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Flashcards in A1-4 Deck (12)
1

In the first audit of a client, an auditor was not able to gather sufficient evidence about the consistent application of accounting principles between the current and prior year, as well as the amounts of assets or liabilities at the beginning of the current year. This was due to the client's record retention policies. If the amounts in question could materially affect current operating results, the auditor would:

a.

Specifically state that the financial statements are not comparable to the prior year due to an uncertainty.

b.

Withdraw from the engagement and refuse to be associated with the financial statements.

c.

Be unable to express an opinion on the current year's results of operations and cash flows.

d.

Express a qualified opinion on the financial statements because of a client-imposed scope limitation.

Choice "c" is correct. Since the auditor was unable to gather sufficient evidence on the beginning balances of the balance sheet accounts, the auditor would be unable to express an opinion on the current year's results of operations and cash flows. The auditor could express an opinion on the statement of financial position.

Choice "d" is incorrect. Since the scope limitation could have a pervasive effect on the financial statements (affecting all assets and liabilities), a disclaimer of opinion (and not merely a qualified opinion) is required on the income statement and statement of cash flows. An opinion may be expressed on the year-end statement of financial position.

Choice "b" is incorrect. The auditor does not need to withdraw from the engagement and refuse to be associated with the financial statements.

Choice "a" is incorrect. An uncertainty does not exist. The auditor can express an opinion on one of the financial statements.

2

Jewel, CPA, audited Infinite Co.'s prior-year financial statements. These statements are presented with those of the current year for comparative purposes without Jewel's auditor's report, which expressed a qualified opinion. In drafting the current year's auditor's report, Crain, CPA, the successor auditor, should:

I.

Not name Jewel as the predecessor auditor.

II.

Indicate the type of report issued by Jewel.

III.

Indicate the substantive reasons for Jewel's qualification.

a.

I, II, and III.

b.

I only.

c.

I and II only.

d.

II and III only.

 

Choice "a" is correct. If the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented, the successor auditor should indicate in an Other-Matter paragraph of the report 1) that the financial statements of the prior period were audited by another auditor, 2) the date of the previous report, 3) the type of report issued by the predecessor auditor, and 4) if the report was other than an unmodified report, the substantive reasons therefor. The successor auditor may name the predecessor auditor only if the predecessor auditor's practice was acquired by or merged with that of the successor auditor.

Choices "b", "c", and "d" are incorrect, based on the above explanation.

3

Comparative financial statements include the prior year's statements that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was unmodified, the successor should:

a.

Express an opinion only on the current year's financial statements and make no reference to the prior year's financial statements.

b.

Indicate in an other-matter paragraph that the predecessor auditor expressed an unmodified opinion on the prior year's financial statements.

c.

Add an emphasis-of-matter paragraph that expresses only limited assurance concerning the fair presentation of the prior year's financial statements.

d.

Obtain a letter of representation from the predecessor auditor concerning any matters that might affect the successor's opinion.

Choice "b" is correct. When a successor auditor does not present the predecessor auditor's report, the successor should indicate in an other-matter paragraph that the predecessor auditor expressed an unmodified opinion on the prior year's financial statements.

Choice "c" is incorrect. No assurance is provided regarding the fair presentation of the prior year's financial statements.

Choice "a" is incorrect. The auditor does make reference to the prior year's financial statements, indicating in an other-matter paragraph that the predecessor auditor expressed an unmodified opinion on the prior year's financial statements.

Choice "d" is incorrect. There is no requirement that the successor obtain a letter of representation from the predecessor auditor, although the reverse may be true (the predecessor should obtain a letter of representation from the successor if the previous report is to be reissued).

4

Comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was qualified, the successor should:

a.

Express an opinion only on the current year's statements and make no reference to the prior year's statements.

b.

Request the client to reissue the predecessor's report on the prior year's statements.

c.

Issue an updated comparative audit report indicating the division of responsibility.

d.

Indicate the substantive reasons for the qualification in the predecessor auditor's opinion.

Choice "d" is correct. If the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented, the successor auditor should indicate in an other-matter paragraph of the audit report (1) that the financial statements of the prior period were audited by a predecessor auditor, (2) the type of opinion expressed by the predecessor auditor and, if the opinion was modified, the reasons for the modification, (3) the nature of any emphasis-of-matter or other-matter paragraph included in the predecessor auditor's report, and (4) the date of the predecessor auditor's report.

Choice "b" is incorrect. The predecessor auditor, not the client, may reissue the previous year's audit report.

Choice "c" is incorrect. An audit report would indicate a division of responsibility when the group auditor's opinion is based in part on the report of another auditor.

Choice "a" is incorrect. If the prior year's financial statements are issued, the previous year's audit opinion must also be disclosed.

5

An auditor has previously expressed a qualified opinion on the financial statements of a prior period because of a departure from generally accepted accounting principles. The prior-period financial statements are restated in the current period to conform with generally accepted accounting principles. The auditor's updated report on the prior-period financial statements should:

a.

Express an unmodified opinion concerning the restated financial statements.

b.

Be accompanied by the original auditor's report on the prior period.

c.

Qualify the opinion concerning the restated financial statements because of a change in accounting principle.

d.

Bear the same date as the original auditor's report on the prior period.

Choice "a" is correct. When prior-period financial statements are restated in the current period to conform with GAAP, the auditor's updated report on the prior-period financial statements should express an unmodified opinion concerning the restated financial statements.

Choice "b" is incorrect. The original auditor's report on the prior period should not be presented.

Choice "d" is incorrect. The original report date is used only if the original report is reissued unchanged.

Choice "c" is incorrect. A change in accounting principle that is properly accounted for does not result in a qualified opinion.

6

Before reissuing the prior year's auditor's report on the financial statements of a former client, the predecessor auditor should obtain letters of representation from the:

a.

Former client's attorney and management.

b.

Former client's board of directors and the successor auditor.

c.

Successor auditor and the former client's management.

d.

Former client's management and the board of directors.

Choice "c" is correct. Before reissuing the prior year's auditor's report on the financial statements of a former client, the auditor should 1) read the financial statements of the current period, 2) compare the prior-period information that the auditor reported on with the financial statements to be presented for comparative purposes, 3) obtain a letter of representation from the successor auditor, and 4) obtain a letter of representation from the former client's management. The representation letter from the successor auditor will state whether the successor's audit revealed any issues of a material nature that might affect the previous financial statements. The representation letter from the former client's management will indicate whether its previous representations are still accurate and whether there have been any subsequent events affecting the previous financial statements.

Choices "d", "a", and "b" are incorrect. The predecessor does not request representation letters from the former client's board of directors or attorney.

7

In May, Year 4, an auditor reissues the auditor's report on the Year 2 financial statements at a continuing client's request. The Year 2 financial statements are not restated and the auditor does not revise the wording of the report. The auditor should:

a.

Use the current-period auditor's report date on the reissued report.

b.

Use the release date of the reissued report.

c.

Dual date the reissued report.

d.

Use the original report date on the reissued report.

 

Choice "d" is correct. If the auditor reissues the audit report at the client's request, the auditor should use the original report date on the reissued report. Use of a subsequent date implies that the auditor has done additional work.

Choice "c" is incorrect. Use of a date subsequent to the original report date implies that the auditor has performed work subsequent to that date.

Choice "b" is incorrect. Use of a date subsequent to the original report date implies that the auditor has performed work subsequent to that date.

Choice "a" is incorrect. Use of a date subsequent to the original report date implies that the auditor has performed work subsequent to that date.

8

Jules, CPA, is reporting on comparative financial statements, but Shah, CPA conducted the previous year's audit. Which of the following is not true in this situation?

a.

If Shah's report was qualified due to a scope limitation, Jules may still issue an unmodified opinion on the current year's financial statements.

b.

Dual dating may be used to indicate the appropriate dates for each audit.

c.

If Shah's report will be presented, management will need to provide a representation letter to Shah.

d.

If Shah's report is not presented, an other-matter paragraph should be included to describe this situation.

Choice "b" is correct. Dual dating is used when there is a subsequent event occurring after the original date of the auditor's report, and the auditor wishes to extend responsibility only for the one event. It is not used for comparative financial statements (the date appropriate for the most recent audit is used in this case).

Choice "d" is incorrect. When the successor auditor does not present the predecessor auditor's report, the successor auditor should express an opinion on the current period financial statements only and indicate in an other-matter paragraph (below the opinion paragraph) that the financial statements of the prior period were audited by a predecessor auditor, the type of opinion expressed by that predecessor auditor, the nature of any emphasis-of-matter or other-matter paragraphs included, and the date of the predecessor auditor's report.

Choice "a" is incorrect. Different opinions may be issued for the different years presented.

Choice "c" is incorrect. Shah will be required to obtain a letter of representation from management in this situation.

9

An entity's comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was qualified, the successor should:

a.

Indicate the substantive reasons for the qualification in the predecessor auditor's opinion.

b.

Issue an updated comparative audit report indicating the division of responsibility.

c.

Explain to the client that comparative financial statements may not be presented under these circumstances.

d.

Express an opinion only on the current year's financial statements and make no reference to the prior year's statements.

 

Choice "a" is correct. When a predecessor auditor's report is not presented, the successor auditor should indicate the following items:

That the statements were audited by a predecessor auditor. The predecessor auditors should not be named unless the practice of the predecessors was acquired by or merged with that of the successor.

The type of opinion expressed by the predecessor auditor and, if the opinion was modified, the reason for the modification.

The nature of any emphasis-of-matter or other-matter paragraph included in the predecessor auditor's report.

The date of the predecessor auditor's report.

Choice "b" is incorrect. The comparative audit report does not need to be updated for this situation.

Choice "c" is incorrect. There is no requirement that the comparative financial statements NOT be issued in such circumstances.

Choice "d" is incorrect. There is nothing preventing the successor auditor from referencing the prior year's statements in this situation.

10

When reporting on comparative financial statements, an auditor ordinarily should change the previously issued opinion on the prior year's financial statements if the:

a.

Prior year's opinion was unmodified and the opinion on the current year's financial statements is modified due to a lack of consistency.

b.

Prior year's financial statements are restated to conform with generally accepted accounting principles.

c.

Prior year's financial statements are restated following a change in reporting entity in the current year.

d.

Auditor is a predecessor auditor who has been requested by a former client to reissue the previously issued report.

Choice "b" is correct. If, during the current audit, auditors become aware of circumstances or events that affect the financial statements of a prior period, they should consider such matters when updating the report on the financial statements of the prior period. For example, if auditors have previously qualified their opinion or expressed an adverse opinion on financial statements of a prior period because of a departure from generally accepted accounting principles, and the prior period financial statements are restated in the current period to conform with generally accepted accounting principles, the auditor's updated report on the financial statements of the prior period should indicate that the statements have been restated and should express an unmodified opinion with respect to the restated financial statements.

Choice "d" is incorrect. The predecessor auditor generally would not change a previously issued opinion when reissuing the audit report.

Choice "a" is incorrect. A difference of opinions between periods would not result in the auditor changing the opinion on a previously issued audit report.

Choice "c" is incorrect. Restatement of financial statements following a change in reporting entity affects comparability of the financial statements, but would not result in a change in opinion from the audit report previously issued.

11

A registration statement filed with the SEC contains the reports of two independent auditors on their audits of financial statements for different periods. The predecessor auditor who audited the prior-period financial statements generally should obtain a letter of representation from the:

a.

Principal underwriter.

b.

Successor independent auditor.

c.

Client's audit committee.

d.

Securities and Exchange Commission

Choice "b" is correct. Before reissuing the prior year's audit report on the financial statements of a former client, the auditor should 1) read the financial statements of the current period, 2) compare the prior period information that the auditor reported on with the financial statements to be presented for comparative purposes, and 3) obtain letters of representation from management of the former client and from the successor auditor. The representation letter from management should indicate whether any of management's previous representations should be modified and whether there have been any subsequent events that would affect the previous financial statements. The representation letter from the successor auditor should state whether the successor auditor's audit disclosed any issues of a material nature that might affect the previous financial statements.

Choice "c" is incorrect. The predecessor auditor is seeking independent confirmation regarding issues that might materially affect the previous financial statements. A representation letter from the client's audit committee would not provide this confirmation.

Choice "a" is incorrect. The predecessor auditor is seeking independent confirmation regarding issues that might materially affect the previous financial statements. A representation letter from the principal underwriter would not provide this confirmation.

Choice "d" is incorrect. The predecessor auditor is seeking independent confirmation regarding issues that might materially affect the previous financial statements. A representation letter from the SEC would not provide this confirmation.

12

An auditor expressed a qualified opinion on the prior year's financial statements because of a lack of adequate disclosure. These financial statements are properly restated in the current year and presented in comparative form with the current year's financial statements. The auditor's updated report on the prior year's financial statements should:

a.

Be accompanied by the auditor's original report on the prior year's financial statements.

b.

Continue to express a qualified opinion on the prior year's financial statements.

c.

Express an unmodified opinion on the restated financial statements of the prior year.

d.

Make no reference to the type of opinion expressed on the prior year's financial statements.

 

Choice "c" is correct. If an auditor has previously qualified his or her opinion on financial statements of a prior period, and the prior period statements are restated to conform with GAAP, the auditor should express an unmodified opinion on the restated financial statements. In addition, the auditor would state the substantive reasons for the change in opinion in an emphasis-of-matter (or other-matter) paragraph following the opinion paragraph.

Choice "a" is incorrect. The original report would not be presented.

Choice "b" is incorrect. The auditor would change the opinion on the restated financial statements from that previously issued.

Choice "d" is incorrect. The auditor would state the substantive reasons for the change in opinion in an emphasis-of-matter (or other-matter) paragraph following the opinion paragraph.