Other reporting considerations Flashcards
(12 cards)
The auditor’s report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards (the Yellow Book), is required to include
The scope of the auditor’s testing ofinternal controls
Uncorrected misstatements that were determined by managementto be immaterial
A. Yes Yes
B. Yes No
C. No Yes
D. No No
B. Yes No
Generally accepted government auditing standards (GAGAS) audits are often performed on government agencies or entities receiving assistance from, or under contract with, federal, state, or local governments. Because governments are accountable for the use of public resources, GAGAS imposes supplemental reporting standards in addition toGAAS. For example, in GAGAS financial statement (F/S) audits, auditors are required to report the scope of their testing of internal control (I/C) and of noncompliance with laws, regulations, contracts, or grants.
The three reports in a GAGAS audit (on F/S, I/C, and compliance) can be provided separately or combined into one or two reports. In this case, the auditor has separated the F/S report from a report on I/C and compliance. Uncorrected misstatements would therefore be referenced in the report on the F/S if the auditors (not management) determined them to be material. However, uncorrected misstatements, material or not, would not be included in the report on I/C and compliance.
Things to remember:
Generally accepted government auditing standards require that auditors report the scope of their testing of internal control and noncompliance with laws, regulations, contracts, or grants.
What is an auditor’s responsibility for supplementary information which is outside the basic financial statements but required by the FASB?
A. The auditor should engage a specialist, such as an actuary, to verify that management’s assertions are reasonable.
B. The auditor’s only responsibility for supplementary information is to determine that such information has not been omitted.
C. The auditor should perform tests of transactions to the supplementary information to verify that it is reasonably comparable to the prior-year’s information.
D. The auditor should apply certain limited procedures to the supplementary information and report deficiencies in, or omissions of, such information.
D. The auditor should apply certain limited procedures to the supplementary information and report deficiencies in, or omissions of, such information.
Supplementary information (SI) is data or narrative presented in addition to the basic financial statements (F/S). Generally, there are three categories of SI: other information, supplementary information, and required supplementary information (RSI). Information outside the basic F/S required by an accounting standards setter (eg, FASB) is an example of RSI.
When RSI (eg, accounting schedule) is shown along with audited financial statements, auditors are required to performlimited procedures on the information. The procedures include inquiring with management about its methods of preparing the information, comparing information for consistency, and obtaining written representations from management. Auditors are also required to report deficiencies in, or omissions of, such information.
(Choices A and C) Auditors are required to perform only limited review procedures, not audit procedures, on RSI. Consequently, auditors would not engage a specialist (eg, an actuary) to verify assertions, nor would they perform tests of transactions on the information.
(Choice B) Although auditors are responsible for verifying that RSI has not been omitted, that is not their only responsibility. They must also perform limited review procedures on the information.
Things to remember:
Required supplementary information (RSI) is data (in addition to the basic financial statements) that is required by an accounting standards setter (eg, FASB). Auditors are required to perform limited procedures (eg, inquiries and analytical procedures) on RSI and report deficiencies in, or omissions of, such information.
While conducting an audit in accordance with Government Auditing Standards (the Yellow Book), an auditor determines that fraud has been committed in one of the client’s government contracts. The auditor reports the fraud to the client’s audit committee, which takes no action to report the fraud to appropriate parties. To which of the following entities is the auditor required to report this situation?
A. The counterparty to the contract.
B. The Association of Certified Fraud Examiners.
C. The client’s CEO.
D. The client’s board of directors.
A. The counterparty to the contract.
Audits under generally accepted government auditing standards (GAGAS) are often performed on government agencies or entities that receive financial assistance from, or are under contract to, federal, state, or local governments. As part of a GAGAS audit, the auditor provides reasonable assurance that no instances of noncompliance with laws, regulations, or contracts have had a direct material effect on the financial statements.
When auditors encounter significant fraud or noncompliance (eg, with a government contract) during a GAGAS audit, they should inform those charged with governance (eg, the audit committee). If governance does not report the information to the counterparty to the contract (eg, the government entity receiving the services) as required by law, the auditor should do so.
(Choice B) The Association of Certified Fraud Examiners (ACFE) is a professional organization of fraud examiners. However, the ACFE itself has no legal authority and does not investigate fraud.
(Choice C) Those charged with governance oversee management, including the CEO. If the audit committee does not communicate the matter, it is unlikely the CEO will.
(Choice D) The audit committee is the arm of the board of directors responsible for communication with the auditor. By notifying the audit committee, the auditor has notified the board of directors.
Things to remember:
When auditors encounter fraud or noncompliance (eg, with a government contract) in an audit conducted under generally accepted government auditing standards, they should inform those charged with governance. If governance does not report the information to the affected parties outside the entity, the auditors should do so.
For financial statement audits performed in accordance with generally accepted government auditing standards, auditors should report which of the following?
A. All violations of private grant agreements, regardless of materiality.
B. Suspected illegal acts.
C. Significant deficiencies in internal control.
D. Significant changes in the entity’s internal control policies.
C. Significant deficiencies in internal control.
Generally accepted government auditing standards (GAGAS) apply when required by law or regulation (eg, defense contractors). GAGAS require an audit report on the financial statements (F/S), a written internal control report, and a report on compliance with laws and regulations.
Because governments are accountable for the proper use of public resources, GAGAS imposes supplemental reporting standards in addition to GAAS. For example, GAGAS requires that auditors report the scope of their testing of internal control and of noncompliance with laws, regulations, contracts, or grants. If auditors discover significant deficiencies in internal control or suspect material fraud or noncompliance, they include their findings in the audit report.
(Choice A) Violations of the provisions of contracts or grants should be reported only if they have a material effect on the F/S.
(Choice B) Identified or suspected illegal acts (ie, fraud or noncompliance with laws and regulations) should be reported only if they are material. If less than material but worthy of attention, they should be communicated in writing to entity officials but do not need to be included in the report.
(Choice D) Significant changes to internal control policies do not have to be reported. However, GAGAS does require the inclusion of significant deficiencies and material weaknesses in the audit report.
Things to remember:
Generally accepted government auditing standards (GAGAS) require that significant deficiencies and material weaknesses in internal control be included in the audit report.
Which of the following should the auditor of a nonissuer do when reporting on supplementary information that is required by a designated accounting standard setter, presented with the basic financial statements?
A. Include a paragraph after the responsibilities of management section.
B. Include a paragraph after the auditor’s responsibilities for the audit section.
C. Include a reference to the required supplementary information in the basis for opinion section.
D. Make no reference to the required supplementary information in the report.
B. Include a paragraph after the auditor’s responsibilities for the audit section.
Information required by a designated accounting standards setter (eg, GASB) to accompany an entity’s basic financial statements (F/S) is referred to as required supplementary information (RSI). An auditor must apply limited procedures to the RSI to determine if the required information has been provided and whether it appears to be correct.
The procedures do not constitute an audit of the RSI; thus, no opinion on the RSI is required and the opinion on the F/S will not be affected. However, the auditor should include a separate section following the “auditor’s responsibilities for the audit” section in the audit report with an appropriate title (eg, “Required Supplemental Information”) (Choices A, C, and D).
The section explains whether:
The RSI is included in the report and the auditor applied the appropriate procedures
The RSI is omitted, or some is missing from the report
The information is not in compliance with applicable requirements
The auditor is not able to complete required procedures
There is substantial doubt about the conformity of the RSI
Things to remember:
Information required by a designated accounting standards setter to accompany the basic financial statements is referred to as required supplementary information (RSI). The auditor should include a separate section following the “auditor’s responsibilities for the audit” section in the audit report explaining the limited procedures that were performed.
An entity’s comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented. If the predecessor’s report was qualified, the successor should
A. Issue an updated comparative audit report indicating the division of responsibility.
B. Explain to the client that comparative financial statements may not be presented under these circumstances.
C. Express an opinion only on the current year’s financial statements and make no reference to the prior year’s statements.
D. Indicate the substantive reasons for the qualification in the predecessor auditor’s opinion.
D. Indicate the substantive reasons for the qualification in the predecessor auditor’s opinion.
Comparative financial statements (F/S) are F/S from prior periods presented alongside those of the current period. If the F/S of the prior period(s) were audited by a different auditor (ie, predecessor auditor) and the predecessor’s report is not reissued with the comparative F/S, the auditor of the current F/S will include an other-matter paragraph (OM) in the audit report.
The OM will state that the current auditor did not audit the prior period F/S. It will also explain the contents of the predecessor’s audit report, including the predecessor’s opinion, basis for that opinion, and contents of any emphasis-of-matter paragraph or OM (Choice C). This provides the user of the comparative F/S with the information necessary to interpret and compare them with the current F/S.
Note: Forissuers, this is called an explanatory paragraph rather than an OM, but the content is the same.
(Choice A) In a group audit, the group auditor may choose to divide responsibility with the component auditor. In contrast, for comparative F/S the successor and predecessor auditors are each responsible for their own reports.
(Choice B) A change in auditors does not prevent the presentation of comparative F/S.
Things to remember:
When comparative financial statements (F/S) include F/S audited by a predecessor whose report is not reissued, the current auditor’s report states that the auditor did not audit the prior period F/S and includes a summary of the predecessor’s report. The summary includes the predecessor’s opinion, basis for the opinion, and contents of any emphasis-of-matter or other-matter paragraphs.
Helpful Co., a nonprofit entity, prepared its financial statements on an accounting basis prescribed by a regulatory agency solely for filing with that agency. Green audited the financial statements in accordance with generally accepted auditing standards and concluded that the financial statements were fairly presented on the prescribed basis. Green should issue a report that includes an
Emphasis-of-matter paragraph Other-matter paragraph
A. YesYes
B. YesNo
C. NoYes
D. NoNo
A. YesYes
Auditors are sometimes engaged to report on financial statements (F/S) prepared in accordance with a special purpose framework (SPF). SPFs are non-GAAP comprehensive bases of accounting intended for a specific purpose (eg, cash basis, regulatory basis).
The use of an SPF entails certain disclosure requirements to clarify the difference between GAAP and the SPF. If the F/S meet the disclosure requirements and conform to the SPF, the auditor will generally issue an unmodified opinion with an emphasis-of-matter paragraph. That paragraph will draw the user’s attention to the SPF and the related disclosures to ensure that the F/S are properly understood.
When the SPF is a contractual basis or regulatory basis and the F/S are not for general use (eg, solely for filing with an agency), the auditor should also include an other-matter paragraph restricting use of the report. This restriction prevents the report from being read outside the context for which it was intended, thereby preventing it from being misunderstood.
Things to remember:
Audit reports on financial statements (F/S) prepared under a special purpose framework (SPF) generally include an emphasis-of-matter paragraph about the SPF. If the SPF F/S are not for general use, the audit report should also include an other-matter paragraph restricting the use of the report.
Jewel, CPA, audited a nonissuer’s prior-year financial statements. These statements are presented with those of the current year for comparative purposes without Jewel’s auditor’s report, which expressed a qualified opinion. In drafting the current year’s auditor’s report, Crain, CPA, the successor auditor, should indicate the
Type of report issued by Jewel Reason for jewel’s qualification
A. Yes Yes
B. Yes No
C. No Yes
D. No No
A. Yes Yes
Comparative financial statements (F/S) are F/S from prior period(s) presented along with those of the current period. An auditor’s responsibility in reporting on F/S in a comparative presentation depends on whether the prior period was audited and by whom. If the prior period was audited by a different auditor (ie, predecessor) and the predecessor’s report is not reissued (ie, not presented), the report on the current F/S will include an other-matter paragraph (OM).
The OM should state that the current auditor did not audit the prior period F/S. It will explain the contents of the predecessor’s report, including the predecessor’s opinion, reasons for any modification to the opinion (eg, qualified), and contents of any emphasis-of-matter paragraph or OM. This provides the users of the comparative F/S with the information necessary to interpret and compare the prior year’s F/S with those of the current year.
Things to remember:
When a predecessor auditor’s report is not reissued with comparative financial statements (F/S), the current auditor’s report includes an other-matter paragraph, which states that the auditor did not audit the prior period F/S and includes a summary of the predecessor’s report. The summary includes the predecessor’s opinion, basis for the opinion, and contents of any emphasis-of-matter or other-matter paragraphs.
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
A. Not refer to the change in the auditor’s report.
B. Refer to the note in the financial statements that discusses the change.
C. Refer to the change in an emphasis-of-matter paragraph.
D. Explicitly state whether the change conforms with GAAP.
A. Not refer to the change in the auditor’s report.
When there has been a change in accounting principles (eg, from FIFO to LIFO), auditors are required to evaluate the change. If the change does not have a material effect on the comparability of the financial statements from one period to the next, it is not referred to in the auditor’s report.
If the change does have a material effect on the comparability of the financial statements, the auditor determines whether the change is justified and properly disclosed in accordance with GAAP. If it is, the auditor issues an unmodified opinion with an emphasis-of-matter paragraph referring to the change and the note in the financial statements discussing the change (Choices B and C).
If the change is not justified or properly disclosed, the auditor must consider whether the effect on comparability constitutes a material misstatement deserving of a qualified or an adverse opinion.
(Choice D) The auditor will state explicitly whether the change in accounting principles conforms with GAAP only if it does not conform and the effect on comparability is material. If the report does not mention consistency, material consistency is implicit in the claim that the financial statements conform with GAAP.
Things to remember:
If a justified and properly disclosed change in accounting principles has a material effect on comparability, it will result in an unmodified opinion with an emphasis-of-matter paragraph. If the effect is immaterial, the audit report will not mention the change.
If management chooses to place supplementary information required by the FASB in footnotes attached to the financial statements, this information should be clearly marked as
A. Unaudited.
B. Supplementary information required by the FASB.
C. Disclosures required by the FASB.
D. Audited financial data required by generally accepted accounting principles.
A. Unaudited.
(Choice A) This answer is correct becausethe professional standards require that the information be clearly marked “unaudited.”
(Choice B) This answer is incorrect because such a statement is not required.
(Choice C) This answer is incorrect becausesuch a statement is not required.
(Choice D) This answer is incorrect because the information is considered unaudited.
A client is presenting comparative (two-year) financial statements. Which of the following is correct concerning reporting responsibilities of a continuing auditor?
A. The auditor should issue one audit report that is on both presented years.
B. The auditor should issue two audit reports, one on each year.
C. The auditor should issue one audit report, but only on the most recent year.
D. The auditor may issue a combined report for both years or separate reports for each year.
A. The auditor should issue one audit report that is on both presented years.
When an audit client presents the F/S of the previous year alongside those of the current year (ie, comparative F/S), the auditor will determine whether the:
Comparative F/S are presented in accordance with the requirements of the applicable financial reporting framework
Comparative F/S and disclosures agree with those reported in the prior period
Accounting principles and policies applied in the comparative F/S and disclosures are consistent with those applied in the current period
For a two-year comparative F/S presentation, GAAS and PCAOB guidelines specify that a continuing auditor (one who audited both periods) should issue a single report on the F/S as a whole. The report should refer to each period for which F/S are presented and on which an audit opinion is expressed. Issuing two separate reports is not allowed in a comparative presentation (Choices B and D).
(Choice C) When comparative F/S are presented and the prior period F/S were audited by a predecessor auditor, not a continuing auditor, the current period audit report may cover only the most recent year. When this occurs, the report should include an other-matter paragraph explaining the situation.
Things to remember:
When a client presents comparative (eg, two-year) F/S and the current period auditor also audited the prior year (ie, is a continuing auditor), a single audit report should be issued to include both years.
An auditor is engaged to report on selected financial data included in a client-prepared document containing audited financial statements. Under this circumstance, the auditor should
A. Issue a separate report that expresses an opinion covering both financial and non-financial information in the document.
B. Restrict the resulting report to users specifically identified in the document.
C. Include a statement in the report indicating the select financial data is presented for additional analysis purposes.
D. Issue a report on the select financial information only when the audited financial statements indicate an adverse opinion.
C. Include a statement in the report indicating the select financial data is presented for additional analysis purposes.
Supplementary information (SI) is optional information presented outside the basic F/S (eg, financial ratios). Such information may be presented in a document containing either issuer or nonissuer audited F/S.
The auditor’s objective is to evaluate the presentation of the SI and report on whether it is fairly stated. The resulting report should state that the SI is not required but is presented for analysis and informational purposes. The auditor should determine that the SI:
Was derived from, and relates to, the records and underlying accounting used to prepare the F/S
Will accompany the audited F/S or the audited F/S will be readily available
Is associated with F/S that were audited by the auditor and contained either an unmodified or qualified opinion (Choice D)
(Choice A) The auditor may issue a separate report identifying the optional financial SI that was reviewed and expressing an opinion on such. However, the SI review is associated with the F/S so the report will exclude non-financial information.
(Choice B) The report on SI is not restricted to specific users because it must be associated with the audited F/S.
Things to remember:
Supplementary information (SI) is select financial data presented outside the basic financial statements for informational and analysis purposes. The auditor’s objective is to evaluate the presentation of the SI and report on whether it is fairly stated. The resulting report should indicate that the SI is presented for analysis purposes only.
