16.1 Flashcards
When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for
Updating the report on the previous financial statements regardless of the opinion previously expressed.
A continuing auditor should update the report on the individual statements of one or more prior periods presented on a comparative basis. An updated report considers information of which the continuing auditor is aware as a result of the current audit. Furthermore, the updated report is issued in conjunction with the report on the current statements. For example, if the opinion was modified because of a material misstatement, and management revises the statements, the updated report expresses an unmodified opinion.
In the first audit of a new client, an auditor was able to obtain sufficient appropriate evidence that the financial statements of the current period are consistent with those of the prior period. Under these circumstances, the auditor should
not refer to the consistency of the auditor’s report.
In an initial engagement, the statements for the prior period either (1) were not audited or (2) were audited by a predecessor auditor. An auditor’s objective in an initial engagement is to obtain sufficient appropriate evidence about whether (1) opening balances materially misstate the current statements, (2) accounting policies reflected in opening balances are consistently applied in the current statements, and (3) changes in accounting policies are appropriately accounted for and disclosed (AU-C 510). Achieving this objective permits the auditor to evaluate whether the comparability of the financial statements between or among periods has been materially affected by (1) a change in accounting principle or (2) adjustments to correct a material misstatement in previously issued financial statements. If the auditor’s report does not state otherwise, it implies that comparability between or among periods has not been materially affected by such changes or corrections (AU-C 708).
An auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. If the entity’s disclosures concerning this matter are adequate and no other issues prevail, the audit report may include a
Disclaimer of opinion:
Qualified opinion:
Yes
No
By itself, a substantial doubt about an entity’s ability to continue as a going concern does not require a modification of the opinion paragraph. Thus, a qualified opinion is inappropriate. However, an auditor may disclaim an opinion in these circumstances.
Kane, CPA, concludes that there is substantial doubt about Lima Co.’s ability to continue as a going concern for a reasonable period of time. If Lima’s financial statements adequately disclose its financial difficulties, Kane’s auditor’s report is required to include an additional paragraph that specifically uses the phrase(s)
“Possible discontinuance of operations”:
“Reasonable period of time, not to exceed one year”:
No
No
The auditor has a substantial doubt about the firm’s ability to continue as a going concern for a reasonable period of time. Accordingly, the auditor should include an emphasis-of-matter paragraph after the opinion paragraph in the report of a nonissuer or explanatory language on an explanatory paragraph in a report on an audit of an issuer. This paragraph should include the terms “substantial doubt” and “going concern.” The specific phrases included in the question are not required.
Grauer, Inc., accounts for its investment in Salvemini Corporation using the equity method. Grauer’s investment in Salvemini equals 45% of the total assets of Grauer. The two entities are not audited by the same CPA. For Grauer’s auditor to express an unmodified opinion regarding the value of Grauer’s investment in Salvemini and the income derived from it, Grauer’s auditor
Should obtain Salvemini’s audited financial statements and make inquiries about the professional reputation and independence of Salvemini’s auditor.
With respect to investments valued based on the investee’s financial results (e.g., the equity method), the auditor who uses another auditor’s report to report on the entity’s equity and share of earnings or losses is in the position of a group auditor. But whether or not the group auditor wishes to refer to the work of the other auditor, (s)he should obtain an understanding of the professional competence and independence of the other auditor. Furthermore, the auditor may not express an unmodified opinion when a long-term investment is material unless (s)he has obtained sufficient appropriate evidence about the investment. The inability to obtain audited statements of a long-term investee is a common scope limitation that precludes an unmodified opinion.
When the auditor concurs with a change in accounting principle that materially affects the comparability of the comparative financial statements, the auditor should
Concur explicitly with the change:
Express a qualified opinion:
Refer to the change in an additional paragraph:
No
No
Yes
A material change in accounting principle raises a consistency issue. Thus, a report with a separate paragraph is required if the auditor’s evaluation concludes that certain criteria have been met: (1) the new principle and the method of accounting for it are in accordance with the applicable framework, (2) related disclosures are appropriate, and (3) the entity has justified that the principle is preferable. The opinion is modified for a material change in principle only if the criteria are not met. Furthermore, the auditor’s concurrence is implied by the inclusion of a descriptive paragraph. This paragraph is included only if the opinion is not modified with regard to the matter.
An auditor’s report on an audit of a nonissuer expresses an unmodified opinion and includes an emphasis-of-matter paragraph. The auditor’s report is deficient if the emphasis-of-matter paragraph states that the entity
Has omitted a statement of cash flows.
The statement of cash flows is a basic financial statement. Its omission when financial position and results of operations are presented is a material misstatement that requires the auditor to modify the opinion. An emphasis-of-matter paragraph is used when (1) the matter is fundamental to users’ understanding of the statements, (2) the auditor considers that drawing users’ attention to the matter is necessary, and (3) the matter is appropriately presented and disclosed in the statements.
Jewel, CPA, audited Infinite Co.’s prior-year financial statements (Infinite Co. is a nonissuer). These statements are presented with those of the current year for comparative purposes without Jewel’s auditor’s report, which expressed a qualified opinion. In drafting the current year’s auditor’s report, the current auditor should
I. Not name Jewel as the predecessor auditor
II. Indicate the type of opinion expressed by Jewel
III. Indicate the reasons for Jewel’s qualification
I, II, & III.
The auditor should state in an other-matter paragraph (following the opinion paragraph and any emphasis-of-matter paragraph) (1) that the prior year’s financial statements were audited by another auditor, (2) the date of the report, (3) the type of opinion expressed and the reasons for any modification, and (4) the nature of any emphasis-of-matter or other-matter paragraph. Furthermore, the predecessor auditor is not named.
Although expressing an unmodified opinion, an auditor of a nonissuer includes a separate paragraph in the report to emphasize that the auditee had significant transactions with related parties. This inclusion
Is appropriate and would not negate the unmodified opinion.
An auditor may include an emphasis-of-matter paragraph while expressing an unmodified opinion. Significant related party transactions, the status of the entity as a component of a larger enterprise, an accounting matter affecting comparability, and an unusually important subsequent event are examples of matters that might be emphasized (AU-C 706).
When management does not provide reasonable justification for a change in accounting principle, and it presents comparative financial statements, the auditor should express a qualified opinion
Each year that the financial statements initially reflecting the change are presented.
If (1) the new principle and the method of accounting for the effect of the change are in accordance with the applicable reporting framework, (2) disclosures are adequate, and (3) the entity has justified that the principle is preferable, the auditor expresses an unmodified opinion. Otherwise, if the change is material, the misstatement results in expression of a qualified or an adverse opinion in the report for the year of change. The basis for the modified opinion is included in the report. In the period of the change, the auditor also must add an additional paragraph following the opinion paragraph to reflect the inconsistency. This paragraph is required in reports on financial statements in the period of change and in subsequent periods until the new principle is applied in all periods presented.
Green, CPA, is auditing JKL Co., a nonissuer. Green concludes that there is substantial doubt about JKL Co.’s ability to continue as a going concern. If JKL’s financial statements adequately disclose its financial difficulties, Green’s auditor’s report should
Include a paragraph following the opinion paragraph:
Specifically use the words “Going concern”:
Specifically use the words “Substantial doubt”:
Yes
Yes
Yes
An evaluation should be made as to whether substantial doubt exists about the entity’s ability to continue as a going concern for a reasonable period of time (U.S. GAAP is 1 year from the date the statements are released or available to be released). If the auditor reaches this conclusion after identifying conditions and events that create such doubt and after evaluating management’s plans to reduce their effects, (s)he should consider the possible effects on the statements and the adequacy of disclosure. (S)he also should include an emphasis-of-matter paragraph (after the opinion paragraph) in the report. The auditor should use language in the emphasis-of-matter paragraph that includes the phrases “substantial doubt” and “going concern.” Also, the emphasis-of-matter paragraph should not use conditional language in expressing its conclusion about the existence of a substantial doubt. The substantial doubt is not a basis for a qualified or an adverse opinion, but a disclaimer is not precluded in the case of such a material uncertainty.
Which of the following situations concerning consistency should the auditor not recognize in the report of an issuer?
A change in the percentage used to calculate the provision for warranty expense.
A change in the calculation of warranty expense is a change in accounting estimate. Changes that affect comparability but not the consistent application of accounting principles do not require recognition in the auditor’s report.
Thomas, CPA, has audited the consolidated financial statements of Kass Corporation. Jones, CPA, has audited the financial statements of its sole subsidiary, which is significant in relation to the total audited by Thomas. It would be appropriate for Thomas to serve as the group auditor, but it is impracticable for Thomas to review the work of Jones. Assuming an unmodified opinion is expressed by Jones, Thomas should
Express an unmodified opinion on the consolidated financial statements and refer to the work of Jones.
The group engagement team should obtain an understanding of the component auditor, a process that includes determining the extent, if any, to which the team will be able to be involved in the component auditor’s work. The group engagement partner then may decide to refer to the component auditor if (1) the component auditor meets relevant independence requirements for the group audit, (2) the group engagement team has no serious concerns about his or her professional competence or other ethical issues, (3) the component’s statements are prepared using the same reporting framework as that of the group statements (or responsibility is taken for adjustments to the group framework), (4) the component auditor’s report is not use-restricted, and (5) the component auditor has performed an audit in accordance with PCAOB standards (if required by law or regulation) or GAAS. If these requirements are met, the group engagement partner may decide (1) not to assume responsibility for the audit of the component auditor and (2) to refer to that audit. Moreover, the reference to the component auditor does not prohibit an unmodified opinion.
Unaudited financial statements are presented in comparative form with audited financial statements in a document filed with the Securities and Exchange Commission. In accordance with the PCAOB’s Auditing Standards, such statements should be
Marked as “unaudited”:
Withheld until audited:
Referred to in the auditor’s report:
Yes
No
No
According to the PCAOB’s Auditing Standards, when unaudited financial statements are presented in comparative form with audited statements in documents filed with the SEC, such statements should be clearly marked as “unaudited.” They should not be referred to in the auditor’s report or withheld until audited. NOTE: The source of authoritative guidance is the PCAOB’s Auditing Standards, not the clarified SASs published by the AICPA. The PCAOB Standards apply to services for issuers.
A nonissuer’s unaudited financial statements for the prior period are presented in comparative form with audited financial statements for the subsequent year. If the prior-period statements were reviewed,
I. The report on the unaudited financial statements should be reissued.
II. The report on the audited financial statements should include an other-matter paragraph.
Either I or II.
A nonissuer’s audited statements for the current period may be presented comparatively with the prior period’s reviewed or compiled statements. If the prior period’s report is not reissued, the auditor’s current-period report should include an other-matter paragraph that states (1) the service performed in the prior period, (2) the date of the service, (3) a description of material modifications noted in the report, and (4) that the service was not an audit and did not provide a basis for an opinion (AU-C 700).
