NEW AUD 3 Flashcards
(40 cards)
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.
The engagement was performed in accordance with Statements on Standards for Consulting Services.
The guidance provided is for management use only and may not be communicated to the prior or continuing auditors.
Nothing came to the accountant’s attention that caused the accountant to believe that the accounting principles violated GAAP.
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 would NOT include a statement indicating that nothing came to the accountant’s attention that caused the accountant to believe that the accounting principles violated GAAP. This type of wording is used in the review report, not in a report on the application of accounting principles.
Which of the following items should be included in an auditor’s report for financial statements prepared using a special-purpose framework?
A sentence stating that the auditor is responsible for the financial statements.
A title that includes the word “independent.”
The signature of the company controller.
A paragraph stating that the audit was conducted in accordance with the special-purpose framework.
A title that includes the word “independent.”
A special-purpose framework is used in preparing the entity’s financial statements. An audit is never conducted in accordance with a special purpose framework.
An auditor’s report would be designated a special report when it is issued in connection with
Interim financial information of a publicly held company that is subject to a limited review.
Compliance with aspects of regulatory requirements related to audited financial statements.
Application of accounting principles to specified transactions.
Limited use prospective financial statements such as a financial projection.
Compliance with aspects of regulatory requirements related to audited financial statements.
Auditors’ reports issued in connection with requirements to comply with contractual agreements or regulatory requirements other than GAAP are designated as special reports.
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.
State whether PDC’s controls were suitably designed to achieve the retailer’s objectives.
Identify PDC’s controls relevant to specific financial statement assertions.
Disclose Cook’s assessed level of control risk for PDC.
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.
The authoritative body designated to promulgate standards concerning an accountant’s association with unaudited financial statements of an entity that is not required to file financial statements with an agency regulating the issuance of the entity’s securities is the
Financial Accounting Standards Board.
General Accounting Office.
Accounting and Review Services Committee.
Auditing Standards Board.
Accounting and Review Services Committee.
The standards that address unaudited financial statements are the Statements on Standards for Accounting and Review Services. These standards are issued by the AICPA Accounting and Review Services Committee.
The General Accounting Office issues governmental auditing standards.
The clarified SSARSs applicable to preparation engagements (AR‐C 70) do not apply to the following engagements, except for
Preparing financial statements to be presented alongside a personal financial plan.
Preparing financial statements for submission to taxing authorities.
Preparing financial statement in connection with litigation services.
Assisting with preparing financial statements by performing bookkeeping services.
Preparing financial statements to be presented alongside a personal financial plan.
AR‐C 70 does not apply to an engagement to prepare financial statements for submission to taxing authorities.
A CPA is reporting on comparative financial statements of a nonissuer. The CPA audited the prior year’s financial statements and reviewed those of the current year in accordance with Statements on Standards for Accounting and Review Services (SSARS). The CPA has added a separate paragraph to the review report to describe the responsibility assumed for the prior year’s audited financial statements. This separate paragraph should indicate
The type of opinion expressed previously.
That the CPA did not update the assessment of control risk.
The reasons for the change from an audit to a review.
That the audit report should no longer be relied on.
The type of opinion expressed previously.
According to PCAOB auditing standards, a “stated control objective” is best described as
The specific control objective that management has failed to identify and that, therefore, constitutes a material weakness.
The specific control objective identified by management that, if achieved, would result in the material weakness no longer existing.
A strategic objective of those charged with governance.
The related internal control activities that make it probable that the auditor can assess control risk as low.
The specific control objective identified by management that, if achieved, would result in the material weakness no longer existing.
AS Section 6115 (para. 16) states: “A stated control objective in the context of an engagement to report on whether a material weakness continues to exist is the specific control objective identified by management that, if achieved, would result in the material weakness no longer existing.”
Sally is an auditor at PWC’s Chicago office. She is on the audit team for the Anchorage Peninsula Corporation (APC). Under which of the following circumstances would there be an independence problem under the new AICPA rules?
I. Sally’s mother inspects labels on jars for APC.
II. Sally’s grown son, who is not dependent on her, is director of financial reporting for APC.
III. Sally’s sister Suzy has a material financial interest in APC of which Sally is aware, but it does not allow her to exert significant influence over APC.
I only
II only.
III only.
II and III.
II and III.
Because both the II and III answers create independence problems, this is the best answer.
The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the
Effectiveness of the audit.
Efficiency of the audit.
Preliminary estimates of materiality levels.
Allowable risk of tolerable error.
Effectiveness of the audit.
The risk of incorrect acceptance and the likelihood of assessing control risk too low are both related to the effectiveness of the audit. The risk of incorrect rejection and the risk of assessing control risk too high pertain to the efficiency of the audit.
Which of the following types of audit evidence provides the least assurance of reliability?
Receivable confirmations received from the client’s customers.
Prenumbered receiving reports completed by the client’s employees.
Prior months’ bank statements obtained from the client.
Municipal property tax bills prepared in the client’s name.
Prenumbered receiving reports completed by the client’s employees.
Bank statements are generated by an independent source and are more reliable than evidence obtained from within the client entity (such as receiving reports). The auditor would prefer that such evidence be obtained directly from the bank, but, in the absence of any indication of alteration, the bank statement would be viewed as pretty reliable even if obtained from the client entity.
Under the ethical standards of the profession, which of the following is a “permitted loan” regardless of the date it was obtained?
Home mortgage loan.
Student loan.
Secured automobile loan.
Personal loan.
Secured automobile loan.
This answer is incorrect because a home mortgage loan is not acceptable (unless “grandfathered” in when the current standard was established).
The clarified SSARSs deal with each of the following engagements involving nonissuers, except for
Performing reviews.
Preparing financial statements.
Performing compilations.
Performing agreed‐upon procedures on financial statement items.
Performing agreed‐upon procedures on financial statement items.
Which of the following procedures is more likely to be performed in a review engagement of a nonpublic entity than in a compilation engagement?
Gaining an understanding of the entity’s business transactions.
Making a preliminary assessment of control risk.
Obtaining a representation letter from the chief executive officer.
Assisting the entity in adjusting the accounting records.
Obtaining a representation letter from the chief executive officer.
The accountant is required to gain an understanding of the entity’s business transactions for both a compilation and a review.
An auditor concludes that a client’s illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the materiality of the effect on the financial statements, the auditor should express either a(n)
Adverse opinion or a disclaimer of opinion.
Qualified opinion or an adverse opinion.
Disclaimer of opinion or an unmodified opinion with a separate explanatory paragraph.
Unmodified opinion with a separate emphasis‐of‐matter paragraph or a qualified opinion.
Qualified opinion or an adverse opinion.
Failure to properly account for or disclose an illegal act that has a material effect on the financial statements is a generally accepted accounting principle (GAAP) departure. Material GAAP departures result in either a qualified or an adverse opinion. It is not appropriate to issue a disclaimer for a GAAP departure. A disclaimer results from a pervasive scope limitation.
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
The auditor is unable to determine the amounts associated with an employee fraud scheme.
Management does not provide reasonable justification for a change in accounting principles.
The client refuses to permit the auditor to confirm certain accounts receivable or apply alternative procedures to verify their balances.
The chief executive officer is unwilling to sign the management representation letter.
Management does not provide reasonable justification for a change in accounting principles.
You need to be careful on negatively worded questions. Here, they are looking for the cases in which a disclaimer would NOT be appropriate. A disclaimer is issued when a pervasive scope limitation exists. The failure of the chief executive officer to sign the management representation letter represents a scope limitation that would likely result in a disclaimer of opinion.
Elimination of a material weakness several months prior to year‐end is most likely to result in what form of audit opinion?
Adverse.
Disclaimer.
Qualified.
Unqualified.
Unqualified.
This answer is incorrect because an adverse opinion is appropriate when a material weakness exists at year‐end.
Which of the following is not a duty owed by a member in business?
To be candid and truthful when communicating with an employer’s external auditor.
To correct inaccurate financial statements or entries.
To be independent in fact and appearance.
To decline gifts or entertainment that would violate an employer’s rules or be unreasonable in the circumstances.
To be independent in fact and appearance.
Which of the following best describes what is meant by the term “generally accepted auditing standards”?
Procedures to be used to gather evidence to support financial statements.
The ten specific criteria that measure the quality of the auditor’s performance.
The Statements on Auditing Standards issued by the Auditing Standards Board.
Rules acknowledged by the accounting profession because of their universal application.
The Statements on Auditing Standards issued by the Auditing Standards Board.
Generally accepted auditing standards are measures of the quality of the auditor’s performance. While specific auditing procedures may be required by GAAS, the procedures alone are not the best description of GAAS.
What is an auditor’s responsibility for supplementary information required by the GASB that is placed outside the basic financial statements?
Label the information as unaudited and expand the auditor’s report to include a disclaimer on the information.
Add an other‐matter paragraph to the auditor’s report and refer to the information as “required supplementary information.”
Apply limited procedures to the information and report deficiencies in, or the omission of, the information.
Audit the required supplementary information in accordance with generally accepted governmental auditing standards.
Apply limited procedures to the information and report deficiencies in, or the omission of, the information.
The auditor’s responsibility for supplementary information required by the GASB that is placed outside the basic financial statements is limited to applying certain procedures to the information and reporting deficiencies in, or the omission of, the information. The auditor is not required to audit the required supplementary information in accordance with Government Auditing Standards.
ABC Company is audited by the Albuquerque office of Whitt CPAs. Which of the following individuals would be least likely to be considered a “covered member” by the AICPA Code of Professional Conduct independence standard?
Staff assistant on the audit.
An audit partner in the Silver Springs office who performs no attest services for ABC Company.
A tax partner in Albuquerque who performs no attest services for ABC Company or for any other firm clients.
The partner in charge of Whitt CPAs (she does not work on the ABC Company audit).
An audit partner in the Silver Springs office who performs no attest services for ABC Company.
This answer is incorrect because all partners in the practice office in which the audit is performed are considered covered members.
In obtaining written representations from management, materiality limits ordinarily would apply to representations related to
Amounts concerning related party transactions.
Fraud involving members of management.
The availability of financial records.
The completeness of minutes of directors’ meetings.
Amounts concerning related party transactions.
Management states that all financial records have been made available. Materiality is not a consideration.
Which of the following analyses appearing in a predecessor’s working papers is the successor auditor least likely to be interested in reviewing?
Analysis of noncurrent balance sheet accounts.
Analysis of current balance sheet accounts.
Analysis of contingencies.
Analysis of income statement accounts.
Analysis of income statement accounts.
This answer is incorrect because the successor auditor will normally review working papers relating to matters of continuing accounting significance. Contingencies are of continuing significance and should be reviewed.
Which of the following is correct concerning a CPA firm’s preparation of financial statements engagement?
The statements should only be used by management and not third parties.
A written engagement letter or oral agreement is required.
No accountant’s report ordinarily accompanies the financial statements.
At a minimum, the accountant preparing the financial statements must comply with the compilation standards.
No accountant’s report ordinarily accompanies the financial statements.
This answer is incorrect because a written agreement is required.
