15.1 Flashcards
When financial statements audited by the independent auditor contain notes that are captioned “unaudited” or “not covered by the auditor’s report,” the auditor
May refer to these notes in the auditor’s report.
If information included in the basic statements is (1) not required by the applicable reporting framework, (2) not necessary for fair presentation, and (3) clearly differentiated from the statements, the information may be identified as “unaudited” or “not covered by the auditor’s report” (AU-C 700). If the auditor wishes to draw attention to such a matter that is appropriately presented or disclosed, (s)he may include an emphasis-of-matter paragraph in the auditor’s report (AU-C 705). If (1) the information constitutes other information, (2) the information is materially inconsistent with the audited statements, and (3) management has not revised the information after a request by the auditor, the auditor should (1) include an other-matter paragraph in the report, (2) withhold the report, or (3) withdraw from the engagement. If the information contains a material misstatement of fact that management refuses to correct, the auditor should take further appropriate action (AU-C 720).
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
The financial statements fail to contain adequate disclosure concerning related party transactions.
A disclaimer is inappropriate when the financial statements contain material departures from the applicable financial reporting framework. Inadequacy of the disclosures required by the applicable financial reporting framework is such a departure. Because U.S. GAAP require certain disclosures about related party transactions, the inadequacy of such disclosures is a basis for expressing a qualified or an adverse opinion.
A CPA who is associated with the financial statements of an issuer, but has not audited or reviewed such statements, should
Read them to determine whether there are obvious material misstatements.
PCAOB auditing standards apply to engagements involving issuers. Under these standards, the CPA should issue a disclaimer stating that (s)he has not audited the statements and expresses no opinion on them. The CPA has no responsibility to apply any procedures beyond reading the financial statements for obvious material misstatements (PCAOB AS 3320).
Which of the following circumstances would not be considered a departure from the auditor’s unmodified report?
The auditor is asked to report only on the balance sheet, and the auditor can comply with relevant standards.
The auditor may report on one basic financial statement and not on the others if (1) the auditor complies with all AU-C sections relevant to the audit, (2) the audit is feasible, and (3) the auditor can perform procedures on interrelated items. For example, (1) sales and receivables, (2) inventory and payables, and (3) equipment and depreciation are interrelated.
Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?
Management does not provide reasonable justification for a change in accounting principles.
When management does not provide reasonable justification for a change in accounting principles, a qualified or adverse opinion should be expressed if the effect is a material misstatement.
A client decides not to correct misstatements communicated by the auditor that collectively are not material and wants the auditor to issue the report based on the uncorrected numbers. Which of the following statements is correct regarding the financial statement presentation?
The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.
If the uncorrected misstatements are immaterial, by definition the financial statements are free from material misstatement, and an unmodified opinion may be expressed. However, the schedule of uncorrected misstatements must be included in the management representation letter, and management must assert that these uncorrected misstatements are individually and collectively immaterial.
An auditor has been engaged by the State Bank to audit the XYZ Corporation, a nonissuer, in conjunction with a loan commitment. The report would most likely be addressed to
The State Bank.
Occasionally, an auditor is retained to audit the financial statements of an entity that is not his or her client. According to AICPA standards, the report customarily is addressed to the client and not to those charged with governance of the entity whose financial statements are being audited.
A limitation on the scope of an audit sufficient to preclude an unmodified opinion is most likely to result when management
Refuses to furnish a management representation letter to the auditor.
According to AU-C 580, Written Representations, management’s refusal to furnish written representations constitutes a limitation on the scope of the audit. The refusal is often sufficient to preclude an unmodified opinion. Moreover, it may cause an auditor to disclaim an opinion or withdraw from the engagement, especially with regard to representations about (1) fraud, (2) noncompliance, (3) uncorrected misstatements, (4) litigation and claims, (5) estimates, (6) related party transactions, and (7) subsequent events. However, the circumstances may permit a qualified opinion. Furthermore, the auditor should consider the effects of management’s refusal on his or her ability to rely on other management representations.
Patentex developed a new secret formula that is of great value because it resulted in a virtual monopoly. Patentex has capitalized all research and development costs associated with this formula. Greene, CPA, who is auditing this account, will probably
Confer with management regarding transfer of the amount from the balance sheet to the income statement.
U.S. GAAP require that R&D costs be expensed as incurred. The auditor should confer with management about this material misstatement. If management refuses to correct the misstatement, the auditor should express a qualified or an adverse opinion if the misstatement is material. The required restatement is to expense the amounts capitalized, i.e., to transfer the amounts from the balance sheet to the income statement.
In an audit of a nonissuer, the auditor’s report most likely is addressed to the following:
Board of directors:
Audited entity:
Internal auditors:
Yes
Yes
No
According to AU-C 700, the auditor’s report ordinarily is addressed to those for whom the report is prepared. It may be addressed to the entity whose statements are being audited or to those charged with governance (e.g., the board or the audit committee). If the client is an unincorporated entity, the addressee depends on the circumstances, e.g., to the partners or the proprietor.
When an auditor expresses an adverse opinion, the opinion paragraph should include
A direct reference to a separate paragraph disclosing the basis for the opinion.
An adverse opinion states that the financial statements are not fairly presented in accordance with the applicable financial reporting framework. When an adverse opinion is expressed, the opinion paragraph should directly refer to a basis for adverse opinion paragraph that discloses the basis for the adverse opinion.
If financial statements are to meet the requirements of adequate disclosure,
All information believed by the auditor to be essential to the fair presentation of the financial statements must be disclosed, no matter how confidential management believes the data to be.
In considering the adequacy of disclosure, the auditor necessarily uses confidential client information. Otherwise, forming an opinion on the statements would be difficult. To the extent required by GAAP or an other appropriate financial reporting framework, such information must be disclosed. But beyond these requirements, the auditor who discloses confidential information without specific consent violates the Code of Professional Conduct.
In the first audit of a client, an auditor was not able to gather sufficient appropriate audit evidence about the consistent application of accounting principles between the current and the prior year, as well as the amounts of assets or liabilities at the beginning of the current year. This was due to the client’s record retention policies. If the amounts in question could materially affect current operating results, the auditor most likely would
Be unable to express an opinion on the current year’s results of operations and cash flows.
According to AU-C 705, in a first audit, the auditor is permitted to (1) express an unmodified opinion on the financial position of the entity and (2) disclaim an opinion on the results of operations and cash flows, if relevant. A disclaimer of opinion is expressed because the auditor is unable to obtain sufficient appropriate audit evidence. This inability may result from (1) circumstances not controlled by the entity, (2) circumstances related to the nature or timing of the auditor’s work, or (3) limitations imposed by management.
An annual shareholders’ report includes audited financial statements and contains a management report asserting that the financial statements are the responsibility of management. Is it permissible for the auditor’s report to refer to the management report?
No, because the reference may lead to the belief that the auditor is providing assurances about management’s representations.
According to AU-C 700, such a reference in the auditor’s report may lead users to the erroneous belief that the auditor is giving assurances about management’s representations in the separate statement in the annual report.
When the client fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the related notes, it is the responsibility of the auditor to present the information, if practicable, in the auditor’s report and express
A qualified or an adverse opinion.
A material misstatement requires the auditor to express a qualified or an adverse opinion. A material misstatement may result from inappropriate or inadequate disclosure or from omission of required disclosures. If information required to be presented or disclosed is omitted, the auditor describes the nature of the information in the report. (S)he also includes the information, if practicable, and discusses the omission with those charged with governance. But an auditor is not expected to prepare a basic statement.