Audit Reporting Flashcards
1
Q
For an entity’s financial statements to be presented fairly in conformity with generally accepted accounting principles, the principles selected should
A
1) be prepared in accordance with the identified financial reporting framework;
2) be appropriate in the circumstances;
3) provide information about matters that may affect the use, understanding, and interpretation of the financial statements;
4) classify and summarize information in a reasonable manner; and
5) reflect transactions in a manner that presents the financial position, results of operations, and cash flows stated within a range of reasonable and practicable limits.
2
Q
GAAS require the auditor’s report to contain either an expression of opinion regarding the financial statements or an assertion to the effect that an opinion cannot be expressed.
The objective of this requirement is to prevent
A
Misinterpretations regarding the degree of responsibility the auditor is assuming.
3
Q
When financial statements contain a departure from GAAP because, due to unusual circumstances, the statements would otherwise be misleading, the auditor should explain the unusual circumstances in a separate paragraph and express an opinion that is
A
Unmodified.
When strict adherence to GAAP would result in misleading financial statements, the auditor may issue an unmodified opinion accompanied by an emphasis-of-matter paragraph describing the GAAP departure.
4
Q
If an auditor is satisfied that there is only a remote likelihood of a loss resulting from the resolution of a matter involving an uncertainty, the auditor should express a(n)
A
Unmodified opinion.
If there is only a remote likelihood of a loss resulting from an uncertainty, GAAP does not require adjustment or disclosure. The auditor should express an unmodified opinion.
5
Q
When issuing an unmodified opinion, the auditor who evaluates the audit findings should be satisfied that the
A
Estimate of the total likely misstatement is less than a material amount.
In order to issue an unmodified opinion, the auditor must be confident that no material misstatements exist in the financial statements. While misstatements may exist, in total they must be believed to be less than a material amount.
6
Q
Clarified Standards—Under the AICPA’s Clarified Standards, the auditor’s unmodified report has been reformatted and expanded to reflect four main sections:
A
- The first section ordinarily has no label, and merely identifies the nature of the engagement and the entity’s financial statements involved (consisting of one sentence).
- Management’s Responsibility for the Financial Statements (one sentence)—States that management is responsible for the fair presentation of the financial statements and the design and implementation of internal control.
- Auditor’s Responsibility, which consists of three separate paragraphs.
- The fourth section is labeled Opinion (one sentence)—Expresses the auditor’s opinion (in the same wording as that used in the previous AICPA standards).
Signature Block—The AICPA now requires identification of the CPA’s city/state, in addition to the signature and date.
7
Q
Auditor’s Responsibility, which consists of three separate paragraphs.
A
- The first consists of three sentences—(1) responsibility to express an opinion; (2) conducted the audit in accordance with (GAAS); and (3) plan and perform the audit to provide reasonable assurance.
- The second consists of five sentences—(1) perform procedures to obtain audit evidence about the amounts and disclosures; (2) the procedures depend on the auditor’s judgment, including assessment of risks of material misstatement, whether due to fraud or error; (3) in making those risk assessments, the auditor considers internal control; (4) auditor expresses no such opinion (on internal control, when not engaged to report on internal control in an integrated audit); and (5) an audit includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates.
- The third consists of one sentence—Expressing the auditor’s belief that the audit evidence is sufficient and appropriate to provide a basis for the opinion.
8
Q
Alternative Audit Reports
A
- emphasis-of-matter paragraph.
- other-matter paragraph.
- Qualified Opinion—The auditor expresses one or more reservations about (1) the financial statement presentation (owing to a material departure from the requirements of the applicable financial reporting framework); or (2) the audit engagement (owing to a scope limitation about a material matter for which the auditor was unable to obtain sufficient appropriate audit evidence).
- Adverse Opinion—The auditor states that the financial statements are not fairly stated (as a result of a departure from the requirements of the applicable financial reporting framework that is material and pervasive).
- Disclaimer of Opinion—A report in which the auditor expresses no conclusion about the fairness of the entity’s financial statements (due to a scope limitation that is material and pervasive).
9
Q
Form AP, which must be filed with the PCAOB for every audit of an issuer, addresses each of the following matters
A
- The extent of participation of any other accounting firm whose participation in the audit accounts for 5% or more of the total audit hours involved with the engagement.
- The name of the engagement partner.
- The number and extent in total of all other accounting firms whose participation in the audit accounts for less than 5% of the total audit hours involved with the engagement.
- PCAOB auditing standards require that such a statement regarding the auditor’s tenure be expressed somewhere within the audit report, not in Form AP.
10
Q
Which of the following statements is correct about the auditor’s report under PCAOB auditing standards?
A
- The auditor’s opinion is expressed at the beginning of the audit report.
- The auditor’s report to be dated at the point at which the auditor obtained sufficient appropriate audit evidence as a basis for the opinion
- Each section of the audit report must have an appropriate label. (a) Opinion on the Financial Statements; (b) Basis for Opinion; and (c) Critical Audit Matters
- Critical audit matters must be identified and discussed in the auditor’s report.
- The report must state the year when the auditor first began serving consecutively as the company’s auditor
11
Q
Under PCAOB auditing standards, every audit report must include a section on critical audit matters, except for
A
A disclaimer of opinion due to a scope limitation that is material and pervasive.
A disclaimer of opinion due to a scope limitation that is material and pervasive.
12
Q
Critical audit matters (CAMs)
A
Any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that relates to accounts or disclosures that are material to the financial statements and involved especially challenging, subjective, or complex auditor judgment
13
Q
In the group auditor’s report, the group engagement partner decides not to make reference to a component auditor who audited a client’s subsidiary. The group auditor could justify this decision if, among other requirements, the group engagement partner
A
The group engagement partner can elect to take full responsibility for the financial statements, so long as satisfaction with the independence, and professional reputation, and competence of the component auditor is obtained and the additional requirements for assuming responsibility have been met.
14
Q
The group engagement partner decides not to refer to the audit of a component auditor who audited a subsidiary of the group auditor’s client. After making inquiries about the component auditor’s professional reputation and independence, the group engagement partner most likely would
A
Contact the component auditor and review the audit programs and documentation pertaining to the subsidiary.
When the group engagement partner decides not to accept responsibility for the work performed by a component auditor, the group engagement partner must disclose this fact in the audit report.
15
Q
Which of the following procedures would the group auditor most likely perform after deciding to make reference to a component auditor who audited a subsidiary of the reporting entity?
A
When part of the audit is performed by a component auditor, the group auditor is required to make inquiries concerning the professional reputation, independence, and competence of the component auditor.
16
Q
AICPA Professional Standards, specifically Terms of Engagement (AU-C 210.A26), identify five considerations that may influence the decision to obtain a separate engagement letter when the auditor audits the parent nonissuer and the component:
A
(1) who engages the component auditor;
(2) whether a separate auditor’s report is to be issued on the component;
(3) legal requirements regarding the appointment of the auditor;
(4) the degree of ownership by the parent; and
(5) the degree of independence of the component management from the parent entity.
17
Q
Green, CPA, concludes that there is substantial doubt about JKL Co.’s ability to continue as a going concern.
If JKL’s financial statements adequately disclose its financial difficulties, Green’s auditor’s report should
A
- Include a separate paragraph following the opinion -paragraph
- Specifically use the words “going concern”
- Specifically use the words “substantial doubt”
18
Q
Emphasis-of-Matter Paragraph
A
A paragraph that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements.
19
Q
Other-Matter Paragraph
A
A paragraph that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report.
20
Q
Matters for which an emphasis-of-matter paragraph is required:
A
- When the auditor has substantial doubt about the entity’s ability to continue as a going concern
- When there is an inconsistency in accounting principles used
- When the financial statements are prepared in accordance with special purpose frameworks
21
Q
Circumstances for which an auditor may consider it necessary to add an emphasis-of-matter paragraph
A
(1) an uncertainty as to the outcome of unusually important litigation or regulator action;
(2) a major casualty having a significant effect;
(3) significant transactions with related parties; or
(4) unusually important subsequent events.
22
Q
Circumstances for which an Auditor May Consider it Necessary to Add an Other-Matter Paragraph:
A
- Relevant to users’ understanding of the audit—In rare situations, the auditor may add an other-matter paragraph to explain why it was not possible for the auditor to withdraw from an engagement in which a scope limitation that was pervasive resulted in a disclaimer of opinion.
- Relevant to users’ understanding of the auditor’s responsibilities or the auditor’s report—For example, when the opinion expressed on the prior year’s financial statements is different than the opinion previously expressed
23
Q
An auditor was unable to obtain audited financial statements or other evidence supporting an entity’s investment in a foreign subsidiary.
Between which of the following opinions should the entity’s auditor choose?
A
Qualified and disclaimer.
The auditor’s inability to obtain audited financial statements or other evidence supporting an entity’s investment in a foreign subsidiary represents a scope limitation. Either a qualified opinion or a disclaimer would be issued.
24
Q
In which of the following circumstances would an auditor usually choose between issuing a qualified opinion or a disclaimer of opinion?
A
Inability to obtain sufficient appropriate evidential matter (scope limitation or GAAP departure)
25
An auditor most likely would modify the audit report if the entity's financial statements include a footnote on related party transactions
Stating that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction.
Material related party transactions must be disclosed.
In general, it is not possible to determine whether or not such transactions were conducted on terms equivalent to those in an arm's-length transaction. If the entity's financial statements include a footnote on related party transactions that states that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction, should obtain sufficient appropriate evidence to verify arm's-length equivalence. If such evidence were not available, the auditor would ask management to remove the unsupportable statement. If the entity refused to remove the footnote in question, the auditor would consider issuing a qualified or adverse opinion, due to GAAP departure.
26
The standard states that the auditor's objective is to express clearly an appropriately modified opinion when
(1) the auditor concludes that the financial statements as a whole are misstated; or
(2) the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.
27
Modified opinion:
A qualified opinion, an adverse opinion, or a disclaimer of opinion.
28
Opinion Scope Limitation Involves Judgment
1. Qualified Opinion— auditor is unable to obtain sufficient appropriate audit evidence, and the auditor concludes that the possible effect on the financial statements, if any, could be material, but not pervasive.
2. Disclaimer of Opinion— auditor is unable to obtain sufficient appropriate audit evidence, and the auditor concludes that the possible effect on the financial statements, if any, could be material and pervasive.
29
Circumstances Resulting in a Scope Limitation
1. entity's accounting records have been destroyed.
2. auditor determines that substantive procedures alone are not sufficient and the entity's controls are ineffective; the auditor is unable to obtain audited financial statements of an investee
3. the timing of the auditor's appointment does not permit the auditor to observe the physical counting of inventories.
4. Limitations Imposed by Management
30
Effect of a Qualification for a Scope Limitation on the Auditor's Report
1. No effect on the introductory paragraph or management's responsibility section.
2. Auditor's responsibility section—Modify the last sentence to state, “We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.”
3. Add a “Basis for Qualified Opinion” paragraph
4. Qualify the opinion using appropriate language such as: “In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph
31
Zag Co. issues financial statements that present financial position and results of operations but Zag omits the related statement of cash flows. Zag would like to engage Brown, CPA, to audit its financial statements without the statement of cash flows although Brown's access to all of the information underlying the basic financial statements will not be limited. Under these circumstances, Brown most likely would
Explain to Zag that the omission requires a qualification of the auditor's opinion.
When an entity omits a statement of cash flows, the auditor may accept an engagement to audit the other financial statements, but should qualify the opinion, since a statement of cash flows is required when general-purpose financial statements present financial position and results of operation.
32
Opinion Choice for a Misstatement (Including Inadequate Disclosure) Involves Judgment
1. Qualified Opinion— auditor concludes that misstatements are material, but not pervasive to the financial statements.
2. Adverse Opinion— auditor concludes that misstatements are material, and pervasive to the financial statements.
33
Effect of a Qualification for a Misstatement on the Auditor's Report:
Same as for Scope limitation except:
Add a “Basis for Qualified Opinion” paragraph (with such a label) before the opinion paragraph which MUST should include a description and quantification of the financial effects of the misstatement; likewise, the auditor should include the omitted information (when practicable).
34
Tread Corp. accounts for the effect of a material accounting change prospectively when the inclusion of the cumulative effect of the change is required in the current year.
The auditor would choose between expressing a(n)
Adverse opinion and a qualified opinion.
Accounting for the effect of a material accounting change prospectively, when GAAP require inclusion of the cumulative effect of the change in the current year, is a GAAP departure. A material GAAP departure results in either an adverse or a qualified opinion.
35
Effect of an Adverse Opinion on the Auditor's Report
1. No effect on the introductory paragraph or management's responsibility section.
2. Auditor's responsibility section—modify the last sentence to state, “We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our adverse audit opinion.”
3. Add a “Basis for Adverse Opinion” paragraph with same requirements as qualification of misstatement
4. Express the adverse opinion using appropriate language such as: “In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion paragraph, the financial statements referred to above do not present fairly
36
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
The financial statements fail to contain adequate disclosure concerning related party transactions.
A disclaimer is issued when the scope limitations pertaining to the audit are so pervasive that the auditor in unable to express an opinion. Lack of adequate disclosures in the financial statements is a GAAP departure, not a scope limitation. Thus, a disclaimer of opinion would not be appropriate.
37
Effect of a Disclaimer of Opinion on the Auditor's Report
1. Minor effect on the introductory paragraph (“We were engaged to audit …”) and no effect on the management's responsibility section.
2. Auditor's responsibility section—Revise this section to consist of the following two sentences: “Our responsibility is to express an opinion on these financial statements based on conducting the audit in accordance with auditing standards generally accepted in the United States of America. Because of the matter described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.”
3. Add a “Basis for Disclaimer of Opinion” paragraph
4. Disclaim an opinion using appropriate language such as: “Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on these financial statements.”
38
When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should
Not refer to the change in the auditor's report.
Only material matters are relevant to the auditor's report.
39
When there has been a change in accounting principle that materially affects the comparability of the comparative financial statements presented and the auditor concurs with the change, the auditor should
Refer to the change in an emphasis-of-matter paragraph
If a change in accounting principle has occurred and the auditor concurs with the change, the only requirement that must be met is to refer to the change in an emphasis-of-matter paragraph following an otherwise unmodified opinion.
40
In the first audit of a new client, an auditor was able to extend auditing procedures to gather sufficient evidence about consistency.
Not refer to consistency in the auditor's report.
GAAS require that the auditor identify occasions in which the accounting principles have not been applied consistently. No mention is to be made in the report if the consistency requirement is met. If the auditor was able to obtain sufficient evidence about consistency, the auditor's report should not refer to consistency.
41
Consistency of Financial Statements. The standard states that the auditor's objectives are to
(1) evaluate the consistency of the financial statements for the periods presented; and
(2) communicate appropriately in the auditor's report when comparability has been materially affected by:
(a) change in accounting principle or (b) adjustments to correct a material misstatement in previously issued financial statements.
42
When the Auditor's Opinion Covers Two (or More) Periods
The auditor should evaluate the consistency between such periods, as well as the consistency of the earliest period covered by the auditor's opinion with the prior period.
43
The auditor should evaluate a change in accounting principles about four matters:
1. in accordance with the applicable financial reporting framework
2. method of accounting for the effect of the change is in accordance with the applicable financial reporting framework
3. disclosures about the change are adequate
4. Whether the entity has justified that the alternative adopted is preferable
44
When the financial statements are restated to correct a prior material misstatement
The auditor should include an emphasis-of-matter paragraph in the auditor's report. (That paragraph need not be included in subsequent periods.) The auditor should state that the auditor's opinion is not modified regarding the matter.
A change from an accounting principle that is not in accordance with the applicable financial reporting framework to one that is in accordance is a correction of a misstatement.
45
If the financial statement disclosures relating to the restatement are not adequate
The auditor should evaluate the inadequacy of disclosure and consider whether the auditor's report should be modified.
46
Effect on the Auditor's Report of consistency
The auditor need not refer to consistency, unless there is an inconsistency due to a material change in accounting principle or restatement.
Emphasis of matter paragraph added for voluntary change in principle and restatement.
47
An auditor should ordinarily add an explanatory paragraph to the auditor's report to identify a material matter related to
A change in accounting principle caused by the issuance of a new authoritative accounting standard that rendered the principle previously used no longer generally accepted.
PCAOB auditing standards identify two specific matters that affect the auditor's evaluation of consistency of financial statements: (1) a change in accounting principle; and (2) an adjustment to correct a misstatement in previously issued financial statements
48
If management has not justified that the alternative accounting principle is preferable to an accounting principle previously used and the effect of the change in accounting principle is material to a company's financial statements, the auditor should
Decide between a qualified opinion and an adverse opinion.
When there is a change in accounting principle, the auditor should evaluate whether: (1) the newly adopted principle is GAAP; (2) the method of accounting for the effect of the change conforms to GAAP; (3) the disclosures related to the change are adequate; and (4) the company has justified that the alternative accounting principle is preferable. If one (or more) of the above criteria is (are) not met, the auditor should treat the matter, if material, as a GAAP departure, which involves a choice between a qualified opinion and an adverse opinion.
49
PCOAB Change in Classification
Changes in classification in previously issued financial statements normally do not require recognition in the auditor's report (unless the change represents a change in accounting principle or the correction of a material misstatement).
50
While conducting an audit of a new nonissuer client, an auditor discovers that accounting policies applied in relation to the financial statement opening balances are inconsistent with accounting policies applied during the period under audit. In this scenario, what should the auditor do?
Obtain sufficient appropriate evidence about whether changes in the accounting policies have been appropriately accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework.
When there is such an inconsistency the auditor should evaluate whether:
(1) the adopted principle is in accordance with the applicable financial reporting framework;
(2) whether the effect of the change is accounted for in accordance with the applicable reporting framework;
(3) whether disclosures about the change are adequate; (4) whether the entity has justified that the alternative selected is preferable.
51
Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement?
Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.
52
Park, CPA, was engaged to audit the financial statements of Tech Co., a new client, for the year ended December 31, 20x1. Park obtained sufficient audit evidence for all of Tech's financial statement items except Tech's opening inventory. Due to inadequate financial records, Park could not verify Tech's January 1, 20x1, inventory balances.
Park's opinion on Tech's 20x1 financial statements most likely will be on the
Auditor is unable to express an opinion and must disclaim on the income and retained earnings statements and the statement of cash flows. The auditor will, however, be able to render an unmodified opinion on the balance sheet.
53
When audited financial statements are presented in a client's document containing other information, the auditor should
Read the other information to determine that it is consistent with the audited financial statements.
54
Other Information:
Information other than the financial statements and the auditor's report that is included in a document containing audited financial statements and the auditor's report (can be financial and nonfinancial information, but excludes required supplementary information).
Financial summaries or highlights, management reports on operations, employment data, financial ratios, selected quarterly data, employment data, names of officers/directors, etc.
Other information does not include press releases or info on company website.
The auditor is not required to reference the other information in the auditor's report, but may choose to include a disclaimer of opinion on it to avoid any confusion.
55
If supplementary information in a document accompanying the basic financial statements has been subjected to auditing procedures, the auditor may include in the auditor's report on the financial statements an opinion that the accompanying information is fairly stated in
All material respects in relation to the financial statements as a whole.
56
When reporting on such supplementary information in relation to the financial statements as a whole, the measurement of materiality is the
Same as that used in forming an opinion on the basic financial statements taken as a whole.
57
When an accountant compiles a client's financial statements accompanied by supplemental information, which of the following is a required element of the accountant's separate report on the supplemental information?
A statement that the information has been compiled from information that is the representation of management without audit or review.
The accountant's separate report on the supplementary information should include a statement that the supplementary information is the responsibility of management and was derived from and relates directly to the underlying records used to prepare the financial statements. The report should further state that the supplementary information was not audited or reviewed (since it was compiled) and that no assurance of any type is provided.
58
Fairly Stated—When engaged to determine whether supplementary information is fairly stated in relation to the financial statements.
The auditor should determine whether:
The supplementary information will either accompany the entity's audited financial statements or the audited financial statements will be made readily available by the entity.
Either an unmodified or qualified opinion was expressed on the financial statements (must not have issued an adverse opinion or disclaimer of opinion).
The supplementary information relates to the same period as the financial statements.
The auditor served as the auditor of the financial statements.
59
The client's financial reporting includes supplementary financial information outside the basic financial statements but required by the Financial Accounting Standards Board (FASB). Which of the following statements is correct regarding the auditor's responsibility for this supplementary financial information?
The auditor should perform limited procedures.
The auditor should make certain specific inquiries of management about the required supplementary information:
(1) measured and presented in accordance with prescribed guidelines;
(2) methods of measurement or presentation have been changed relative to the prior period; and
(3) any significant assumptions affect the measurement or presentation of it.
60
An auditor determines that the entity is presenting certain supplementary financial disclosures of pension information that are required by the GASB. Under these circumstances, the auditor should
When supplementary information is included with the financial statements, the auditor is required to perform the following:
1) inquire OF management about methods of preparing the information and whether such methods have changed;
2) ask about significant assumptions;
3) compare the information for consistency with management's responses, the audited financial statements, and other knowledge obtained during the audit; and
4) obtain additional representations in the management representation letter.
61
What is an auditor's responsibility for supplementary information, such as disclosure of pension information, which is outside the basic financial statements, but required by the GASB?
The auditor should apply certain limited procedures to the supplementary information and report deficiencies in, or omissions of, such information.
62
If management declines to present supplementary information required by the Governmental Accounting Standards Board (GASB), the auditor should issue a(n)
Unmodified opinion with an other-matter paragraph.
63
What is an auditor's responsibility for supplementary information, which is outside the basic financial statements, but which is required by the FASB?
Supplementary information, which is required by the FASB, differs from other information presented outside the basic financial statements because authoritative guidelines have been established for the measurement and presentation of such information. As a result, an auditor's responsibility for required supplementary information is to apply certain limited procedures to ascertain whether the information has been presented in accordance with the prescribed guidelines.
64
The auditor's report on supplemental information under PCAOB auditing standards should include a statement about each of the following
A statement that the supplemental information is management's responsibility.
A statement that the supplemental information complies with the applicable regulatory requirements.
An opinion (or disclaimer) as to whether the supplemental information is fairly stated in relation to the financial statements as a whole.
65
In reporting on supplemental information under PCAOB auditing standards, the auditor's procedures should include each of the following
Obtain an understanding of the purpose of the supplemental information and the criteria used by management for its preparation.
Inquire of management about any significant assumptions or interpretations underlying the presentation of the supplemental information.
Verify that the supplemental information reconciles to the underlying accounting or other records of the entity.
Obtain management's representation that the supplemental information complies with the applicable regulatory (or other) criteria
66
The definition of "supplemental information" under PCAOB auditing standards includes all of the following
Supporting schedules that brokers and dealers are required to file with the Securities and Exchange Commission.
Information outside of the financial statements that is derived from the entity's accounting records, which is covered by the auditor's report in relation to financial statements audited under PCAOB auditing standards.
Information that is required to be presented under the rules of a regulatory authority, which is covered by the auditor's report in relation to financial statements audited under PCAOB auditing standards.
67
When adding an alert to restrict the auditor's report, the auditor should place the alert
In a paragraph at the end of the auditor's report.
The purpose of the alert is to restrict the use of the auditor's written communication because of the potential for misunderstanding if taken out of the context for which the written communication is intended.
The auditor should state that the written communication is intended solely for the use of the specified parties
68
The financial statements of KCP America, a U.S. entity, are prepared for inclusion in the consolidated financial statements of its non-U.S. parent. These financial statements are prepared in conformity with the accounting principles generally accepted in the parent's country and are for use only in that country.
How may KCP America's auditor report on these financial statements?
II. A U.S.-style report revised to reference the accounting principles of the parent's country.
III. The report form of the parent's country.
IF the statements are for use ONLY outside the US.
69
For Use Both Outside and Inside the U.S.
Auditor should report using the U.S. form of report, including an emphasis-of-matter paragraph that (1) identifies the financial reporting framework used; (2) refers to the note to the financial statements describing that framework; and (3) indicates that such a framework differs from U.S. GAAP
70
An auditor may report on condensed financial statements that are derived from complete audited financial statements if the
1) the auditor has audited and expressed an opinion on the complete financial statements;
2) the date of the auditor's report on such statements;
3) the type of opinion expressed; and
4) information in the condensed financial statements is consistent, in all material respects, with the audited financial statements.
71
Which of the following procedures ordinarily should be performed when an independent accountant conducts a review of interim financial information under AICPA Professional Standards?
Read the minutes of meetings of those charged with governance.
72
Which of the following statements is correct regarding a review of interim financial information under AICPA Professional Standards?
The independent accountant is required to obtain sufficient knowledge of the entity's business and its internal control related to the interim financial information.
73
Which of the following statements would normally be included in a representation letter for a review of interim financial information?
To the best of our knowledge and belief, no events have occurred subsequent to the balance sheet and through the date of this letter that would require adjustment to or disclosure in the interim financial information.
We acknowledge our responsibility for the design and implementation of programs and controls to prevent and detect fraud.
We have made available to you all financial records and related data.
74
When planning a review of an audit client's interim financial statements, which of the following procedures should the accountant perform to update the accountant's knowledge about the entity's business and its internal control?
Consider the results of audit procedures performed with respect to the current year's financial statements.
Consider the results of audit procedures performed with respect to the current year's financial statements.
75
An independent accountant's report is based on a review of interim financial information.
If this report is presented in a registration statement, a prospectus should include a statement clarifying that the
Accountant's review report is not a part of the registration statement within the meaning of the Securities Act of 1933.
76
Agreement on Engagement Terms for Interim reports
Engagement letter that includes:
(1) the objectives and scope of the engagement;
(2) the responsibilities of management;
(3) the responsibilities of the auditor;
(4) the limitations of a review engagement; and
(5) identification of the applicable financial reporting framework.
77
Engagement Performance for Interim Reports
1. Analytical procedures
2. Inquiries and other review procedures
3. Inquiry concerning litigation, claims, and assessments
4. Going-concern issues
78
Written Representations from Management for Interim Reports
The auditor should obtain written representations from management for all interim financial information presented as of the date of the auditor's review report. If management does not provide the written representation requested, the auditor should withdraw from the engagement to review the interim financial information.
79
Responsibilities under Federal Securities Statutes—The Securities Act of 1933
- Section 11 defense—After a reasonable investigation, the independent accountant had reasonable grounds to believe that the financial statements were fairly stated
- Statutory responsibility is determined in light of the circumstances on the effective date of the registration statement.
- The CPA should read the relevant parts of any prospectus filed under the 1933 Act to verify that the independent accountant's name is not being used inappropriately.
- When the registration statement references the interim financial information reviewed by the accountant—the prospectus should clearly indicate that the review report is not part of the registration statement within the meaning of the 1933 Act.
80
King, CPA, was engaged to audit the financial statements of Newton Company after its fiscal year had ended. King neither observed the inventory count nor confirmed the receivables by direct communication with debtors, but was satisfied concerning both after applying alternative procedures.
King's auditor's report most likely contained a(n)
Unmodified opinion.
As long as the auditor is satisfied regarding the fair presentation of the accounts and financial statements in accordance with GAAP, an unmodified opinion may be expressed.
81
When unaudited financial statements of a nonpublic entity are presented in comparative form with audited financial statements in the subsequent year, the unaudited financial statements should be clearly marked to indicate their status and
I. The report on the unaudited financial statements should be reissued.
OR
II. The report on the audited financial statements should include a separate paragraph describing the responsibility assumed for the unaudited financial statements.
82
Miller Co. uses the first-in, first-out method of costing for its international subsidiary's inventory and the last-in, first-out method of costing for its domestic inventory.
Under these circumstances, Miller should issue an auditor's report with an
Unmodified opinion.
A company is allowed to utilize different methods of costing for different inventories.
83
An auditor's report contains the following sentences:
We did not audit the financial statements of JK Co., a wholly-owned subsidiary, whose statements reflect total assets and revenues constituting 17 percent and 19 percent, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for JK Co., is based solely on the report of the other auditors.
These sentences
Divide responsibility.
84
Which of the following phrases should be included in the opinion paragraph when an auditor expresses a qualified opinion?
The opinion paragraph of a qualified opinion should include the phrase "except for . . ."
85
An auditor should ordinarily add an explanatory paragraph to the auditor's report to identify a material matter related to
A correction of a material misstatement in previously issued financial statements.
The PCAOB identifies two specific matters that affect the auditor's evaluation of consistency of financial statements: (1) a change in accounting principle; and (2) an adjustment to correct a misstatement in previously issued financial statements
86
The objective of a review of interim financial information of a public entity is to provide the accountant with a basis for
Reporting whether material modifications should be made for such information to conform with the applicable financial reporting framework.
87
In connection with a proposal to obtain a new client, an accountant in public practice is asked to prepare a written report on the application of accounting principles to a specific transaction.
The accountant's report should include a statement that
Any difference in the facts, circumstances, or assumptions presented may change the report.
An accountant's report on the application of accounting principles to a specific transaction should include:
1) a statement that the engagement was conducted in accordance with applicable AICPA standards,
2) a description of the transaction and the accounting principles to be applied,
3) a statement indicating that responsibility for proper accounting treatment rests with the preparers of the financial statements, and
4) a statement that any difference in the facts, circumstances, or assumptions may change the report.
88
Reporting Accountant:
An accountant, other than a continuing accountant, who prepares a written report or provides oral advice on the application of the requirements of an applicable financial reporting framework to a specific transaction or on the type of report that may be issued on a specific entity's financial statements.
The reporting accountant should not accept any engagement involving a hypothetical transaction .
The reporting accountant should consider the following: (1) the circumstances under which the written report or oral advice is requested; (2) the purpose of the request; and (3) the intended use of the written report or oral advice.
89
When reporting on financial statements prepared on the same basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that
States that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles.
90
An auditor's report on financial statements prepared on the cash receipts and disbursements basis of accounting should include all of the following
A reference to the note to the financial statements that describes the cash receipts and disbursements basis of accounting.
An opinion as to whether the financial statements are presented fairly in conformity with the cash receipts and disbursements basis of accounting.
A statement that the audit was conducted in accordance with generally accepted auditing standards.
91
Which of the following items should be included in an auditor's report for financial statements prepared using a special-purpose framework?
A title that includes the word "independent."
The auditor's report should include the word "independent," regardless of the financial reporting framework used in preparing the entity's financial statements.
92
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
Disclose any reservations in an explanatory paragraph and qualify the opinion.
This constitutes a departure from the applicable accounting framework (analogous to a GAAP departure).
93
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
Notes to the financial statements.
94
An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include a separate explanatory paragraph after the opinion paragraph that
Refers to the note to the financial statements that describes the basis of accounting.
95
Which special purpose frameworks require a description of purpose for which such financial statements are prepared?
Only regulatory basis (whether intended for general use or not) and contractual basis. (Cash basis and tax basis do not!)
96
Alerting Readers in an Emphasis-of-Matter Paragraph
The auditor's report on special purpose financial statements should include an emphasis-of-matter paragraph that
(1) indicates that the financial statements are prepared in accordance with the applicable special purpose framework;
(2) refers to the note that describes that framework; and (3) states that the special purpose framework is a basis of accounting other than GAAP. (only exception involves regulatory basis financial statements intended for general use.)
97
Restricting the Use of the Auditor's Report to the Intended Users
The auditor's report should also include an other-matter paragraph that restricts the use of the auditor's report to those within the entity, the parties to the contract ⁄ agreement, or the regulatory agencies to whom the entity is subject when the financial statements are prepared in accordance with either
(1) a contractual basis of accounting; or
(2) a regulatory basis of accounting.
(exception involves regulatory basis financial statements intended for general use for which no such restriction is needed, no restriction applies to cash or tax basis.)
98
Regulatory Basis Financial Statements Intended for General Use
If the financial statements are prepared in accordance with a regulatory basis of accounting and are intended for general use, the auditor should NOT include the emphasis-of-matter or other-matter paragraphs. Instead:
(1) an opinion as to whether the financial statements are prepared in accordance with GAAP (which they are not); and
(2) an opinion in a separate paragraph as to whether the financial statements are prepared in accordance with the special purpose framework.
99
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 access to the information underlying the basic financial statements is not limited.
The auditor may express an opinion on a single financial statement (such as the balance sheet)
100
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
Refer to the report issued on the audited financial statements.
101
If the Specific Element is Based on Stockholders' Equity
The auditor should obtain sufficient appropriate evidence to enable the auditor to express an opinion about financial position. (This effectively means that the auditor should have audited the whole balance sheet in order to report on an element based on stockholders' equity.)
102
If the Specific Element is Based upon the Entity's Net Income or the Equivalent
The auditor should obtain sufficient appropriate evidence to enable the auditor to express an opinion about both financial position and results of operations. (This effectively means that the auditor should have audited the complete set of financial statements in order to report on an element based on net income.)
103
An auditor's report would be designated a special report when it is issued in connection with
Auditors' reports issued in connection with requirements to comply with contractual agreements or regulatory requirements other than GAAP are designated as special reports.
104
A client uses a service organization to process its payroll. Which of the following statements is correct regarding the user auditor's use of the service auditor's report on internal controls placed in operation?
The client's auditor can use the service auditor's report as audit evidence for the client's internal controls.
105
Which of the following is a requirement for accepting an attestation engagement to report on the controls at a service organization?
The service auditor has the competence and capability to perform the engagement.
AT-C 105, “Concepts Common to All Attestation Engagements.” AT-C 105.27 states that the engagement should be accepted only when all personnel performing the engagement have the necessary competence and capabilities.
106
Green, CPA, is auditing the financial statements of Ajax Co. Ajax uses the DP Service Center to process its payroll. DP's financial statements are audited by Blue, CPA, who recently issued a report on DP's policies and procedures regarding the processing of other entity's transactions. In considering whether Blue's report is satisfactory for Green's purposes, Green should
Make inquiries concerning Blue's professional reputation.
107
Which of the following procedures should a user auditor include in the audit plan to create the most efficient audit when an audit client uses a service organization for several processes?
Review the service auditor's report on controls placed in operation.
The user auditor should plan to read the service auditor's report, whether on controls placed in operation (type 1 report) or on operating effectiveness (type 2 report) in connection with obtaining an understanding of internal controls at the service organization that may be relevant to the user entity's financial statements.
108
Lake, CPA, is auditing the financial statements of Gill Co.
Gill uses the EDP Service Center, Inc., to process its payroll transactions. EDP's financial statements are audited by Cope, CPA, who recently issued a report on EDP's internal control structure. Lake is considering Cope's report on EDP's internal control structure in assessing control risk on the Gill engagement.
What is Lake's responsibility concerning making reference to Cope as a basis, in part, for Lake's own opinion?
Lake may not refer to Cope under the circumstances above.
Although Cope's work and report may be used by Lake in obtaining an understanding of internal control and assessing control risk for the Lake engagement, Cope did not examine any portion of the financial statements under audit and therefore cannot be responsible for any portion of the audit.
The user auditor should not refer to the service auditor in the user auditor's report containing an unmodified opinion.
109
Type 1 Report:
Report on management's description of a service organization's system and the suitability of the design of controls.
110
Type 2 Report:
Report on management's description of a service organization's system and the suitability of the design and operating effectiveness of controls.
111
Reference to service auditor
The user auditor may refer to the service auditor in the user auditor's report containing a modified opinion if that reference would be relevant to understanding the user auditor's modification. The user auditor should indicate that such reference does not change the user auditor's responsibility for that opinion.
112
Payroll Data Co. (PDC) processes payroll transactions for a retailer.
Cook, CPA, is engaged to express an opinion on a description of PDC's internal controls placed in operation as of a specific date. These controls are relevant to the retailer's internal control, so Cook's report may be useful in providing the retailer's independent auditor with information necessary to plan a financial statement audit.
Cook's report should
Contain a disclaimer of opinion on the operating effectiveness of PDC's controls.
A report on controls placed in operation should include a disclaimer on operating effectiveness as this type of engagement does not include any tests of controls. It is not intended to provide a user auditor with a basis for reducing control risk below maximum.
113
Comfort letters ordinarily are signed by the entity's
Independent auditor.
Comfort letters are issued (and signed) by an entity's independent auditor for the purpose of providing a "due diligence" defense to underwriters and certain other requesting parties in connection with a securities offering.
114
Comfort letters ordinarily are
Addressed to the entity's-Underwriter of securities
Signed by the entity's-Independent auditor
They provide the underwriter with "reasonable grounds to believe there are no material omissions or misstatements in financial statements related to a 1933 Act securities offering."
