17.1 Flashcards
The information supplementary to the basic financial statements on which the auditor has been engaged to report may not include
Modifications of the audit’s report.
The auditor’s report covers the basic financial statements and notes, which are an integral part of the statements. Supplementary information is presented outside the basic statements and not deemed necessary for their fair presentation in accordance with the applicable financial reporting framework. It includes additional details or explanations of items in or related to the statements, consolidating information, statistical data, historical summaries, etc. Modifications of the auditor’s report, however, must appear in the report itself, not in the supplementary information.
Management chooses to place supplementary information required by the FASB or GASB in notes to the financial statements. According to GAAS, this information may be identified as
unaudited.
RSI is information that the designated accounting standards setter has determined must accompany the basic financial statements. However, it is not a part of the basic statements and therefore is not required by the applicable reporting framework to be included in the basic statements. The notes are an integral part of the basic financial statements. According to AU-C 700, if information included in the basic statements is (1) not required, (2) not needed for fair presentation, and (3) clearly differentiated, it may be identified as unaudited or not covered by the auditor’s report.
An auditor is reporting on summary financial statements for an annual period. The auditor’s unmodified opinion should indicate whether the information in the summary financial statements is consistent, in all material respects, with
The audited financial statements.
If an unmodified opinion is appropriate, the auditor states that the summary statements are consistent, in all material respects, with the audited statements from which they are derived, in accordance with the applied criteria.
The auditor should not accept an engagement to report on summary statements unless
The auditor has been engaged to audit the financial statements from which the summary statements are derived.
Summary financial statements consist of historical information derived from financial statements audited in accordance with GAAS by the same auditor. The auditor should not accept an engagement to report on summary statements unless (s)he has been engaged to audit the statements from which they are derived. The report expresses an opinion on whether the summary statements are consistent, in all material respects, with the audited statements, in accordance with the applied criteria.
Which of the following applies to an accountant conducting a review of interim financial information?
The accountant must maintain independence in mental attitude in all matters relating to the engagement.
An accountant cannot perform a review if his or her independence is impaired for any reason. The AICPA’s Code of Professional Conduct provides guidance about independence. The Conceptual Framework for AICPA Independence Standards defines independence as independence of mind and independence in appearance.
In connection with a proposal to obtain a new client, an accountant in public practice is asked to prepare a written report on the requirements of an applicable financial reporting framework to a specific transaction. The accountant’s report should include a statement that
Any difference in the facts, circumstances, or assumptions presented may change the report.
The accountant’s report is addressed to the requesting party. The report should contain (1) a description of the engagement and a statement that it was performed in accordance with AU-C 915; (2) a description of the transaction and identification of the entity; (3) a description of the financial reporting framework applied (including its country of origin), the type of report that may be issued, and the reasons for the conclusion; (4) a statement that the responsibility for proper accounting is with the preparers of the financial statements; (5) statements of the facts, circumstances, and assumptions and their sources; (6) a statement that any difference in the facts, etc., may change the report; (7) an alert restricting the use of the report to specified parties; and (8), if the accountant is not independent, a statement of the lack of independence.
The Securities and Exchange Commission has authority to
Determine accounting principles for the purpose of financial reporting by companies offering securities to the public.
The SEC has the authority to regulate the form and content of all financial statements, notes, and schedules filed with the SEC and also the financial reports to shareholders if the company is subject to the Securities Exchange Act of 1934. The SEC has stated that financial statements conforming to FASB standards will be presumed to be in accordance with U.S. GAAP. However, the SEC reserves the right to substitute its principles for those of the accounting profession and to require any additional disclosures it deems necessary. The Sarbanes-Oxley Act of 2002 authorized the SEC to recognize as generally accepted any accounting principles established by a standards-setting body that meets the act’s criteria.
When a CPA reports on audited financial statements prepared on the cash receipts and disbursements basis of accounting, the report should
State that the basis of presentation is a basis of accounting other than GAAP.
An auditor may report on financial statements prepared in accordance with a special purpose framework. Except when regulatory-basis statements are intended for general use, an emphasis-of-matter paragraph (titled “Basis of Accounting”) should follow the opinion paragraph. It (1) identifies the special purpose framework, (2) refers to the note describing the framework, and (3) states that the framework is not GAAP.
An auditor may express an opinion on an entity’s accounts receivable balance even if the auditor has disclaimed an opinion on the financial statements as a whole, provided that the
Report on the accounts receivable is presented separately from the disclaimer of opinion on the financial statements.
An auditor may be requested to express an opinion on one or more specified elements, accounts, or items of a financial statement. However, the auditor may not express such an opinion after disclaiming an opinion on the financial statements if such reporting is tantamount to a piecemeal opinion on the financial statements. Nevertheless, an auditor may be able to express an opinion in these circumstances if a major portion of the financial statements is not involved. For example, an auditor who has disclaimed an opinion on the financial statements may be able to express an opinion on the accounts receivable balance. Moreover, the report should be presented separately.
Prior to the report release date, an auditor reads the letter of transmittal accompanying a county’s comprehensive annual financial report and identifies a material inconsistency with the financial statements. The auditor determines that the financial statements do not require revision. Which of the following actions should the auditor take?
Request that the client revise the letter of transmittal.
A material inconsistency may be identified prior to the report release date that requires revision of the audited statements. If management refuses, the auditor should modify the opinion. A material inconsistency may be identified prior to the report release date that requires revision of the other information. If management refuses to revise the other information, the auditor should consult legal counsel. The auditor also should communicate the matter to those charged with governance and (1) include an other-matter paragraph in the auditor’s report, (2) withhold the auditor’s report, or (3) withdraw from the engagement.
In its annual report to shareholders, Lake Co. included an assertion about the effectiveness of its sales force. Lake’s auditor is expressing an unmodified opinion on Lake’s financial statements but has not been engaged to examine and report on this management assertion. What is the auditor’s responsibility concerning such information?
The auditor should read the assertion and consider whether it is a material misstatement of fact.
The auditor’s responsibility is to respond appropriately when the other information may undermine the credibility of the statements and the auditor’s report. However, unless otherwise required for a specific engagement, the opinion on the statements does not cover other information. Also, the auditor has no responsibility for determining whether it is properly stated. The auditor should read the other information to identify material inconsistencies with the audited statements. An inconsistency is a conflict with the audited information. It may create doubt regarding the audit conclusions. The auditor need not refer to the other information in the auditor’s report. But (s)he may disclaim an opinion on it in an other-matter paragraph.
Which of the following statements is true concerning letters for underwriters, commonly referred to as comfort letters?
Comfort letters typically give negative assurance on unaudited interim financial information.
A typical comfort letter includes negative assurance on whether, if applicable, unaudited IFI included in the registration statement materially complies as to form with the 1933 act and SEC pronouncements. Moreover, negative assurance may be provided on whether any material modifications should be made to the unaudited IFI for them to conform with the applicable framework. But the auditor provides negative assurance on unaudited IFI included in the securities offering only if (s)he has performed a review in accordance with GAAS.
Whenever a report filed on a printed form designed by authorities calls upon the independent auditor to make an assertion that the auditor believes is not justified, the auditor should
Reword the form.
The auditor may be required by law or regulation to use a specific layout, form, or wording of the auditor’s report. For example, printed forms designed by the agencies or other authorities that they will be filed with often prescribe the wording of the auditor’s report. Many are unacceptable to auditors because they conflict with GAAS. When a report form calls for an unjustified assertion, an auditor should reword the form. If rewording the form would not (1) be permitted or (2) mitigate the risk that users will misunderstand the report, the auditor should not accept the audit unless required by law or regulation. In this case, the auditor’s report should not refer to performing an audit in accordance with GAAS (AU-C 210).
When planning a review of an audit client’s interim financial statements, which of the following procedures should the auditor perform to obtain an understanding of the entity and its environment, including its internal control?
Consider the results of audit procedures performed with respect to the current year’s financial statements.
Procedures to obtain an understanding include (1) reading documentation of the prior audit and of prior reviews; (2) reading the recent annual information and prior interim financial information; (3) considering current audit results; (4) inquiring of management about changes in the business or in internal control; (5) in an initial review, inquiring of the predecessor auditor and reading his or her documentation (if permitted); and (6) obtaining knowledge of the relevant aspects of the components of internal control relating to annual information and interim financial information.
The auditor’s inquiries of management regarding required supplementary information (RSI) should be directed to the judgments made concerning
measurement and presentation.
RSI is information that the designated accounting standards setter has determined must accompany the basic financial statements. Thus, authoritative guidelines for its measurement and presentation have been prescribed. The auditor should inquire about whether the RSI is within the guidelines, (2) whether methods of measurement or presentation have changed and the reasons for any change, and (3) any significant assumptions or interpretations (AU-C 730).
