16.2 Flashcards
Pell, CPA, is the group engagement partner in the audit of the financial statements of Tech Consolidated, Inc. Smith, CPA, audits one of Tech’s subsidiaries. In which situation(s) should Pell refer to Smith’s audit?
I. Pell reviews Smith’s audit documentation and assumes responsibility for Smith’s work but expresses a qualified opinion on Tech’s financial statements.
II. Pell is unable to review Smith’s audit documentation but reads the financial statements and gains an understanding that Smith has an excellent reputation for professional competence and integrity.
II only.
Regardless of the decision to make reference, the group engagement team should obtain an understanding of the component auditor’s professional competence and compliance with ethical requirements (especially independence). The understanding also addresses (1) the extent of the team’s involvement in the component auditor’s work, (2) whether (s)he operates under regulatory oversight, and (3) whether the team will be able to obtain information about the consolidation process from the component auditor. Serious concerns about (1) compliance with ethical requirements or (2) lack of competence preclude a reference to the audit of the component auditor. Moreover, the group engagement partner’s assumption of responsibility for the component auditor’s audit indicates a decision not to refer to the audit of the component auditor.
When a predecessor auditor reissues the report on the prior period’s financial statements at the request of the former client, the predecessor should
Compare the prior period’s financial statements that the predecessor reported on with the financial statements to be presented for comparative purposes.
The predecessor auditor should perform certain procedures before reissuing a report on prior-period financial statements. (S)he should (1) read the current period’s financial statements, (2) compare the prior and current financial statements, (3) obtain a representation letter from the auditor stating whether (s)he has discovered matters having a material effect on (or requiring disclosure in) the statements reported on by the predecessor auditor, and (4) obtain a representation letter from management confirming past representations and stating whether post-balance-sheet events require adjustment of or disclosure in the financial statements.
Digit Co. uses the FIFO method of costing for its international subsidiary’s inventory and the LIFO method for its domestic inventory. Under these circumstances, the auditor’s report on Digit’s financial statements should express an
Unmodified opinion.
A difference between the accounting principles used by two segments of an entity is not a consistency issue. The relevant standard applies to the consistent observation of principles in one period in relation to the preceding period. Thus, the use of LIFO for one segment and FIFO for another does not, by itself, affect comparability. Assuming that the use of different methods is appropriate, an unmodified opinion is not precluded.
Management believes, and the auditor is satisfied, that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss but fully discloses the situation in the notes to the financial statements. If management does not make an accrual in the financial statements, the auditor should express a(n)
Unmodified opinion with no additional paragraph in the auditor’s report.
If the auditor concludes that sufficient appropriate evidence supports management’s assertions about the nature of a matter involving an uncertainty, an unmodified report is ordinarily appropriate.
The auditor’s report on the audited financial statements of a nonissuer must include an emphasis-of-matter paragraph if
A material change in an accounting principle occurs.
Inclusion of an emphasis paragraph ordinarily is based on the auditor’s professional judgment. However, certain auditing standards require inclusion. For example, a material change in accounting principle or correction of a material misstatement in previously issued financial statements requires the auditor to include an emphasis-of-matter paragraph in the report.
An auditor expressed a qualified opinion on the prior year’s financial statements of a nonissuer because of a lack of adequate disclosure. These financial statements are properly restated in the current year and presented in comparative form with the current year’s financial statements. The auditor’s updated report on the prior year’s financial statements should
Express an unmodified opinion on the restated financial statements of the prior year.
During the audit, an auditor may become aware of information affecting the statements of a prior period and should consider them when updating the report. For example, if the opinion was modified because of a material misstatement, and the statements are restated in the current period, the updated report should express an unmodified opinion. The report should contain an emphasis-of-matter or other-matter paragraph following the opinion paragraph to disclose (1) the date of the auditor’s previous report, (2) the type of opinion previously expressed, (3) the substantive reasons for the different opinion, and (4) a statement that the auditor’s updated opinion on the statements of the prior period is different from the previous opinion.
The objective of the auditor’s evaluation of the consistency of financial statements is to determine whether
The comparability of financial statements between periods has been materially affected by a change in accounting principle.
The objective of the evaluation of consistency for the periods presented is to communicate in the report when the comparability of financial statements between periods has been materially affected by (1) a change in accounting principle or (2) adjustments to correct a material misstatement in previous statements.
When reporting on comparative financial statements, which of the following circumstances ordinarily should cause the auditor to change the previously expressed opinion on the prior year’s financial statements?
A material misstatement caused an adverse opinion on the prior year’s financial statements, and those statements have been properly restated.
If an opinion in an updated report is different from the one previously expressed, the auditor should disclose the following in an additional paragraph: (1) the date of the auditor’s previous report, (2) the type of opinion previously expressed, (3) the substantive reasons for the different opinion, and (4) a statement that the auditor’s updated opinion on the statements of the prior period is different from the previous opinion.
An auditor concludes that there is substantial doubt about an issuer entity’s ability to continue as a going concern for a reasonable period of time. The entity’s financial statements adequately disclose its financial difficulties. Under these circumstances, the auditor’s report is required to include an explanatory paragraph that specifically uses the phrase(s)
“Except for the effects of such adjustments”:
“Possible discontinuance of an entity’s operations”:
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 explanatory language or an explanatory paragraph in the report. This language or paragraph should include the terms “substantial doubt” and “going concern.” The specific phrases included in the question are not required.
In which of the following should an auditor’s report on the audit of a nonissuer stating an unmodified opinion refer to the lack of consistency when a material change in accounting principle has occurred?
An emphasis-of-matter paragraph following the opinion paragraph.
The auditor should evaluate a change in principle to determine whether (1) the new principle and the method of accounting for the effect of the change are in accordance with the applicable framework, (2) the disclosures related to the change are adequate, and (3) the entity has justified that the alternative principle is preferable. If the criteria stated above are met, and the change in principle is material, the auditor should include an emphasis-of-matter paragraph in the report. This paragraph (1) describes the change, (2) refers to the entity’s disclosures, and (3) follows the opinion paragraph.
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?
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.
For initial audits, the auditor should obtain sufficient appropriate audit evidence about whether the accounting policies reflected in the opening balances have been consistently applied in the current period’s financial statements. If there is an inconsistency, sufficient appropriate evidence about whether the changes in policy have been accounted for appropriately should be obtained.
The auditor draws attention to a matter that is not presented or disclosed in the financial statements by including
An other-matter paragraph.
An other-matter paragraph is used in the auditor’s report to draw users’ attention to any matter relevant to users’ understanding of the auditor’s (1) audit, (2) responsibilities, or (3) report. Unlike the matter addressed in an emphasis paragraph, the other matter is not required to be presented or disclosed in the financial statements.
With respect to consistency of financial statements, which of the following should be done by an auditor who has audited a company’s financial statements for the current year but not the preceding year?
Determine whether the current period’s accounting policies are consistently applied regarding opening balances.
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) change in accounting policies are appropriately accounted for and disclosed (AU-C 510).
When a group auditor of a nonissuer decides to refer to a component auditor’s audit, the group auditor’s report should indicate clearly, in the auditor’s responsibility section, the
Magnitude of the portion of the financial statements audited by the component auditor.
When the group engagement partner decides to refer to the report of a component auditor, the report on the group statements should clearly indicate that the component was not audited by the group auditor. It also should state (1) that the component was audited by the component auditor and (2) the magnitude of the portion of the statements audited. This language is included in the auditor’s responsibility section of the report.
An emphasis-of-matter paragraph is included in the auditor’s report on the financial statements of a nonissuer to draw users’ attention to matters
Fundamental to users’ understanding of the financial statements.
An emphasis-of-matter paragraph in the auditor’s report draws users’ attention to a matter appropriately presented or disclosed that is fundamental to their understanding of the financial statements.
