16.3 Flashcards
Which of the following requires recognition in the auditor’s report as to consistency?
Changing the companies included in combined financial statements.
A change in the reporting entity results in statements that are effectively those of a different entity. The auditor should recognize the change by including an additional paragraph in the report unless the change results from a transaction or event. A transaction or event is the creation, cessation, or complete or partial purchase or disposition of a subsidiary or other business unit. Thus, no additional paragraph is required. Changes in the reporting entity not from a transaction or event include (1) presenting consolidated or combined statements in place of the statements of individual entities, (2) changing the subsidiaries included in consolidated statements, or (3) changing the entities included in combined statements. Thus, an additional paragraph is required.
Grant Company’s financial statements adequately disclose uncertainties that concern future events, the outcome of which are not susceptible to reasonable estimation. The auditor’s report should include a(n)
Unmodified opinion.
An auditor assesses whether management’s assertions about uncertainties are supported by sufficient appropriate audit evidence. This judgment is based on the evidence that is, or should be, available. Thus, in the absence of (1) an inability to obtain sufficient appropriate evidence or (2) a material misstatement, an uncertainty does not require modification of the report.
A former client requests a predecessor auditor to reissue the prior year’s audit report in connection with the issuance of comparative financial statements by the client. What is the predecessor auditor’s responsibility?
Read the current report, compare it to the previous report, and obtain a letter of representation from the successor auditor.
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. However, the predecessor auditor is not required to reissue the report.
An auditor of the financial statements of a nonissuer is considering whether to include an emphasis-of-matter paragraph in the report. In the exercise of professional judgment, the auditor is most likely to include the paragraph if
An uncertainty relates to the outcome of unusually important legal action.
Examples of circumstances when the auditor may consider an emphasis-of-matter paragraph to be necessary include (1) an uncertainty relating to the outcome of unusually important litigation or regulatory action, (2) a major catastrophe that has had (or continues to have) a significant effect on the entity’s financial position, (3) significant transactions with related parties, and (4) unusually important subsequent events.
An auditor may issue an unmodified audit report when the
Group engagement partner assumes responsibility for the work of a component auditor.
If the group engagement partner assumes responsibility for the work of the component auditor, the component auditor is not referred to in the report on the group financial statements.
When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should
Not refer to the consistency in the auditor’s report.
If the change in principle does not have a material effect on the current-year statements, the auditor need not recognize the change in the current-year report.
In the auditor’s report, the group auditor decides not to refer to another CPA who audited a client’s subsidiary. The group auditor could justify this decision if, among other requirements, the group auditor
Is satisfied as to the independence and professional reputation of the other CPA.
Whether or not the group auditor decides to refer to the audit of a component auditor, (s)he should obtain an understanding of the professional competence and independence of the other auditor.
The predecessor auditor, who is satisfied after properly communicating with the current auditor, has reissued a report because the audit client desires comparative financial statements. The predecessor auditor’s report should
Not refer to the work or the report of the current auditor.
A predecessor auditor who has been asked to reissue his or her report should (1) read the current-period statements, (2) compare the statements (s)he reported on with other statements to be presented comparatively, (3) obtain a representation letter from the auditor, and (4) obtain a representation letter from management of the former client. However, the reissued report should not refer to the report or work of the auditor.
An auditor of the financial statements of an issuer has included an emphasis paragraph in the auditor’s report. In accordance with PCAOB auditing standards, an emphasis paragraph
is never required.
Under PCAOB auditing standards for audits of issuers, an emphasis paragraph is (1) never required, (2) not a substitute for required critical matters, and (3) is not referred to in the opinion paragraph.
If management of a nonissuer fails to justify a material change in accounting principle, the auditor should
Add a basis for modified opinion paragraph to the report and express a qualified or an adverse opinion.
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. A basis for modified opinion paragraph is added preceding the opinion paragraph.
In which of the following circumstances would an auditor of a nonissuer most likely add an emphasis-of-matter paragraph to the auditor’s report while expressing an unmodified opinion?
There is substantial doubt about the entity’s ability to continue as a going concern.
An auditor may have a substantial doubt about the entity’s ability to continue as a going concern after (1) identifying conditions and events that create such doubt and (2) evaluating management’s plans to mitigate their effects. In this circumstance, (s)he should (1) consider the adequacy of disclosure and (2) include an emphasis-of-matter paragraph (after the opinion paragraph) in the report. The auditor must use language in the emphasis-of-matter paragraph that includes the words “substantial doubt” and “going concern.” By itself, however, the substantial doubt is not a basis for modifying the opinion.
Comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose opinion is not presented. If the predecessor’s opinion was qualified, the auditor should
Indicate the reasons for the qualification in the predecessor auditor’s opinion.
When the predecessor’s report is not presented, the auditor’s report should include an additional paragraph titled “other matter” if for a nonissuer or with no title if for an issuer. The statement also includes (1) a statement that the financial statements of the prior period were audited by another auditor, (2) the date of the report, (3) the opinion expressed, (4) the reasons if the opinion was modified, and (5) the nature of any additional paragraphs.
Seripak Corporation, a nonissuer, made a material change in accounting principle with which the auditor concurs. The auditor should express
An unmodified opinion with an emphasis-of-matter paragraph.
An auditor includes an emphasis-of-matter paragraph in the audit report when a material change in accounting principle has occurred. 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 opinion is unmodified.
A group auditor has decided to assume responsibility and not make reference to a component auditor. The report of the component auditor expressed a qualified opinion, but the group auditor believes the qualification to be immaterial in regard to the consolidated financial statements. Accordingly, the group auditor
Need not refer to the audit of the component auditor.
The group auditor need not refer to the audit of the component auditor if (s)he is willing to assume responsibility for the component auditor’s work. Because the qualification stated by the component auditor is immaterial to the group financial statements, it need not cause a qualification of the opinion. For example, the component may not (1) be financially significant to the group or (2) be likely to include significant risks of material misstatement of the group statements.
Which of the following would cause an auditor of an entity’s financial statements to issue either a qualified opinion or a disclaimer of opinion?
Scope limitation involving a recorded uncertainty.
Conclusive audit evidence about the outcome of uncertainties is not expected to exist at the date of the audit. Accordingly, management is responsible for (1) estimating the effect of future events on the financial statements or (2) determining that a reasonable estimate is not possible and making required disclosures. When the auditor is able to conclude that sufficient appropriate audit evidence supports management’s assertions about an uncertainty and its presentation and disclosure, an unmodified opinion is ordinarily appropriate, with no requirement to add an additional paragraph. However, a material scope limitation (an inability to obtain sufficient appropriate evidence) results in a (1) qualified opinion if the possible effects are not pervasive and (2) a disclaimer if they are pervasive.
