2.19.19 Flashcards
Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions?
Reviewing accounting records for nonrecurring transactions recognized near the balance sheet date.
Related party transactions may involve window dressing at the end of the period. For example, a shareholder may repay a loan just before the balance sheet date, and the entity may then lend the same amount to the same party after the beginning of the next period (AU-C 550).
Which of the following procedures would provide the most reliable audit evidence?
Inspection of bank statements obtained directly from the client’s financial institution.
When documentation is prepared solely by client personnel, its reliability is less than that prepared by the auditor or an independent party. Ordinarily, the most reliable documentation is created outside the entity and has never been within the client’s control, e.g., statements obtained from the bank, letters from attorneys, and letters from insurance brokers.
Which of the following is the primary objective of monetary-unit sampling (MUS)?
To identify overstatement errors.
MUS gives each monetary unit in the population an equal chance of selection. However, the auditor does not examine an individual monetary unit but uses it to identify an entire transaction or balance to audit (the logical sampling unit). MUS is useful only for tests of overstatements (e.g., of assets) because a systematic selection method is applied (every nth monetary unit is selected). Accordingly, the larger the transaction or balance, the more likely it will be selected. This method is inappropriate for testing a population (e.g., liabilities) when understatement is the primary audit consideration.
The auditor has determined that the audited financial statements and supplementary information (SI) are presented together. The auditor may report on the SI in
An other-matter paragraph.
When the SI and the audited statements are presented together, the auditor reports on the SI in (1) a separate report or (2) an other-matter paragraph following the opinion paragraph and any emphasis-of-matter paragraph.
Which of the following is not a responsibility of a group engagement team?
Choose one member to be the group engagement partner.
The audit firm chooses the group engagement partner. This individual is responsible for (1) the group engagement, (2) its performance, and (3) the report on the group statements.
The most reliable procedure for an auditor to use to test the existence of a client’s inventory at an outside location would be to
Observe physical counts of the inventory items.
The existence assertion about inventories included in the balance sheet is that they physically exist. Examples of substantive procedures are (1) observing physical counts, (2) confirming inventories at outside locations, and (3) testing transactions between a preliminary physical inventory date and the balance sheet date. The most reliable of these procedures is observation. It provides direct personal knowledge.
The primary responsibility for the adequacy of disclosure in the financial statements of an issuer rests with the
management of the issuer.
Management is responsible for the accounting policies and the internal control of an entity, including the accounting system. Accordingly, management has the primary responsibility for the fairness of presentation of the financial statements in accordance with U.S. GAAP.
An auditor did not observe a client’s taking of beginning physical inventory and was unable to become satisfied about the inventory by means of other auditing procedures. The possible effects are material. Assuming no other scope limitations or reporting problems, the auditor could express an unmodified opinion on the current year’s financial statements for
the balance sheet only.
The auditor did not observe the counting of physical inventories at the beginning of the year and was not able to become satisfied by performing other procedures on those inventories. Because they enter into the determination of net income and cash flows, the auditor could not determine whether any adjustments were needed with respect to profit and net cash flows from operating activities. Moreover, the possible effects of the inability to obtain sufficient appropriate evidence regarding beginning inventories are material. Thus, the auditor should not express an opinion on the results of operations and cash flows. However, because the balance sheet reports only the ending inventory balance, the auditor can express an unmodified opinion on it alone, assuming (s)he is satisfied with the ending balance.
Because an expression of opinion as to certain identified items in financial statements tends to overshadow or contradict a disclaimer of opinion or adverse opinion, it is inappropriate for an auditor to express
Piecemeal opinion.
A piecemeal opinion is an opinion on a specific element of the statements when an auditor has disclaimed an opinion or expressed an adverse opinion on the statements as a whole. A piecemeal opinion is not acceptable because it contradicts the disclaimer or adverse opinion.
As a condition of obtaining a loan from First National Bank, Maxim Co. is required to submit an audited balance sheet but not the related statements of income, retained earnings, or cash flows. Maxim would like to engage a CPA to audit only its balance sheet. Under these circumstances, the CPA
May audit only Maxim’s balance sheet if the CPA can audit interrelated items.
The auditor may report on one basic financial statement and not on the others if (1) the auditor complies with all AU-C sections relevant to the audit, (2) the audit is feasible, and (3) the auditor can perform procedures on interrelated items. For example, (1) sales and receivables, (2) inventory and payables, and (3) equipment and depreciation are interrelated.
Which of the following audit procedures would an auditor most likely perform to test controls relating to management’s assertion concerning the completeness of sales transactions?
Inspect the entity’s reports of prenumbered shipping documents that have not been recorded in the sales journal.
The completeness assertion relates to whether all transactions that should have been recorded in the accounting records were included. Thus, unrecorded shipping documents would indicate that not all transactions are being properly recorded.
Which of the following statements is true concerning letters for underwriters, commonly referred to as comfort letters?
Comfort letters typically give negative assurance on unaudited interim financial information.
A typical comfort letter includes negative assurance on whether, if applicable, unaudited IFI included in the registration statement materially complies as to form with the 1933 act and SEC pronouncements. Moreover, negative assurance may be provided on whether any material modifications should be made to the unaudited IFI for them to conform with the applicable framework. But the auditor provides negative assurance on unaudited IFI included in the securities offering only if (s)he has performed a review in accordance with GAAS.
A CPA concludes that the unaudited financial statements of an issuer on which the CPA is disclaiming an opinion are not in conformity with generally accepted accounting principles (GAAP) because management has failed to capitalize leases. The CPA suggests appropriate revisions to the financial statements, but management refuses to accept the CPA’s suggestions. Under these circumstances, the CPA ordinarily would
Describe the nature of the departure from GAAP in the CPA’s report and state the effects on the financial statements, if practicable.
An accountant planning to disclaim an opinion on an issuer’s financial statements may discover a material departure from GAAP. Under PCAOB standards, the accountant should disclose the departure in the disclaimer, including its effects if they have been determined by management or by the accountant’s procedures.
Comfort letters ordinarily are addressed to
The party who negotiated the agreement with the client.
The letter should be addressed only to the requesting party (or that party and the entity) and should not be given to anyone else. A requesting party is a specified party that has negotiated an agreement with the entity. Requesting parties may include (1) underwriters (purchasers of securities for public distribution) and (2) others who are conducting a review process consistent with the due diligence process performed when a securities offering is registered. Thus, a comfort letter signed by an independent auditor assists the requesting party in developing a record of a reasonable investigation.
In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if
The population has highly variable recorded amounts.
The primary objective of stratification is to reduce the effect of high variability by dividing the population into subpopulations. Reducing the effect of the variance within each subpopulation allows the auditor to sample a smaller number of items while holding precision and the confidence level constant.
