Question

1. What is accounting

2. What is auditing

3. What is attestation

4. The roles SEC, PCAOB, AICPA and ASB

5. The differences between operational audit, compliance audit, financial statements audit

6. The difference between information and business risk

7. The AICPA principles and their subcategories

8. What are the SASs and their purpose

9. The difference between S-1, 8-K, 10-K, and 10-Q

10. If an auditor of a public company cannot find guidance issued by the PCAOB, where should (s)he look for guidance

11. Possible organizational structures for CPA firms

12. The difference between compilation, review, and audit services

13. The audit report parts

14. The purpose and characteristics of each paragraph on the audit report

15. When a standard unmodified report can be issued

16. What is going to happened if there is a scope limitation

17. What is the difference between standard unqualified report and combined report on financial statements and internal controls

18. When should an unqualified report with explanatory paragraph should be issued

19. When should an unqualified report with modified wording should be issued

20. What are the conditions that require departure form unqualified opinion

Answer 1

Accounting is the recording of financial transactions along with storing, sorting, retrieving, summarizing, and presenting the results in various reports and analyses. Accounting is also a field of study and profession dedicated to carrying out those tasks.

Audit is performed to ascertain the validity and reliability of information. Examination of books and accounts with supporting vouchers and documents to detect and prevent error, fraud is the primary function of auditing.

External auditors come in from outside the organization to examine accounting and financial records and provide an independent opinion on these records. Law requires that all public companies have their financial statements externally audited.

Internal auditors work for the organization as internal employees to examine records and help improve internal processes such as operations, internal controls, risk management, and governance.

The Public Company Accounting Oversight Board (PCAOB) maintains external auditing standards for public companies (issuers) registered with the Securities and Exchange Commission (SEC).

As of 2012, PCAOB has 15 permanent standards approved by the SEC and a number of interim standards that reflect generally accepted auditing standards, as described in standards issued by the Auditing Standards Board (ASB), which is part of the American Institute of CPAs (AICPA).

The ASB also issues Statements on Auditing Standards (SASs) that apply to preparing and releasing audit reports for nonissuers (companies not required to register with the SEC). AICPA members who audit a nonissuer are required by the AICPA Code of Professional Conduct to comply with these standards. As of 2012, there are more than 60 active standards.

For internal auditing, the Institute of Internal Auditors provides a conceptual framework called the International Professional Practices Framework (IPPF) that provides guidance for internal audits. Some of the guidance is mandatory, while others are considered strongly recommended, but not required by law.

Auditors have the option of choosing among four different types of auditor opinion reports. An auditor opinion report is a letter that auditors attach to the statutory audit report that reflects their opinion of the audit. The four types of auditor opinions are:

1. Unqualified opinion-clean report
2. Qualified opinion-qualified report
3. Disclaimer of opinion-disclaimer report
4. Adverse opinion-adverse audit report

Unqualified Opinion – Clean Report

An unqualified opinion is considered a clean report. This is the type of report that auditors give most often. This is also the type of report that most companies expect to receive. An unqualified opinion doesn’t have any kind of adverse comments and it doesn’t include any disclaimers about any clauses or the audit process. This type of report indicates that the auditors are satisfied with the company’s financial reporting. The auditor believes that the company’s operations are in good compliance with governance principles and applicable laws. The company, the auditors, the investors and the public perceive such a report to be free from material misstatements.

Qualified Opinion-Qualified Report

When an auditor isn’t confident about any specific process or transaction that prevents them from issuing an unqualified, or clean, report, the auditor may choose to issue a qualified opinion. Investors don’t find qualified opinions acceptable, as they project a negative opinion about a company’s financial status. Auditors write up a qualified opinion in much the same way as an unqualified opinion, with the exception that they state the reasons they’re not able to present an unqualified opinion.

A common for reason for auditors issuing a qualified opinion is that the company didn’t present its records with GAAP.

Disclaimer of Opinion-Disclaimer Report

When an auditor issues a disclaimer of opinion report, it means that they are distancing themselves from providing any opinion at all related to the financial statements. Some of the reasons that auditors may issue a disclaimer of opinion are because they felt like the company limited their ability to conduct a thorough audit or they couldn’t get satisfactory explanations for their questions. They may not have been able to decipher the correct nature of some transactions or to secure enough evidence to support good financial reporting. Auditors that aren’t allowed an opportunity to observe operational procedures or to review particular procedures may feel like they’re not able to express a definite opinion, so they feel a disclaimer is necessary and in order. The general consensus is that a disclaimer of opinion constitutes a very harsh stance. As a result, it creates an adverse image of the company.

Adverse Opinion-Adverse Audit Report

The final type of audit opinion is an adverse opinion. Auditors who aren’t at all satisfied with the financial statements or who discover a high level of material misstatements or irregularities know that this creates a situation in which investors and the government will mistrust the company’s financial reports.

An auditor’s adverse opinion is a big red flag. An adverse audit report usually indicates that financial reports contain gross misstatements and have the potential for fraud. Adverse opinions send out a high alert that the company’s records haven’t been prepared according to GAAP. Financial institutions and investors take this opinion seriously and will reject doing any kind of business with the company.

Auditors use all types of qualified reports to alert the public as to the transparency, reliability and accountability of companies. Auditor opinions place pressure on companies to change their financial reporting processes so that they’re clear and accurate. Companies, investors and the public highly value unqualified reports.

Attestation is the act of witnessing the signing of a formal document and then also signing it to verify that it was properly signed by those bound by its contents. Attestation is a legal acknowledgement of the authenticity of a document and a verification that proper processes were followed.