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Flashcards in Chapter 12 Deck (47)
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1
Q

What reports accompany fiancial statements?

A
  1. Opinion on financial statements and related disclosures
  2. Opinion on internal control over financial reporting
2
Q

Opinion on financial statements and related disclosures

A

Are F/S presented per applicable financial reporting framework (GAAP)?

Prepared by Auditor

3
Q

Opinion on internal control over financial reporting

A

Is I/C effective?

Prepared by Auditor only for accelerated filers
Prepared by Management only for issuers

4
Q

What are the five types of auditor’s reports?

A
  1. Unqualified/unmodified opinion
  2. Unqualified/unmodified opinion with explanatory paragraphs
  3. Qualified opinion
  4. Adverse opinion
  5. Disclaimer of opinion
5
Q

Unqualified/unmodified opinion

A

“clean” opinion

6
Q

Unqualified/unmodified opinion with explanatory paragraphs

A

Financial statements are in conformity with GAAP, additional matters are disclosed in report

7
Q

Qualified opinion

A

“except for” some matter, financial statements are in conformity with GAAP

8
Q

Adverse opinion

A

Financial statements are not in conformity with GAAP

9
Q

Disclaimer of opinion

A

No opinion is issued by auditors

10
Q

What are the four types of explanatory paragraphs?

A
  1. Reference to ICFR opinion
  2. Going concern
  3. Lack of consistency
  4. Critical audit matters (CAMs)
11
Q

Reference to ICFR Opinion

A

Can issue two separate reports or one combined report
If separate reports, each report will reference date and opinion in the other report

12
Q

Going-concern

A

Auditors are responsible to evaluate whether substantial doubt exists about ability of entity to continue in existence for a “reasonable period of time” (typically about a year)

13
Q

If there are uncertainties about going-concern what are auditors’ options?

A
  1. Add explanatory paragraph - still unqualified opinion
  2. Disclaimer of opinion (if serious, very rare)
  3. Qualified/adverse opinion (if uncertainty was not properly disclosed by client - departure from GAAP)
14
Q

Consistency - what are situations that the auditor would call inconsistent?

A
  1. Change in accounting principles (from one GAAP method to another GAAP method)
  2. Changes in the form of reporting entity (other than that resulting from a transaction or event).
  3. Changes in accounting principle that is not a GAAP to one that is a GAAP
  4. Changes in accounting principles inseparable from changes in estimates
15
Q

Is changing the useful life in a depreciation calculation a consistency issue?

A

No

16
Q

Is changing from straight-line to double-declinging depreciation a consistency issue?

A

Yes

17
Q

What is the effect of an inconsistency?

A
  1. Add explanatory paragraph
  2. May issue a qualified opinion (GAAP departure) if: the change is not justified OR the change is not accounted for in conformity with GAAP
18
Q

CAMs

A

matters that have been communicated to the audit committee, are related to accounts or disclosures that are material to the financial statements, and involved especially challenging, subjective, or complex auditor judgment

19
Q

CAMs are effective for large accelerated filers for audits for fiscal years ending on or after…

A

June 20, 2019.

20
Q

CAMs are effective for issuers that are not large accelerated filers for audits for fiscal years ending on or after…

A

December 15, 2020

21
Q

Conditions for Departure from “Clean” Opinion

A
  1. Scope limitation
  2. Departure from GAAP
22
Q

What does a scope limitation or departure from GAAP result in?

A

A qualified, disclaimer, or adverse opinion

23
Q

Immateral Misstatement

A

Unqualified/Unmodified Opinion (sometimes with an explanatory paragraph)

24
Q

Material Misstatement

A

Qualified (either for scope limitation or GAAP departure)

25
Q

Pervasively Material Misstatement

A

Disclaimer or adverse opinion

26
Q

When is an unqualified opinion given with an explanatory paragraph?

A

Immaterial…
1. Other auditors
2. Going concern
3. Lack of consistency
4. Additional emphasis
5. Refer to audit of internal controls

27
Q

When is a qualified opinion given?

A

Material…
1. Scope limitation (client-imposed or condition-imposed)
2. GAAP departure

28
Q

When is a disclaimer given?

A

A pervasively material…
1. Scope limitation
2. Lack of independence
3. Substantial doubt about the entity’s ability to continue as a going concern

29
Q

When is an adverse opinion given?

A

A pervasively material…
1. GAAP departure

30
Q

Circumstance-Imposed Scope Limitation

A

Situation in which matters beyond auditors’ and client’s control limit procedures performed by auditor

31
Q

What is an example of a Circumstance-Imposed Scope Limitation?

A

inability to observe year-end inventory because of late appointment

32
Q

Client-Imposed Scope Limitation

A

Situation in which client specifically limits auditors’ procedures

33
Q

What is the result of a Client-Imposed Scope Limitation?

A

Should be viewed as a significant restriction and a disclaimer is ordinarily issued

34
Q

Group financial statements

A

Financial statements comprised of more than one division/subsidiary/segment/component
“consolidated financial statements” -> multinational company that has operations in several different countries

35
Q

Group auditors

A

Conduct audit of material portion of the entity

36
Q

Component auditors

A

May be engaged by group auditors to audit divisions, subsidiaries, or components

37
Q

Does the group auditor normaly take responsibility for the component auditor’s work?

A

Yes, because the auditing firm usually uses an affiliate firm (ex: Deloitte US wants to use Deloitte Sweden to audit the Sweden component).

38
Q

Group auditors should…

A
  1. Verify component auditors’ reputation and independence
  2. Communicate and coordinate with component auditors
39
Q

If the group auditors take responsibility for the component auditors’ work…

A

There is a standard (unmodified) report

40
Q

If the group auditors do not take responsibility for the component auditors’ work…

A

The component auditors are named (the component auditors’ report is presented only with their permission)
The component auditors’ work is referred to

41
Q

Comparative Financial Statements - Continuing Auditors

A
  1. Update opinion by considering if previously-issued opinions still appropriate
  2. Must be clear which opinion applies to which f/s
42
Q

Comparative Financial Statements - Predecessor Auditors

A
  1. Predecessor auditor may reissue their report
  2. If predecessors’ report not presented, current auditors’ report must reference predecessors’ report and opinion on prior-years’ F/S
43
Q

Auditing standards provide guidance for the auditor’s consideration of other information contained in:

A
  1. Annual reports
  2. Other documents to which the auditor devotes attention at the entity’s request
44
Q

Auditor is required to read the client’s other information and consider whether it is consistent with the information contained in the audited f/s, however…

A

the auditor has no obligation to perform any audit procedures over the other information

45
Q

Auditors found that the entity has not capitalized a material amount of leases in the financial statements. When considering the materiality of this departure from GAAP, the auditors would choose between which reporting options?
A. Unqualified opinion OR disclaimer of opinion.
B. Unqualified opinion OR qualified opinion.
C. Unqualified opinion with an emphasis of matter paragraph OR an adverse opinion.
D. Qualified opinion OR adverse opinion

A

D. is the correct answer

46
Q

How will materiality and pervasiveness influence auditors’ reporting decisions in the following circumstances?
A. The entity prohibits confirmation of A/R, and sufficient appropriate audit evidence cannot be obtained using alternative procedures. Scope issue.
B. The entity leases buildings under terms that qualify as capital leases under ASC 840. These leases are not capitalized as leased assets and lease obligations.
C. The entity has lost a lawsuit in court. The case is on appeal in an attempt to reduce the amount of damages awarded. No loss amount is recorded.

A

A. Scope issue. If pervasive: disclaimer. If material: qualified.

B. GAAP issue. If pervasive: adverse. If material: qualified.

C. GAAP issue. If pervasive: adverse. If material: qualified.

47
Q

When is a misstatement pervasively material?

A
  1. It affects multiple accounts
  2. Affects a large portion of the financial statements
  3. Fundamental for user’s understanding (the most important account for investors)