17.2 Flashcards
If information supplementary to the basic financial statements has been subjected to auditing procedures, the auditor may express an opinion that the accompanying information is fairly stated in
All material respects in relation to the basic financial statements as a whole.
The report on the supplementary information should include an opinion on its fairness in relation to the basic financial statements as a whole if it has been audited using the procedures performed in the audit of the financial statements and certain other procedures. The auditor should report either in an other-matter paragraph or in a separate report (AU-C 725 and AS 2701).
As a condition of obtaining a loan from First National Bank, Maxim Co. is required to submit an audited balance sheet but not the related statements of income, retained earnings, or cash flows. Maxim would like to engage a CPA to audit only its balance sheet. Under these circumstances, the CPA
May audit only Maxim’s balance sheet if the CPA can audit interrelated items.
The auditor may report on one basic financial statement and not on the others if (1) the auditor complies with all AU-C sections relevant to the audit, (2) the audit is feasible, and (3) the auditor can perform procedures on interrelated items. For example, (1) sales and receivables, (2) inventory and payables, and (3) equipment and depreciation are interrelated.
An entity prepares its financial statements on its income tax basis. The accompanying notes include a summary of significant accounting policies that discusses the basis of presentation and describes how that basis differs from GAAP. The dollar amount of the effects of the difference between the income tax basis and GAAP
Need not be quantified and included in either the notes to the financial statements or the auditor’s report.
The tax basis is a special purpose framework used to file tax returns. Moreover, the statements should be appropriately titled in accordance with the framework used. Also, the statements should include a summary of significant accounting policies and describe how the special purpose framework varies from GAAP. However, the dollar amount of the effects of the difference is not required to be included in the notes to the financial statements or the auditor’s report.
Which of the following circumstances requires modification of the auditor’s report on a review of interim financial information (IFI)?
Substantial doubt about an entity’s ability to continue as a going concern:
inadequate disclosure:
No
Yes
Modification of the report on a review of IFI is necessary because of departures from the applicable financial reporting framework, including inadequate disclosure. A review of IFI is not intended to identify a going concern issue. But the auditor may become aware of conditions or events indicating a possibility that the entity may not be able to continue as a going concern. In this case, the auditor should inquire of management and consider the adequacy of disclosure. If disclosure is adequate, report modification is not required. Nevertheless, the auditor may include an emphasis-of-matter paragraph.
An auditor has performed additional procedures for a client making a private placement of securities that is exempt from SEC filing requirements. In addition to permitting the inclusion of the audited statements in the offering document, the auditor has assisted the client in its preparation of the placement document. Before the client distributes the document, the auditor should do all the following except
Obtain agreement from the SEC that the offering document is complete.
Certain securities offerings and franchise offerings may be sold under conditions other than through an SEC registered offering (e.g., private placements, government-backed securities, and franchies offerings). Because the offering is exempt, typically no filing with the SEC is necessary. If it were not exempt, the client would be responsible for SEC reporting, not the auditor.
A U.S. entity prepares its financial statements in accordance with a financial reporting framework generally accepted in another country. These financial statements will be included in the consolidated financial statements of its non-U.S. parent. Before reporting on the financial statements of the U.S. entity, the auditor practicing in the U.S. should
Obtain an understanding of the purpose of the financial statements and the intended users.
An auditor practicing in the U.S. may report on the financial statements of a U.S. entity prepared in accordance with a financial reporting framework generally accepted in another country for use outside the U.S. The auditor should understand (1) the purpose of the statements, (2) the intended users, and (3) the steps by management to determine that the financial reporting framework is acceptable. If the statements are for general use and the report form and content of the foreign country will be used, the auditor should consider any additional legal responsibilities.
An auditor practicing in the U.S. has been engaged to report on the financial statements of a U.S. entity that have been prepared in accordance with a financial reporting framework generally accepted in another country. The auditor should
Understand the framework.
An auditor practicing in the U.S. may report on financial statements prepared in accordance with a financial reporting framework generally accepted in another country. Such a framework is not one adopted by a standards setter designated by the AICPA Council to establish GAAP (e.g., the FASB for U.S. GAAP and the IASB for IFRS). In these circumstances, because of the requirement to understand the entity’s selection and application of accounting policies (AU-C 315), the auditor should obtain an understanding of the framework. The auditor’s report should identify the country of origin of the accounting standards used to prepare the statements. It also should identify the auditing standards followed in performing the audit.
When making a review of interim financial information (IFI), the auditor’s work consists primarily of
Making inquiries and performing analytical procedures concerning significant accounting matters.
Timeliness is an important element of interim reporting. The development of documentation and information underlying the report is necessarily less extensive at interim dates than at year end. Consequently, procedures for reviewing IFI generally are limited to inquiries, analytical procedures, and obtaining written representations from management (AU-C 930).
SEC Form S-3 is an optional, short-form registration statement that relies on the incorporation by reference of periodic reports required by the Securities Exchange Act of 1934. Form S-3 offers substantial savings in filing costs over other forms because minimal disclosures are required in the prospectus. The SEC permits the use of Form S-3 by an issuer that
is a seasoned issuer or a well-known issuer.
Under the SEC’s integrated disclosure system, four categories of issuers are recognized. A nonreporting issuer (one who need not file reports under the 1934 act) must use detailed Form S-1. An unseasoned issuer has reported for at least 3 consecutive years under the 1934 act. It must use Form S-1 but provides less detailed information and may include some information by reference to other 1934 act reports. A seasoned issuer has filed for at least 1 year and has a market capitalization of at least $75 million. It may use Form S-3 to report even less detail and may include even more information by reference. A well-known seasoned issuer has filed for at least 1 year and (1) has a worldwide market capitalization of at least $700 million or (2) has issued for cash in a registered offering at least $1 billion of debt or preferred stock in the past 3 years. Such an issuer also may use Form S-3.
What is an auditor’s responsibility for required supplementary information (RSI)?
Apply limited procedures to the information and report its omission or the need for material modifications.
RSI differs from other information outside the basic statements because the designated accounting standard setter considers it to be an essential part of financial reporting for placing the basic financial statements in context. The auditor at minimum should apply limited procedures and report on the RSI in an other-matter paragraph that follows the opinion paragraph.
Investment and property schedules are presented for purposes of additional analysis in a document outside the basic financial statements. The schedules are not required supplementary information. When the auditor is engaged to report on whether the supplementary information is fairly stated in relation to the audited financial statements as a whole, the measurement of materiality is the
Same as that used in forming an opinion on the basic financial statements as a whole.
When reporting on whether supplementary information is fairly stated in relation to the statements as a whole, the measurement of materiality is the same as that used in forming an opinion on the basic financial statements taken as a whole. Accordingly, the auditor need not apply procedures as extensive as would be necessary to express an opinion on the information by itself.
Which of the following matters is covered in a typical comfort letter?
An opinion as to whether the audited financial statements comply in form with the accounting requirements of the SEC.
A typical comfort letter expresses an opinion on whether audited financial statements and schedules included in the securities offering comply as to form, in all material respects, with the applicable accounting requirements of the Securities Act of 1933 and the related published rules and regulations. However, the comfort letter does not state or repeat an opinion about the fairness of presentation of the statements.
An auditor may report on summary financial statements that are derived from audited financial statements only if the auditor
States whether the information is consistent with the audited financial statements.
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.
Comfort letters ordinarily are signed by the client’s
independent auditors.
A common condition of an underwriting agreement in connection with the offering for sale of securities registered with the SEC under the Securities Act of 1933 is that the auditors furnish a comfort letter to the underwriters. Hence, the independent auditors sign the comfort letter.
Which of the following best describes the auditor’s reporting responsibility when engaged to report on supplementary information in relation to the financial statements as a whole?
The auditor should report on all information.
When an auditor is engaged to report on supplementary information in relation to the financial statements, (s)he should report on all the information (AU-C 725 and AS 2701).
