Compliance audit

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  • #1553344
    adsfasf
    Participant

    In performing a financial statement audit in accordance with Government Auditing Standards, an auditor is required to report on the entity’s compliance with laws and regulations. This report should:

    a.State that the audit should be planned to obtain reasonable assurance about whether noncompliance could have a material effect on the entity’s programs
    b.Describe the laws and regulations that the entity must comply with.
    c.Provide an opinion on overall compliance with laws and regulations.
    d.Provide negative assurance of the entity’s legal compliance.

    Explanation
    Choice “a” is correct. Basic elements of a report on compliance include a statement that the audit should be planned to obtain reasonable assurance about whether noncompliance could have a material effect on the programs audited.
    Choice “b” is incorrect. It is not necessary to describe the laws and regulations with which the entity must comply.
    Choice “c” is incorrect. The objective of the audit of the financial statements is not to provide an opinion on overall compliance with laws and regulations.
    Choice “d” is incorrect. The report should specifically state that a compliance audit does not provide a legal determination of the entity’s compliance.

    Why isn’t C the correct answer? Can anyone help me?

    Thanks!

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  • #1553529
    Tscape16
    Participant

    You're writing an opinion the fairness of the company's financials, not their compliance with laws and regulations. They could be non-compliant with something outside the scope of your audit. I understand your confusion towards C, but A is the best answer.

    Should their be an issue, you might include as an other matters paragraph, but if it's immaterial you'd typically just bring it up with management. If they don't fix the issue or seem to care, then you should reconsider that relationship.

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    #1553562
    adsfasf
    Participant

    @Tscape16

    Thank you so much for your reply. However, I stil have some problem with this question. Could you help me? So when should an auditor express an opinion about its compliance with regulation? I incorrectly chose C because the question mentioned that the auditor is required to report its compliance with laws and regulations. If the auditor is required to report the compliance, why doesn't he express the opinion?

    In addition, AU 935 says auditor's objectives are to report whether the entity compile in all material respects with applicable compliance requirements (at the level specified in the governmental audit requirement)

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    #1553568
    adsfasf
    Participant

    So do you mean that whenever the auditor issue the audit report, he does not even need to express an unmodified opinion upon the company's compliance with laws and regulations? He can simply not to write them in the report? Sorry, I am so confused about whether to express this opinion in the report or not, because in my text book(Wiley), the book does express an opinion about the compliance in its sample report.. i am so confused

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    #1553586
    adsfasf
    Participant

    Is Option C not correct because the auditor can issue “disclaimer of opinion” on it? Am I right?

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    #1553700
    Anonymous
    Inactive

    Can you post a link to the sample report from Wiley? I wonder if the sample you are looking at is actually a Compliance Audit, not a Financial Statement Audit?

    The standard report format goes like this:

    Unmodified Opinions on Basic Financial Statements Accompanied by Required Supplementary Information
    and Other Information—State or Local Governmental Entity

    Independent Auditor’s Report

    [Appropriate Addressee]

    Report on the Financial Statements

    We have audited the accompanying financial statements of the governmental activities…

    Management’s Responsibility for the Financial Statements

    Management is responsible for the preparation and fair presentation of these financial statements…

    Auditor’s Responsibility

    Our responsibility is to express opinions on these financial statements based on our audit. We conducted
    our audit in accordance with auditing standards generally accepted in the United States of America and
    the standards applicable to financial audits contained in Government Auditing Standards, issued by
    the Comptroller General of the United States. Those standards require that we plan and perform the audit
    to obtain reasonable assurance about whether the financial statements are free from material misstatement.
    An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
    the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment
    of the risks of material misstatement of the financial statements, whether due to fraud or error.

    In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation
    and fair presentation of the financial statements in order to design audit procedures that are appropriate
    in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
    entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating
    the appropriateness of accounting policies used and the reasonableness of significant accounting estimates
    made by management, as well as evaluating the overall presentation of the financial statements.

    We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
    our audit opinions.

    Opinions

    In our opinion, the financial statements referred to above present fairly, in all material respects, the respective
    financial position of the governmental activities…

    Other Matters – Required Supplementary Information

    Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis and budgetary
    comparison information on pages XX–XX and XX–XX be presented to supplement…

    Other Reporting Required by Government Auditing Standards

    In accordance with Government Auditing Standards, we have also issued our report dated [date of report]
    on our consideration of the City of Example's internal control over financial reporting and on our
    tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and
    other matters. The purpose of that report is to describe the scope of our testing of internal control
    over financial reporting and compliance and the results of that testing, and not to provide an opinion on
    internal control over financial reporting or on compliance. That report is an integral part of an audit
    performed in accordance with Government Auditing Standards in considering City of Example’s internal
    control over financial reporting and compliance.

    [Auditor’s signature]
    [Auditor’s city and state]
    [Date of the auditor’s report]

    https://www.aicpa.org/interestareas/governmentalauditquality/resources/illustrativeauditorsreports/downloadabledocuments/illustrativegovernmentauditingstandardsreports2016.pdf
    Example 4-1

    So, the required reporting on compliance is in the “Other Reporting Required by Government Auditing Standards” paragraph. An opinion on compliance is not issued. But the auditor does report on it. In order to issue an opinion on compliance, you would have to do far more testing than is required for a financial statement audit. That's a completely different engagement.

    #1553745
    adsfasf
    Participant

    https://books.google.com/books?id=xn8JDgAAQBAJ&pg=PA368&lpg=PA368&dq=%22the+auditor+may+issue+(1)+a+separate+report+on+compliance+only%22&source=bl&ots=iagQOWMMQj&sig=rf8OBa35CjE14SRq-lhvd9GhYiQ&hl=en&sa=X&ved=0ahUKEwietank5ejTAhUF5IMKHVavBKgQ6AEIIjAA#v=onepage&q=%22the%20auditor%20may%20issue%20(1)%20a%20separate%20report%20on%20compliance%20only%22&f=false

    Here is the link from Google's preview.

    This report is on Wiley's 2017 study test book page 368-369. Wiley express an opinion on the compliance and it states that “AU 935: auditor's objectives are to report whether the entity compile in all material respects with applicable compliance requirements (at the level specified in the governmental audit requirement)”

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