17.4 Flashcards
Comfort letters ordinarily are addressed to
The party who negotiated the agreement with the client.
The letter should be addressed only to the requesting party (or that party and the entity) and should not be given to anyone else. A requesting party is a specified party that has negotiated an agreement with the entity. Requesting parties may include (1) underwriters (purchasers of securities for public distribution) and (2) others who are conducting a review process consistent with the due diligence process performed when a securities offering is registered. Thus, a comfort letter signed by an independent auditor assists the requesting party in developing a record of a reasonable investigation.
Which of the following statements is true with respect to an auditor’s report expressing an opinion on a specific item on a financial statement?
Materiality must be related to the specified item rather than to the financial statements as a whole.
In an engagement to express an opinion on one or more specific elements, accounts, or items of a financial statement, materiality must be measured in relation to each element, account, or item reported on rather than in relation to their aggregate or to the financial statements as a whole (AU-C 805).
In a comfort letter, an auditor may provide negative assurance about
Whether the entity’s unaudited interim financial information complies as to form with the accounting requirements of the Securities Act of 1933.
A typical comfort letter includes negative assurance on whether the unaudited interim financial information included in the registration statement complies as to form, in all material respects, with the applicable accounting requirements of the Securities Act of 1933 and rules and regulations of the SEC.
AU-C 915, Reports on Application of Requirements of an Applicable Financial Reporting Framework, provides guidance to a reporting accountant who
Is preparing a written report on the application of an applicable financial reporting framework to a specific transaction.
AU-C 915 guides the reporting accountant when (s)he prepares a written report or gives oral advice on (1) the application of the requirements of a financial reporting framework to a specific transaction (completed or proposed) involving facts and circumstances of a particular entity or (2) the type of report that may be issued on a specific entity’s financial statements. The accountant should not issue a written report on a hypothetical transaction.
Reports are considered reports on financial statements prepared in accordance with a special purpose framework when issued in conjunction with
Compliance with aspects of regulatory requirements related to audited financial statements.
Special purpose frameworks include (1) the cash basis used to record cash receipts and cash payments, (2) the tax basis used to file income tax returns, (3) the regulatory basis used to comply with the requirements of a regulatory agency, (4) the contractual basis used to comply with an agreement between the entity and a third party, and (5) an other basis consisting of definite criteria that are (a) logical and reasonable and (b) applied to all material items.
The auditor is engaged to report on whether supplementary information is fairly stated in relation to the audited financial statements as a whole. Which of the following best describes the auditor’s responsibility for this information if it is outside the basic financial statements and not deemed necessary to their fair presentation?
The auditor should not express an opinion on the supplementary information if (s)he disclaimed an opinion on the financial statements.
Supplementary information is presented outside the basic statements and is not deemed necessary for their fair presentation in accordance with the applicable financial reporting framework. For example, it includes (1) additional details or explanations of items in or related to the statements, (2) consolidating information, (3) statistical data, and (4) historical summaries. The auditor should not express an opinion on the supplementary information if (s)he expressed an adverse opinion or disclaimed an opinion on the audited financial statements. Moreover, the auditor should have served as the group auditor of those statements.
The financial statements of KCP America, a U.S. entity, are prepared for inclusion in the consolidated financial statements of its non-U.S. parent. These financial statements are prepared in accordance with a financial reporting framework generally accepted in the parent’s country and are for use only in that country. Which is an appropriate report on the financial statements for KCP America’s auditor to issue?
I. A U.S. form of report (unmodified)
II. A U.S. form of report modified to report on the financial reporting framework of the parent’s country
III. The report form of the parent’s country
II & III only.
Financial statements may be prepared in accordance with a financial reporting framework generally accepted in another country. In these circumstances, if the statements are prepared for use only outside the U.S., the auditor may use either a U.S. form of report modified to report on the financial reporting framework of the other country or, if appropriate, the report form of the other country. An unmodified U.S. form of report is inappropriate because of the departures from GAAP contained in statements prepared in accordance with a financial reporting framework generally accepted in the other country.
A registration statement filed with the SEC contains the reports of two independent auditors on their audits of financial statements for different periods. The predecessor auditor who audited the prior-period financial statements generally should obtain a letter of representation from the
Successor independent auditor.
An auditor who has audited the financial statements for prior periods but not for the most recent period included in a registration statement has a responsibility for material subsequent events affecting the prior-period statements. Thus, the predecessor auditor who audited the prior-period financial statements generally should obtain a letter of representation from the successor auditor.
For reporting purposes, the auditor should consider each of the following types of financial presentation to be a financial statement except the statement of
Changes in the elements of working capital.
AU-C 805 defines financial statements as a structured representation of historical financial information, including related notes, intended to communicate an entity’s economic resources and obligations at a point in time or the changes therein for a period of time in accordance with a financial reporting framework. The related notes ordinarily comprise a summary of significant accounting policies and other explanatory information. AU-C 805 lists various types of financial statements but excludes the statement of changes in working capital.
All of the following statements about financial statements prepared in accordance with a reporting framework generally accepted in another country and intended for use in the U.S. are true except
The auditor expresses an opinion on whether the financial statements are presented fairly within the framework of the U.S.
The auditor expresses an opinion on whether the financial statements are presented fairly within the framework of the other country, not the U.S.
Form 10-K is filed with the SEC to update the information a company supplied when filing a registration statement under the Securities Exchange Act of 1934. A large accelerated filer must submit Form 10-K within
60 days of the end of the company’s fiscal year.
Form 10-K is the annual report to the SEC. A large accelerated filer must submit Form 10-K within 60 days after the corporation’s year end. A large accelerated filer has $700 million or more of publicly held voting and nonvoting stock. Form 10-K must contain audited financial statements and be signed by the principal executive, financial, and accounting officers and by a majority of the board. The content is essentially that in the Basic Information Package.
The client’s financial reporting includes supplementary financial information outside the basic financial statements but required by the Financial Accounting Standards Board (FASB). Which of the following statements is correct regarding the auditor’s responsibility for this supplementary financial information?
the auditor should perform limited procedures.
The limited procedures performed include inquiry and comparing the supplementary information to the financial statements.
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.
When audited financial statements are presented in a document containing other information, the auditor
Should be aware of whether the other information contains a material misstatement of fact.
A misstatement of fact is other information that is unrelated to matters in the audited statements and is incorrectly stated or presented. If material, it may undermine the credibility of the document containing the audited statements. When management refuses to correct a material misstatement of fact, the auditor should notify those charged with governance.
When the auditor reports on supplementary information (SI), a separate report should be issued when the
SI and the audited financial statements are presented separately.
If the SI and the audited statements are presented separately, a separate report should be issued. If the SI and the audited statements are presented together, the auditor may report on the SI in an other-matter paragraph following the opinion paragraph and any emphasis-of-matter paragraph.
