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Flashcards in Reports Deck (43):
1

three general standards field work standard

Adequate planning and supervision.
Understanding the entity and its environment including internal control.
Sufficient appropriate audit evidence.

2

The Kansas CPA firm is the auditors for Horzeno Corporation. Horzeno produces group financial statements because it has a number of subsidiaries. Kansas CPAs is the auditor of those group financial statements which are prepared in conformity with US GAAP. One subsidiary produces its financial information using IFRS. It is auditing by a component auditor. Kansas CPAs plans to make reference to the work of this component auditor. What else must Kansas CPAs disclose in connection with this subsidiary?

An indication that Kansas CPAs is responsible for evaluating the adjustments required to switch IFRS to US GAAP. The subsidiary financial statements are prepared according to IFRS but must be converted to US GAAP for consolidation purposes. Although the component auditor was responsible for the audit of the subsidiary's statements, the conversion of balances from IFRS to US GAAP is required because of consolidation. To avoid confusion, the auditor of the group statements must disclose its responsibility for evaluating that conversion process.

3

When auditing related party transactions, an auditor places primary emphasis on

Evaluating the disclosure of the related party transactions.

4

In which of the following situations would an auditor most likely add an explanatory paragraph to the standard report while not affecting the auditor's unmodified opinion?

There is substantial doubt about the entity's ability to continue as a going concern.

5

In which of the following circumstances would an auditor not express an unmodified opinion?

The auditor is unable to obtain audited financial statements of a significant consolidated investeeThe inability to obtain audited financial statements of a consolidated investee represents a scope limitation resulting in a qualified or a disclaimer of opinion.

6

A scope limitation sufficient to preclude an unmodified opinion always will result when management

Refuses to acknowledge its responsibility for the fair presentation of the financial statements in conformity with U.S. GAAP.

7

An auditor may not issue a qualified opinion when

The auditor lacks independence with respect to the audited entity. Because the auditor lacks independence, she/he must issued a disclaimer; no opinion can be expressed in this situation.

8

The CPA firm of Hancock and Jefferson is doing an audit for the Philadelphia Corporation (a company that has its stock traded on a national stock exchange). This engagement was performed by a different auditing firm in the previous year. When looking at the audit report for last year, the partner-in-charge of the audit for Hancock and Jefferson noticed something unusual in the scope paragraph of the unmodified opinion. Which of the following is most likely to have caught the attention of the partner?

The auditor’s responsibility is to express an opinion on the accompanying financial statements. The audit report for a company that has publicly traded shares (sometimes known as an "issuer") has several paragraphs. The first is the introductory paragraph which identifies the financial statements being audited and discloses the responsibilities of both the management and the independent auditor. That is the reason for the answer here; this statement should be in the first (introductory) paragraph and not the second. The second paragraph is the scope paragraph which outlines the work performed by the independent auditor. Thus, planning and performing the audit to obtain reasonable assurance, examining evidence supporting amounts and disclosures, and assessing the accounting principles are all described in this paragraph. They refer specifically to the work performed by the auditor. Although it does not relate to this question, the third paragraph is the opinion paragraph which provides the level of assurance being given by the auditor.

9

Which of the following statements is a basic element of the auditor's standard report?
The disclosures provide reasonable assurance that the financial statements are free of material misstatements.
The auditor evaluated the overall internal control.
An audit includes assessing significant estimates made by management.
The financial statements are consistent with those of the prior period.

An audit includes assessing significant estimates made by management. C is correct because the statement is a required element included in the scope paragraph of a standard report.

10

The introductory paragraph of the standard audit report states that the financial statements and the opinion expressed about those statements are:
The responsibility of management.
The responsibility of the auditor.
The joint responsibility of the auditor and management.
None of the above.

None of the above. The introductory paragraph contains three important facts to express an opinion on the financial statements. 1) It states that an audit was conducted and indicates which financial statements are cover in the financial report; 2) It contains a statement that the financial statements are the responsibility of management; and, 3) It identifies the auditor responsibility.

11

In using the work of a specialist, an auditor may refer to the specialist in the auditor's report if, as a result of the specialist's findings, the auditor

Becomes aware of conditions causing substantial doubt about the entity's ability to continue as a going concern.
If the auditor, as a result of the report or findings of a specialist, decides to add explanatory language to the auditor's report regarding a going concern issue, he or she may refer to and identify the specialist in that auditor's report.

12

A limitation on the scope of an auditor's examination sufficient to preclude an unmodified opinion will always result when management

Refuses to furnish a management representation letter to the auditor. Generally accepted auditing standards require the auditor to obtain written representations from management. Management's refusal to furnish those written representations, therefore, would always constitute a limitation on the scope of the auditor's examination which in turn would preclude an unmodified opinion. The other issues are serious problems or challenges but the handling is left up to the auditor's judgement.

13

The Wishton Corporation’s financial statements are audited by the CPA firm of Mansen and Dallas. Wishton has a subsidiary located 1,800 miles from the company’s headquarters. The financial statements of this subsidiary are consolidated with the statements of the parent for external reporting purposes. The subsidiary’s assets and revenues make up approximately 16 percent of the total for the consolidated entity. The subsidiary’s financial statements are audited by a local CPA firm and that audit report has now been forwarded to Mansen and Dallas. In providing the audit report for the consolidated financial statements, Mansen and Dallas has decided to make reference to the work done by the other (component) audit firm. Which of the following statements is true?
The audit report should make reference to the other auditors in the introductory paragraph only.
The audit report should make reference to the other auditors in the management's responsibility section only
The audit report should make reference to the other auditors in the introductory section and opinion section only.
The audit report should make reference to the other auditors in the auditor's responsibility section and opinion section only.

The audit report should make reference to the other auditors in the auditor's responsibility section and opinion section only. When the auditor of group financial statements plans to make reference to the work performed by another (component) auditor, the division of work done is spelled out in the auditor's responsibility section of the audit opinion. In addiiton, in the opinion section, the role of the report of the component auditor is mentioned.

14

A registration statement filed with the SEC contains the reports of two independent auditors on their audits of financial statements for different periods. The predecessor auditor who audited the prior-period financial statements generally should obtain a letter of representation from the

Successor independent auditor.
The predecessor auditor should, before reissuing an auditor report, obtain a letter of representations from the successor auditor.

15

The audit report for a nonissuer mentions the internal control for the reporting company. Which of the following is NOT mentioned specifically?
No opinion on internal control is provided.
Consideration of internal control helps the auditor design appropriate audit procedures.
The overall quality of the reporting entity’s internal control
The only internal control considered is that which is relevant to the preparation and fair presentation of the financial statements.

The overall quality of the reporting entity’s internal control
Consideration of internal control helps the independent auditor decide what testing needs to be done but no opinion or indication of the specific quality of the internal control is provided. That is not the purpose of a financial statement audit.

16

Which of the following is not an objective of a CPA's examination of a client's MD & A?
The presentation includes, in all material respects, the required elements of the rules and regulations adopted by the SEC.
The presentation is in conformity with rules and regulations adopted by the SEC.
The historical amounts included in the presentation have been accurately derived, in all material respects, from the entity's financial statements.
The underlying information, determinations, estimates, and assumptions provide a reasonable basis for the disclosures contained in the presentation.

The presentation is in conformity with rules and regulations adopted by the SEC. The practitioner's objectives in an examination of MD & A, in accordance with the attestation engagement standards, does not involve examining whether the presentation is in conformity with rules and regulations adopted by the SEC but rather whether the presentation includes the required elements of the rules and regulations adopted by the SEC.

17

When a qualified opinion results from a limitation on the scope of the audit, the situation should be described in an explanatory paragraph

Preceding the opinion paragraph and referred to in both the scope and opinion paragraphs of the auditor's report.
Since the opinion resulted from a scope limitation, reference to the explanatory paragraph needs to be made in the scope paragraph. This is done by adding the phrase, "Except as discussed in the following paragraph, we conducted ..." to the beginning of the scope paragraph. The opinion paragraph is also modified as follows: "In my opinion, except for ... the financial statements, in all material respect, present fairly ..."

18

An auditor would be most likely to add an emphasis of a matter paragraph to an otherwise unmodified audit report in which of the following circumstances?
Immaterial change in accounting estimate.
Change in accounting estimate.
Immaterial change in accounting principle.
Change in accounting estimate inseparable from a change in accounting principle.

Change in accounting estimate inseparable from a change in accounting principle.
Unless clearly immaterial, a change in accounting principle, including a change in accounting estimate inseparable from a change in accounting principle, will result in an emphasis of a matter paragraph to alert readers of the statements. For example, a change in estimated depreciation that reflects a change in the consumption pattern or expected future value of an asset is indistinguishable from a change in depreciation method.

19

The auditor believes that an unmodified opinion should be rendered on a set of financial statements. However, the auditor wants to draw the reader's attention to significant subsequent events and adds an extra paragraph after the opinion paragraph to emphasize this matter. In the opinion paragraph, what wording should the auditor to refer to those events?

No change in wording is necessary.
When an extra paragraph is added at the end of the audit report to emphasize a matter of importance, no related change is made in the wording of any of the other three paragraphs. The additional paragraph is for informational purposes and has no impact on the scope of the audit work or the opinion rendered.

20

Which of the following statements most accurately captures the intent of the standards of field work?
Field work standards are primarily concerned with personal attributes necessary during the conduct of an audit.
Field work standards are primarily directed at the auditor's planning, understanding of internal control, and evidence accumulation.
Field work standards provide extensive guidance regarding the conduct of an audit.
Field work standards are primarily concerned with the conduct of substantive testing as opposed to testing of internal controls.

Field work standards are primarily directed at the auditor's planning, understanding of internal control, and evidence accumulation.
The standards of field work are primarily directed at telling the auditor 'what to do.' They are directed at the auditor's planning, understanding of internal control, and evidence accumulation.

21

In which of the following situations would an auditor choose between expressing a qualified opinion or an adverse opinion?
There has been a change in accounting principles that has a material effect on the comparability of the entity's financial statements.
The auditor is unable to apply the necessary procedures to reconcile the physical inventory with the dollar amount on the balance sheet.
The auditor is unable to apply the necessary procedures concerning an investors share of an investee's earnings recognized on the equity method.
Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going concern and management has refused to provide any relevant disclosure.

Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going concern and management has refused to provide any relevant disclosure.
Lack of disclosure is a departure from generally accepted accounting principles, which results in either a qualified opinion or an adverse opinion. It is not the "substantial doubt" that is the problem here but the failure to provide adequate disclosure of that issue.

22

A company issues audited financial statements under circumstances which require the presentation of a statement of cash flows. If the company refuses to present a statement of cash flows, the independent auditor should do which of the following?
Prepare a statement of cash flows and note in a middle paragraph of the report that this statement is auditor-prepared.
Disclaim an opinion.
Qualify his opinion but cannot give an adverse opinion
Provide an adverse opinion

Qualify his opinion but cannot give an adverse opinion
The statement of cash flows is required by U.S. GAAP and its omission results in a qualified opinion. Leaving off the statement of cash flows, for reporting purposes, is considered the omission of a disclosure. Normally, when disclosure is omitted, the auditor must provide it in the audit report. However, the statement of cash flows is an entire statement and the auditor is not required to create that statement. In addition, because the information actually provided is not wrong as a result of the omission, an adverse opinion cannot be given.

23

When a principal auditor (the auditor of group financial statements) decides to make reference to the examination of another (component) auditor, the principal auditor's report should indicate clearly the amount of the division of responsibility between the portions of the financial statements covered by each auditor. In which paragraph(s) of the report should the division of responsibility be stated?

Only the auditor's responsibility paragraph

The auditor of the group financial statements mentions the report of the other auditor in the auditor's responsibility paragraph and the opinion paragraph. However, only in the auditor's responsibility paragraph is the amount of the division mentioned.

The example of wording provided in the official guidance states: "We did not audit the financial statements of B Company, a wholly-owned subsidiary, which statements reflect total assets constituting 20 percent and 22 percent, respectively, of consolidated total assets at December 31, 20X1 and 20X0, and total revenues constituting 18 percent and 20 percent, respectively, of consolidated total revenues for the years then ended."

24

The scope of an audit is not restricted when an attorney's response to an auditor as a result of a client's letter of audit inquiry limits the response to

Matters to which the attorney has given substantive attention in the form of legal representation.
The auditor is required to send a letter of audit inquiry to the client's legal counsel concerning claims, litigation and assessments. It is reasonable to assume that an attorney would be responsible to respond concerning only those items that he has given substantive attention. He would not be able to respond to items he has not given substantive attention since the attorney has no knowledge of those items. Therefore, such a limited response on the part of an attorney would not be considered a scope limitation.

25

The CPA firm of Bryant and James audited the financial statements of Kidd Corporation. However, Kidd owns a subsidiary that operates several thousand miles away from the company’s headquarters. Although Bryant and James are the auditors of the group financial statements, this subsidiary is audited by Anthony and Associates, another CPA firm located in that vicinity. Anthony and Associates is viewed as a component auditor of these statements. Bryant and James have made appropriate inquiries concerning the competence and independence of Anthony and Associates and the firm is satisfied with all responses. However, in providing an audit opinion on the group financial statements, the partners of Bryant and James have decided to make reference to the portion of the audit performed by Anthony and Associates. Which of the following statements is true?
Bryant and James are required to make reference when component auditors are present.
Anthony and Associates must have provided a qualified opinion on the subsidiary which is the reason for the reference.
Bryant and James will change the auditor's responsibility section and the opinion section of its report to make reference to the component auditors.
Bryant and James must add an explanatory paragraph which has to be after the opinion paragraph.

Bryant and James will change the auditor's responsibility section and the opinion section of its report to make reference to the component auditors.

The auditor of group financial statements (Bryant and James for this company) must make appropriate inquiries concerning the competence and independence of component auditors. If satisfied, the auditor can make reference to the other firm (not assume responsibility) or can choose not to make reference (assume responsibility). Normally this decision is based on the size of the other work and the amount of risk involved. The question here is how reference is made when that choice is selected. Under normal circumstances, the auditor's responsibility section of the report indicates the presence and work done by the component auditors and the opinion section also indicates the component auditor's role in arriving at the audit opinion.

26

According to the standards of the Public Company Accounting Oversight Board (PCAOB), the auditor of a company that issues securities must audit the company's internal control as well as its financial statements. Which of the following statements is true about the reporting process?
The two reports must be combined.
The two reports must be separate.
The report on internal control must be issued at least 45 days before the report on the financial statements.
The two reports can be combined or can be separate.

The two reports can be combined or can be separate.
The PCAOB leaves the decision about reporting to the parties involved. The CPA can issue one report to cover both audits or can issue separate reports. When the reports are separate, both reports must be included in the annual report of the company.

27

If an auditor performs an audit of a private company, the scope paragraph should make reference to which standards?

U.S. generally accepted auditing standards.
The criteria applied for an audit of a private company are generally accepted auditing standards of the U.S.

28

An auditor's responsibility to express an opinion on the financial statements is:

Explicitly represented in the opening paragraph of the auditor's standard report.
The opening (introductory paragraph) of the auditor's standard report states that the auditor's responsibility is to express an opinion on the financial statements based on the audit.

29

The CPA firm of Ambrose and Albert has been associated with the unaudited financial statements of Lakeside Corporation. The firm plans to issue a disclaimer because no audit procedures of any type were performed. However, the partner on the engagement realizes that Lakeside has omitted all income tax balances although a material amount is owed at the end of the current year. How does this knowledge impact the report to be issued?

The nature and extent of the problem must be described in the report and then a disclaimer is rendered.
Whenever a CPA is aware of a material misstatement in a set of financial statements, that problem must be clearly identified even if there is no audit and a disclaimer is to be rendered. Because an audit has not been performed, no opinion can be given. However, before disclaiming an opinion, the CPA is obligated to spell out all of the known information about the problem in connection with the reporting of income taxes.

30

An investor is looking at audit reports for two different companies and finds the same sentence in both: “Our responsibility is to express an opinion on these financial statements based on our audit.” In the first case, that sentence is at the end of the first paragraph. In the second case, that sentence is at the beginning of the third paragraph. Which of the following is most likely?
The first report is for a public entity and the second report is for a nonpublic entity.
The first report is for a nonpublic entity and the second report is for a public entity.
The first case is correct but the second case is not.
The second case is correct but the first case is not.

The first report is for a public entity and the second report is for a nonpublic entity.
The Public Company Accounting Oversight Board sets the standards for public companies and has maintained the traditional audit report where the auditor’s responsibility is stated at the end of the first paragraph. The Auditing Standards Board sets standards for nonpublic companies and has created a new standard report where the auditor’s responsibilities are spelled out at the beginning of the third paragraph.

31

The Wilkinson Company is publicly-traded. The auditors have recently rendered a standard unmodified audit opinion. In which paragraph is the following sentence found: “An audit includes examining all evidence that supports the amounts and disclosures in the financial statements.”
First (introductory) paragraph
Second (scope) paragraph
Third (opinion) paragraph
None of the above

None of the above
The auditor almost never examines all of the evidence for any reported amount or disclosure. Thus, that statement is simply never made. Instead, as is explained in the scope paragraph, the auditor looks at evidence on a test basis. A test basis means that items are studied in samples. The size of these samples is sufficient to be able to provide the reasonable assurance which is given by a CPA in an unmodified opinion.

32

When is an auditor most likely to change an unmodified opinion if the entity's financial statements include a disclosure note on related party transactions?

The note states that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction.
It generally will not be possible for an auditor to determine whether a particular transaction was consummated on terms equivalent to those with unrelated parties. Therefore, the auditor may be required to express a qualified or adverse opinion when such an unsubstantiated disclosure is included.

33

CPA's standard report on audited financial statements would be inappropriate if it referred to

The CPA's assessment of sampling risk factors.
The CPA's assessment of sampling risk factors should not be referred to in the audit report. Management's responsibility for the financial statements is always mentioned in the introductory paragraph. "An audit also includes assessing the accounting principles used and the significant estimates made by management..." is stated in the scope paragraph.

34

The CPA firm of Lyn and Law is auditing the financial statements of Dillon Corporation. MaryLu Tracy is a close relative of a covered member of this audit engagement. Which of the following would cause the CPA firm to have a problem with its independence?
Tracy is employed by Dillon as head of payroll accounting.
Tracy owns 100 shares of Dillon although the amount is viewed as immaterial.
Tracy is employed by Dillon as vice-president in charge of advertising.
Tracy works for Lyn and Law as a senior auditor in a different office of the firm.

Tracy is employed by Dillon as head of payroll accounting.
A close relative can have a financial interest in an audit client as long as that interest is immaterial to the person. A close relative can work for the audit client as long as the position is not in accounting or financial reporting (such as head of payroll accounting). If the close relative works for the audit firm, the person is not a covered member unless the person works on the engagement team or is in a position to influence the members of the engagement team or the audit.

35

If an auditor performs an audit of a public company, the scope paragraph should make reference to which standards?

Standards issued by the PCAOB
An auditor who performs an audit of a public company must make reference to standards issued by the Public Company Accounting Oversight Board (PCAOB) in the scope paragraph of the audit report.

36

A CPA firm is associated with the financial statements of a company but is not independent. Which of the following statements is correct?
A two paragraph report is provided that indicates the firm's failure to follow generally accepted auditing standards.
A disclaimer of opinion is issued that explains the cause of the independence problem and then indicates that no assurance of any kind can be given.
A disclaimer of opinion is issued that states that the firm is not independent and, therefore, has no opinion.
A three paragraph report is given that indicates the work done but spells out that no opinion is being rendered.

A disclaimer of opinion is issued that states that the firm is not independent and, therefore, has no opinion.
If a disclaimer is rendered because of a lack of independence (rather than a significant lack of audit evidence), the CPA firm should simply say that there was not independence so no opinion can be given. No other information is needed or is relevant. Providing explanatory information about the lack of independence can be potentially misleading and furnishes no additional benefit to any outside party.

37

The exact wording of the auditor's standard audit report must be changed for which of the following?
The audit work included the work of other (component) auditors and the principal auditor does not want to assume responsibility for a component auditor.
The CPA wanted to emphasize a matter.
The company switched from one allowable method of GAAP to another.
Substantial doubt about continuing as a going concern.

The audit work included the work of other (component) auditors and the principal auditor does not want to assume responsibility for a component auditor.

Group financial statements included more than one component. When the auditor of the group financial statements (the principal auditor) uses the work and reports of other (component) auditors who conduct audits and audit procedures on these components, the principal auditor must decide whether to make reference to those component auditors. If the auditor of the group financial statements decides to assume responsibility for all work, no reference is made to the others in the audit report. If the auditor of the group statements decides not to assume that responsibility, the audit report will refer to the component auditor and indicate the division of responsibility between the group auditor and the component auditor. The auditor's responsibility section will be changed in the report as well as the opinion paragraph. For the other available answers, an extra paragraph is added at the end of the audit report without any modification of the standard audit language.

38

Bristol and Associates is the auditor of group financial statements produced by Wilmington Myers Corporation. A large portion of the company’s inventory is located 2,000 miles away so the taking of that physical inventory is observed by another CPA firm. Bristol and Associates wants to make reference to the work of the other (component) firm. Can reference be made to the work done by the component auditor in this case?
Yes, because the work was performed by a CPA firm.
No, because an audit was not performed.
Yes, because making reference to another CPA firm is always allowed.
No, because the auditor of group financial statements must observe the physical inventory.

No, because an audit was not performed.
Reference can be made to the work done by a component auditor but an audit must be performed. In this case, the other CPA firm was not acting as an auditor but rather carrying out one particular procedure. The reader of the audit report cannot be expected to understand the division of responsibility if only specific procedures are performed.

39

Which of the following procedures most likely could assist an auditor in identifying related party transactions?
Performing tests of controls concerning the segregation of duties.
Evaluating the reasonableness of management's accounting assertions.
Reviewing confirmations of compensating balance arragements.
Scanning the accounting records for recurring transactions.

Reviewing confirmations of compensating balance arragements.
Because compensating balance arrangements and nonmonetary transactions obscure the forms of transactions, they are always suspect. Compensating balance arrangements involve related parties more often than the other answer options.

40

If a publicly held company issues financial statements that purport to present its financial position and results of operations, but omits the statement of cash flows, the auditor will ordinary express a(n)

Qualified opinion.
Failure to include a statement of cash flow will lead the auditor to qualify the report.

41

When determining whether an exception is "highly material," the extent to which the exception affects different elements of the financial statements must be considered. This concept is called:

Pervasiveness.
Pervasiveness here is defined as the extent to which the exception affects different elements of the financial statements.

42

Which of the following unmodified opinions will still contain a change in wording (excluding an explanatory paragraph)?
Substantial doubt about continuing as a going concern.
Lack of consistent application of GAAP.
Material uncertainties.
Reference is made in group financial statements to the work of component auditors

Reference is made in group financial statements to the work of component auditors

Group financial statements contain more than a single component. The auditor of group financial statements can choose to make reference to a separate auditor of one of those components. The wording of the report must be changed to enable the reader to understand the work done by the component auditor. The opinion is unmodified and no additional paragraph is included.

43

A CPA firm is issuing separate reports based on audits of an issuing company's internal control over financial reporting and its financial statements. Which of the following statements is true according to the standards of the Public Company Accounting Oversight Board (PCAOB)?
The report on internal control has to be dated as of the balance sheet date.
The report on internal control has to be dated at least 21 days prior to the date of the report on the financial statements.
Both reports have the same date: normally, the last day of audit fieldwork.
The reports might have the same date but they will often have different dates.

Both reports have the same date: normally, the last day of audit fieldwork.
The date that is included indicates the last day of audit responsibility for the CPA. Consequently, the last day of field work is used for all audit work whether it is on the financial statements or the internal control.