■​ Sufficient appropriate audit evidence for “qualified” opinion should be claimed.
○​ All other elements are the same as unmodified.

●​ Nonissuer report changes for Adverse opinions

○​ Opinion → Adverse Opinion
■​ “Because of the significance of the matter discussed in the Basis for Adverse Opinion section
of the report….. do not present fairly….”
○​ Basis for Opinion → Basis for Adverse Opinion
■​ Add paragraph describing departure from framework and quantify effects (if possible)
following the opinion section.
■​ Sufficient appropriate audit evidence for “adverse” opinion should be claimed.
○​ Key Audit Matters section is OMITTED.
○​ All other elements are the same as unmodified.

●​ Issuer report changes for Qualified opinions

○​ No heading changes for qualified opinions.
■​ Headings are consistent with unqualified opinions,
■​ Headings change for disclaimer opinions (audit issues).
○​ Opinion on the Financial Statements section
 ■​ “Except for… as discussed in the following paragraph…”
■​ Add paragraph describing departure from framework and quantify effects (if possible).
○​ All other elements are the same as unqualified.

●​ Issuer report changes for Adverse opinions

○​ No heading changes for qualified opinions.
■​ Headings are consistent with unqualified opinions,
■​ Headings change for disclaimer opinions (audit issues).
○​ Opinion on the Financial Statements section
■​ “Because of… discussed in the following paragraph, the financial statements do not present
fairly…”
■​ Add paragraph describing departure from framework and quantify effects (if possible).
○​ Critical Audit Matters section is OMITTED.
○​ All other elements are the same as unqualified.

●​ Notes from MCQs

○​
 M6: Modified Opinions Due to Audit Issues
●​ Modified opinion (audit issues)
○​ The auditor is unable to gather sufficient appropriate audit evidence.
○​ Qualified = Material but NOT pervasive.
○​ Disclaimer = Material AND pervasive.

○​

●​ Audit Issues (scope limitations)

○​ Time constraints
○​ Inability to obtain sufficient appropriate evidence such as:
■​ Observing inventory
■​ Confirm receivables
■​ Obtain audited financial statements of a consolidated investee
■​ Restrictions on the use of auditing procedures
■​ Inadequacy of accounting records
○​ Refusal of clients attorney to respond to an inquiry

●​ Scenarios that result in a disclaimer of opinion:

○​ Auditor is not independent
○​ Unaudited financial statements
○​ Refusal of management to take responsibility for the fair presentation of financials in conformity
with GAAP (may also withdraw rather than disclaim opinion).

●​ Causes of Audit Issues (scope limitations)

○​ Circumstances beyond the control of the entity relating to the nature or timing of the auditors
work.
■​ Ex) a fire
■​ The auditor should determine whether it is possible to perform alternative procedures.
○​ Management-imposed limitations
■​ Ex) management not giving evidence that was asked for, or not allowing auditors to speak to
someone.
■​ Auditor should ask management to remove the limitation
■​ If management does not remove the limitation, communicate with those charged with
governance to see if they can remove the limitation, or determine if there are alternative
procedures to perform.
 ■​ If the possible effect from the scope limitation is both material and pervasive, either disclaim
an opinion or withdraw from the engagement.

●​ Unaudited Financial Statements

○​ Financial statement association occurs when an accountant either:
■​ Consents to the use of their name in connection with the financial statements, or
■​ Has prepared the financial statements, even if the accountant's name is not used.
○​ When the auditor is not independent but is required to report on the financial statements, the
auditor should disclaim an opinion and should specifically state that they are not independent.
■​ All reasons for lack of independence should be stated, if chosen to provide those reasons.
○​ Requirements for a disclaimer on unaudited financial statements:
■​ Accountant must read the financial statements for obvious errors.
■​ “Unaudited” should be clearly marked on each page of the financial statements.
■​ The disclaimer may accompany the unaudited financial statements, or it may be placed
directly on them.

●​ Nonissuer report changes for Qualified opinions

○​ Opinion → Qualified Opinion
■​ Opinion sentence adds the wording: “Except for the possible effects of the matter as
described in the Basis for Qualified Opinion section…”
●​ Do NOT refer to the scope limitations in the opinion sentence, the limitations will be
addressed in the basis section.
○​ Basis for Opinion → Basis for Qualified Opinion
■​ Add in a paragraph explaining the reasons for inability to obtain evidence.
■​ Sufficient appropriate audit evidence for “qualified” opinion should be claimed.
○​ All other elements are the same as unmodified.

●​ Nonissuer report changes for Disclaimer opinions

○​ Opinion → Disclaimer of Opinion
■​ State that auditors were only “engaged to” audit X company (company was not audited).
■​ Opinion sentence is omitted as an opinion is NOT being given.
■​ “Do not express an opinion… because of significance of matters described in Basis for
Disclaimer of Opinion section, not able to obtain sufficient appropriate audit evidence.”
○​ Basis for Opinion → Basis for Disclaimer of Opinion
■​ Add in a paragraph explaining reasons for inability to obtain evidence.
■​ Removed from section:
●​ Referral to auditors responsibilities section.
●​ Sufficient appropriate audit evidence for opinion (cannot gather).
○​ Auditor’s Responsibilities section
■​ Removed from section:
●​ Reasonable assurance claim
●​ Identify and assess risk of material misstatement claim
 ●​ Examine on a test basis claim
●​ Understand internal control claim
●​ Evaluating policies, estimates, overall presentation, and going concern claim(s)
○​ If engaged to report on Key Audit Matters, KAMs section is OMITTED.

○​

●​ Issuer report changes for Qualified opinions

○​ No heading changes for qualified opinions.
■​ Headings are consistent with unqualified opinions,
■​ Headings change for disclaimer opinions (audit issues).
○​ Opinion on the Financial Statements section
■​ “Except for the effects of the adjustments, if any, … as described below”
●​ Focus on potential adjustments in this sentence, do not focus on scope limitations.
■​ Add paragraph explaining reasons for inability to obtain evidence.
●​ Describe scope limitations here.
○​ Basis for Opinion
■​ “Except as discussed above”

●​ Issuer report changes for Disclaimer opinions

○​ Opinion on the Financial Statements → Disclaimer of Opinion on the Financial Statements
■​ State that auditors were only “engaged to” audit X company (company was not audited).
■​ Opinion sentence is altered/removed.
■​ “As described in the following paragraph, because… not able to obtain sufficient appropriate
audit evidence… do not express an opinion.”
■​ Add paragraph explaining reasons for inability to obtain evidence.
○​ Basis for Opinion → Basis for Disclaimer of Opinion
■​ Only included in section:
●​ Management is responsible for financial statements claim.
●​ Registered with PCAOB and independent claim(s).
○​ Critical Audit Matters section is OMITTED.

○​
●​ Summary of each report changes (nonissuer vs issuer; misstatement vs scope limitation)

○​

○​
 ○​

○​

●​ Notes from MCQs

○​
 M7: Emphasis-of-Matter, Other-Matter, and Explanatory Paragraphs
Emphasis-of-Matter Paragraphs
●​ Definition
○​ Used when referring to a matter that is appropriately presented or disclosed in the financial
statements and is fundamental to the users’ understanding of the financials.
○​ For a nonissuer (private company), this paragraph is included in the report when required by
GAAS, or at the auditor’s discretion.
●​ Reporting Requirements
○​ Use the heading “Emphasis-of-Matter” or other appropriate heading.
■​ Required to use “Emphasis-of-Matter” if KAMs are reported on.
○​ Describe the matter being emphasized and the location of the relevant disclosures from the
financials.
■​ Ex) As discussed in note 5…. there was a fire in ABC company…
○​ Indicate that the auditor’s opinion is not modified with respect to the matter.
●​ Required Uses (“CAP”)
○​ Consistency (Lack of)
■​ To describe a justified change in accounting principle with material effects.
■​ To describe a change in reporting entity that results in financial statements, in effect, that
are of a different entity.
○​ Audit opinion change
■​ Subsequently discovered facts lead to a change in an audit opinion.
○​ Purpose - special purpose frameworks
■​ The financial statements are prepared with a special purpose framework.
●​ Optional Uses
○​ The extent to which the group engagement team is involved in the work of the component
auditor.
○​ The uncertainty related to the outcome of unusually important litigation or regulatory action.
■​ Typically, uncertainties that are properly accounted for are NOT added as paragraphs,
however if the uncertainty is “unusually important,” then an emphasis-of-matter may be
added.
○​ A major catastrophe having significant effects on the financial position.
○​ Significant related party transactions.
○​ Unusually important subsequent events.
○​ Conditions raising substantial doubt as a going concern exist but have been alleviated by plans
and disclosed.
●​ Not appropriate for use to describe any matter already identified as a key audit matter.

Other-Matter Paragraphs
●​ Definition
○​ Used when referring to matters other than those that are presented or disclosed in the
financials.
 ○​ Matters are relevant to:
■​ Users’ understanding of the audit
■​ Auditor’s responsibilities
■​ Audit report
○​ Included in the auditor’s report when required by GAAS or at the auditor’s discretion.
●​ Reporting Requirements
○​ An “other-matter” or other appropriate heading is used.
●​ Required Uses
○​ Restrict Use
■​ Alert in audit that restricts use for certain individuals.
■​ Ex)
●​ Report on compliance included in the auditor's report on the financial statements.
●​ Financial statements prepared using contractual or regulatory basis of accounting
(except when intended for general use).
○​ Subsequently discovered facts that lead to a change in opinion
○​ Comparative financial statements and:
■​ Prior period financials were audited by another firm and the audit report is not reissued.
■​ Current period financials are presented in comparative form with prior period financials that
were compiled or reviewed, or in comparative form with prior period financials that were
not reviewed.
●​ Not appropriate for use to describe any matter already identified as a key audit matter.

●​

Explanatory Paragraphs
●​ Definition
○​ Used for Issuers (public companies).
 ○​ Used to explain certain matters without modifying the opinion.
○​ Included in the report when required by PCAOB auditing standards or at the auditor’s discretion.
●​ Reporting Requirements
○​ Use an appropriate heading.
○​ Describe the matter being emphasized and the location of relevant disclosures about the matter
in the financial statements.
○​ The location of the explanatory paragraph will generally follow the opinion paragraph in an
unqualified report.

●​

General Notes
●​ Lack of Consistency
○​ Unless explicitly stated otherwise, the auditor’s report implies that the financial statements are
comparable between periods (consistency).
○​ Standard report does not explicitly state consistency, it’s implied.
○​ Unless the auditor adds an emphasis-of-matter or explanatory paragraph, the user can assume
consistency (no changes in accounting principles or adjustments to correct material
misstatements from prior periods).
○​ Examples:
■​ Use FIFO in Year 2 and Year 1 → Do not mention that years are consistent (it’s implied in the
report).
■​ Adopt a new accounting principle in the current year → If justified, add emphasis-of-matter
(nonissuer) or explanatory paragraph (issuer).
●​ Lack of Consistency (cont’d)
○​ When evaluating the acceptability of an accounting change, auditors should consider:
1.​ The newly adopted principle is in accordance with the applicable reporting framework.
 2.​ The method of accounting for the change is acceptable.
3.​ The disclosures related to the change are appropriate and adequate.
4.​ The entity has justified that the new principle is preferable.
○​ Auditor is satisfied → Emphasis-of-matter (or explanatory) paragraph should be added.
○​ Auditor is unsatisfied → If change results in material misstatement, opinion may need to be
modified.
●​ Examples of Circumstances that Affect Consistency
○​ The following situations require an emphasis-of-matter or explanatory paragraph.
○​ A change in accounting estimate that is inseparable from a change in principle.
■​ Ex) A change in depreciation method.
○​ Corrections of an error in accounting principle.
■​ Ex) Changing from cash method (non-GAAP) to the accrual method (GAAP).
○​ Correction of a material misstatement in previously issued financial statements.
○​ A change in reporting entity that results in financial statements that are, in effect, those of a
different reporting entity.
○​ If an entity’s financial statements include a significant investment accounted for using the equity
method, the auditor’s evaluation of consistency should include consideration of the investee.
■​ If the investee makes a change in accounting principle that is material to the investing entity,
that change should be described in an emphasis-of-matter or explanatory paragraph.
●​ Effects of an Acceptable Change on the Auditor’s Report
○​ Immaterial → No revision to the report is necessary.
○​ Material → Add emphasis-of-matter or explanatory paragraph.
○​ This paragraph should:
■​ Describe the change in principle and reference the entity’s disclosure.
■​ Be included in the auditor’s report in the period of change in principle and all subsequent
periods until the new principle is applied to all periods presented.

●​ Notes from MCQs

○​
 M8: Reporting With Different Opinions and Other Auditors
●​ Comparative financial statements are financial statements that present more than one year.
○​ Audit reports indicate when comparative financial statements are present.
○​ “as of December 31, 20X1 and 20X0…”
○​ Therefore, only this phrase as well as the date of the auditor's report can be changed from year
to year.

●​ Reporting with different opinions

○​ Auditors must let users know what happened in all financial statement years presented.
○​ You cannot simply ignore a prior period if it's presented.
○​ The auditor’s opinion may differ with respect to different periods.
■​ Ex) Prior year may be unmodified while current year is qualified.
○​ Complete financial statements as well as individual financial statements may have differing
opinions, even within the same year.
■​ 20X2 complete financial statements = Unmodified.
■​ 20X1 Balance sheet = Unmodified.
■​ 20X1 Income statement, changes in stockholders' equity, and cash flows = Disclaimer.
○​ Example as to why a balance sheet may be unmodified while the other statements are
disclaimers:
■​ Auditor was engaged after the beginning of the year and last year is unaudited.
■​ In essence, the auditor is facing a scope limitation as the beginning balances may not be
discernible.
■​ For instance, if the auditor cannot count beginning inventory, then COGS may be
unobtainable.
■​ This example would be relevant for “period of time” financials, such as those that got
disclaimers.
■​ “Point in time” financials, such as the balance sheet, are up to date at that point in time.

●​ Updating (changing) prior opinions

○​ If a modified opinion is given in Year 1, but changes are made to fix the issue in Year 2, the
auditor should update their opinion to unmodified (unqualified) for Year 1 and
○​ Add an emphasis-of-matter or other-matter or explanatory paragraph to the audit report.

●​ Updating (changing) opinion format (only “DORCS” change their mind) (disclose these in paragraph)
○​ Date of the auditor’s previous report
○​ Opinion type previously issued
○​ Reason for the prior opinion
○​ Changes that have occurred
○​ Statement that the ”opinion… is different”

●​ Reporting with Predecessor Auditors

○​ When prior year financials were audited by another auditor, two situations can occur:
1.​ Prior auditor’s report is presented
2.​ Prior auditor’s report is not presented.

○​ Report of predecessor auditor presented

■​ Prior year’s auditor’s report is reissued.
■​ In doing this, previous auditor should:
●​ Read the statements for the current period.
●​ Compare the audited statements with the current period statements.
●​ Obtain a letter from the current auditor asking if they had discovered any changes that
would have material effects on the prior periods financial statements (Letter of
Representation).
●​ Obtain a letter from management asking if there are any previous management
representations that have changed or whether any subsequent events occurred that
require disclosure for the prior period financial statements (Letter of Representation).
■​ After determining whether previous financial statements are still appropriate as issued, the
predecessor auditor should date the report as appropriate:
●​ Unrevised → Use original report date when reissuing previous report.
●​ Revised → Dual date is used in the event that the predecessor auditor revises the
report.

○​ Report of predecessor auditor is NOT reissued

■​ When the current auditor does not present the predecessor auditors report, the current
auditor should express an opinion on the current period financials only and indicate in an
other-matter or explanatory paragraph:
●​ That the financial statements of the prior period were audited by the predecessor
auditor.
●​ The type of opinion expressed by the predecessor auditor, and the reason for any
modifications to the opinion, if applicable.
●​ The nature of any emphasis-of-matter, other-matter, or explanatory paragraph included
in the predecessor’s report.
●​ The date of the predecessor auditor’s report.

○​ Prior period financial statements reviewed or compiled

■​ When the current period financial statements were reviewed or compiled and the report of
the prior period is not reissued, an other-matter or explanatory paragraph should be added
and include:
●​ The service (review or compilation) performed in the prior period
●​ The date of the prior period report
●​ A description of any material modifications described in the report
●​ A statement that the service was less in scope than an audit and does not provide the
basis for expressing an opinion (review).
 ●​ A statement that no opinion or other form of assurance is expressed (compilation).

●​ Other reporting considerations

○​ If the prior period financial statements were not audited, reviewed, or compiled, the auditor
should include an other-matter or explanatory paragraph stating that the auditor did not audit,
review, or compile the prior period statements and that the auditor assumes no responsibility for
them.
○​ When unaudited financial statements are presented with audited financial statements in
comparative form, the unaudited financials should be clearly marked as “unaudited.”
○​ If unaudited financials are presented in comparative form with audited financials in documents
filed with the SEC, such statements should be marked “unaudited,” but should not be referred to
in the auditor's report.

●​ Reporting on Audits of Group Financial Statements

○​ Definitions
■​ Group Engagement Partner (AICPA) or Principal Auditor (PCAOB) → the partner or other
person who is responsible for the engagement and auditor’s report.
■​ Group Financial Statements → financial statements from all components included (i.e.
subsidiaries).
■​ Group Engagement Team → includes the engagement partner, other partners, and staff who
establish audit strategy, communicate with component auditors, perform work, etc.
■​ Component → an entity of business activity that prepares financial information included in
the group financial statements (such as a subsidiary)
■​ Component Auditor → an auditor who performs work on the financial information of a
component that will be used as evidence in the group audit.
●​ An auditor may elect to audit the entire consolidated financial statements and choose
NOT to hire another auditor to audit the components.

■​
○​ Component Auditor
■​ Group engagement team must understand the following for each component auditor:
●​ Whether they are independent and will comply with all relevant ethical requirements;
●​ Their professional competence; and
●​ Their reputation
■​ If the component auditor is not independent or the group engagement team has serious
concerns about any of the matters listed above, the group engagement team should NOT
use the work on the component auditor or make reference to the component auditor in the
auditor’s report.

○​ The group engagement team will determine:

■​ The extent to which the engagement team will be involved in the work of the component
auditor.
■​ Components that are significant or insignificant.
●​ Significant = will need to be audited.
●​ Insignificant = analytical procedures only.
■​ The group auditor mainly focuses on the components that can impact the consolidated
financial statements, as that is where most of the auditor’s effort is spent.

○​ When the group engagement team relies on the work on a component auditor, there are two
options:
1.​ Group engagement team takes full responsibility for the audit of the component.
●​ Do not reference the component auditor.
2.​ Group engagement team and component audit divide responsibility.
●​ Reference the component auditor.

○​ Option 1: Assume full responsibility

■​ No reference to the component auditor should be made in the auditor’s report.
■​ Treat component auditor like staff when assuming responsibility.
■​ In this case, group engagement team is responsible for:
●​ Determining the type of work to be performed on the financial information of the
components.
●​ Reviewing component auditors work.
○​ Option 2: Divide responsibility
■​ Reference the component auditor in the auditor’s report.
■​ In this situation, the group engagement team is not assuming responsibility for the
component auditor’s work.
■​ The component auditor will provide their audit report to the group.
●​ Component auditor must follow GAAS, and PCAOB AS if required, report should be
unrestricted.
■​ Group engagement partner will determine the appropriate opinion based on the group
engagement audit and the audit report given by the component auditor.
 ■​ Even when responsibility is divided, component auditors' independence, ethics, and
reputation should still be evaluated.
○​ Referencing the component auditors
■​ Nonissuers → reference only occurs in the Opinion section.
■​ Issuers → reference occurs in both the Opinion and Basis for Opinion sections.
■​ Magnitude of the portion of the financial statements audited by the component auditor
should be given in the opinion sections.
●​ Ex) “...statements reflect total assets and revenues constituting 20 percent and 22
percent…”
■​ Typically, component auditors are only referred to as “other auditors” when they are
referenced.

●​ Notes from MCQs

○​

M9: Subsequent Events

●​ A subsequent event is an event or transaction that occurs after the balance sheet date but before
the financial statements are issued or available to be issued.
○​ Balance sheet date → December 31, 20X1
○​ Issued financial statements → February 15, 20X2
○​ Subsequent events are the events that occur between December 31 and February 15.
●​ Two categories of subsequent events:
1.​ Recognized subsequent event
2.​ Nonrecognized subsequent event
○​ Management needs to figure out which category the event falls under.
○​ This is based on when the underlying event occurred.

●​ Recognized subsequent event

○​ Events that provide additional information about conditions that existed at the balance sheet
date.
○​ Underlying event existed at or before the balance sheet date.
○​ Adjust records and disclosure required.
○​ These events will often relate to estimated accounts.
○​ Adjusting and disclosing these events ensures financial statements are best represented for the
period.
○​ Example scenario (litigation):
■​ The company is already facing litigation on or before December 31.
■​ The original amount recorded was $150,000 (probable and estimable loss).
■​ On February 5, the company settled the litigation for $200,000.
■​ Therefore, the litigation recorded will be adjusted and disclosed to show the true amount.
■​ The financial statements issued on February 15 will now reflect this event.
 ○​ Example scenario (uncollectible receivables):
■​ A customer notifies your company that the customer is going bankrupt on January 15.
■​ Because the company already had receivables/uncollectibles recorded before December 15,
this is a recognized subsequent event.
■​ The financials will be updated and the event will be disclosed for the February 15 issuance.

●​ Nonrecognized subsequent event

○​ Events that provide information about conditions that occurred after the balance sheet date.
○​ Underlying event occurred after the balance sheet date.
○​ Disclosure only (NO adjustments).
○​ Examples:
■​ Sale of capital stock
■​ Business combination
■​ Settlement of litigation that arose AFTER the balance sheet date
■​ Natural disaster that resulted in loss of building or inventory
○​ Example scenario:
■​ Balance sheet date → December 31, 20X1
■​ Fire occurs → January 5, 20X2
■​ This event occurred after the balance sheet date, so only disclosure should be considered for
Feb. 15 issuance.

●​ Management's Responsibility for Subsequent Events

○​ Subsequent events should be evaluated through either:
■​ The date the financial statements are issued or widely distributed (issuers).
■​ The date the financial statements are available to be issued or in a form and format that
complies with GAAP and all approvals for issuance have been obtained (nonissuers).
○​ When an entity reissues or revises financial statements, the entity generally should NOT
recognize subsequent events that occurred between the date the financial statements were
issued or available to be issued.

●​ Auditor’s Responsibility for Subsequent Events

○​ Understand and evaluate subsequent events (“PRIME”)
■​ Post Balance Sheet Transactions
●​ Changes in stock or long-term debt after year end.
■​ Representation Letter → obtain a letter from management asking if any events occurred
during the subsequent event period that requires adjustment or disclosure.
■​ Inquiry → inquire the client’s legal counsel and management about whether any subsequent
events have occurred.
●​ Status of litigation, new commitments, unusual transactions, etc.
■​ Minutes → obtain and review the minutes of stockholders, directors, and other committee
meetings during the subsequent period.
 ■​ Examine → examine the most recent interim financial statements and compare them with
financials under audit.

○​ The auditor has an active responsibility to evaluate subsequent events during the period
between the date of the financial statements and the date of the auditor’s report.
■​ Balance sheet date → December 31, 20X1
■​ Auditor’s report date → February 10, 20X2
■​ Auditor is responsible for subsequent event evaluation from December 31 until February 10.
●​ PRIME procedures through this date.
○​ Auditor responsibility AFTER the original auditor’s report date occurs if:
■​ Auditor’s report is included in an exempt offering document and the auditor is involved.
●​ Date extended through the distribution, circulation, or submission of the document.
■​ Auditor’s report is included in a registration statement.
●​ Date extended through the date of or shortly before the date of the registration
statement.

●​ Auditor Action - After Report Issuance

○​ If more material information becomes available after an auditor report has been issued, the
auditor will indeed to:
■​ Investigate if the information is reliable.
■​ If it existed at the report date and would have affected the auditor’s report.
○​ Key terms to look for when an auditor needs to investigate after report date:
■​ “Information existed at the report date” or
■​ “New information that existed for the year under audit”
○​ Auditor is not responsible for information that did not exist at the report date.
■​ Ex) litigation that settles after the report date.
○​ If the auditor determines that this information is something the auditor should have known
about when the report was issued, the auditor should:
■​ Determine if there are individuals relying on, or likely to rely on, the financial statements.
■​ Discuss the matter with management or those charged with governance.
■​ Advise the client to immediately disclose the new information and its impact on the
financials.
■​ Disclosure can be done by:
●​ Advising the client to reissue revised financial statements along with a new audit
report, and describe reasons for revision;
●​ Advising the client to make necessary disclosures and revision to any financials; or
●​ If effect cannot be determined on a timely basis, provide notification that the financials
and auditor’s report should not be relied upon.
○​ If adjustments or disclosures are made by the client after the original auditor’s report date, the
auditor will need to perform additional procedures.
■​ As a result, the auditor may either:
 ■​
○​ If a client refuses to take action to address materially affected information, the auditor should
notify each member of the board of directors.
○​ If even the board of directors does not take action, perform the following (“DAR them to fix it”):
■​ Disassociate → notify the client that the auditor’s report must no longer be used for their
financials.
■​ Alert agencies → notify any applicable regulatory agencies that the auditor’s report should
no longer be relied on.
■​ Relying parties → notify persons known to or likely to be relying on the financials that the
auditor’s report should no longer be relied upon.

●​ Notes from MCQs

○​
 M10: Other Information and Supplementary Information
Other Information
●​ Definition
○​ Financial or nonfinancial information (other than the statements and the auditor’s report)
included in the annual report.
○​ Not required by a standard setter.
●​ Examples of other information include:
○​ A report by management or those charged with governance
○​ Financial summaries or highlights
○​ Employment data
○​ Financial ratios
○​ Selected quarterly data
●​ Other information does NOT include:
○​ Press releases or cover letters accompanying the document containing the audited financial
statements and auditor’s report.
○​ Information contained in analyst briefings.
○​ Information contained on the entity's website.
●​ Auditor’s responsibilities for other information:
○​ Read the other information.
○​ Consider any material inconsistencies between the other information and the audited financial
statements.
■​ If other information shows $20mill in revenue, but audited financials show $5mill, there are
issues.
■​ In this scenario, determine if the financials or other information needs to be revised.
■​ Auditor should request management to correct the material inconsistency.
●​ Material inconsistencies: Auditor’s action
○​ Upon identification of material inconsistencies between the audited financial statements and the
other information, the auditors actions depends on what information requires revision:
■​ Audited financials need to be revised, but management refuses → auditor should modify
opinion.
■​ Other information needs to be revised, but management refuses → communicate to those
charged with governance and:
●​ Consider the implications for the auditor’s report;
●​ Withhold the use of the report; or
●​ Withdraw from the engagement and consult with legal counsel.
●​ Material misstatement of fact: Auditor’s action
○​ Other information may include a misstatement that is unrelated to the financial statement data.
■​ Ex) Other information states a company introduced two new products, when this isn't true.
○​ If the auditor becomes aware of a material misstatement of fact, do the following:
■​ Discuss the matter with management
 ■​ If management refuses to take corrective action, request that management consult with
legal counsel.
■​ If after consultation with the third party, and the auditor still believes there is a
misstatement, notify those charged with governance.
○​ Because opinions relate to the fairness of the basic financial statements, companies may still get
unmodified/unqualified opinions even if there are material misstatements of fact in other
information.
●​ Reporting other information
○​ Nonissuer → Report in a separate section (location not specified).
○​ Issuer → Required when issues with information reported (typically located after opinion
paragraph).
■​ Not required to include an explanatory paragraph when other information is included in a
document with the auditor’s report.
■​ However, the auditor may choose to include an explanatory paragraph within the auditor’s
report disclaiming an opinion on the other information.
○​ Heading should be “Other Information [Included in the Annual Report]”
○​ Auditor’s responsibilities over other information should be stated in the paragraph.

Supplementary Information
●​ Definition
○​ Information presented outside of the basic financial statements that may be presented in a
document containing the audited financial statements or separate from the financial statements.
○​ An auditor may be engaged to provide an opinion on this type of information.
○​ The auditor is not providing an opinion on information unrelated to the financial statements.
○​ The auditor has two objectives:
1.​ To evaluate the presentation of the supplementary information as a whole.
2.​ To provide an opinion on whether the supplementary information is fairly stated in all
material respects in relation to the financial statements.
●​ Audit procedures
○​ The auditor should perform the following using the same materiality level used for financial
audit:
■​ Inquire management regarding the purpose of supplementary information and its
preparation.
■​ Obtain an understanding of the methods used and changes of methods.
■​ Inquire regarding any significant assumptions.
■​ Compare and reconcile the information to the audited financial statements and underlying
accounting records.
■​ Evaluate completeness and appropriateness.
■​ Determine whether the form and content complies with applicable criteria.
■​ Obtain written representations from management regarding the information.
●​ Reporting for Nonissuers
○​ May be presented in either a:
■​ Separate section in the auditor’s report with the heading “Supplementary Information” OR
■​ Separate report
○​ Regardless of method of reporting, the supplementary information paragraph should include:
■​ Identify supplemental information;
■​ Describe procedures performed; and
■​ Provide the opinion.
○​ If a material misstatement is present, and management refuses to revise the supplementary
information:
■​ Modify the opinion on the information (qualified or adverse) and describe the misstatement.
■​ If a separate report is being issued, withhold the report.
○​ Effects of Modifications to the Audit Report on the FInancial Statements:

■​

●​ Reporting for Issuers

○​ Unless prescribed by regulatory requirements, supplementary information may be presented in
either a:
■​ Explanatory paragraph in the auditor’s report on the financial statements, OR
■​ Separate report
○​ Regardless of method of reporting, the supplementary information paragraph should include:
■​ Identify supplemental information;
■​ Describe procedures performed; and
■​ Provide the opinion.
○​ If a material misstatement is present, the auditor should:
■​ Describe the misstatement in the auditor’s report on the supplemental information; and
■​ Express a qualified or adverse opinion on the supplemental information.
○​ Effects of Modifications to the Audit Report on the FInancial Statements:
 ■​

Required Supplementary Information

●​ Definition
○​ Information that a designated account standard setter (e.g., GASB, SEC) requires to accompany
the basic financial statements.
○​ Generally, the opinion on the basic financial statements does NOT cover the required
supplementary information.
○​ The auditor’s responsibility for required supplementary information is to perform limited
procedures on the information.

●​ Nonissuers
○​ The auditor of a nonissuer should add a separate section to the auditor’s report with the
heading “Required Supplementary Information” to explain the following, as applicable:
■​ No issues → The required supplementary information is included, and the auditor has
applied the required procedures.
■​ Issues:
●​ All or some of the required supplementary information is omitted;
●​ Some required supplementary information is missing and some is presented;
●​ The auditor has identified material departures from the guidelines;
●​ The auditor is not able to complete the required procedures or there are unresolved
doubts;
■​ The separate section should state that the required supplementary information is the
responsibility of management, and the auditor does NOT express an opinion on such
information.
○​ For nonissuers, whenever required supplementary information is required to be presented, a
separate section is added to the audit report, regardless of whether there are issues or not with
the information.

●​ Issuers
○​ PCAOB standards do not require the auditor to add an explanatory paragraph to the audited
financial statements or refer to the required supplementary information unless one of the
following is applicable:
 ■​ The required information is omitted;
■​ There are material departures from the guidelines;
■​ The auditor is unable to complete prescribed procedures;
■​ There are unresolved doubts about conformance of required supplementary information.
○​ Essentially, there needs to be an issue with the required supplementary information.

Multiple-Choice Tips

●​ Notes from MCQs

○​ When the audit engagement includes reporting on selected financial data, the report prepared
by the auditor should be limited to the data that was obtained from the financial statements
○​ When information accompanying the basic financial statements has been subjected to auditing
procedures, the auditor may include in the auditor's report an opinion that the information is
fairly stated in all material respects in relation to the financial statements as a whole. This
statement would appear in a separate section with the heading "Supplementary Information" or
explanatory paragraph for a nonissuer or issuer, respectively. The information may be included in
a separate report instead of as a separate section in the auditor's report on the financial
statements.

M11: Special Purpose Frameworks

●​ Auditors evaluate financial statements based on the framework selected by management, such as
GAAP.
●​ Nonissuers can prepare their financial statements using special purpose frameworks.
●​ Special purpose frameworks are financial reporting frameworks other than GAAP, such as the
following:
○​ Cash Basis → Used to record cash receipts and disbursements
 ○​ Tax Basis → Used to file income tax returns
○​ Regulatory Basis → Used to comply with the requirements of regulatory agencies in certain
jurisdictions
○​ Regulatory Basis General Use → Dual opinion
○​ Contractual Basis → Used to comply with an agreement between an entity and third party
○​ Other Basis → Used to define a set of logical, reasonable criteria that is applied to material items

●​
○​ Description of purpose → goes in the management’s responsibilities section.

●​ Differences from standard auditor’s reports

○​ Non-GAAP financial statement titles should be used for special purpose frameworks.
■​ Instead of “Balance Sheet” → “Balance Sheet-Cash Basis”
■​ Instead of “Income Statement” → “Statement of Income-Regulatory Basis”
■​ Etc…
○​ When management has a choice of financial reporting framework, the management's
responsibility section should make reference to its responsibility for determining the framework
as acceptable.

○​ If required, the report should include an emphasis-of-matter paragraph that:

■​ Indicates that the financial statements were prepared in accordance with the applicable
framework.
■​ Refers to the note in the financial statements that describes the framework.
■​ States that the framework is a basis of accounting other than GAAP.
■​ States that the financial statements may not be suitable for any purpose other than the
stated purpose (when the purpose is required to be described).
 ○​ If required, the report should include an other-matter paragraph that restricts the use:
■​ “Our report is intended solely for the use of the board of directors and management…”
■​ “... should not be used by anyone other than these specific parties…”

○​ If the auditor is required by law or regulation to use a specific layout, form, or wording, the
auditor’s report should only refer to GAAS if the report includes all the minimum report
requirements of GAAS.
■​ If the layout, form, or wording is not acceptable, the auditor should reword the form or
attach a correctly worded separate report.

○​ Examples of all these differences are given in the lecture/textbook.

●​ Notes from MCQs

○​ Special purpose frameworks may also be known as “other comprehensive basis of accounting
(OCBOA)”.
○​ Financial statements prepared under a special framework with unacceptable statement titles will
require a qualified opinion with a basis for modification paragraph.
Overall Review Notes

●​ Wording
○​ Qualified - Scope
■​ “Except for the possible effects of the matter described in the Basis for
Qualified Opinion section…”
○​ Disclaimer of Opinion
■​ Because of significant matters described in Basis for Disclaimer of
Opinion… not been able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion
○​ Adverse Opinion
■​ “Do no present fairly”
●​ Issuer reports
○​ References PCAOB and GAAP
●​ Nonissuer reports
●​ Predecessor auditor - report presented in comparative form
○​ Obtain rep letters from management/successor auditor
●​ Justified change in accounting principle
○​ If material, include an “Emphasis-of-Matter” paragraph
○​ If immaterial, unmodified opinion, with no mention
○​