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Flashcards in A2-1 Deck (27)
1

An auditor may express an opinion on an entity's accounts receivable balance even if the auditor has disclaimed an opinion on the financial statements taken as a whole provided the:

a.

Auditor also reports on the current asset portion of the entity's balance sheet.

b.

Use of the report on accounts receivable is restricted to internal use only.

c.

Report on accounts receivable is presented separately from the disclaimer of opinion on the financial statements.

d.

Report on accounts receivable discloses the reason for the disclaimer of opinion on the financial statements.

Choice "c" is correct. If the auditor has disclaimed an opinion on the financial statements taken as a whole, the auditor may express an opinion on an entity's accounts receivable balanceonly if the special report on accounts receivable is presented separately from the disclaimer of opinion on the financial statements and the accounts receivable balance does not constitute a major portion of the entity's complete set of financial statements. 

Choice "d" is incorrect. The report on the accounts receivable balance should not refer to the disclaimer of opinion on the financial statements.

Choice "b" is incorrect. A special report expresses an opinion on the accounts receivable balance based on an audit of this specified element of the balance sheet. The report need not be restricted to internal use only.

Choice "a" is incorrect. A special report expresses an opinion on the accounts receivable balance based on an audit of this specified element. The auditor need not also report on the current asset portion of the entity's balance sheet.

2

Financial information is presented in a printed form that prescribes the wording of the independent auditor's report. The form is not acceptable to the auditor because the form calls for statements that are inconsistent with the auditor's responsibility. Under these circumstances, the auditor most likely would:

a.

Restrict use of the report to the party who designed the form.

b.

Reword the form or attach a separate report.

c.

Express a qualified opinion with an explanation.

d.

Withdraw from the engagement.

Choice "b" is correct. An auditor should not sign a preprinted report form that includes statements that are inconsistent with the auditor's responsibility. Instead, the form should be revised or a separate, more accurate report should be attached.

Choice "d" is incorrect. Provided the form can be revised or a separate report can be attached, there is no need to withdraw from the engagement.

Choice "c" is incorrect. Qualified opinions relate to departures from GAAP and/or scope limitations, neither of which is the case here.

Choice "a" is incorrect. Even if the use of the report is restricted, an auditor should never sign a report including statements that are inconsistent with the auditor's responsibility

3

Harris, CPA, has been asked to audit and report on the balance sheet of Fox Co., but not on the statements of income, retained earnings, or cash flows. This audit will not be performed in conjunction with an audit of the complete set of financial statements. Under these circumstances, Harris may:

a.

Not accept the engagement because it would be tantamount to rendering a piecemeal opinion.

b.

Accept the engagement because such engagements merely involve special considerations in the application of U.S. GAAS.

c.

Accept the engagement but should disclaim an opinion because the complete set of financial statements was not audited.

d.

Not accept the engagement because it would constitute a violation of the profession's ethical standards.

Choice "b" is correct. An audit of a single financial statement is permitted under U.S. GAAS. An audit of a single financial statement can be performed as a separate audit or in conjunction with an audit of the complete set of financial statements.

Choice "d" is incorrect. Compliance with this request would not violate any ethical standards of the profession.

Choice "a" is incorrect. A "piecemeal" opinion, which is prohibited, is one in which different opinions are issued on enough different elements in the same financial statement as to constitute a "major portion" of the financial statements.

Choice "c" is incorrect. An audit of a single financial statement can be performed as a separate audit or in conjunction with an audit of the complete set of financial statements.

4

Field is an employee of Gold Enterprises. Hardy, CPA, is asked to express an opinion on Field's profit participation in Gold's net income. Hardy may accept this engagement only if:

a.

Gold's financial statements are prepared in conformity with GAAP.

b.

Hardy also audits Gold's income statement and balance sheet.

c.

Field owns controlling interest in Gold.

d.

Hardy's report is available for distribution to Gold's other employees

Choice "b" is correct. The engagement described is one to express an opinion on a specified element, account, or item of the financial statements. Since Field's profit participation is based on Gold's net income or stockholders' equity, Hardy can accept the engagement only if Hardy also audits and expresses an opinion on the entity's income statement and balance sheet.

Choice "a" is incorrect. If the auditor can express an opinion that the specified elements, accounts, or items are presented fairly on a basis of accounting other than GAAP, then the auditor can accept the engagement.

Choice "d" is incorrect. Hardy's report need not be available for distribution to Gold's other employees. Usually the distribution of this type of report is restricted to those within the entity and the parties to the contract or agreement. This is necessary because the basis of presentation is determined by reference to a document that would not generally be available to other third parties. Mandatory distribution of an audit report is never required.

Choice "c" is incorrect. Field does not need to own a controlling interest in Gold.

5

An auditor's report on financial statements prepared on the cash receipts and disbursements basis of accounting should include all of the following, except:

a.

A statement that the cash receipts and disbursements basis of accounting is not a comprehensive basis of accounting.

b.

An opinion as to whether the financial statements are presented fairly in conformity with the cash receipts and disbursements basis of accounting.

c.

A statement that the audit was conducted in accordance with auditing standards generally accepted in the United States of America.

d.

A reference to the note to the financial statements that describes the cash receipts and disbursements basis of accounting.

Choice "a" is correct. The auditor's report on financial statements prepared in conformity with a comprehensive basis of accounting other than GAAP would include a statement that the basis is a comprehensive basis of accounting other than GAAP. It would not state that the cash receipts and disbursements basis is not a comprehensive basis of accounting.

Choice "d" is incorrect. The auditor's report should include a paragraph that states the basis and refers to the note to the financial statements that describes the basis.

Choice "b" is incorrect. The auditor's report should include a paragraph that expresses the auditor's opinion on whether the financial statements are presented fairly, in all material respects, in conformity with the basis described.

Choice "c" is incorrect. The auditor's report should state that the audit was conducted in accordance with U.S. GAAS.

6

Due to a scope limitation, an auditor disclaimed an opinion on the financial statements taken as a whole, but the auditor's report included a statement that the current asset portion of the entity's balance sheet was fairly stated. The inclusion of this statement is:

a.

Appropriate provided the statement is in a separate paragraph preceding the disclaimer of opinion paragraph.

b.

Not appropriate because the auditor is prohibited from reporting on only one basic financial statement.

c.

Not appropriate because it may tend to overshadow the auditor's disclaimer of opinion.

d.

Appropriate provided the auditor's scope paragraph adequately describes the scope limitation.

Choice "c" is correct. Piecemeal opinions (opinions on parts of the financial statements, when those parts constitute a major portion of the financial statements) are not appropriate if the auditor has disclaimed an opinion or issued an adverse opinion, because they may overshadow the auditor's opinion on the financial statements taken as a whole. An opinion on specified elements that does not constitute a piecemeal opinion may be expressed, but should not accompany the disclaimer of opinion or the adverse opinion.

Choice "b" is incorrect. The auditor may express an opinion on one financial statement, even if the auditor must issue a disclaimer on the financial statements taken as a whole.

Choice "d" is incorrect. Even with adequate description in the scope paragraph, an opinion on the current asset portion of the balance sheet cannot be included in a disclaimer of opinion, as it might overshadow the disclaimer.

Choice "a" is incorrect. It is not appropriate to include an opinion on the current asset portion of the balance sheet in a disclaimer of opinion, as it might overshadow the disclaimer.

7

When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should:

a.

Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards.

b.

Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting.

c.

Not express an opinion on whether the statements are presented in conformity with the comprehensive basis of accounting used.

d.

State that the basis of presentation is a basis of accounting other than GAAP.

Choice "d" is correct. When reporting on financial statements prepared in conformity with a basis of accounting other than GAAP, the auditor should include an emphasis-of-matter paragraph that states that the special purpose framework is a basis of accounting other than GAAP.

Choice "a" is incorrect. The statements would be examined in accordance with GAAS; however, no opinion (or disclaimer) is given regarding this fact.

Choice "c" is incorrect. The auditor should express an opinion on the financial statements' conformity with the comprehensive basis other than GAAP.

Choice "b" is incorrect. The auditor would include a statement indicating that the basis differs from GAAP, but need not quantify the differences among various bases of accounting.

8

A CPA is permitted to accept a separate engagement (not in conjunction with an audit of financial statements) to audit an entity's:

~Schedule of accounts receivable
~Schedule of royalties
a.

No

No

b.

No

Yes

c.

Yes

No

d.

Yes

Yes

Choice "d" is correct. An independent auditor may express an opinion on one or more specified elements, accounts, or items of a financial statement as a special engagement, not in conjunction with an audit.

Choices "c", "b", and "a" are incorrect, per above explanation.

9

An auditor may report on summary financial statements that are derived from complete financial statements if the:

a.

Summary financial statements are presented in comparative form with the prior year's summary financial statements.

b.

Auditor describes the additional procedures performed on the summary financial statements.

c.

Auditor indicates whether the information in the summary financial statements is fairly stated in all material respects in relation to the complete financial statements from which it has been derived.

d.

Summary financial statements are distributed to stockholders along with the complete financial statements.


Explanation

Choice "c" is correct. An auditor may report on summary financial statements that are derived from financial statements that he or she has audited, indicating (1) that he or she has audited and expressed an opinion on the complete financial statements, (2) the date of the auditor's report, (3) the type of opinion expressed, and (4) that the information contained in the summary financial statements is fairly stated in all material respects in relation to the complete financial statements from which it has been derived.

Choice "d" is incorrect. The summary financial statements do not have to be distributed to the stockholders.

Choice "b" is incorrect. The audit report on summary financial statements does not require that additional procedures be described.

Choice "a" is incorrect. Summary financial statements do not need to be presented in comparative form with the prior year's financial statements.

10

An auditor is engaged to report on selected financial data that are included in a client-prepared document containing audited financial statements. Under these circumstances, the report on the selected data should:

a.

Be distributed only to senior management and the board of directors.

b.

Indicate that the data are not fairly stated in all material respects.

c.

Be limited to data derived from the audited financial statements.

d.

State that the presentation is a comprehensive basis of accounting other than GAAP.

Choice "c" is correct. An auditor's report on selected information included in a client-prepared document containing audited financial statements should be limited to data derived from audited financial statements.

Choice "a" is incorrect. It is not necessary to limit distribution of such a report.

Choice "d" is incorrect. Selected financial data is not an "other comprehensive basis of accounting."

Choice "b" is incorrect. The auditor indicates whether the selected financial data is fairly stated, in all material respects, in relation to the financial statements from which it has been derived.

11

Delta Life Insurance Co. prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission. If Wall, CPA, Delta's auditor, discovers that the statements are not suitably titled, Wall should:

a.

Issue a special statutory basis report that clearly disclaims any opinion.

b.

Explain in the notes to the financial statements the terminology used.

c.

Disclose any reservations in a basis for modification paragraph and qualify the opinion.

d.

Apply to the state insurance commission for an advisory opinion.

Choice "c" is correct. Financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP that are not suitably titled require a qualified opinion with a basis for modification paragraph.

Choice "d" is incorrect. The financial statements are not suitably titled. The auditor does not need any advice from the insurance commission as to how the statements should be titled or as to how to handle the situation.

Choice "a" is incorrect. The auditor would not disclaim an opinion unless there is a scope limitation or independence problem. 

Choice "b" is incorrect. The notes to the financial statements are communications from management, not from the auditor.

12

Helpful Co., a nonprofit entity, prepared its financial statements on an accounting basis prescribed by a regulatory agency solely for filing with that agency. Green audited the financial statements in accordance with generally accepted auditing standards and concluded that the financial statements were fairly presented on the prescribed basis. Green should issue a:

a.

Disclaimer of opinion.

b.

Single unmodified opinion on the special purpose financial statements.

c.

Standard three paragraph report with reference to footnote disclosure.

d.

Qualified opinion.

Choice "b" is correct. A report using the special purpose framework required by the regulatory agency would be issued and include an opinion paragraph that contains an opinion on the special purpose financial statements and a reference to the special purpose framework used to prepare the financial statements. The report would also contain an other-matter paragraph restricting the use of the auditor's report.

Choices "d" and "a" are incorrect. The special purpose framework report would be unmodified since Green concluded that the financial statements were fairly presented on the prescribed basis.

Choice "c" is incorrect. The wording of the special purpose framework report varies from the auditor's standard three-paragraph report, and includes an emphasis-of-matter and other-matter paragraphs.

13

An auditor's report would be designated a report on compliance when it is issued in connection with:

a.

Compliance with aspects of regulatory requirements related to audited financial statements.

b.

Application of accounting principles to specified transactions.

c.

Interim financial information of a publicly held company that is subject to a limited review.

d.

Limited use prospective financial statements such as a financial projection.

Choice "a" is correct. An auditor's report would be designated a report on compliance when it is issued in connection with compliance with aspects of regulatory requirements related to audited financial statements. It should be noted that a report on compliance in connection with audited financial statements provides only negative assurance on compliance. This type of report differs from a separate compliance audit and an attestation engagement. 

Choice "c" is incorrect. A "review report" (not a "report on compliance") should be issued in connection with a limited review of interim financial information of a publicly held company.

Choice "b" is incorrect. A report on compliance pertaining to an audit of financial statements is not issued in connection with the application of accounting principles to specified transactions.

Choice "d" is incorrect. An auditor may compile, examine, or apply agreed-upon procedures to limited use prospective financial statements (PFS) such as a financial projection, but this would not constitute a report on compliance pertaining to audited financial statements.

14

In the standard report on summary financial statements that are derived from a public entity's audited financial statements, a CPA should indicate that the:

a.

CPA expresses limited assurance that the financial statements conform with GAAP.

b.

CPA has audited and expressed an opinion on the complete financial statements.

c.

Summary financial statements are prepared in conformity with another comprehensive basis of accounting.

d.

Summary financial statements are not fairly presented in all material respects.

Choice "b" is correct. The auditor's report on summary financial statements derived from audited statements should indicate (1) that the CPA audited and expressed an opinion on the complete financial statements, (2) the date of the auditor's report on the complete financial statements, (3) the type of opinion expressed, and (4) whether, in the auditor's opinion, the information set forth in the summary financial statements is consistent, in all material respects, with the audited financial statements from which it was derived.

Choice "c" is incorrect. Summary financial statements are not prepared in conformity with a comprehensive basis of accounting other than GAAP.

Choice "d" is incorrect. The auditor's report on summary financial statements does not indicate whether they are fairly presented in all material respects; rather, the report indicates whether they are fairly presented in relation to the complete financial statements.

Choice "a" is incorrect. The auditor does not express an opinion (or provide any assurance) on whether summary financial statements conform with GAAP but only on whether such statements are fairly stated in relation to the complete financial statements.

15

When a CPA reports on audited financial statements prepared on the cash receipts and disbursements basis of accounting, the report should:

a.

Explain why this basis of accounting is more useful for the readers of this entity's financial statements than GAAP.

b.

Include a separate emphasis-of-matter paragraph that discusses the justification for, and the CPA's concurrence with, the departure from GAAP.

c.

State that the basis of presentation is a comprehensive basis of accounting (OCBOA) other than GAAP.

d.

Refer to the note in the financial statements that describes management's responsibility for the financial statements.

Choice "c" is correct. A report on other comprehensive basis of accounting ("OCBOA") financial statements should include an emphasis-of-matter paragraph stating the basis, referring to the footnote that describes it, and indicating that it is a non-GAAP basis.

Choice "a" is incorrect. A report on other comprehensive basis of accounting ("OCBOA") financial statements does not include an evaluation of the usefulness of the basis of accounting.

Choice "d" is incorrect. A report on other comprehensive basis of accounting ("OCBOA") financial statements makes reference to the note in the financial statements that describes the accounting basis, not to a note describing management's responsibility.

Choice "b" is incorrect. The separate emphasis-of-matter paragraph states the basis, refers to the footnote describing it, and indicates that it is a non-GAAP basis. It does not discuss the justification for the non-GAAP basis, nor does the CPA indicate concurrence.

16

Which of the following titles would be considered suitable for financial statements that are prepared on a cash basis?

a.

Statement of operations.

b.

Statement of cash flows.

c.

Statement of revenues collected and expenses paid.

d.

Income statement.

Choice "c" is correct. Non-GAAP statements should be suitably titled. For example, instead of an income statement, an appropriate cash basis financial statement title might be "statement of revenues collected and expenses paid."

Choices "d", "a", and "b" are incorrect. Income statement, statement of operations, and statement of cash flows are all GAAP basis financial statement titles that would not be suitable for cash basis financial statements.

17

Which of the following would be an appropriate title for a statement of revenue and expenses prepared using an other comprehensive basis of accounting (OCBOA)?

a.

Income statement.

b.

Statement of activities.

c.

Statement of operations.

d.

Statement of income-regulatory basis.

Choice "d" is correct. Other comprehensive basis of accounting financial statements include financial statements prepared in accordance with a regulatory basis of accounting. An income statement prepared in accordance with a regulatory basis of accounting could be entitled "Statement of income-regulatory basis."

Choice "c" is incorrect. This is another term for an income statement under U.S. GAAP and is not an appropriate title for a statement of revenue and expenses prepared using an other comprehensive basis of accounting.

Choice "a" is incorrect. The income statement title is used under U.S. GAAP and is not an appropriate title for a statement of revenue and expenses prepared using an other comprehensive basis of accounting.

Choice "b" is incorrect. The statement of activities is the title used for a not-for-profit organization's statement of revenues and expenses and is not an appropriate title for a statement of revenue and expenses prepared using an other comprehensive basis of accounting.

18

An auditor may report on summary financial statements that are derived from complete audited financial statements if the:

a.

Summary financial statements are presented in comparative form with the prior year's summary financial statements.

b.

Summary financial statements are distributed only to management and the board of directors.

c.

Auditor indicates whether the summary financial statements are consistent in all material respects with the audited financial statements.

d.

Auditor describes the additional review procedures performed on the summary financial statements.

Choice "c" is correct. When reporting on summary financial statement the auditor should indicate in his report whether the summary financial statements are consistent in all material respects with the audited financial statements from which they have been derived.

Choices "a" and "b" are incorrect. There is no requirement that the summary financial statements be presented in comparative form, or that they be distributed only to management and the board of directors (i.e., distribution is not restricted).

Choice "d" is incorrect. The auditor would not perform or describe additional review procedures related to the summary financial statements.

19

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:

a.

May audit only Maxim's balance sheet if the CPA disclaims an opinion on the other financial statements.

b.

May not audit only Maxim's balance sheet if the amount of the loan is material to the financial statements taken as a whole.

c.

May not audit only Maxim's balance sheet if Maxim is a nonissuer.

d.

May audit only Maxim's balance sheet if the auditor obtains an understanding of the purpose for which the single financial statement is prepared, the intended users, and the steps taken by management to determine that the applicable financial reporting framework is acceptable in the circumstances.

Choice "d" is correct. The auditor may report on one basic financial statement and not the others provided these steps are taken by the auditor. The auditor should also perform procedures on any interrelated items as necessary, such as sales and receivables, inventory and payables, and fixed assets and depreciation.

Choice "b" is incorrect. Materiality only comes into play when dealing with a piecemeal opinion, not an opinion on one entire statement.

Choice "c" is incorrect. If Maxim is a nonissuer, it would not need to abide by GAAP, thus many of the financial statement requirements would not apply.

Choice "a" is incorrect. A disclaimer of opinion on the other statements is not required as long as there is no limitation on the information underlying the basic financial statements.

20

Reports on special purpose frameworks are issued in conjunction with:

a.

Interim financial information reviewed to determine whether material modifications should be made to conform with GAAP.

b.

Compliance with reporting requirements to be filed with a specific regulatory agency.

c.

Feasibility studies presented to illustrate an entity's results of operations.

d.

Pro forma financial presentations designed to demonstrate the effects of hypothetical transactions.

Choice "b" is correct. A special purpose framework is a financial basis of accounting other than GAAP that includes cash basis, tax basis, regulatory basis, and contractual basis. Reporting to comply with required regulatory requirements fits a special purpose framework that deviates from traditional GAAP reporting.

Choice "a" is incorrect. A report on interim financial information reviewed to determine whether material modifications should be made to conform with GAAP is not included in the definition of a special purpose framework report. 

Choice "c" is incorrect. Reports related to feasibility studies presented to illustrate an entity's results of operations are not special purpose framework reports.

Choice "d" is incorrect. Reports on pro forma financial presentations designed to demonstrate the effects of hypothetical transactions are attestation reports, not special purpose framework reports.

21

Which of the following is true about the assurance provided by special reports?

a.

A list of procedures and findings (but no assurance) is provided in some special reports.

b.

A positive opinion may be rendered in some types of special reports.

c.

All special reports result in positive assurance.

d.

All special reports result in negative assurance.

Choice "b" is correct. Positive assurance is provided in OCBOA reports, reports on specified elements, accounts, or items, and reports on special-purpose financial presentations to comply with contractual agreements or regulatory provisions. Where applicable, the emphasis-of-matter paragraph in the report indicates that the financial statements (elements, accounts, items) were prepared in accordance with the applicable special purpose framework (positive assurance). 

Choice "d" is incorrect. Positive assurance is provided in OCBOA reports, reports on specified elements, accounts, or items, and reports on special-purpose financial presentations to comply with contractual agreements or regulatory provisions.

Choice "c" is incorrect. Negative assurance is provided in reports on compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements.

Choice "a" is incorrect. Procedures and findings are listed in reports related to agreed-upon procedures engagements, not in special reports.

22

A report includes the following language, "This report is intended solely for the information and use of the board of directors and management of X Company, and is not intended to be and should not be used by anyone other than the specified parties." This report would most likely relate to which of the following engagements?

a.

A report on an examination of a financial forecast.

b.

A report on financial statements prepared on the cash basis of accounting.

c.

A report on a specified element in a financial statement, where that element is prepared in accordance with an other comprehensive basis of accounting.

d.

A report on a client's compliance with a regulatory requirement, assuming the report is prepared based on a financial statement audit of the complete financial statements.

Choice "d" is correct. A report on a client's compliance with a regulatory requirement, assuming the report is prepared based on a financial statement audit of the complete financial statements, would contain restricted use language.

Choice "c" is incorrect. A report on a specified element in a financial statement, where that element is prepared in accordance with an other comprehensive basis of accounting, would not contain restricted use language.

Choice "a" is incorrect. A report on an examination of a financial forecast does not require a restriction on the use of the report.

Choice "b" is incorrect. A report on financial statements prepared in conformity with an other comprehensive basis of accounting (such as the cash basis) does not require a restriction on the use of the report.

23

Which of the following items should be included in an auditor's report for financial statements prepared in conformity with another comprehensive basis of accounting (OCBOA)?

a.

A paragraph stating that the audit was conducted in accordance with OCBOA.

b.

The signature of the company controller.

c.

A sentence stating that the auditor is responsible for the financial statements.

d.

A title that includes the word "independent."

Choice "d" is correct. The title of the OCBOA report should be "Independent Auditor's Report."

Choice "c" is incorrect. The management of the company is responsible for the financial statements.

Choice "b" is incorrect. Because the auditor is preparing the auditor's report under OCBOA, he or she would sign the report (not the company controller).

Choice "a" is incorrect. The financial statements are prepared using the OCBOA.  The audit report would state that the audit was conducted in accordance with auditing standards generally accepted in the United States of America.

24

An auditor is reporting on summary financial statements for an annual period that are derived from the audited financial statements of a publicly-held entity. The auditor's opinion should indicate whether the information in the summary financial statements is fairly stated in all material respects:

a.

In relation to supplementary filings under federal security statutes.

b.

In conformity with an other comprehensive basis of accounting.

c.

In relation to the complete financial statements.

d.

In conformity with accounting principles generally accepted in the United States of America.

Choice "c" is correct. The auditor should report whether the information in the summary financial statements is fairly stated, in all material respects, in relation to the financial statements from which it has been derived.

Choice "d" is incorrect. Summary financial statements do not include all of the disclosures required by GAAP, and therefore would not typically be presented in conformity with GAAP.

Choice "b" is incorrect. Summary financial statements are presented in less detail than complete financial statements, but the fact pattern gives no indication that any comprehensive basis of accounting other than GAAP has been used.

Choice "a" is incorrect. The auditor should report whether the information in the summary financial statements is fairly stated, in all material respects, in relation to the financial statements from which it has been derived, not in relation to supplementary filings under federal security statutes.

25

An auditor may report on summary financial statements that are derived from a complete set of audited financial statements only if the auditor:

a.

Expresses an unqualified opinion on the audited financial statements from which the summary financial statements are derived.

b.

Indicates whether the information is consistent in all material respects with the complete financial statements.

c.

Presents the summary financial statements in comparative form with the prior-year's summary financial statements.

d.

Determines that the summary financial statements include all the disclosures necessary for the complete set of financial statements.

Choice "b" is correct. An auditor may report on summary financial statements that are derived from a complete set of financial statements only if the auditor indicates whether the information is consistent in all material respects with the complete set of financial statements.

Choice "a" is incorrect. The auditor can issue a qualified opinion on the audited financial statements from which the summary financial statements are derived.

Choice "d" is incorrect. Summary financial statements do not include all of the disclosures that are included in a complete set of financial statements.

Choice "c" is incorrect. There is no requirement that prior year's summary financial statements be presented in comparative form with the current year's summary financial statements.

26

An auditor has been asked to report on the balance sheet of Kane Company but not on the other basic financial statements. Which of the following is not required of the auditor?

a.

When auditing a single financial statement, the auditor may perform the audit as a separate engagement or in conjunction with an audit of an entity's complete set of financial statements.

b.

When auditing a single financial statement, the auditor should perform procedures, as necessary, on interrelated items (sales/receivables, inventory/payables, fixed assets/depreciation).

c.

When auditing a single financial statement, the auditor should determine materiality for the complete set of financial statements rather than for the single financial statement.

d.

When auditing a single financial statement, the auditor should obtain an understanding of the intended users of the statement.

Choice "c" is correct. The auditor is required to determine materiality for the single financial statement.

Choice "a" is incorrect. The auditor can perform the audit as either a separate engagement or in conjunction with an audit of the complete set of financial statements.

Choice "b" is incorrect. In auditing a single financial statement, the auditor should perform procedures, as necessary, on interrelated items.

Choice "d" is incorrect. The auditor, when auditing a single financial statement, is required to understand the intended users of the financial statement.

27

An entity prepares its financial statements on its income tax basis. A description of how that basis differs from GAAP should be included in the:

a.

Auditor's engagement letter.

b.

Notes to the financial statements.

c.

Management representation letter.

d.

Introductory paragraph of the auditor's report.

Choice "b" is correct. A description of how the income tax basis differs from GAAP should be included in the notes to the financial statements.

Choice "a" is incorrect. The auditor's engagement letter may discuss that the financial statements are prepared on the income tax basis. However, it is unlikely that the engagement letter would include a description of how that basis differs from GAAP.

Choice "c" is incorrect. The management representation letter would likely include management's acknowledgement of their responsibility for the fair presentation of the financial statements in accordance with the applicable financial reporting framework. However, it is unlikely that the management representation letter would include a description of how that basis differs from GAAP.

Choice "d" is incorrect. The introductory paragraph of the auditor's report identifies the financial statements audited, but does not include a description of how the other comprehensive basis of accounting differs from GAAP.