16.5 Flashcards
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.
When an auditor concludes that substantial doubt exists about an entity’s ability to continue as a going concern for a reasonable period of time, the auditor’s responsibility is to
Consider the adequacy of disclosure about the entity’s possible inability to continue as a going concern.
If the auditor reaches this conclusion after (1) identifying conditions and events that create such doubt and (2) evaluating management’s plans to mitigate their effects, (s)he should consider the adequacy of disclosure and include an additional paragraph (after the opinion paragraph) in the report that includes the words “substantial doubt” and “going concern.” If disclosure is inadequate, the material misstatement requires modification of the opinion. By itself, however, the substantial doubt does not require a modified opinion paragraph or a disclaimer of opinion.
An auditor’s report included the following paragraph relative to substantial doubt about a client’s ability to continue as a going concern:
“The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. If the Company is not able to renew the contract described in Note X, there may be substantial doubt about the company’s ability to continue as a going concern.”
Which of the following statements is true?
The report should not contain conditional language.
The report should not contain conditional language. “If the Company is not able to renew the contract . . .” is not permissible language.
An auditor’s report on comparative financial statements should be dated as of the date of the
No earlier than completion of the auditor’s most recent audit.
The auditor’s report on comparative financial statements should be dated no earlier than the date the auditor obtained sufficient appropriate evidence for the opinion on the most recent audit.
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.
If an auditor includes an emphasis-of-matter paragraph to draw users’ attention to a matter relevant to the users’ understanding of the financial statements of a nonissuer, then the auditor should
Include the paragraph immediately after the opinion paragraph in the audit report.
An emphasis-of-matter paragraph in the auditor’s report draws users’ attention to a matter (1) appropriately presented or disclosed in, and (2) fundamental to their understanding of, the statements. The auditor should (1) include it immediately after the opinion paragraph, (2) use the heading “Emphasis of Matter” or another appropriate heading, (3) include in the paragraph a clear reference to (a) the matter being emphasized and (b) where relevant disclosures that fully describe the matter can be found in the statements, and (4) indicate that the auditor’s opinion is not modified with respect to the matter emphasized.
Which of the following portions of a continuing auditor’s report on comparative financial statements of a nonissuer is incorrect?
“Applied on a basis consistent with that of the preceding year.”
The auditor’s report is silent as to consistency unless the comparability of the financial statements has been materially affected by a change in accounting principle or by correction of a material misstatement in previous statements. The change should be referred to in an emphasis-of-matter paragraph following the opinion paragraph. Agreement with the change is implied unless the auditor takes exception to it.
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.
The following additional paragraph was included in an auditor’s report of a nonissuer to indicate a lack of consistency:
“As discussed in note T to the financial statements, the company changed its method of computing depreciation in Year 1.”
How should the auditor report on this matter if the auditor concurred with the change?
type of opinion:
Location of additional paragraph:
Unmodified opinion.
After the opinion paragraph
A change in accounting principle meeting certain criteria and having a material effect on the financial statements of a nonissuer requires the auditor to refer to the change in an emphasis-of-matter paragraph of the report. This paragraph should follow the opinion paragraph, describe the change, and refer to the entity’s disclosure. If the report is for an issuer, the wording of the paragraph is unchanged. But it is included in explanatory language (or an explanatory paragraph). It is not included in an emphasis paragraph.
William Halsey is auditing the consolidated financial statements of Rex, Inc. Abbey Lincoln is the auditor who has audited and reported on the financial statements of a wholly owned subsidiary of Rex, Inc. Halsey’s first concern with respect to the Rex financial statements is to decide whether he
May serve as the group auditor and report as such on the consolidated financial statements of Rex, Inc.
The first objective of the group engagement partner is to determine whether to serve as the auditor of the group statements. If so, the objectives are to (1) determine whether to refer to the component auditor’s report, (2) communicate clearly with the component auditor or auditors, and (3) obtain sufficient appropriate evidence about the financial information of the components and the consolidation process. Thus, the group engagement partner should evaluate whether sufficient appropriate evidence can be obtained to serve as the auditor of the group statements. Factors relevant to the decision to act as the group auditor also include (1) the financial significance of individual components for which responsibility will be assumed, (2) the significant risks of material misstatement of the group statements from assuming responsibility for components, and (3) the group engagement team’s knowledge of the overall financial statements.
A change in accounting principle made by a nonissuer has no material effect on the financial statements in the current year but is expected to have a material effect in later years. Accordingly, the change should be
Disclosed in the notes to the financial statements of the current year.
The accounting change has no material effect on the financial statements in the current year but is expected to have a material effect in later years. The applicable financial reporting framework may require that the change be disclosed in the notes to the financial statements. But the independent auditor need not recognize the change in the current period’s report.
In which of the following situations will a group auditor be most likely to refer to a component auditor who audited a subsidiary of the entity?
The component auditor performed an audit in accordance with PCAOB standards.
The group engagement partner may not refer to the audit of the component auditor unless the component auditor performed an audit in accordance with (1) GAAS or (2), if required by law or regulation, PCAOB auditing standards.
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.
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.
A nonissuer company has made a material change in its method of inventory measurement from an unacceptable one to one in accordance with the applicable financial reporting framework. The auditor’s report on the financial statements of the year of the change should include
A reference to the entity’s disclosure of the correction.
The auditor’s report should include an emphasis-of-matter paragraph to describe the correction of a material misstatement in previous statements. The paragraph should (1) state that the previous statements have been restated and (2) refer to the entity’s disclosure of the correction.
