Chapter 1

Question 1

State the primary purpose of an audit.

Answer 1

To provide financial statement users with an opinion on whether the financial statements are fairly presented, in all material respects, in accordance with the applicable financial reporting framework.

Question 2

Identify three inherent limitations of an audit.

Answer 2

1) The nature of financial reporting 2) The nature of audit procedures 3) Timeliness of financial reporting and the balance between benefit and cost

Question 3

Which standards provide the most authoritative US auditing guidance for nonissuers and issuers, and who issues those standards?

Answer 3

1) Nonissuers: Statements on Auditing Standards (SASs), issued by the AICPA Auditing Standards Board. (ASB) 2) Issuers: Auditing Standards (Ass), issued by the Public Company Accounting Oversight Board (PCAOB) plus all SAS adopted by the PCAOB.

Question 4

Describe the role of the International Auditing and Assurance Standards Board (IAASB) and the use of International Standards of Auditing (ISAs).

Answer 4

IAASB is a standard setting board of the International Federation of Accountants (IFAC) that establishes ISAs. Currently over 100 countries are using or in the process of adopting ISAs. ISAs do not override local laws/regs or national standards that govern the audits of financial statements in a given country.

Question 5

What are the five general GAAS requirements related to the conduct of an audit?

Answer 5

1) S - Professional Skepticism 2) E - Ethical Requirements 3) J - Professional Judgment 4) E - Sufficient and Appropriate Audit Evidence 5) C - Compliance with GAAS

Question 6

List in order the primary sections of an unmodified audit opinion.

Answer 6

1) Title: Independent Auditor’s Report 2) Addressee: Based on the circumstances of the engagement 3) Management’s Responsibility for the Financial Statements: Management is responsible for the prepartion and fair presentation of the financial statements. 4) Auditor’s Responsibility: Responsibility is to express an opinion on these financial statements based on the audit. 5) Opinion: The financial statements referred to above present fairly in all material respects, the financial position. 6) Report on Other Legal and Regulatory Requirements: If applicable

Question 7

What should be included in the intro paragraph of the unmodified audit opinion?

Answer 7

1) Entity whose financial statements have been audited 2) Statement that the financial statements were audited 3) Title of each financial statement audited 4) Dates or periods covered by each financial statement

Question 8

What should be included in the Management’s Responsibility paragraph of the unmodified audit opinion?

Answer 8

1) Explanation that management is responsible for the preparation and fair presentation of the financial statements 2) Statement that this responsibility includes the design, implementation, and maintenance of internal control

Question 9

What should be included in the Auditor’s Responsibility paragraph of the unmodified audit opinion?

Answer 9

1) Statement that it is the auditor’s responsibility to express an opinion on the financial statements based on the audit 2) Statement that the audit was conducted in accordance with auditing standards generally accepted in the USA 3) Statement that standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement 4) Description of the audit

Question 10

What should be included in the opinion paragraph of the unmodified audit opinion?

Answer 10

1) Statement that the financial statements present fairly, in all material respects, the financial position of the entity as of the balance sheet date and the results of operations and its cash flows for the period then ended, in accordance with the applicable financial framework. 2) Identification of the applicable financial reporting framework and its origin.

Question 11

Identify the key differences in the auditor’s report under US GAAS and ISAs.*

Answer 11

Requirements in Auditor’s Report under ISAs (not GAAS): 1) Intro paragraph refers to the summary of significant accounting policies and other explanatory info. 2) The report may refer to “the preparation and fair presentation of the financial statements” (consistent with GAAS) or “the preparation of financial statements that give a true and fair view” (not allowed under GAAS). 3) The auditor’s responsibility paragraph must include a statement that the auditing standards require that the auditor comply with ethical requirements. Requirements in Auditor’s Report under GAAS (not ISAs): 1) Sufficient appropriate audit evidence should include evidence that the audit documentation has been reviewed. 2) The description of management responsibilities for the financial statement in the auditor’s report should not be reference to a separate statement by management if such a statement is included in a document containing the auditor’s report. That one sucked love.

Question 12

Define a component auditor and identify the three requirements that are necessary to reference a component auditor in the auditor’s report.

Answer 12

A component auditor is an auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit. The component auditor may be part of the group engagement partner’s firm, network firm, or another firm. Reference can be made to the component auditor if: 1) Component’s financial statements are prepared using the same financial reporting framework as the group financial statements. 2) Component auditor has performed an audit in accordance with GAAS, or when required, the PCAOB. 3) Component auditor’s report is not restriced use.

Question 13

What are the responsibilities of a group engagement partner (team) when they assume responsibility for the work of a component auditor?

Answer 13

No reference to the component auditor is made in the auditor’s report. If the component is a significant component due to its individual financial significance, it should be audited by the group engagement team or the component auditor. When a component is deemed significant because of significant risks of material misstatement to the group financial statements, the group engagement team or component auditor should perform additional audit procedures pertaining to the potential risks identified. Components that are not considered significant only require that analytical procedures be performed by the group engagement team.

Question 14

When should an auditor’s opinion be modified?

Answer 14

A modification is necessary when: 1) auditor determines that the financial statements as a whole are materially misstated (GAAP issue) 2) Auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement (GAAS issue)

Question 15

What is the purpose of an emphasis-of-matter paragraph and how is it used (reported) in an auditor’s report?

Answer 15

The purpose of an emphasis-of-matter paragraph is to reference a matter that is appropriately presented in the financial statements, but is of such importance that it is fundamental to the user’s understanding of the financial statements. It includes: 1) Placing the paragraph immediately after the opinion paragraph 2) Using the heading “Emphasis-of-Matter” or other appropriate heading 3) Describing the matter being emphasized and the location of relevant disclosures in the financial statements 4) Indicating that the auditor’s opinion is not modified with respect to the matter emphasized

Question 16

****Under what circumstances would an emphasis-of-matter paragraph be required in an auditor’s report?*********

Answer 16

When: 1) Auditor determines there is substantial doubt regarding the entity’s ability to continue as a going concern for a reasonable time period 2) There is a need to describe a justified change in accounting principle that has a material effect on the entity’s financial statements 3) Facts are subsequently discovered that lead to a change in the auditor’s opinion (note: an other-matter paragraph may also be appropriate) 4) The financial statements are prepared in accordance with an applicable special purpose framework, other than regulatory basis financial statements intended for general use

Question 17

Under what circumstances would an auditor use an other-matter paragraph in an auditor’s report?

Answer 17

1) Auditor includes alert in the audit report that restricts its use 2) facts are subsequently discovered that lead to a change in opinion 3) Prior period financial statements were audited by a predecessor auditor and the predecessor’s audit report is not reissued 4) current period financial statements are audited and presented in comparative form with compiled or reviewed financial statements for the prior period 5) prior to release date, the auditor identifies a material inconsistency in other info included in a document with audited financial statements that requires revision and management refuses revision 7) The auditor chooses (or required) to report on supplementary info presented with financial statements in auditor’s report 8) Special purpose financial statements are prepared in accordance with contractual/reg basis of accounting 9) auditor’s report on the financial statements includes a compliance report

Question 18

Evidence from what auditing procedures may lead the auditor to conclude that there is significant doubt about and entity’s ability to continue as a going concern? ADMITS!

Answer 18

1) Analytical procedures 2) Debt Compliance (review compliance) 3) Minutes (review from board meetings) 4) Inquiry of client’s legal counsel 5) Third parties (review financial support arrangements) 6) Subsequent events review

Question 19

What conditions and events may indicate subtantial doubt about an entity’s ability to continue as a going concern? What is the going concern period? FINE

Answer 19

1) Financial difficulties 2) Internal matters, such as labor difficulties, substantial dependence on a particular project 3) Negative trends 4) External matters, such as legal proceedings, new legislation, loss of a prinicpal customer, natural disasters. The going concern period should not exceed one year under US auditing statndards, but may be greater than or equal to one year under ISAs.

Question 20

What phrases must be included in a going concern emphasis-of-matter paragraph?

Answer 20

1) Substantial doubt 2) Going concern

Question 21

**When there is a year-to-year lack of comparability (consistency) in an entity’s financial statements due to an acceptable change in accounting principle, how dows the auditor reflect this in the current year’s auditor’s report?**

Answer 21

When the auditor conclued that the change in accounting principle is acceptable (justified), the auditor should include an emphasis-of-matter paragraph in the auditor’s report describing the change in the accounting principle and provide a reference to the entity’s disclosure of the change. If the justified change in accounting principlie is deemed immaterial, no revision to the report is necessary.

Question 22

How is an alert that restricts the use of the auditor’s written communication reflected in the auditor’s report and what items should be included in the alert?

Answer 22

Used to restrict the use of auditor’s report required by GAAS or when the auditor deems it necessary. 1) Statement that the auditor’s written communication is intended for the info and use of specified parties 2) identification of the specified parties for whom use is intended 3) Statement that the auditor’s written communication is not intended to be and should not be used by anyone other than the specified parties

Question 23

When would an auditor use professional judgment to determine whether to issue a qualified opinion or an adverse opinion?

Answer 23

When audit evidence indicates that there is material misstatement of the financial statements. 1) Qualified issued when auditor concludes that misstatements, individual or aggregate, are material but not pervasive to the financial statements 2) Adverse issued when auditor concludes that misstatements, individual or aggregate, are both material and pervasive to the financial statements.

Question 24

Describe the circumstances in which a material misstatement of the financial statements may arise.

Answer 24

1) Appropriateness of accounting principles 2) Application of accounting policies 3) Appropriateness of the financial statement presentation 4) Appropriateness or adequacy of disclosures in the financial statements

Question 25

When would an auditor use professional judgment to determine whether to issue a qualified opinion or a disclaimer of opinion?

Answer 25

When there is a limitation on the scope of the audit. 1) Qualified when auditor is unable to obtain sufficient appropriate evidence to base opinion and determines that possible effects could be material but not pervasive. 2) Disclaimer of opinion when auditor is unable to obtain sufficient appropriate evidence to base opinion and determines that possible effects could be material and pervasive.

Question 26

Identify some causes of scope limitations? | "Miley Cyrus's Cunt Rides Round Objects"

Answer 26

1) Circumstances 2) Management 3) Inability to observe inventory 4) Inability to confirm receivables 4) Refusal of the client's attorney to respond to inquiry 5) Refusal of management to provide a representation letter

Question 27

The auditor's report should not be dated earlier than the date which the auditor has obtained sufficient appropriate audit evidence. This should include evidence that what 3 things have occurred?

Answer 27

1) Audit documentation has been reviewed 2) Financial statements have been prepared 3) management has taken responsibility for the financial statements

Question 28

How do uncertainties affect the auditor's report?

Answer 28

1) If managements analysis is supported and properly reported or disclosed, the auditor issues an unmodified opinion with no reference to the uncertainty in the audit report 2) If the auditor is unable to obtain sufficient audit evidence involving an uncertainty and its presentation or disclosure in the financial statements, the auditor should consider the need to express a qualified (GAAS) opinion or to disclaim an opinion due to a limitation of scope 3) If the auditor concludes that the FS are materially misstated due to a departure from GAAP related to an uncertainty, the auditor should express a qualified (GAAP) or adverse opinion

Question 29

If during the current examination of comparative financial statements, the auditor discovers evidence that affects the prior statements and the opinion that was expressed, what action should be taken? Only DORCS change their mind!

Answer 29

The auditor should update the opinion in the current year report. Explanatory paragraph: 1) Date of auditor's previous report 2) Opinion type previously report 3) Reason for prior opinion 4) Changes that have occurred 5) Statement "opinion is different"

Question 30

The predecessor auditor should take what steps before reissuing an audit report on prior period financial statements?

Answer 30

1) Read statements for current period 2) Compare previous audit statement with current period 3) Obtain letter of representation from predecessor 4) Obtain letter of representation from management at or near date of reissuance 5) If unrevised, use original date, if revised, dual date the report.

Question 31

What is the effect on the audit report when the current period financial statements are audited and presented in a comparative format with prior period financial statements that were not audited?

Answer 31

Other-matter paragraph: 1) description of service in prior period 2) Date of prior period 3) Description of material modifications 4) statement that service was less in scope than an audit and does provide basis for expressing an opinion on financial statements. If prior period was not audited, indicate this and state auditor assumes no responsibility

Question 32

Define the two types of subsequent events.

Answer 32

1) Recognized subsequent event relates to a condition on of before balance sheet date. Financial statement adjustment required 2) Nonrecognized subsequent event occurs after the balance sheet date. Generally do not require financial statement adjustment, may require footnote.

Question 33

***************What procedures should the auditor perform during the subsequent period? PRIME*****************

Answer 33

1) P - review Post balance sheet transactions 2) R - obtain a Representation letter from management describing events that occurred during the subsequent period requiring adjustment to financial statements 3) I - Inquire with management if subsequent events could impact financial statements 4) M - review Minutes of board meetings 5) E - Examine current interim financial statements and compare to financial statements under audit

Question 34

After the date of the auditor's report, what actions should an auditor take regarding subsequent events?

Answer 34

None. While auditor is responsible for subsequent events until report, no active responsibility after that date.

Question 35

*********When and why is dual dating used?********

Answer 35

Used when subsequent events require financial statement adjustment or disclosure come to auditor attention after original date of audit report but before audit report is issued. Extends auditor's responsibility only for particular subsequent event. Original date of report is retained for rest of financial statements.

Question 36

After issuance of report, what actions should an auditor take upon discovering info that materially affects the report?

Answer 36

1) Determine if relying on financial statements 2) Advise client to disclose new info to persons currently relying on financial statements. Disclosure may take form of Revised financial statements, Disclosures and revisions to any imminent financial statements, or Notification that the FS and report should not be relied upon. 3) Advise the client to discuss the new disclosures or revisions with the SEC, stock exchanges, and appropriate regulatory agencies. 4) Ensure that appropriate steps have been taken by the client.

Question 37

What actions should an auditor take upon discovering omitted audit procedures?

Answer 37

1) Determine whether other procedures were adequate to compensate 2) If not, and if people are likely to be relying on the report, apply the omitted (alternative) procedures 3) If facts emerge that support a different opinion, advise the client to make appropriate disclosure and notification.

Question 38

What is the auditor's responsibility with respect to information accompanying the basic financial statements in a client-prepared document?

Answer 38

The auditor should read the other information to determine that it is consistent with the audited financial statements and that there are no material inconsistencies or material misstatements of fact. The auditor may (not required) report on other info.

Question 39

***********What are the two objectives of engagements to report on supplementary information?**********

Answer 39

1) Evaluate the presentation of the supplementary info in relation to financial statements as a whole 2) Report on whether the supplementary info is fairly stated, in all material respects, in relation to financial statements as a whole

Question 40

**************What procedures would an auditor perform related to supplementary info that is required by GAAP and accompanies the financial statements?**************

Answer 40

1) Inquire regarding how the supplementary info was prepared, including changes from prior years and significant assumptions used. 2) Determine whether the methods used are consistent with management's responses, audited financial statements, and other knowledge. 3) Obtain written management representations regarding the required supplemental info 4) The auditor may (not required) issue an opinion on the info

Question 41

**************List several features of a report on the application of the requirements of an applicable financial reporting framework**************

Answer 41

1) Description of engagement, entity, and transaction 2) Reference to AICPA standards 3) Description of appropriate application of the requirements of the applicable financial reporting framework to the specific transaction or type of report 4) Preparers are responsible for proper accounting 5) Differences in facts, circumstances, or assumptions may change the report 6) Restricted use paragraph

Question 42

When accepting an engagement to audit financial statements prepared in accordance with a financial framework generally accepted in another country, the auditor should obtain an understanding of:

Answer 42

1) Purpose for which the financial statements are prepared 2) Whether the financial reporting framework is a fair presentation framework 3) The intended users of the financial statements 4) Steps taken by management to ensure that the applicable financial reporting framework is acceptable under the circumstances

Question 43

What are the reporting options for financial statements prepared in accordance with a financial reporting framework generally accepted in another country when the financial statements will be distributed outside the US only? What if financial statements are also intended for use within the US?

Answer 43

Distributed outside the US only: 1) Report form of the other country or the report sent out in the ISAs (if applicable) 2) US style report modified to refer to the financial reporting framework generally accepted in another country. Distributed within the US: 1) Emphasis of matter paragraph that Identifies the financial reporting framework 2) Emphasis of matter paragraph that refers to the note in the financial statements describing the framework 3) Emphasis of matter paragraph that Indicates the framework differs from accounting principles generally accepted in the USA.