16.4 Flashcards
When reporting on comparative financial statements of a nonissuer, an auditor ordinarily should change the previously expressed opinion on the prior year’s financial statements if the
Prior year’s financial statements are restated to correct a material misstatement.
If the previous opinion was modified because of a material misstatement, but the prior year’s statements were restated to remove the basis for the modification, the updated report should express an unmodified opinion. The auditor’s report should include an emphasis-of-matter paragraph that (1) states that the previously issued financial statements have been restated to correct a material misstatement and (2) refers to the entity’s disclosure (AU-C 708).
An auditor’s report contains the following: “We did not audit the financial statements of JK Co., a wholly owned subsidiary whose statements reflect total assets and revenues constituting 17% and 19%, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for JK Company, is based solely on the report of the other auditors.” These sentences
Assume no responsibility for the audit of JK Co.
The decision to refer to the work of a component auditor in the report signifies that the group engagement partner does not assume responsibility for the audit of the component auditor.
The group engagement partner has identified a significant component of the group that is being audited by a component auditor. The group auditor intends to assume responsibility for the work of the component auditor. Accordingly,
The group engagement team should either audit the component directly or have the component auditor audit the information on its behalf.
A significant component is one that is (1) of individual financial significance to the group or (2) likely to include significant risks of material misstatement of the group financial statements. When the group engagement partner assumes responsibility for the audit of the component, the audit report does not refer to the audit of the component auditor. Thus, the group engagement team should (1) audit the financial information directly or (2) have the component auditor audit the information on its behalf, using appropriate component materiality.
In which of the following situations would an auditor’s report ordinarily express an unmodified opinion without an additional paragraph?
A group auditor decides to refer to the report of a component auditor.
A reference to a component auditor indicates that the group auditor does not assume responsibility for the audit of the component auditor. It also indicates the source of the audit evidence with respect to the component. The reference is not a qualification of the opinion and does not require an additional paragraph.
A CPA has been requested by a former audit client to reissue the auditor’s report for the prior period. Before reissuing the report, the CPA should
Obtain a letter of representation from the former client’s management.
A predecessor auditor ordinarily can reissue the report for a prior period at the request of the former client if (1) satisfactory arrangements are made to perform this service and (2) certain procedures are performed. One procedure is to obtain a representation letter from management stating whether (1) any new information has caused management to believe that previous representations should be modified, and (2) any events have occurred after the date of the latest prior-period statements reported on by the predecessor auditor that would require adjustment of, or disclosure in, those financial statements.
If an auditor of a nonissuer is satisfied that sufficient appropriate evidence supports management’s assertions about an uncertainty, the auditor should
Express an unmodified opinion.
If sufficient appropriate evidence supports management’s assertions about an uncertainty and its presentation or disclosure, the opinion ordinarily is unmodified (AU-C 705).
If a company is experiencing financial difficulty that raises substantial doubt about its ability to continue as a going concern, auditing standards require the auditor to
Include in the report a paragraph describing the nature of the difficulties.
Auditing standards require the auditor to alert financial statement users to the existence of doubt about the ability of an auditee to continue in existence. The requirement is intended to reduce the instances when, shortly after the expression of an unmodified opinion, the auditee becomes bankrupt. Thus, the auditor’s substantial doubt requires inclusion of an emphasis-of-matter paragraph in the report for a nonissuer or an explanatory paragraph in the report of an issuer. This paragraph should include the words “substantial doubt” and “going concern.”
Before reissuing the prior year’s auditor’s report on the financial statements of a former client, the predecessor auditor should obtain a letter of representations from the
Successor auditor.
Before reissuing the report, the predecessor auditor should consider whether the report is still appropriate. The predecessor auditor should (1) read the current period financial statements, (2) compare the prior period statements reported on with those to be presented comparatively, and (3) obtain written representations from the successor auditor and management.
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.
Green Company, an issuer, uses the first-in, first-out method of costing for its international subsidiary’s inventory and the last-in, first-out method of costing for its domestic inventory. The different costing methods will cause Green’s auditor to issue a report with a(n)
unqualified opinion.
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 a change in accounting principles or by adjustments to correct a material misstatement in previous statements. Thus, the use of two different cost flow assumptions does not, by itself, affect the comparability of the entity’s financial statements between periods if no accounting changes have occurred.
When an auditor has substantial doubt about an entity’s ability to continue as a going concern because of the probable discontinuance of operations, the auditor most likely would express a qualified opinion if
Information about the entity’s ability to continue as a going concern is not disclosed.
When the auditor concludes that a substantial doubt exists about an entity’s ability to continue as a going concern for a reasonable period of time, (s)he should include an additional paragraph (following the opinion paragraph) in the auditor’s report to describe the uncertainty. By itself, this doubt does not require modification of the opinion. However, if the entity’s disclosures about the going concern issue are materially inadequate, the material misstatement may result in a qualified or an adverse opinion.
Tech Company has disclosed an uncertainty arising from pending litigation. The auditor’s decision to express a qualified opinion rather than an unmodified opinion most likely would be determined by the
Lack of sufficient appropriate audit evidence.
By definition, sufficient appropriate evidence regarding the outcome of an uncertainty cannot be expected to exist at the time of an audit. However, management must analyze existing conditions, including uncertainties, and their financial statement effects. The auditor should therefore determine whether appropriate evidence is sufficient to support these analyses. If, as a result of a scope limitation, sufficient appropriate evidence is not available to the auditor to make this determination, a qualification or disclaimer of opinion is appropriate.
An auditor has previously expressed a qualified opinion on the financial statements of a prior period because of a material misstatement. The prior-period financial statements are restated in the current period to conform with the applicable reporting framework. The auditor’s updated report on the prior-period financial statements should
Express an unmodified opinion concerning the restated financial statements.
If an auditor has previously modified the opinion on statements of a prior year because of a material misstatement, and the statements are subsequently restated in conformity with the applicable reporting framework, the auditor’s updated report on the prior period’s statements should indicate that they have been restated and should express 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 most likely includes an emphasis-of-matter paragraph in the auditor’s report on a nonissuer’s financial statements when
A major catastrophe has a significant effect on the entity’s financial position.
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. 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.
