15.2 Flashcards
A client using U.S. GAAP has capitalizable leases but refuses to capitalize them in the financial statements. Which of the following reporting options does an auditor have if the effects on the financial statements are material and pervasive?
Adverse opinion.
An adverse opinion is expressed when the financial statements are not presented fairly in accordance with the applicable reporting framework. An adverse is appropriate when a material misstatement exists that has pervasive effects on the financial statements.
A CPA concludes that the unaudited financial statements of an issuer on which the CPA is disclaiming an opinion are not in conformity with generally accepted accounting principles (GAAP) because management has failed to capitalize leases. The CPA suggests appropriate revisions to the financial statements, but management refuses to accept the CPA’s suggestions. Under these circumstances, the CPA ordinarily would
Describe the nature of the departure from GAAP in the CPA’s report and state the effects on the financial statements, if practicable.
An accountant planning to disclaim an opinion on an issuer’s financial statements may discover a material departure from GAAP. Under PCAOB standards, the accountant should disclose the departure in the disclaimer, including its effects if they have been determined by management or by the accountant’s procedures.
A limitation on the scope of an audit sufficient to preclude an unmodified opinion is most likely to result when management
Is unable to obtain audited financial statements supporting the entity’s investment in a foreign subsidiary.
An auditor’s inability to obtain sufficient appropriate evidence may arise from, among other things, circumstances related to the nature or timing of the auditor’s work. An example is an inability, not resulting from a management-imposed limitation, to obtain audited financial statements of a long-term investee. If the possible effects are material, the auditor expresses a qualified opinion or disclaims an opinion, depending on pervasiveness.
When would an audit report refer to both the auditing standards of the PCAOB and generally accepted auditing standards (GAAS)?
For the audit of a nonissuer in accordance with the standards issued by the PCAOB.
The audit of financial statements of a nonissuer in accordance with the standards of the PCAOB is not within the jurisdiction of the PCAOB. The auditor must conduct the audit in accordance with GAAS. In such circumstances, the auditor should use the form of report required by the standards of the PCAOB, amended to state that the audit also was in accordance with GAAS.
In May Year 3, an auditor reissues the auditor’s report on the Year 1 financial statements at a former client’s request. The Year 1 financial statements are to be presented comparatively with subsequent audited statements. They are not restated, and the auditor does not revise the wording of the report. The auditor should
Use the original report date on the reissued report.
Use of the original date in a reissued report removes any implication that records, transactions, or events after such date have been audited or reviewed. However, the predecessor auditor should perform the following procedures to determine whether the report is still appropriate: (1) read the statements of the subsequent period, (2) compare the prior statements with the current statements, and (3) obtain written representations from management and the successor auditor about information obtained or events that occurred subsequent to the original date of the report.
Restrictions imposed by management prohibit the observation of physical inventories, which account for 35% of all assets. The possible effects of the omission are material and pervasive. Alternative audit procedures cannot be applied, although the auditor was able to examine satisfactory evidence for all other items in the financial statements. The auditor should express
A disclaimer of opinion.
The auditor may become aware of a management-imposed scope limitation after accepting the engagement that is likely to result in a qualified opinion or a disclaimer of opinion. The auditor should request removal of the limitation. If it is not removed, the auditor should communicate with those charged with governance and determine whether alternative procedures can be performed. If the auditor cannot obtain sufficient appropriate evidence because of the limitation, (s)he should determine whether the possible effects of undetected misstatements could be material and pervasive. If they are, the auditor should disclaim an opinion or withdraw from the engagement (AU-C 705).
The financial statements of a nonissuer include a separate statement of changes in equity. This statement should
Be identified in the introductory paragraph of the report but need not be reported on separately in the opinion paragraph.
The balance sheet, statement of income, statement of changes in equity, and statement of cash flows are the financial statements upon which the auditor customarily reports. The introductory paragraph of the audit report for an audit of a nonissuer identifies the titles of the entity’s financial statements. However, the statement of changes in equity and a separate statement of comprehensive income are not separately reported on the opinion paragraph. The reason is that changes in equity and comprehensive income are included in financial position, results of operations, and cash flows.
Trotman, Inc., a nonissuer manufacturing company, has engaged a CPA to audit its financial statements for the year ended June 30, Year 2. The CPA observed the physical inventory count at June 30, Year 2, but no physical inventory had been taken at June 30, Year 1. The CPA has not been able to become satisfied as to the value of the inventory at June 30, Year 1. Assuming that the financial statements are fairly presented in all other material respects, the CPA should
Disclaim an opinion on the results of operations and cash flows but express an unmodified opinion on the balance sheet.
An inability to obtain sufficient appropriate evidence may result from, among other things, circumstances related to the nature or timing of the work. An example is not being able to observe the counting of physical inventories at the beginning of the year. These inventories enter into the determination of net income and cash flows. If the possible effects of this scope limitation are material and pervasive to the results of operations and cash flows, the auditor cannot express an opinion on them. However, the auditor can express an unmodified opinion on year-end financial position.
An auditor did not observe a client’s taking of beginning physical inventory and was unable to become satisfied about the inventory by means of other auditing procedures. The possible effects are material. Assuming no other scope limitations or reporting problems, the auditor could express an unmodified opinion on the current year’s financial statements for
The balance sheet only.
The auditor did not observe the counting of physical inventories at the beginning of the year and was not able to become satisfied by performing other procedures on those inventories. Because they enter into the determination of net income and cash flows, the auditor could not determine whether any adjustments were needed with respect to profit and net cash flows from operating activities. Moreover, the possible effects of the inability to obtain sufficient appropriate evidence regarding beginning inventories are material. Thus, the auditor should not express an opinion on the results of operations and cash flows. However, because the balance sheet reports only the ending inventory balance, the auditor can express an unmodified opinion on it alone, assuming (s)he is satisfied with the ending balance.
The evaluation of fairness in determining the appropriate opinion to express should include consideration of the qualitative aspects of the entity’s accounting practices, including whether
Indicators of possible bias exist in management’s judgments.
The auditor should be aware of the potential for management bias. For example, management’s judgments may indicate a lack of neutrality that results in selective correction of identified misstatements and bias in making accounting estimates.
An auditor’s client has violated a minor requirement of its bond indenture that could result in the trustee requiring immediate payment of the principal amount due. The client refuses to seek a waiver from the bond trustee. Request for immediate payment is not considered likely. Under these circumstances, the auditor should
Disclose the situation in the auditor’s report.
The auditor should disclose the violation in the report because it could have a material effect on financial statement presentation. Even if no reason exists for modifying the opinion, the auditor is permitted but not required to disclose the matter in an emphasis paragraph, regardless of whether the client is an issuer or nonissuer. But U.S. GAAP require such information to be disclosed, for example, when the obligation has been classified as a noncurrent liability although the creditor has not waived or lost its right to demand immediate repayment. Thus, the auditor also may need to modify the opinion because of the misstatement resulting from the omitted disclosure.
If an issuer releases financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(n)
Qualified opinion.
An entity that reports financial position and results of operations should provide a statement of cash flows. Thus, the omission of the cash flow statement is normally a basis for modifying the opinion. If the statements fail to disclose required information, the auditor should provide the information in the report, if practicable. However, the auditor is not required to prepare a basic financial statement. Accordingly, (s)he should qualify the opinion and explain the reason in a basis for qualified opinion paragraph.
In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion and an adverse opinion?
The financial statements fail to disclose information that is required by the applicable reporting framework.
Misstatements, including inadequate disclosures, may result in either a qualified or an adverse opinion. The auditor should exercise judgment about materiality by considering such factors as (1) benchmarks for dollar amounts, (2) significance to the statements and the entity, and (3) pervasiveness. If the misstatement is not pervasive, the auditor should express a qualified opinion.
An auditor released an audit report that was dual-dated for a subsequently discovered fact occurring after the date of the auditor’s report but before issuance of the related financial statements. The auditor’s responsibility for events occurring subsequent to the original report date was
Limited to the specific event referenced.
Subsequent to the original report date, the auditor is responsible only for the specific subsequently discovered fact for which the report was dual-dated. (S)he is responsible for other events only up to the original report date.
Due to a scope limitation, an auditor disclaimed an opinion on the financial statements as a whole, but the auditor’s report included a statement that the current asset portion of the entity’s balance sheet was fairly stated. The inclusion of this statement is
Not appropriate because it may tend to overshadow the auditor’s disclaimer of opinion.
A piecemeal opinion is an expression of an opinion on a specific element of a financial statement when the auditor has disclaimed an opinion or expressed an adverse opinion on the financial statements as a whole. This type of assurance is inappropriate because it would contradict a disclaimer of opinion or an adverse opinion (AU-C 705).
