Other Reporting Considerations

Question 1

While planning an engagement to issue a report on the application of the requirements of an applicable financial reporting framework to a specific transaction of a nonissuer, a reporting accountant should obtain an understanding of the

A. Financial expertise of the users of the reporting accountant’s report.

B. Risk appetites of parties to the specific transaction.

C. Form and substance of the specific transaction.

D. Internal control activities related to the specific transaction.

Answer 1

The correct answer is (C).

While planning an engagement to issue a report on the application of the requirements of an applicable financial reporting framework to a specific transaction the reporting accountant should:

1. Obtain an understanding of the form and substance of the specific transaction or the conditions relevant to the type of report that may be issued on a specific entity’s financial statement
2. Review relevant requirements of the applicable financial reporting framework
3. Consult with other professionals, experts, or regulatory authorities
4. Request permission from the entity’s management to consult with the continuing accountant
5. Consult with the continuing accountant to determine the available facts relevant to forming a conclusion.

Hence the correct answer is (C) an accountant should obtain an understanding of the form and substance of the specific transaction.

Question 2

According to US generally accepted auditing standards (GAAS) related to comfort letters,

A. When component auditors’ reports are included in a securities offering and comfort letters are issued by those component auditors, the auditor of the group financial statements is only required to read those letters related to significant components.

B. The auditor is not required to accept an engagement to issue a comfort letter in connection with financial statements included in a securities offering.

C. The auditor may provide negative assurance regarding the auditor’s report.

D. The auditor may provide the comfort letter to the requesting party, the entity, and investors.

Answer 2

B.

Answer b., the auditor is not required to accept an engagement to issue a comfort letter in connection with financial statements included in a securities offering. Neither is the auditor required to provide comfort on every matter requested.

Regarding incorrect answer a., when component auditors’ reports are included in a securities offering and comfort letters are issued by those component auditors, the auditor of the group financial statements is required to read all of those letters. Editor Note: Previous guidance only required the auditor to read the comfort letters related to significant components.

Regarding incorrect answer c., the auditor should not provide negative assurance regarding the auditor’s report.

Regarding incorrect answer d., the letter should be addressed only to the requesting party and the entity and should not be provided to any other parties.

Question 3

Alpha, a CPA, is engaged to review the interim financial statements of a non-issuer which follows the same financial reporting framework as annual financial statements which will also be audited by Alpha. Which of the following standards should Alpha follow?

A. Statements on Auditing Standards (SAS) if the entity does not have an annual audit, and Statements on Standards for Accounting and Review Services (SSARS) if the entity has an annual audit

B. Standards for Accounting and Review Services (SSARS), irrespective of the annual audit

C. Statements on Auditing Standards (SAS) if the entity has an annual audit, and Statements on Standards for Accounting and Review Services (SSARS) if the entity does not have an annual audit

D. Statements on Auditing Standards (SAS), irrespective of the annual audit

Answer 3

The correct answer is (C).

With respect to the entity that Alpha is engaged to review if all of the following conditions are met. The review will be per the Statements on Auditing Standards (SAS).

1. Last year Financial Statements were audited
2. Interim Review Accountant is the latest or next annual audit accountant, AND
3. Interim information follows the same financial framework as the annual information.

Question 4

Although the scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies, these audits generally have which of the following elements in common?

A. The auditor is to determine whether the federal financial assistance has been administered in accordance with applicable laws and regulations.

B. The materiality levels are lower and are determined by the government entities that provided the federal financial assistance to the recipient.

C. The auditor should obtain written management representations that the recipient’s internal auditors will report their findings objectively without fear of political repercussion.

D. The auditor is required to express both positive and negative assurance that illegal acts that could have a material effect on the recipient’s financial statements are disclosed to the inspector general.

Answer 4

A.

The auditor must design the audit to provide reasonable assurance that the financial statements are free of material misstatements resulting from violations of law and regulations that have a direct and material effect on the determination of financial statement amounts. Materiality levels are determined by the auditor in relation to an entity’s federal programs, not the government entities that provide the federal financial assistance to the recipient. An auditor generally does not obtain representations regarding internal auditors’ reports. An auditor usually does not express assurance on disclosures to an inspector general.

Question 5

An auditor determines that a client who received a federal grant fraudulently reported information to the federal government. The client’s management refuses to acknowledge the fraud. Which of the following parties should the auditor contact first?

A. The state accountancy board.

B. The state attorney general’s office.

C. The agency that provided the grant.

D. The recipients of the client’s services.

Answer 5

The correct answer is (C).

The first course of action would be to contact the agency that provided the grant. The auditor’s client received a federal government grant and reported fraudulent information provided. The auditor needs to immediately get in touch with the agency of the federal government that provided the contract as client’s management has refused to acknowledge the fraud.

Question 6

An auditor reads the cover letter accompanying the document containing the audit report and audited financial statements and identifies a material inconsistency with the financial statements. The auditor determines that the financial statements do not require revision. Which of the following actions should the auditor take?

A. No action is required

B. Include a other-matter paragraph in the audit report

C. Consider withdrawing from the engagement

D. Request a client representation letter acknowledging the inconsistency

Answer 6

A.

For purposes of US GAAS, other information does not encompass a cover letter accompanying the document containing audited financial statements and the audit report.

Editor’s note: There is nothing noted within the question that discusses whether the cover letter and the audited financial statements were distributed, hence why choice a. is the correct answer.

Question 7

An entity prepares its financial statements on its income tax basis. The accompanying notes include a summary of significant accounting policies that discusses the basis of presentation and describes how that basis differs from GAAP. The dollar amount of the effects of the difference between the income tax basis and GAAP

A. Is required to be included only in the auditor’s report.

B. Is required to be included only in the notes to the financial statements.

C. Is required to be included both in the notes to the financial statements and the auditor’s report.

D. Need not be quantified and included in either the notes to the financial statements or the auditor’s report.

Answer 7

The correct answer is (D)

If an entity prepares its financial statements under a special purpose framework, they should include in a note the description of how the special purpose framework differs from GAAP ordinarily only includes the material differences between GAAP and the special purpose framework. For example, if several items are accounted for differently under the special purpose framework than they would be under U.S. GAAP, but only the differences in how depreciation is calculated are material, a brief description of the depreciation differences is all that would be necessary, and the remaining differences need not be described. The disclosure of difference is enough, there is no requirement to state the quantitative or quantitative effect of the difference.

Question 8

An independent auditor is issuing an audit report for a governmental entity and plans to issue separate reports on internal control over financial reporting and compliance with laws and regulations. The auditor should do which of the following?

A. Report to the governing authority that separate reports will be issued

B. Issue the same opinion in each report

C. State in the audit report that separate reports will be issued

D. Obtain permission from the audit committee to issue separate reports

Answer 8

The correct answer is (C).

An independent auditor is issuing a report for a governmental entity and plans to issue separate reports on internal control over financial reporting and compliance with laws and regulations. The auditor should state in the audit report that separate reports will be issued.

GAGAS (Generally Accepted Governmental Auditing Standards) reporting requirements on an audit of a governmental entity require two additional reports in addition to an opinion on financial statements:

1. Opinion on compliance with laws and regulations.
2. Opinion on internal control over financial reporting.

These two additional reports may be included in the audit report or separate reports may be issued. If separate reports are issued, then the fact should be referred to in the audit report that separate reports will be issued.

Question 9

Bravo, a CPA is engaged to report on a set of summary financial statements. Bravo has also been engaged to report on the financial statements from which the summarized financial statements have been derived. If Bravo issues an adverse or a disclaimer of opinion on the financial statements from which the summarized financial statements have been derived:

A. Bravo should issue the same opinion on the summary financial statements

B. Bravo should withdraw from the engagement

C. Bravo may issue a standard unmodified opinion on the summary financial statements

D. Bravo should issue an appropriate opinion, along with an emphasis of matter paragraph

Answer 9

B.

The correct answer is (B).

When the auditor’s report on the audited financial statements (from which the summarized financial statements have been derived) contains an adverse opinion or a disclaimer of opinion, the auditor should withdraw from the engagement to report on summary financial statements, when withdrawal is possible under applicable law or regulation. If it is not possible for the auditor to withdraw from the engagement, the auditor’s report on the summary financial statements should:

1. State that the auditor’s report on the financial statement from which the summary financial statement is derived contains an adverse opinion or a disclaimer of opinion.
2. Describe the basis of the adverse opinion or the disclaimer of opinion.
3. State that, as a result of the adverse opinion or disclaimer of opinion on the financial statement from which the summary financial statements have been derived, it is inappropriate to express, and the auditor does not express an opinion on the financial statements.

Thus, in case of an adverse opinion or a disclaimer of opinion on the financial statement from which the summary financial statements are derived, the auditor should withdraw from the engagement, or state that it is inappropriate to express an opinion, and the auditor does not express an opinion on the summarized financial statements

Question 10

Charlie, a CPA, is engaged to prepare a report on the application of accounting principles to a specific transaction. Charlie’s report should include a statement that:

A. The engagement was performed in accordance with the Standards for Accounting and Review Services (SSARS)

B. Responsibility for proper accounting treatment rests with the preparers of the financial statements

C. Nothing came to Charlie’s attention that caused him to believe that the company failed to comply with the applicable accounting framework

D. Charlie was engaged to report on the audited financial statements of the entity

Answer 10

The correct answer is (B).

When reporting on the application of accounting principles to specific transactions, the report of the accountant should, among many other things, include a statement that the preparers of the financial statements, who should consult with their continuing accountants, are responsible for proper accounting treatment.

(A) is incorrect, since the engagement is performed in accordance with the Statements on Auditing Standards (SAS), rather than the Standards for Accounting and Review Services (SSARS).

(C) is incorrect, as no such statement is included.

(D) is incorrect, since the auditor engaged to report on the application of accounting principles to a specific transaction need not be the same as the entity’s continuing auditor.

Question 11

Comfort letters are ordinarily signed by the client’s

A. Independent auditor

B. Underwriter of securities

C. Audit committee

D. Senior management

Answer 11

The correct answer is (A).

A Comfort Letter is a letter from CPA to the underwriter and certain other requesting parties (like client, broker-dealer, financial intermediary, buyer/seller) in connection with a public offering of securities under the Securities Act of 1933. Comfort letters are requested by the underwriters as part of their “due diligence and reasonable investigation relating to material omissions or misstatements in the registration statement

Comfort letters are provided by the auditors to the underwriters and other parties such as broker-dealers, financial intermediaries. These are signed by the client’s auditors.

Question 12

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

Answer 12

The correct answer is (C).

As per generally accepted government auditing standards, report on ICFR is always required. An auditor should report any significant deficiencies or materials weaknesses in Internal Control identified by the auditor.

Question 13

For financial statement audits, generally accepted government auditing standards (GAGAS) incorporate the Statements on Auditing Standards (SAS) that are issued by the AICPA. GAGAS prescribe additional standards on

Direct reporting of illegal acts

Reporting on internal controls

A. Yes Yes

B. Yes No

C. No Yes

D. No No

Answer 13

A.

According to GAGAS, when providing an opinion or a disclaimer on financial statements, auditors should include in their report on the financial statements either a description of the scope of the auditors’ testing of internal control over financial reporting and compliance with laws, regulations, and provisions of contracts or grant agreements and the results of those tests or an opinion, if sufficient work was performed; or reference to the separate report(s) containing that information. In some circumstances, auditors should report fraud and illegal acts directly to parties external to the audited entity.

Question 14

Having an emphasis of matter paragraph is not a requirement when reporting on which of the following special-purpose frameworks?

A. Cash basis

B. Contractual basis

C. Regulatory basis

D. Regulatory basis (for general use)

Answer 14

The correct answer is (D).

The emphasis of matter paragraph is required when reporting financial statements prepared in accordance with an applicable financial reporting framework, other than regulatory basis financial statements intended for general use.

Question 15

Helpful Co., a nonprofit entity, prepared its financial statements in accordance with an accounting basis prescribed by a regulatory agency solely for filing with that agency. Green audited the financial statements in accordance with GAAS and concluded that the financial statements were fairly presented. Green should issue an audit report

A. With a qualified opinion

B. With an unmodified opinion with reference to the footnote disclosure

C. With a disclaimer of opinion

D. On special-purpose financial statements

Answer 15

D.

Special-purpose financial statements include those prepared in accordance with a regulatory basis of accounting (basis of accounting that the entity uses to comply with the requirements or financial reporting provisions of a regulatory agency to whose jurisdiction the entity is subject).

Question 16

Hill, CPA, is auditing the financial statements of Helping Hand, a not-for-profit organization that receives financial assistance from governmental agencies. To detect misstatements in Helping Hand’s financial statements resulting from violations of laws and regulations, Hill should focus on violations that

A. Could result in criminal prosecution against the organization

B. Involve significant deficiencies to be communicated to the organization’s trustees and the funding agencies

C. Have a direct and material effect on the amounts in the organization’s financial statements

D. Demonstrate the existence of material weaknesses in the organization’s internal control

Answer 16

C.

Due to their acceptance of financial assistance from government agencies, not-for-profit organiza­tions may be subject to laws and regulations. The audit should be designed to give reasonable assurance that the financial statements are free of misstatements resulting from violations of laws and regulations that have a direct and material effect on the determination of financial statement amounts. The audit should not be restricted to the consideration of violations that could result in criminal prosecution against the organization, involve signifi­cant deficiencies to be communicated to the organization’s trustees and the funding agencies, or demonstrate the existence of material weaknesses in the organization’s internal control.

Question 17

In accordance with Office of Management and Budget audit requirements for audits of non-Federal enti­ties expending Federal awards, which of the following statements is accurate regarding Federal awards expended?

A. Donated surplus property cannot be valued at the assessed value provided by the federal agency.

B. Food stamps cannot be valued at fair market value at the time of receipt.

C. Government loans are classified as noncash assistance programs.

D. Free rents received as part of an award to carry out a federal program are treated as federal funds expended.

Answer 17

D.

The determination of when an award is expended should be based on when the activity related to the award occurs. Generally, the activity pertains to events that require the non-Federal entity to comply with laws, regulations, and the provisions of contracts or grant agreements, such as: the receipt of surplus property; the distribution or consumption of food commodities; and the use of loan proceeds under loan and loan guarantee programs. Free rent received by itself is not considered a Federal award expended; however, free rent received as part of an award to carry out a Federal program shall be included in determining Federal awards expended and subject to audit.

Question 18

In accordance with Office of Management and Budget audit requirements for audits of non-Federal enti­ties expending Federal awards, which of the following statements is accurate regarding Federal awards expended?

A. Donated surplus property cannot be valued at the assessed value provided by the federal agency.

B. Food stamps cannot be valued at fair market value at the time of receipt.

C. Government loans are classified as noncash assistance programs.

D. Free rents received as part of an award to carry out a federal program are treated as federal funds expended.

Answer 18

D.

The determination of when an award is expended should be based on when the activity related to the award occurs. Generally, the activity pertains to events that require the non-Federal entity to comply with laws, regulations, and the provisions of contracts or grant agreements, such as: the receipt of surplus property; the distribution or consumption of food commodities; and the use of loan proceeds under loan and loan guarantee programs. Free rent received by itself is not considered a Federal award expended; however, free rent received as part of an award to carry out a Federal program shall be included in determining Federal awards expended and subject to audit.

Question 19

In an audit of financial statements prepared in accordance with a financial reporting framework generally accepted in another country, the auditor should obtain an understanding of all of the following except

A. The purpose for which the financial statements are prepared

B. The certification required by the appropriate auditing or accountancy board of the other country

C. The intended users of the financial statements

D. The steps taken by management to determine that the applicable financial reporting framework is acceptable in the circumstances.

Answer 19

B.

The auditor is not required to have an understanding of the certification required by the appropriate auditing or accountancy board of the other country.

Question 20

In auditing compliance with requirements governing major federal financial assistance programs under the Single Audit Act, the auditor’s consideration of materiality differs from materiality under generally accepted auditing standards. Under the Single Audit Act, materiality is

A. Calculated in relation to the financial statements taken as a whole

B. Determined separately for each major federal financial assistance program

C. Decided in conjunction with the auditor’s risk assessment

D. Ignored, because all account balances, regardless of size, are fully tested

Answer 20

B.

In auditing an entity’s compliance with requirements governing each major federal financial assis­tance program in accordance with the Single Audit Act, the auditor considers materiality separately for each major federal financial assistance program, not in relation to the financial statements taken as a whole. Also, materiality is decided completely separate of the auditor’s risk assessment. Materiality is not ignored because not all account balances need to fully tested

Question 21

In reporting on a performance audit under Government Auditing Standards, an auditor most likely would be required to report findings directly to outside parties under which of the following circumstances?

A. When entity management fails to take the corrective action recommended by the auditor to resolve the findings

B. When entity management fails to satisfy legal or regulatory requirements to report such information to external parties specified

C. When auditors detect instances of fraud, noncompliance with provisions of laws, regulations, contracts, or grant agreements, or abuse that are not significant within the context of the audit objectives but warrant the attention of those charged with governance

D. When auditors conclude, based on sufficient, appropriate evidence, that fraud, noncompliance with provisions of laws, regulations, contracts or grant agreements, or abuse either has occurred or is likely to have occurred which is significant within the context of the audit objectives

Answer 21

B.

Auditors should report known or likely fraud, noncompliance with provisions of laws, regulations, contracts, or grant agreements, or abuse directly to parties outside the audited entity when entity management fails to satisfy legal or regulatory requirements to report such information to external parties specified. Management should respond to known or likely fraud noncompliance, but is not required to use auditor recommended corrective actions. When auditors detect instances of fraud, noncompliance with provisions of laws, regulations, contracts, or grant agreements, or abuse that are not significant within the context of the audit objectives but warrant the attention of those charged with governance, they should communicate those findings in writing to audited entity officials. When auditors conclude, based on sufficient, appropriate evidence, that fraud, noncompliance with provisions of laws, regulations, contracts or grant agreements, or abuse either has occurred or is likely to have occurred which is significant within the context of the audit objectives, they merely report the matter as a finding in the report.

Question 22

In reporting on compliance with laws and regulations during a financial statement audit in accordance with Government Auditing Standards, an auditor should include in the auditor’s report

A. A statement of assurance that all controls over fraud and illegal acts were tested

B. Material instances of fraud and illegal acts that were discovered

C. An opinion on whether compliance with laws and regulations affected the entity’s goals and objectives

D. The materiality criteria used by the auditor in considering whether instances of noncompliance were significantBb

Answer 22

B.

AICPA standards and GAGAS require auditors to address the effect fraud or illegal acts may have on the audit report and to determine that the audit committee or others with equivalent authority and responsibility are adequately informed about the fraud or illegal acts. GAGAS further require that this information be in writing and also include reporting on significant violations of provisions of contracts or grant agreements and significant abuse. Therefore, when auditors conclude, on the basis of evidence obtained, that fraud, an illegal act, a signif­icant violation of a contract or grant agreement, or significant abuse either has occurred or is likely to have occurred, they should include in their audit report the relevant information. GAGAS require auditors to place their findings in proper perspective and identify the condition, criteria, cause, and effect of noncompliance. There is no requirement that all controls be tested. There also is no requirement for an opinion on whether compliance with laws and regulations affected the entity’s goals and objectives in a financial statement audit.

Question 23

In reporting under Government Auditing Standards, an auditor most likely would be required to communicate management’s misappropriation of assets directly to a federal inspector general when the fraudulent activities are

A. Concealed by management by circumventing specific internal controls designed to safeguard those assets

B. Reported to the entity’s governing body and the governing body fails to make a required report to the federal inspector general

C. Accompanied by fraudulent financial reporting that results in material misstatements of asset balances

D. Perpetrated by several levels of management in a scheme that is likely to continue in future years

Answer 23

B.

It is the audit committee’s (or its equivalent) responsibility to take appropriate action regarding frau­dulent activities that are perpetrated or concealed by management. Only when the audit committee fails to take appropriate action (such as not filing a required report), the auditor is responsible to do so. The other responses are failings by management, not omissions of the governing body (the audit committee equivalent).

Question 24

Letters for underwriters and certain other requesting parties, commonly known as comfort letters, provided by a CPA in connection with a nonissuer’s financial statements included in registration statements filed with the Securities and Exchange Commission (SEC)

A. Are one of a number of procedures that may be used to establish that an underwriter has conducted a reasonable investigation related to a securities offering

B. Are required by US securities laws

C. Cover only financial statements included in the registration statement that have been audited by the CPA

D. Are one of a number of procedures that may be used to provide an underwriter with reasonable assurance regarding the sufficiency of the procedures for the requesting party’s purposes

Answer 24

A.

Answer a., comfort letters are one of a number of procedures that may be used to establish that an underwriter has conducted a reasonable investigation related to a securities offering.

Regarding incorrect answer b., comfort letters are not required by US securities laws and copies are not filed with the SEC.

Regarding incorrect answer c., the subjects covered in a comfort letter are not limited to audited financial statements. For example, unaudited financial statements, condensed interim financial information, and other financial information included in the securities offering may be covered.

Regarding incorrect answer d., the auditor should clearly state in any discussion of procedures that the auditor cannot provide any assurance regarding the sufficiency of the procedures for the requesting party’s purposes.

Question 25

Reporting on internal control under Government Auditing Standards differs from reporting under generally accepted auditing standards in that Government Auditing Standards requires a

A. Statement of positive assurance that internal control procedures designed to detect material errors and fraud were tested

B. Written report describing each significant deficiency observed including identification of those considered material weaknesses

C. Statement of negative assurance that internal control procedures not tested have an immaterial effect on the entity’s financial statements

D. Written report describing the entity’s internal control procedures specifically designed to prevent fraud, abuse, and illegal acts

Answer 25

B.

GAGAS require a written report on the consideration of internal control in all audits; whereas GAAS require communication only when the auditor has noted significant deficiencies. The auditor is not required to report on the description of the entity’s internal control procedures. The auditor should not give negative assur­ance that internal control procedures not tested have an immaterial effect on the entity’s financial statements or give positive assurance because of the potential for misinterpretation of the limited degree of assurance associ­ated with the auditor’s written report representing that no significant deficiencies were noted.

Question 26

The auditor of a non issuer should evaluate the appropriateness of a change in accounting principle to determine whether

A. Both the principle and the method of accounting for the effect of the change are in accordance with US generally accepted accounting principles.

B. The related disclosures are adequate

C. The auditor can justify that the alternative accounting principle is preferable

D. The effect of the change exceeds the auditor’s planned level of materiality.

Answer 26

B.

The auditor should evaluate a change in accounting principle to determine whether the disclosures related to the accounting change are appropriate and adequate. Regarding incorrect answer a., for a non issuer, the principle and the effect of the change should be in accordance with the applicable financial reporting framework, which may or may not be US GAAP. Regarding incorrect answer c., management, not the auditor, justifies that the alternative accounting principle is preferable. The auditor evaluates management’s justification. Editor Note:The issuance of an accounting pronouncement that requires the use of a new accounting principle, interprets an existing principle, expresses a preference for an accounting principle, or rejects a specific principle is sufficient justification for a change in accounting principle, as long as the change in accounting principle is made in accordance with the applicable financial reporting framework. Regarding incorrect answer d., the materiality limits set by the auditor for the audit are not relevant to the evaluation of the appropriateness of an entity’s change in accounting principle. The auditor considers materiality in the evaluation of whether the com­parability of financial statements between periods has been affected to a degree that it should be reflected in the audit report and related procedures performed.

Question 27

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?

A. The auditor should perform limited procedures.

B. The auditor should apply tests of details of transactions.

C. The auditor is not required to report omissions.

D. The auditor should read the supplementary financial information.

Answer 27

The correct answer is (A).

The auditor should perform limited procedures for any supplementary financial information required by the FASB.

For supplementary financial information required to be disclosed by FASB, auditors should perform limited review procedures to see if the required information has been provided and it appears to be free of obvious deficiencies. The limited review procedures that auditor should perform can be inquiries from the management about the methods used for preparing the information; compare the consistency of information with management’s responses, audited financial statements and other knowledge obtained during the audit and also obtain written representation from the management regarding the required supplementary information.

(B) is incorrect because tests of details of transactions are required for audit purposes only.

(C) is incorrect because firstly auditor should perform limited review procedures and if the auditor identifies misstatements or omissions and management refuses to make revisions, it should be added in the other matter paragraph. The auditor is required to report omissions.

(D) is incorrect because in addition to reading the supplementary financial information limited review procedures should be performed.

Question 28

The GAO standards of reporting for governmental financial audits incorporate the AICPA standards of reporting and prescribe supplemental standards to satisfy the unique needs of governmental audits. Which of the following is a supplemental reporting standard for governmental financial audits?

A. Auditors should report the scope of their testing of compliance with laws and regulations and of internal controls.

B. Material indications of illegal acts should be reported in a document distributed only to the entity’s senior officials.

C. All changes in the audit program from the prior year should be reported to the entity’s audit committee.

D. Any privileged or confidential information discovered should be reported to the organization that arranged for the audit.

Answer 28

A.

GAGAS require auditors to include in their report either a description of the scope of the auditors’ testing of internal control over financial reporting and compliance with laws, regulations, and provisions of contracts or grant agreements and the results of those tests or, if sufficient work was performed, an opinion; or a reference to the separate report(s) containing that information. In some circumstances, auditors must report illegal acts directly to parties external to the audited entity. Auditors are not required to disclose all changes in the audit program. Certain privileged or confidential information may be prohibited from disclosure; the report should state the nature of the omitted information and the requirement making omission necessary.

Question 29

The objective of a review of interim financial information of a non issuer is to provide an auditor with a basis for communicating whether

A. Material modifications should be made to conform with the applicable financial reporting framework

B. A reasonable basis exists for expressing an updated opinion regarding the financial statements that were previously audited.

C. Condensed financial statements or pro forma financial information should be included in a registration statement.

D. The financial information is presented fairly in accordance with the applicable financial reporting framework

Answer 29

A.

The objective of a review of the interim financial information of a non issuer is to obtain a basis for reporting whether any material modifications should be made for such information to be in accordance with the applicable financial reporting framework by performing limited procedures. It is not to update the opinion on the previously audited financial statements nor to determine whether condensed statements or pro forma information should be included. In a review, the accountant supplies only limited assurance and would not provide an opinion stating the financial information is presented fairly.

Question 30

The scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies. Which of the following elements do these audits have in common?

A. The auditor is required to disclose all situations and transactions that could be indicative of fraud, abuse, and illegal acts to the federal inspector general.

B. The materiality levels are higher and are determined by the government entities that provide the federal financial assistance to the recipients.

C. The auditor is required to document an understanding of internal control established to ensure compliance with the applicable laws and regulations.

D. The accounts should be 100% verified by substantive tests because certain statistical sampling applications are not permitted.

Answer 30

C.

All audits of recipients of federal financial assistance require the auditor to obtain and document an understanding of internal control established to ensure compliance with the laws and regulations applicable to the federal award. The auditor is not required to disclose all situations and transactions that could be indicative of fraud, abuse, and illegal acts to the federal inspector general. Materiality levels are determined by the auditor in relation to an entity’s federal programs, not the government entities that provide the federal financial assis­tance to the recipients. Accounts need not be 100% verified by substantive tests because certain statistical sampling applications are in fact permitted.

Question 31

There has been a justified change in the accounting principle, which the auditor decided to include in the Emphasis-of-Matter paragraph. Which of the following statements is not correct concerning the inclusion of the Emphasis-of-Matter paragraph?

A. Should be included after the opinion paragraph.

B. Indicate that the auditor’s opinion is not modified with respect to the matter emphasized.

C. Indicate that the change has an immaterial impact on comparability of the financial statement of the current and preceding year.

D. Reference should be made to the relevant disclosures in the financial statements.

Answer 31

The correct answer is (C).

When an entity changes its accounting principle or a method which has a material effect on comparability, it may not be necessarily a departure from GAAP as long as it is an acceptable principle, justified sufficiently and disclosed adequately. The audit opinion will continue to be unmodified but will need to include an Emphasis-of-Matter paragraph after the opinion paragraph, referring to the financial statement note that discusses the change in details including the justification for the change and the cumulative effect of the change on the audited financial statements.

An auditor will not indicate that the change has an immaterial impact on the comparability of the financial statement of the current and preceding year.

(A) is incorrect, since the Emphasis-of-Matter paragraph is included after the opinion paragraph.

(B) is incorrect, since the auditor has to indicate that the opinion is not modified with respect to the matter being emphasized.

(D) is incorrect, since the auditor should, in an Emphasis-of-Matter paragraph, refer to the relevant disclosures about the matter in the financial statements.

Question 32

Wale Company plans to present comparative financial statements for the years ended December 31, year 7, and year 8, respectively. Dauphin, CPA, audited Wale’s financial statements for both years and plans to report on the comparative financial statements on March 1, year 9. Dauphin’s audit is subject to the requirements of the Public Company Accounting Oversight Board (PCAOB). What time is covered by Dauphin’s opinion on internal control over financial reporting (ICFR)?

A. The end of year 7 and the end of year 8

B. The end of year 8

C. Year 7 and year 8

D. Year 8

Answer 32

B.

The auditor’s opinion on ICFR is as of a specified date rather than a period of time. When the audi­tor elects to issue a combined report, the audit opinion will address multiple periods for the financial statements presented, but only the end of the most recent fiscal year for the effectiveness of ICFR.

Question 33

What is an auditor’s responsibility for supplementary information which is outside the basic financial state­ments but required by a standard setter designated by the AICPA to promulgate GAAP?

A. The auditor should apply substantive tests of transactions to the supplementary information and verify its conformity with the designated standard setter’s requirement

B. The auditor should apply certain limited procedures to the supplementary information and include an other-matter paragraph in the audit report to refer to the RSI.

C. The auditor’s only responsibility for the supplementary information is to determine that such information has not been omitted.

D. The auditor has no responsibility for such supplementary information as long as it is outside the basic financial statements.

Answer 33

B.

RSI (Required Supplementary Information) differs from other types of information outside the basic financial statements because an accounting standard setter (FASB, GASB, FASAB, or IASB) designated by the AICPA to establish GAAP consi­ders the information an essential part of the financial reporting of certain entities and because authoritative guidelines for the measurement and presentation of the information have been established. Accordingly, the auditor should apply certain limited procedures to the RSI and should include a other-matter paragraph after the opinion paragraph in the audit report to explain that the RSI is included and that limited audit procedures were applied. If there are problems with the RSI, the other-matter paragraph should describe whether some or all of the information has been omitted or has not been presented in accordance with the applicable guidelines; and whether the auditor was unable to complete the audit procedures or has unresolved doubts about whether the information is presented in accordance with prescribed guidelines

Question 34

When an entity is required or permitted to disclose segment information in the financial statements

A. The auditor should obtain an understanding of the related industry standards as the applicable financial reporting framework may not include requirements for this level of presentation

B. The auditor is unlikely to perform analytical procedures on segment information

C. The auditor’s responsibility regarding the presentation and disclosure of segment information is in relation to the financial statements as a whole

D. The auditor is required to perform audit procedures that would be necessary to express an opinion on the segment information presented on a stand-alone basis

Answer 34

C.

The auditor’s responsibility regarding the presentation and disclosure of segment information is in relation to the financial statements as a whole. Accordingly(regarding incorrect answer d.), the auditor is not required to perform audit procedures that would be necessary to express an opinion on the segment information presented on a stand-alone basis.Regarding incorrect answer a., the applicable financial reporting framework (AFRF) is the likely source of guidance for management and the auditor. The AFRF may include requirements to disclose segment information; thus, the auditor should, rather than looking to industry standards, obtain an understanding of the methods used by management in determining segment information and evaluate whether such methods are likely to result in disclosure and presentation in accordance with the AFRF. When appropri­ate, the auditor should test the application methods and perform audit procedures. For example, when obtaining an understanding of management’s methods to determine segment information, the auditor may look at (1) the allocation of assets and costs among segments or (2) sales, transfers, and charges between segments and the elimination of inter segment amounts.Regarding incorrect answer b., the auditor may find it appropriate to per­form analytical procedures or other audit procedures appropriate in the circumstances. Analytical procedures may help identify inconsistencies with prior period information.

Question 35

When auditing an entity’s financial statements in accordance with Government Auditing Standards (the “Yellow Book”), an auditor is required to report on

I.Noteworthy accomplishments of the program

II.The scope of the auditor’s testing of internal controls

A. I only

B. II only

C. Both I and II

D. Neither I nor II

Answer 35

B.

GAGAS require a written report on the consideration of internal control in all audits; whereas GAAS require communication only when the auditor has noted significant deficiencies. Reporting on program accom­plishments is not required of the auditor.

Question 36

When auditing an entity’s financial statements in accordance with Government Auditing Standards (the “Yellow Book”), an auditor is required to report on

I.Recommendations for actions to improve operations

II.The scope of the auditor’s tests of compliance with laws and regulations

A. I only

B. II only

C. Both I and II

D. Neither I nor II

Answer 36

B.

In an audit in accordance with Governmental Auditing Standards, an auditor is required to report on the auditor’s test of the entity’s compliance with applicable laws and regulations. Among the basic elements of such a report is a statement that the standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Recommendations for actions to improve operations are a side-benefit of an audit, but are not required.

Question 37

When considering whether the comparability of financial statements between periods has been materially affected, the auditor should evaluate and report on

A. A change in accounting estimate that is inseparable from the effect of a related change in accounting principle like other changes in accounting principle

B. A change from an accounting principle that is not in accordance with the applicable financial reporting framework to one that is in accordance like other changes in accounting principle

C. A change in financial statement classification like other changes in accounting principle

D. A change in reporting entity that results from a transaction or event like other changes in accounting principle

Answer 37

A.

The auditor should evaluate and report on a change in accounting estimate that is inseparable from the effect of a related change in accounting principle like other changes in accounting principle. For example, when a change is made to the method of depreciation of an asset to reflect a change in the estimated future benefit of the asset or the pattern of consumption for those benefits, such a change in accounting may be inseparable from a change in estimate. Regarding incorrect answer b., a change from an accounting principle that is not in accordance with the applicable financial reporting framework (AFRF) to one that is in accordance with the AFRF is a correction of a misstatement, not a change in accounting principle. Regarding incorrect answer c., the auditor should evaluate a material change in financial statement classification and the related disclosure to determine whether such a change is also either a change in accounting principle or an adjustment to correct a material misstatement in previously issued financial statements. Regarding incorrect answer d., when a change in the reporting entity results in financial statements that, in effect, are those of a different reporting entity, the auditor should include an emphasis-of-matter paragraph in the audit report that describes the change in the reporting entity and provides a reference to the entity’s disclosure, unless the change in reporting entity results from a transaction or event.A change in reporting entity that results from a transaction or event, such as the creation, cessation, or complete or partial purchase or disposition of a subsidiary or other business unit, does not require recognition in the audit report. Examples of a change in reporting entity that should be recognized in the audit report because they are not the result of a transaction or event include (1) presenting consolidated or combined financial statements in place of financial statements of individual entities; (2) changing specific subsidiaries that make up the group of entities for which consolidated financial statements are presented; and (3) changing the entities included in combined financial statements.

Question 38

When engaged to report on supplemental information that accompanies a public company’s financial statements that is required by a regulatory authority that prescribes a lower materiality level than the one used for the audit of the financial statements, the auditor should

A. Withdraw from the engagement to report on the supplemental information

B. Use the same level as for the financial statements and add an explanatory paragraph to the report on the supplemental information

C. Use the regulatory authority’s level in planning and performing the audit procedures for the supplemental information

D. File an exception report with the regulatory authority

Answer 38

C.

Answer c., when engaged to report on supplemental information that accompanies a public company’ s financial statements that is required by a regulatory authority that prescribes a lower materiality level than the one used for the audit of the financial statements, the auditor should use the regulatory authority’s level in planning and performing the audit procedures for the supplemental information.

Question 39

When issuing letters for underwriters, commonly referred to as comfort letters, an accountant may provide negative assurance concerning:

A. The absence of any significant deficiencies in internal control.

B. The conformity of the entity’s unaudited condensed interim financial information with generally accepted accounting principles (GAAP).

C. The results of procedures performed in compiling the entity’s financial forecast.

D. The compliance of the entity’s registration statement with the requirements of the Securities Act of 1933.

Answer 39

The correct answer is (B).

When issuing letters for underwriters, commonly referred to as comfort letters, an accountant may provide negative assurance concerning the conformity of the entity’s unaudited condensed interim financial information with generally accepted accounting principles (GAAP).

(A) is incorrect as comments in a comfort letter are limited to financial information.

(C) is incorrect as accountants may not provide negative assurance on the results of procedures performed in compiling an entity’s financial forecast. Accountants may attach to the comfort letter a standard report on a compilation of the forecast, and may include additional procedures and findings in the comfort letter, but may not provide any form of assurance on the forecast.

(D) is incorrect as when issuing letters for underwriters, commonly referred to as comfort letters, an accountant typically provides positive assurance concerning the compliance of the financial statements and financial statement schedules included in the registration statement with the requirements of the Securities Act of 1933.

Question 40

When performing a compliance audit, the auditor

A. Should obtain sufficient appropriate audit evidence to form an opinion and report at the level specified in the governmental audit requirement on whether the entity complied in all material respects with the applicable compliance requirements.

B. Is not required to obtain written management representations.

C. Should establish and apply the same materiality levels used in the audit of the financial statements

D. Is not required to perform risk assessment procedures for each of the government programs and applicable compliance requirements selected for testing.

Answer 40

A.

An auditor has two objectives in a compliance audit: (1) to obtain sufficient appropriate audit evidence to form an opinion and report at the level specified in the governmental audit requirement on whether the entity complied in all material respects with the applicable compliance requirements; and (2) to identify audit and reporting requirements specified in the governmental audit requirement that are supplementary to GAAS and Government Auditing Standards, if any, and perform procedures to address those requirements. The auditor should obtain management written representations from management. The auditor should establish and apply materiality levels for the compliance audit based on the governmental audit requirement. The auditor should perform risk assessment procedures for each of the government programs and applicable compliance requirements selected for testing.

Question 41

When there has been a change in an accounting principle by a public company, but the effect of the change on the comparability of the financial statements is not material, the auditor should

A. Refer to the change in an explanatory paragraph

B. Explicitly concur that the change is preferred

C. Not refer to consistency in the audit report

D. Refer to the change in the opinion paragraph

Answer 41

C

A change in accounting principle that does not have a material effect on the comparability of the financial statements should not be recognized in the audit report.

Question 42

Which of the following characteristics of prospective financial statements would require the practitioner to include in a report on the prospective financial statements a paragraph that restricts the use and distribution of the report?

A. They are considered a financial projection

B. They are considered a financial forecast

C. They contain a range of forecasted results.

D. They are prepared by a practitioner who lacks independence

Answer 42

A.

Prospective financial statements (PFS) are either a forecast or a projection. A financial forecast presents, to the best of the responsible party’s knowledge and belief, an entity’s expected financial position, results of operations, and cash flows. A financial forecast can be a general-use or limited-use report. A financial projection presents, to the best of the responsible party’s knowledge and belief, given one or more hypothetical assumptions, an entity’s expected financial position, results of operations, and cash flows. It answers the question, “What would happen if…?” A financial projection must be labeled a limited-use report. Independence is not required for either type of engagement

Question 43

Which of the following circumstances requires modification of the auditor’s report on a review of interim financial information of a non issuer?

An uncertainty

Inadequate disclosure

A. No No

B. Yes Yes

C. Yes No

D. No Yes

Answer 43

D.

The accountant’s report on are view of the interim financial information should be modified for depar­tures from the applicable financial reporting framework, which include inadequate disclosure and changes in accounting principles that are not in conformity with the applicable financial reporting framework. The existence of an uncertainty or a lack of consistency in the application of accounting principles affecting interim financial information would not require the accountant to include an additional paragraph in the report, provided that the interim financial information appropriately discloses such matters

Question 44

Which of the following cognizant agencies is most likely to be assigned to an auditee?

A. The federal agency that is located within the auditee’s region.

B. The federal agency that provides the most funding to the auditee.

C. An independent federal agency that does not provide funding to the auditee.

D. A preselected federal agency whose sole purpose is to monitor single audits.

Answer 44

The correct answer is (B).

The auditee is any non-federal entity (state, local or a not for profit) that receives federal financial assistance and must be audited by a cognizant agency (a federal agency designated to carry out the audit). Under the Single Audit Act, the federal agency that provides the most direct funding to the auditee is most likely to be assigned to an auditee as a cognizant agency to carry out the audit.

Question 45

Which of the following does not form part of the duties of a predecessor auditor when the predecessor’s audit report is reissued and included along with the current auditor’s audit report?

A. Read the current year comparative financial statements and compare with the prior period financial statements issued.

B. Inquire for any information that has come to management’s attention or any subsequent events after the prior period financial statements date that would require adjustments/ disclosures in the prior period financial statements.

C. Obtain representation letters from the successor auditor and the management.

D. Dual date the prior period report.

Answer 45

The correct answer is (D).

When a predecessor auditor’s report is reissued and included along with the current auditor’s audit
report, the predecessor auditor should:

i. Read the current year comparative financial statements and compare with the prior period
financial statements issued.
ii. Inquire for any information that has come to management’s attention or any subsequent
events after the prior period financial statements date that would require adjustments/
disclosures in the prior period financial statements.
iii. Obtain representation letters from the successor auditor and the management

There is no requirement for the predecessor auditor to dual date the prior period report.

Question 46

Which of the following is not a condition that should be met in order for an auditor to opine on whether supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole?

A. The supplementary information was derived from, and relates directly to, the underlying accounting and other records used to prepare the financial statements.

B. The supplementary information relates to the same period as the financial statements.

C. The auditor issued an audit report on the financial statements that contained an unmodified opinion.

D. The supplementary information will accompany the entity’s audited financial statements, or such audited financial statements will be made readily available by the entity.

Answer 46

C.

An unmodified opinion on the financial statements is not required; instead, the auditor should have issued an audit report on the financial statements that contained neither an adverse opinion nor a disclaimer of opinion.

The other answer alternatives cover the remainder of the criteria.

Question 47

Which of the following is not an acknowledgement an auditor should obtain from management regarding management’s responsibilities when an auditor is engaged to report on whether supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole?

A. Management is responsible for the preparation of the supplementary information in accordance with the applicable criteria.

B. Management is responsible for including the auditor’s report on the supplementary information in any document that contains the supplementary information and that indicates that the auditor has reported on such supplementary information.

C. Management is responsible for providing the auditor with certain written representations.

D. Management is responsible for presenting the supplementary information with the audited financial statements or making the statements available no later than 30 days after the date of issuance of the auditor’s report on the supplementary information.

Answer 47

D.

All of the answers are correct regarding the responsibilities of management except the last one. Instead of answer d., the correct statement is as follows: Management is responsible for presenting the supple­mentary information with the audited financial statements or, if the supplementary information will not be pre­sented with the audited financial statements, to make the audited financial statements readily available to the intended users of the supplementary information no later than the date of issuance by the entity of the supple­mentary information and the auditor’s report there on.

Editor Note: Just remember that when it comes to financial statements and relevant information being “readily available”, there is no specified time period associated with this. As such, that would lead you to believe that choice d. is the correct answer here.

Question 48

Which of the following is not one of the elements that form a framework for applying the field work requirements for a performance audit conducted in accordance with Government Auditing Standards?

A. Sufficiency

B. Significance

C. Reasonable assurance

D. Audit risk

Answer 48

A.

Sufficiency is not one of the elements that form a framework for applying field work requirements for a performance audit; it is a measure of the quantity of evidence used to support the findings and conclusions related to the audit objectives and supporting findings and conclusions. Sufficiency also depends on the appropri­ateness of the evidence. Field work requirements for performance audits relate to planning the audit; supervis­ing staff; obtaining sufficient, appropriate evidence; and preparing audit documentation. Reasonable assurance, significance, and audit risk form a framework for applying these requirements.

Question 49

Which of the following statements best serves as management’s assertion of consistency in an MD&A presentation?

A. Information included in the presentation is properly classified and described.

B. Nonfinancial data have been accurately derived from related records.

C. Reported transactions took place during a given period.

D. Descriptions of transactions are included to understand.

Answer 49

The correct answer is (B).

Assertions about consistency with the financial statements address whether:

Reported transactions, events, and explanations are consistent with the financial statements.

Historical financial amounts have been accurately derived from the financial statements and related records.

Non-financial data have been accurately derived from related records.

Management’s assertion of the consistency in an MD&A presentation is best served by a statement that non-financial data have been accurately derived from related records.

(A) Information included in the presentation is properly classified and described: Classification.

(C) Reported transactions took place during a given period – Cutoff.

(D) Descriptions of transactions are included to understand – Understandability.

Question 50

Which of the following statements is a standard applicable to financial statement audits in accordance with Government Auditing Standards (the “Yellow Book”)?

A. An auditor should report on the scope of the auditor’s testing of internal controls.

B. All instances of abuse, waste, and mismanagement should be reported to the audit committee.

C. An auditor should report the views of responsible officials concerning the auditor’s findings.

D. Internal control activities designed to detect or prevent fraud should be reported to the inspector general.

Answer 50

A.

The auditor must summarize the audit results concerning internal control, financial statements, and compliance with laws and regulations. Immaterial amounts are not necessarily reported to the audit committee. Officials may report their own views - it is the auditor’s duty to do so only if the auditor’s report on the engagement discloses deficiencies in internal control, fraud, illegal acts, violations of provisions of contracts or grant agreements, or abuse. A report on all internal control activities designed to detect or prevent fraud is far more than need be reported to the inspector general or other parties.

Question 51

Which of the following statements is correct concerning an auditor’s required communication of significant deficiencies and material weaknesses identified during an audit of financial statements?

A. A significant deficiency previously communicated during the prior year’s audit that remains uncor-rected causes a scope limitation.

B. An auditor should perform tests of controls on significant deficiencies before communicating them to the client.

C. An auditor’s written communication on deficiencies in internal control should include a restriction on the use of the communication.

D. An auditor should communicate significant deficiencies after tests of controls, but before commencing substantive tests.

Answer 51

C.

The written communication regarding significant deficiencies and material weaknesses identified during an audit of financial statements should include a restriction on its use (an appropriate alert). Significant deficiencies, previously communicated and uncorrected or not, do not create scope limitations unless when aggregated with other internal control deficiencies they are so pervasive that an entity cannot be audited which was not indicated by this question. The auditor is not required to perform tests of controls on significant deficien­cies; however, performing tests of controls in an audit may reveal significant deficiencies. For a nonissuer, the required written communication is best made by the audit report release date, but should be made no later than 60 days after this date. For an issuer, it must be made prior to the issuance of the audit report. In some circum­stances, the auditor may decide to communicate certain identified significant deficiencies and material weak­nesses during the audit; however these should ultimately be included in the formal final written communication even if remediated during the audit.

Question 52

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

Answer 52

The correct answer is (A).

While conducting an audit in accordance with Government Auditing Standards, 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. The next step is to report this fraud to the counterparty to the contract. The auditor took a correct first step in reporting the fraudulent contract client’s audit committee. The audit committee wrongfully took no action, leaving the auditor to report the fraud to the counterparty to the contract. If management fails to report such info to external parties per law/regulation - Auditor first communicates failure to report to TCWG. If the entity still does not do the needful, then the auditor should report directly to specified external parties.

Question 53

Reporting standards for financial audits under Government Auditing Standards (the “Yellow Book”) differ from reporting under generally accepted auditing standards in that Government Auditing Standards require the auditor to

A. Provide positive assurance that control activities regarding segregation of duties are consistent with the entity’s control objectives

B. Present the results of the auditor’s tests of controls

C. Provide negative assurance that the auditor discovered no evidence of intentional override of internal controls

D. Describe the scope of the auditor’s principal substantive tests

Answer 53

B.

When providing an opinion or a disclaimer of opinion on financial statements in accordance with GAGAS, the audit must include in the report either a description of the scope of the auditor’s testing of internal control over financial reporting and compliance with laws, regulations, and contractual provisions and the results of those tests (negative assurance) or, if sufficient work was performed, an opinion (positive assurance); or refer to a separate report containing that information. The auditor does not necessarily assure that no evidence of intentional override of controls was found, nor report the scope of the principal substantive tests.

Question 54

The auditor should evaluate a change in accounting principle to determine whether the newly adopted accounting principle is a generally accepted accounting principle. All of the following conditions must also be met except for

A. The method of accounting for the effect of the change is in conformity with generally accepted accounting principles.

B. The disclosures related to the accounting change are adequate.

C. The company has justified that the alternative accounting principle is preferable.

D. The company has prepared pro forma financial statements with and without the change.

Answer 54

D.

Preparation of pro forma financial statements is not required.

Question 55

When auditors do not comply with applicable GAGAS requirements for a performance audit they should include which of the following in the audit report?

A. A modified GAGAS performance statement

B. An unmodified GAGAS performance statement

C. A modified GAGAS compliance statement

D. An unmodified GAGAS compliance statement

Answer 55

C.

When auditors do not comply with all applicable GAGAS requirements for a performance audit, they should include a modified GAGAS compliance statement in the audit report. For performance audits, auditors should use the language for an unmodified GAGAS compliance statement, but modify it to indicate the require­ments that were not followed, or language to indicate that the auditor did not follow GAGAS.

Question 56

When performing procedures in an engagement to report on whether supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole, the auditor should

A. Use the same materiality level used in the audit of the financial statements.

B. Obtain a separate understanding of the entity’s internal control and assess fraud risk.

C. Apply procedures as extensive as would be necessary to express an opinion on the information on a stand-alone basis.

D. Not consider materiality in determining which information to compare and reconcile to the underlying accounting and other records used in preparing the financial statements or to the financial statements themselves.

Answer 56

A.

When performing procedures in an engagement to report on whether supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole, the auditor should use the same materiality level used in the audit of the financial statements. Regarding incorrect answer b., with respect to the supplementary information, the auditor is not required to obtain a separate understanding of the entity’s internal control or assess fraud risk. Regarding incorrect answer c., the auditor need not apply procedures as extensive as would be necessary to express an opinion on the information on a stand-alone basis. Regarding incorrect answer d., the auditor should consider materiality in determining which information to compare and reconcile to the underlying accounting and other records used in preparing the financial statements or to the financial statements themselves.

Question 57

Because the effective date of a registration statement filed under the Securities Act of 1933 may not necessarily coincide with the filing date, the auditor should request management to keep the auditor advised of the progress of the registration proceedings through

A. The effective date of the registration statement

B. The date of the referenced financial statements

C. The date of the audit report on the referenced financial statements

D. The date of the entity’s latest interim financial statements

Answer 57

A.

Because the effective date of a registration statement filed under the Securities Act of 1933 may not necessarily coincide with the filing date, the auditor should request management to keep the auditor advised of the progress of the registration proceedings through the effective date of the registration statement. The effec­tive date of the registration statement is the date on which the registration statement becomes effective for purposes of evaluating the auditor’s liability. Requesting management to keep the auditor advised of the progress of the registration proceedings through the effective date is important so that the auditor’s consideration of events occurring after the date of the audit report up to the effective date, or as close to it as reasonable and practicable,can be completed by the effective date of the registration statement. Generally, the filing date of a registration statement will precede the effective date. In addition to performing the procedures required by US GAAS at or shortly before the effective date,the audit or may also perform some or all of such procedures at or shortly before the filing date.

Question 58

A CPA was engaged to audit the financial statements of a municipality that received federal financial assistance and that required a Single Audit Act for compliance with the terms of the financial assistance. Which of the following guidelines should the CPA consider?

Generally Accepted Auditing Standards

Government Auditing Standards

A. Yes Yes

B. Yes No

C. No Yes

D. No No

Answer 58

The correct answer is (A).

The Single Audit Act requires government organizations receiving federal financial assistance of more than $750,000 within a single fiscal year to engage an auditor to perform a single coordinated audit of the entity and of applicable federal financial assistance program requirements. Auditor performing an audit for a government organization has to follow GAS (Government Auditing Standards) in addition to GAAS (Generally Accepted Auditing Standards). A CPA who was engaged to audit the financial statements of a municipality that received federal financial assistance and that required a Single Audit for compliance with the terms of the financial assistance would need to perform his audit as per GAAS and also GAS.

Question 59

Which of the following would be an appropriate title for a statement of revenue and expenses prepared using an other comprehensive basis of accounting?

A. Statement of operations

B. Statement of income – regulatory basis

C. Income statement

D. Statement of activities

Answer 59

The correct answer is (B).

Financial statements prepared on the basis of an other comprehensive basis of accounting should be suitably titled so as to clearly distinguish the basis used.

Based on the above explanation, (A), (C) and (D) are incorrect, since they are not suitably titled.

Question 60

A former client requests a predecessor auditor to reissue the prior year’s audit report in connection with the issuance of comparative financial statements by the client. What is the predecessor auditor’s responsibility?

A. Review the previous report and make the necessary changes.

B. Consult with the client’s legal counsel to determine available remedies.

C. Read the current report, compare it to the previous report, and obtain a letter of representation from the successor auditor.

D. Audit the current statements.

Answer 60

The correct answer is (C).

A former client requests a predecessor auditor to reissue the prior year’s audit report in connection with the issuance of comparative financial statements by the client. The predecessor auditor’s responsibility is to read the current report, compare it to the previous report, and obtain a letter of representation from the successor auditor.

When a predecessor’s audit report reissued and included along with current’s audit report. Predecessor auditor should

• Read current year comparative F/S and compare with the prior period F/S issued
• Inquire for any info that has come to management’s attention or any subsequent events after the prior period F/S date that would require adjustment/disclosure on prior period F/S
• Obtain representation letters both from the successor auditor and from the management

Question 61

What is an auditor’s responsibility for information that is outside the basic financial statements, but pre­sented in a document with the audited financial statements?

A. The auditor should apply substantive tests of transactions to the other information and include an explanatory paragraph in the audit report to refer to the other information.

B. The auditor should apply certain limited procedures to the other information and include an explanatory paragraph in the audit report to refer to the other information.

C. The auditor’s only responsibility for the other information is to read it and determine whether it has any material inconsistencies with the financial statements.

D. The auditor has no responsibility for other information as long as it is outside the basic financial statements.

Answer 61

C.

The auditor’s only responsibility for the other information is to read it and determine whether it has any material inconsistencies with the financial statements. The auditor need not perfrom audit (substantive tests) or review (limited procedures) procedures related to the other information.

Question 62

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?

A. 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

B. Refrain from placing any reliance on information obtained from the review of the predecessor auditor’s audit documentation of the prior period

C. Request that management inform the predecessor auditor that the prior-period audited financial statements require revision

D. Express a qualified or adverse opinion

Answer 62

The correct answer is (A).

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. The auditor should 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.

An entity is permitted to change an accounting policy if the change is required by a standard/interpretation or if the change results in the financial statements providing more reliable and relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance, cash flows, etc. Once auditor is satisfied with the change in accounting policies then the auditor can issue an unmodified opinion but with an emphasis of matter paragraph referring to footnote in the financial statements which discuss the change.

Question 63

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

A. Be limited to data derived from the audited financial statements

B. Be distributed only to senior management and the board of directors

C. State that the presentation is a comprehensive basis of accounting other than GAAP

D. Indicate that the data is not fairly stated in all material respects

Answer 63

The correct answer is A. The selected data accompanying the basic financial statements (supplementary information) should be derived from, and related directly to, the underlying accounting and other records used to prepare the financial statements.

Regarding incorrect answer B., the report is not required to be restricted.

Regarding incorrect answer C., the basis of accounting is not necessarily other than GAAP. Supplementary information may be prepared in accordance with various criteria or other requirements.

Regarding incorrect answer D., ordinarily, the opinion on whether the supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole, is that it is fairly stated. However, if a qualified opinion on the financial statements affects the supplementary information, the opinion on the supplementary information will refer to the explanation about the qualification that either appears in the audit report on the financial statements or if the auditor reports on the supplementary information in a separate report, the explanation described in that separate report.(When the audit report on the financial statements contains an adverse opinion or a disclaimer of opinion,the auditor is precluded from expressing an opinion on the supplementary information.)

If the supplementary information is materially misstated, the auditor should discuss the matter with management and propose appropriate revision of the supplementary information. If management does not revise the supplementary information, the auditor should either-

(1) modify the auditor’s opinion on the supplementary information and describe the misstatement in the audit report or
(2) if a separate report is being issued on the supplementary information, withhold the report on the supplementary information.

Question 64

Which of the following procedures ordinarily should be applied when an auditor conducts a review of interim financial information of a nonissuer?

A. Verify changes in key account balances

B. Read the minutes of the board of directors’ meeting

C. Inspect the open purchase order file

D. Perform cutoff tests for cash receipts and disbursements

Answer 64

B.

The procedures for are view of the interim financial information should include reading the available minutes of meetings of stockholders, directors, and appropriate committees and inquiring about matters dealt with at meetings for which minutes are not available to identify matters that may affect the interim financial infor­mation. Answers a., c., and d. are not procedures ordinarily applied in a review of interim financial information.

Question 65

When an auditor is engaged to report on whether supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole and the entity presents the supplementary information with the financial statements, the auditor should

A. Include a statement in the audit report that the supplementary information is presented for purposes of additional analysis and is a required part of the financial statements

B. Include an explanation in the report if the auditor expressed an adverse opinion or disclaimed an opinion on the financial statements

C. Report on the supplementary information in either an other-matter paragraph in the audit report on the financial statements or in a separate report

D. Restrict the distribution of the report

Answer 65

C.

When the entity presents the supplementary information with the financial statements, the auditor should report on the supplementary information in either an other-matter paragraph in the audit report on the financial statements or in a separate report. This is done in order for the user to have an explicit understanding that the supplementary information is in addition to the financial statements, and not a basic financial statement in itself. Regarding incorrect answer a., the auditor should include a state­ment that the supplementary information is presented for purposes of additional analysis and is not a required part of the financial statements. Regarding incorrect answer b., when the audit report on the financial statements contains an adverse opinion or a disclaimer of opinion the auditor is precluded from expressing an opinion on the supplementary information. In this case, when permitted by law or regulation, the auditor may withdraw from the engagement to report on the supplementary information. If the auditor does not withdraw, the report on the supplementary information (or the other-matter paragraph in the audit report) should state that because of the significance of the matter disclosed in the audit report, it is inappropriate to, and the auditor does not, express an opinion on the supplementary information. Regarding incorrect answer d., the auditor is most likely to con­sider restricting the use of a separate report on supplementary information to the appropriate specified parties to avoid potential misinterpretation or misunderstanding of the supplementary information that is not presented with the financial statements, but it is not required in either case.

Question 66

An auditor is engaged to report on supplementary information in relation to the financial statements as a whole that is included in a client-prepared document containing audited financial statements. Under these circumstances, the auditor has elected to report on the supplementary information in an other-matter paragraph in the audit report on the financial statements. The other-matter paragraph should

A. State that the presentation is a comprehensive basis of accounting other than GAAP

B. State that the supplementary information has not been subjected to the auditing procedures

C. State that the information is limited to data derived from records used to prepare the entity’s financial statements

D. Restrict the use of the report to appropriate specified parties

Answer 66

C.

When an auditor is engaged to report on supplementary information that is included in a client-prepared document containing audited financial statements,the other-matter paragraph or separate report should include a statement that the supplementary information is the responsibility of management and was derived from, and relates directly to, the underlying accounting and other records used to prepare the financial state­ments. The auditor’s primarily responsibility here is to ensure that the supplementary information is consistent with the financial statements it accompanies. In addition, none of the other answers are required report elements. Regarding incorrect answer a., supplementary information is presented outside the basic financial statements; thus, an explanation concerning the framework is not required. And, the basis of accounting used for supplementary information is not necessarily other than GAAP. Supplementary information may be prepared in accordance with various criteria or other requirements. Regarding incorrect answer b., the report should state that the supplementary information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, includ­ing comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves and other additional procedures, in accordance with US GAAS. Regarding incorrect answer d., note that the question stipulates that the selected financial data is in a document containing the financial statements and the auditor is reporting via an other-matter paragraph included in the audit report on the financial statements. If the auditor had elected to issue a separate report on the supplementary information (or had been required to report separately because the audited financial statements were not presented with the supplementary information), the auditor may consider including an alert that restricts the use of the separate report solely to the appropriate specified parties to avoid potential misinterpretation or misunderstanding of the supplementary information that is not presented with the financial statements.

Editor Note: When the entity presents the supplementary information with the financial state­ments, the auditor should report on the supplementary information in either an other-matter paragraph in the audit report on the financial statements or in a separate report. When the audited financial statements are not presented with the supplementary informa­tion, the auditor should report on the supplementary information in a separate report. When reporting separately, the report should include a reference to the report on the financial statements, the date of that report, the nature of the opinion expressed on the financial statements, and any report modifications

Question 67

An auditor concludes, prior to the audit report release date, that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. If the auditor concludes that the financial statements do not require revision but the client refuses to revise the other information to eliminate the inconsistency, the auditor should communicate the matter to those charged with governance and may

A. Revise the auditor’s report to include an other-matter paragraph describing the material inconsistency

B. Issue a qualified opinion after discussing the matter with the client’s board of directors

C. Consider the matter closed because the other information is not in the audited financial statements

D. Disclaim an opinion on the financial statements.

Answer 67

A.

One of the auditor’s alternatives in this situation is to include an other-matter paragraph in the audit report describing the material inconsistency. The addition of this paragraph would not affect the auditor’s opinion. The auditor may also decide to withhold the audit report or withdraw from the engagement, if withdrawal is possible under applicable law or regulation. The auditor should not consider the matter closed. A qualified opinion or a disclaimer of opinion would not be appropriate.