Auditing Principles & Procedures Flashcards

An audit opinion that states financial statements are presented fairly in all material respects is called a:

Answer: Unmodified (clean) opinion

An unmodified opinion indicates the auditor found the financial statements to be free of material misstatement and compliant with applicable standards.

A qualified audit opinion is issued when:

Answer: There is a material misstatement or scope limitation that is not pervasive

A qualified opinion is used when a specific, material issue exists but does not affect the overall reliability of the financial statements.

Which statement best describes an 'adverse opinion' in insurance company auditing?

Answer: The financial statements do not present fairly in accordance with GAAP due to pervasive misstatements

An adverse opinion is the most negative audit opinion, issued when misstatements are both material and pervasive throughout the financial statements.

The NAIC Model Audit Rule requires insurance companies to submit audited financial statements prepared under:

Answer: Statutory Accounting Principles (SAP)

The NAIC Model Audit Rule mandates that annual financial statements filed with state regulators be audited under SAP, not GAAP.

When an insurance audit reveals a material weakness in internal controls, the auditor is required to:

Answer: Communicate the finding to those charged with governance (e.g., the audit committee)

Auditing standards require that material weaknesses be communicated in writing to management and those charged with governance.

A 'management representation letter' obtained during an insurance audit serves to:

Answer: Provide written confirmation from management of its responsibility for the financial statements and key assertions

The management representation letter formally documents management's acknowledgment of its responsibilities and confirms specific representations made to the auditor.

Under GAAS, an auditor's responsibility for detecting fraud is best described as:

Answer: Reasonable assurance — procedures are designed to detect material misstatements due to fraud

GAAS requires the auditor to plan and perform the audit to obtain reasonable (not absolute) assurance about whether financial statements are free of material misstatement, including fraud.