ACC 640 Project Two Guidelines and Rubric

Scenario

The auditing team of your CPA firm has performed an audit engagement for Keystone, which consists of testing financial statements, internal controls, and other factors that could have an impact on the company's position. At the end of the audit, the engagement partner has asked you to submit to all the firm's partners the final executive summary audit report. This will include an overall executive summary of the firm's internal control effectiveness in providing reasonable assurance on the company's financial statements and an explanation of the choice of an unqualified opinion versus a different opinion type.

ACC 640 AS 3101 Standard

The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion

Introduction

.01 The auditor's report contains either an expression of opinion on the financial statements, taken as a whole or an assertion that an opinion cannot be expressed. This standard establishes requirements regarding the content of the auditor's written report when the auditor expresses an unqualified opinion on the financial statements (the "auditor's unqualified report").

.02 The auditor can express an unqualified opinion on the financial statements when the auditor conducted an audit in accordance with the standards of the Public Company Accounting Oversight Board ("PCAOB") and concludes that the financial statements, taken as a whole, are presented fairly, in all material respects, in conformity with the applicable financial reporting framework.

.03 When the auditor conducts an audit of financial statements in accordance with the standards of the PCAOB, some circumstances require that the auditor express a qualified opinion, adverse opinion, or disclaimer of opinion on the financial statements and state the reasons for the departure from the unqualified opinion. AS 3105, Departures from Unqualified Opinions and Other Reporting Circumstances, describes reporting requirements related to departures from unqualified opinions and other reporting circumstances.

Objectives

.04 The objectives of the auditor when the auditor concludes that an unqualified opinion is appropriate are to:

a. Issue a written report that expresses an unqualified opinion on the financial statements and describes the basis for that opinion; and

b. Communicate in the auditor's unqualified report critical audit matters, when required, relating to the audit of the financial statements or state that the auditor determined that there are no critical audit matters.

The Auditor's Unqualified Report

.05 The auditor's unqualified report includes:

a. The basic elements, as described in paragraphs .06-.10.

b. Communication regarding critical audit matters relating to the audit of the current period's financial statements, as described in paragraphs .11-.17, unless such requirements do not apply.

Note: Communication of critical audit matters is not required for audits of (1) brokers and dealers reporting under Exchange Act Rule 17a-5; (2) investment companies registered under the Investment Company Act of 1940 ("Investment Company Act"), other than companies that have elected to be regulated as business development companies; (3) employee stock purchase, savings, and similar plans; and (4) emerging growth companies. Auditors of these entities may consider voluntarily including communication of critical audit matters as described in this standard.

c. Other explanatory languages (or an explanatory paragraph), as appropriate in the circumstances, as described in paragraphs .18-.19; and

d. Information about certain audit participants, if the auditor decides to provide this information in the auditor's report, as described in paragraph .20.

Basic Elements

Title

.06 The auditor's report must include the title, "Report of Independent Registered Public Accounting

Firm."

Addressee

.07 The auditor's report must be addressed to the shareholders and the board of directors, or

equivalents for companies not organized as corporations. The auditor's report may include additional addresses.

Opinion on the Financial Statements

.08 The first section of the auditor's report must include the section title "Opinion on the Financial

Statements" and the following elements:

a. The name of the company whose financial statements were audited.

b. A statement identifying each financial statement and any related schedule(s) that has been audited.

c. The date of, or the period covered by, each financial statement and related schedule, if applicable, identified in the report.

d. A statement indicating that the financial statements, including the related notes and any related schedule(s), identified, and collectively referred to in the report as the financial statements, were audited; and

e. An opinion that the financial statements present fairly, in all material respects, the financial position of the company as of the balance sheet date and the results of its operations and its cash flows for the period then ended in conformity with the applicable financial reporting framework. The opinion should also include an identification of the applicable financial reporting framework.

Basis for Opinion

.09 The second section of the auditor's report must include the section title "Basis for Opinion" and the following elements:

a. A statement that the financial statements are the responsibility of the company's management.

b. A statement that the auditor's responsibility is to express an opinion on the financial statements

based on the audit.

c. A statement that the audit was conducted in accordance with the standards of the PCAOB.

d. A statement that PCAOB standards require that the auditor 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.

e. A statement that the audit included:

1. Performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond tothose risks.
2. Examining, on a test basis, evidence regarding the amounts and disclosures in thefinancial statements.
3. Evaluating the accounting principles used and significant estimates made by management; and
4. Evaluating the overall presentation of the financial statements.

f. A statement that the auditor believes that the audit provides a reasonable basis for the auditor's opinion; and

g. A statement that the auditor is a public accounting firm registered with the PCAOB (United States) and is 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 SEC and the PCAOB.

Definition and Limitations of Internal Control Over Financial Reporting

.85E The third section of the auditor's report on the audit of internal control over financial reporting must include the section title "Definition and Limitations of Internal Control Over Financial Reporting" and the following elements:

a. A definition of internal control over financial reporting as stated in paragraph A5.

b. A paragraph stating that, because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements and that projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

Determination of Critical Audit Matters

.11 The auditor must determine whether there are any critical audit matters in the audit of the current period's financial statements. A critical audit matter is any matter arising from the 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 auditor judgment. Critical audit matters are not a substitute for the auditor's departure from an unqualified opinion (i.e., a qualified opinion, adverse opinion, or disclaimer of opinion on the financial statements as described in AS 3105).

.12 In determining whether a matter involved especially challenging, subjective, or complex auditor judgment, the auditor should consider, alone or in combination, the following factors, as well as other factors specific to the audit:

a. The auditor's assessment of the risks of material misstatement, including significant risks.

b. The degree of auditor judgment related to areas in the financial statements that involved the application of significant judgment or estimation by management, including estimates with significant measurement uncertainty.

c. The nature and timing of significant unusual transactions and the extent of audit effort and judgment related to these transactions.

d. The degree of auditor subjectivity in applying audit procedures to address the matter or in evaluating the results of those procedures.

e. The nature and extent of audit effort required to address the matter, including the extent of specialized skill or knowledge needed or the nature of consultations outside the engagement team regarding the matter; and

f. The nature of audit evidence obtained regarding the matter.

Note: It is expected that, in most audits, the auditor would determine that at least one matter involved especially challenging, subjective, or complex auditor judgment.

Signature, Tenure, Location, and Date

.10 The auditor's report must include the following elements:

a. The signature of the auditor's firm.

b. A statement containing the year the auditor began serving consecutively as the company's auditor.

Note: For purposes of this subparagraph, references to the auditor include other firms that the auditor's firm has acquired or that have merged with the auditor's firm. If there is uncertainty as to the year the auditor began serving consecutively as the company's auditor, such as due to a firm or company mergers, acquisitions, or changes in ownership structure, the auditor should state that the auditor is uncertain as to the year the auditor became the company's auditor and provide the earliest year of which the auditor has knowledge.

c. The city and state (or city and country, in the case of non-U.S. auditors) from which the auditor's report has been issued; and

d. The date of the auditor's report.

APPENDIX BAn Illustrative Auditor's Unqualified Report Including Critical Audit Matters

Report of Independent Registered Public Accounting Firm

To the shareholders and the board of directors of X Company

Opinion on the Financial Statements

We have audited the accompanying balance sheets of X Company (the "Company") as of December 31, 20X2 and 20X1, the related statements of [titles of the financial statements, e.g., income, comprehensive income, stockholders' equity, and cash flows], for each of the three years in the period ended December 31, 20X2, and the related notes [and schedules] (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 [at] December 31, 20X2 and 20X1, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20X2, in conformity with [the applicable financial reporting framework].

Basis for Opinion

These financial statements are the responsibility of the Company's 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.

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were 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 our especially challenging, subjective, or complex 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

[Include critical audit matters]

[Signature]

We have served as the Company's auditor since [year].

[City and State or Country]

[Date

ACC 640 Summary of Audit Findings

Financial Test Results

Result #1

Alice prepares a draft management representation letter for Jo, the partner, to review before presenting it to Keystone's CEO and CFO to sign. The letter includes a statement about management's responsibility for critical accounting policies and critical accounting estimates. Sally also drafts a report to be used for communication with Keystone's audit committee. The report includes critical items for Keystone.

Revenue recognition is a critical accounting policy to discuss with the audit committee. Key items that impact revenue recognition include deferred revenue accounting and accounting for service contracts when Keystone supports technology it sells to other brokers. Some of the critical accounting estimates to discuss with the audit committee include compliance with standard ASC 606. The details to be discussed are:

ASC 606 Revenue Recognition

You've identified the contract with a customer with specified performance obligations, payment terms, and rights of the buyer and seller. Keystone charges customers for consulting services and workshops. The company accounts for all its contracts the same way. All parties have agreed on a two-year contract that includes consulting fees of$120,0000 and an onboarding fee of $10,000. The company has entered 100 contracts for the year. Each customer paid $120,000 in advance of receiving promised goods or services. The entry recorded by Keystone for each contract was as follows:

Account	DR	CR
Cash	$120,000
Revenue		$120,000

Record payment received on a 24-month contract for all services.

The onboarding fee is a one-time, upfront fee for setup and training and is recorded when the contract begins. It was recorded as follows:

Account	DR	CR
Deferred Revenue	$10,000
Service Revenue		$10,000

Record onboarding fee revenue earned on a 24-month contract.

You believe part of this accounting is a departure from standard ASC 606, where all the contract revenue should not be recognized upfront even if the company has been paid in full. Revenue is recognized when the entity satisfies the performance obligations, regardless of when payment is received. This is a material item for financial statements.

Result #2

The financial ratios indicate no problems with solvency, and the major borrowings are not due to be repaid or refinanced for another four years.

However, Keystone's management is anticipating a decline in earnings this year because of the costs associated with the rollout of its new data products. Keystone does have a sizeable line of credit at its bank that is currently not being utilized. If Keystone has an unexpected need for additional cash, Keystone management could draw on the line of credit.

The team makes a note that these issues have been formally reviewed, and they conclude that there are no significant issues casting substantial doubt on the going concern assumption.

Result #3

Our testing of accounts receivable using confirmations revealed two errors in our sample, which while corrected by the client, were not corrected in a timely manner. Both errors resulted in overcharging the customers. Auditors conclude this is not a significant deficiency.

Result #4

The testing of accounts payable revealed a classification error in writing a month-end accrual where items that should have been accrued to accounts payable were classified as accrued liabilities. This classification error amounted to $325,153.43. Accounts payable were understated by 2.84% and accrued liabilities were overstated by 2.81%. However, there is no P&L impact.

Result #5

The testing of fixed assets for the year ended 12/31/xx revealed an understatement of fixed assets and accounts payable as of 12/31/xx. Fixed assets and accounts payable are understated by $463,197. Performance materiality (tolerable misstatement) for the fixed asset testing was $1 million.

Result #6

Keystone rolling out new products that bring new inherent risks, such as the risk of providing incorrect data to customers that could result in disputes or legal action for damages.

Keystone must design internal controls for the new revenue stream (data products) that is different from its trading operations. These risks are not material to Keystone's overall operations at this time, but if sales expand, then the risk will increase.

Internal Control Test Results

Result #1

The audit team concluded that, at an entity level, there is sufficient evidence that Keystone's internal controls are potentially effective. At a high level, the company demonstrates an environment where potential material misstatements are prevented or detected.

Specific controls that affect transaction processes will be documented in more detail. Items to include:

Keystone has a tightly structured system of performance reviews. Managers at each level must report financial and operating performance against budgets at regular intervals.

Higher-level managers can access information about activities within their area of responsibility for monitoring purposes through the information system.

Testing showed a thorough approach to appropriate segregation of duties.

Result #2

Tests of controls show that IT general controls are effective. As a result, application controls can be relied upon for their financial applications. Testing of the application controls showed operational effectiveness.

Result #3

The audit team is pleased with the results of tests of controls related to the purchasing process. They found strong controls over the master vendor file, and vouchers are prepared based only on original invoices. Keystone is careful about entering the right invoice number, including any leading zeros, so an invoice is not paid twice. Finally, Keystone developed clear procedures for accruing payables for consulting services for which vendor invoices had not yet been received.

Other Test Results

Result # 1

Keystone's lawyers state that there are no pending legal issues, so there is nothing we need to emphasize in that area. Keystone has had a decline in earnings this year, but that does not represent a growing concern. There are no consistency issues with Keystone's application of accounting principles. So, we do not need to add an emphasis-of-matter paragraph to this year's audit report.

Result #2

Keystone must design internal controls for selling data products that are unique from its trading business. At this time, these risks are not material to Keystone's overall operations but could be due to future growth.

Directions

Prepare an Audit Report based on the audit team's findings. Use APPENDIX BAn Illustrative Auditor's Unqualified Report Including Critical Audit Matters