of external audit in enhancing the financial statementsI need you to write term paper (11 pages
minimum), and it must be zero plagiarism.The topic is the importance of external
audit in enhancing the financial statements.***The outline is ready to follow.Also, I need you to add to the outline and
explain the following:1- What is the implications for users and
the auditors?2- Does the new audit report support the
external audit or auditor in enhancing the financial statements?3- How does it impact it? (the impact of
it)(the attached files will help you to answer
them).4- Also, I need you to use few samples to
the paper.In addition, (create contents table to
number the contents according to the page number)***You must give your reaction, and your
opinion.- At least (11) full pages.-Font size 12.-Single line spacing.-Time roman.-APA style****Again, it must be zero plagiarism.The 11 pages must not include the table of
contents, cover, samples, and reference pages.I have attached the new audit report, the
outline, and the contents table.The outline just has an idea to what you
are going to do.
Unformatted Attachment Preview
Auditing & Assurance Services
Messier, Glover & Prawitt
Update No. 1
SSAE No. 18
Key Issues from recent Exposure Drafts:
o Changes to management assertion categories
o Changes to ASB revised audit report
On June 1, 2017, the PCAOB passed a new auditing standard titled The Auditor’s Report on an
Audit of Financial Statements when the Auditor Expresses an Unqualified Opinion (AS 3101)
with a phased approach for the effective date. The essential elements of these changes are already
included in the 10th edition of the Messier/Glover/Prawitt auditing textbook, even though the 10th
edition was published before the final PCAOB standard. A brief section at the end of Chapter 18
discusses the basics of the new IAASB reporting standard and indicates that similar changes would
likely be coming to U.S. standards. We are providing this update for clarity and ease of student
understanding. The new PCAOB standard is effective for audits of fiscal years ending on or after
December 15, 2017, except for those requirements related to critical audit matters (known in the
profession as CAMs). The requirements related to critical audit matters will be effective for
audits of fiscal years ending on or after June 30, 2019, for large accelerated filers; and for fiscal
years ending on or after December 15, 2020, for all other companies to which the requirements
The standard introduces a number of important changes to the auditors unqualified opinion,
including the following:
A requirement to communicate critical audit matters. Similar to key audit matters
highlighted in IAASB standards, critical audit matters are matters communicated or
required to be communicated to the audit committee and that: (1) relate to accounts or
disclosures that are material to the financial statements; and (2) involved especially
challenging, subjective, or complex auditor judgment.
A disclosure of auditor tenure based on the year in which the auditor began serving
consecutively as the companys auditor.
Other improvements to the auditors report to clarify the auditors role and responsibilities,
and make the auditors report easier to read include:
o A statement that the auditor is required to be independent;
o Addressing the auditor’s report to the company’s shareholders and board of directors or
o Specifically indicating the distinct responsibilities of management and the auditor with
respect to the financial statements;
o Changing standardized language in the auditor’s report, including adding the phrase
whether due to error or fraud when describing the auditor’s responsibility under
PCAOB standards to obtain reasonable assurance about whether the financial
statements are free of material misstatements; and
o Placing the opinion in the first section of the auditor’s report and adding titles to each
section of the audit report.
We present the new audit report for EarthWear Clothiers based on PCAOB standards in the pages
that follow. This report replaces the audit report shown in Exhibit 1-1, the EarthWear Clothiers
insert, and Exhibit 18-1 of the text.
Report of Independent Registered Public Accounting Firm
To the shareholders and the board of directors of EarthWear Company
Opinion on the Financial Statements
We have audited the consolidated balance sheets of EarthWear Clothiers (the Company) as of
December 31, 2018 and 2017, and the related consolidated statements of operations, stockholders’
equity, and cash flows for each of the three years in the period ended December 31, 2018, and the
related notes (collectively referred to as the financial statements). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2018, in conformity with U.S. generally accepted
Basis for Opinion
These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on the Company’s financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of
the financial statements that was communicated or required to be communicated to the audit
committee and that: (1) relates to accounts or disclosures that are material to the financial
statements and (2) involved especially challenging, subjective, or complex audit judgments. The
communication of critical audit matters does not alter in any way our opinion on the financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing separate opinions on the critical audit matter or on the accounts or disclosures to which
Critical Audit Matter
IT systems and controls
We conducted detailed end-to-end walkthroughs of the
finance processes, utilizing our understanding from the
We place a high level of reliance on the prior year to reassess the design effectiveness of the key
Companys IT systems and key internal internal controls and to identify changes.
controls. As a result, a significant proportion of
our audit effort was conducted in this area at We then conducted testing of the operating
local, regional and international levels and at effectiveness of these controls to obtain evidence that
the companys shared service centers. Our they operated throughout the year.
focus was on understanding and validating the
impacts of key changes being made to the In response to the changes and control enhancements
made during the year, we performed the following:
reviewed the design of the standard controls to
As indicated in EarthWears financial
ensure they mitigated the relevant financial
statement disclosures, the Company has
reporting risks and testing samples from the periods
continued to devote considerable resources to
immediately prior to and post implementation;
the development of key business and related IT where systems changed during the year, tested IT
controls to ensure a robust system of internal
general controls and data migration processes;
tested the enhanced user access management
tested controls and performed additional substantive
procedures of key general ledger account
reconciliations and manual journals.
We also have audited, in accordance with the standards of the PCAOB, EarthWear Clothier’s
internal control over financial reporting as of December 31, 2018, based on the criteria established
in Internal ControlIntegrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated February 15, 2019
expressed an unqualified opinion.
Williams & Adams, CPAs
We have served as the Company’s auditor since 1975.
February 15, 2019
The following section replaces the Revenue Recognition section presented on pages 341-342 of
the text. This update is provided in view of the FASBs new revenue recognition standard, ASC606. Public entities are required to apply the revenue standard for annual reporting periods
beginning after December 15, 2017.
[LO-1] Revenue recognition is reviewed at the beginning of this chapter because knowledge of
this underlying concept is fundamental to auditing the revenue process. Additionally, revenue must
be recognized in conformity with GAAP in order for an auditor to issue an unqualified opinion.
FASB ASC 606 Revenue from contracts with customers defines revenues as
inflows or other enhancements of assets of an entity or settlements of its liabilities (or a
combination of both) from delivery or producing goods, rendering services, or other
activities that constitute the entitys major or central operations (606-10-20).
The accounting standard for revenue (ASC 606) contains principles that an entity should apply to
determine the measurement of revenue and timing of when it is recognized. The underlying
principle is that an entity recognizes revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services (606-05-3). The revenue standard applies to all contracts
with customers with some exceptions (e.g., lease contracts; insurance contracts; financial
instruments; and nonmonetary exchanges between entities in the same line of business to facilitate
sales to customers).
The accounting standard requires the entity to follow a five-step approach (606-05-4):
Step 1: Identify the contract(s) with a customer where a contract is an agreement between two or
more parties that creates enforceable rights and obligations.
Step 2: Identify the performance obligations in the contract where a contract includes promises to
transfer goods or services to a customer.
Step 3: Determine the transaction price where the transaction price is the amount of consideration
in a contract to which an entity expects to be entitled in exchange for transferring promised goods
or services to a customer.
Step 4: Allocate the transaction price to the performance obligations in the contract. An entity
typically allocates the transaction price to each performance obligation on the basis of the relative
standalone selling prices of each distinct good or service promised in the contract.
Step 5: Recognize revenue when the entity satisfies a performance obligation. An entity
recognizes revenue when it satisfies a performance obligation by transferring a promised good or
service to a customer (which is when the customer obtains control of that good or service).
Revenue recognition continues to pose a significant audit risk to auditors, and because of
inconsistent application of revenue recognition approaches across companies and over time, has
resulted in questions about the integrity of the financial reporting process. As we noted in Chapter
4, because of its highly sensitive and sometimes complex nature, the auditor should presume that
there is a risk of material misstatement due to fraud relating to revenue recognition.
The auditor should be alert for the following activities that are fraud risks related to revenue
Side agreements: arrangements that are used to alter the terms and conditions of recorded
sales in order to entice customers to accept delivery of goods and services.
Channel stuffing (also known as trade loading): a marketing practice that suppliers
sometimes use to boost sales by inducing distributors to buy substantially more inventory
than they can promptly resell.
Related-party transactions: transactions that are not considered arms-length. Such
transactions require special consideration because related parties can be difficult to
identify. Related-party transactions also may pose significant substance over form
Bill and hold sales (also called parked inventory schemes): sales where the customer agrees
to purchase the goods but the seller retains physical possession until the customer requests
shipments. Unless certain conditions are met, such an arrangement does not qualify as a
sale because delivery has not occurred.
For most entities, the revenue recognition process occurs over a short period of time (days or
weeks), but in certain industries, such as construction or defense, the revenue recognition process
may extend over a period of years.
An entitys revenue recognition policies affect how transactions are processed and how they are
accounted for in the financial statements. Thus, an auditor must understand the FASBs new
revenue recognition standard as well as an entitys specific revenue recognition policies in order
to effectively audit the revenue process.
In August of 2016, the FASB issued ASU 2016-15, Presentation of Financial StatementsGoing
Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entitys Ability to Continue as
a Going Concern. Messier/Glover/Prawitt 10e discusses this new standard in Chapter 17, noting
that under this new standard management now has to go first in assessing a companys ability
to continue in existence as a going concern. However, at the time of writing, auditing standards
had not changed in response to ASU 2016-15. In this update, we outline revisions to the auditing
standards relating to going concern since the printing of 10e for student understanding and clarity.
In February of 2017, the AICPAs Auditing Standards Board issued SAS No. 132, The Auditors
Consideration of an Entitys Ability to Continue as a Going Concern. This new SAS requires
auditors of non-SEC registrants to assess managements going concern evaluation and related
disclosures and to continue to provide a separate, independent assessment of the companys goingconcern status. In addition, SAS No. 132 clarifies and changes the auditors responsibilities in
several important ways:
The auditor is required to make separate assessments about (1) the appropriateness of
managements use of the going concern basis of accounting, and (2) whether substantial
doubt exists about an entitys ability to continue as a going concern for a reasonable period
of time. In other words, if a company is in sufficient financial distress, it may be appropriate
for management to use a liquidation basis of accounting, rather than a basis of accounting
that assumes the company will continue as a going concern. An auditor is to assess this
issue in addition to determining whether a going concern explanatory paragraph should be
added to the auditors report.
If managements plans to overcome substantial doubt about its ability to continue as a
going concern including receiving financial support from third parties, the auditor must
obtain evidence of both the intent and the ability of the third party to provide support, either
through written evidence of commitment or direct confirmation with the third party.
The auditor may choose to include an emphasis-of-matter paragraph to highlight liquidity
concerns in close-call situations when a conclusion is reached that managements plans
alleviate substantial doubt, but the auditor believes the decision is a close one.
In reviewing interim (e.g. quarterly) financial information, the auditor is required, under
certain circumstances, to apply review procedures specifically targeted at the going
concern question if the auditor becomes aware of conditions or events that might indicate
the entitys inability to continue as a going concern. If a substantial doubt conclusion is
reached during the interim period, the auditor will now include a going concern emphasisof-matter paragraph in the review report, making the interim review report more consistent
with the annual audit report in this regard.
The standard refers the auditor to the applicable reporting framework (e.g. the FASBs
accounting standards) to determine the definition of substantial doubt and the definition of
the reasonable period of time look-forward period. In the case of U.S. GAAP, substantial
doubt is defined as probable, and the look-forward period is defined as one year from the
issuance of the financial statements.
The auditor would include a separate section in the auditors report under the heading
Substantial Doubt About the Entitys Ability to Continue as a Going Concern instead of
an emphasis-of-matter paragraph if the auditor concludes that substantial doubt about the
entitys ability to continue as a going concern remains after considering managements
SAS 132 is effective for audits of financial statements for periods ending on or after Dec. 15, 2017.
As you can see, the biggest change relating to the going concern issue is that, consistent with other
areas of auditor involvement, management will now go first in providing an evaluation of its
own going concern status and determining appropriate disclosures, whereas previously only the
auditor had a duty to assess going concern. In addition to evaluating managements assessment
and disclosures relating to going concern, the auditor also provides a separate, independent
assessment of the entitys ability to continue as a going concern, consistent with the procedures
already described in Chapter 17 of Messier/Glover/Prawitt 10e.
While the PCAOB has Going Concern on its future standard setting agenda, the PCAOB has not
revised its auditing standards in the area of Going Concern. Auditors currently look to the
PCAOBs Staff Audit Practice Alert No. 13, Matters Related to the Auditor’s Consideration of a
Company’s Ability to Continue as a Going Concern, issued in September of 2016 for guidance.
This very short practice alert essentially tells auditors that they should assess managements going
concern evaluation and related disclosures, and that the auditor should look to the requirements
specified in the applicable accounting standards (e.g., the FASB standards) in making this
assessment. The auditor should continue to make a separate, independent evaluation of the entitys
going concern status in accordance with existing auditing standards (as described in 10e) for the
purpose of determining whether there is a need to make a disclosure in the auditors report relating
to substantial doubt about the entitys ability to continue as a going concern. Presumably, looking
to the requirements specified in the applicable accounting standards would include, in the case of
FASB standards, interpreting substantial doubt as meaning probable, and defining a
reasonable period of time for the look-forward period as being one year from the date of issuance
of the financial statements rather than one year from the date of the financial statements.
Standards for Attestation Engagements No. 18
Since the writing of Messier/Glover/Prawitt 10e, the AICPA Auditing Standards Board (ASB) has
undertaken a project to redraft nearly its entire body of Statements on Standards for Attestation
Engagements (SSAEs or attestation standards) in the ASBs Clarity Format, culminating in
SSAE No. 18, Attestation Standards: Clarification and Recodification. In addition to redrafting
the attestation standards in the Clarity Format, there are a few important chan …
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