17.5 Flashcards
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.
Harris, CPA, has been asked to audit and report on the balance sheet of Fox Co. but not on the statements of income, changes in shareholders’ equity, or cash flows. Harris will have access to all information underlying the basic financial statements. Under these circumstances, Harris may
Accept the engagement if an audit in accordance with GAAS is practicable.
An auditor may report on one basic financial statement and not on the others. An auditor should comply with all AU-C sections relevant to the audit. For an audit of a single financial statement, this requirement applies regardless of whether the auditor also audits the complete set of statements. If the auditor audits only a single financial statement, (s)he should determine whether it is feasible to (1) audit the statement and (2) perform procedures on interrelated items. Procedures should be performed on interrelated items when the auditor cannot consider the financial statement in isolation.
The information supplementary to the basic financial statements on which the auditor has been engaged to report may not include
Modifications to the auditor’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.
An auditor who conducts an audit in accordance with generally accepted auditing standards and concludes that the financial statements are fairly presented in accordance with a special purpose framework, such as the cash basis of accounting, should issue a
Report expressing an opinion.
An auditor’s judgment (opinion) about the fair presentation of financial statements is applied within an identifiable framework, which is usually provided by GAAP. However, a special purpose framework (e.g., cash basis) may sometimes be used. An auditor’s report is appropriate for reporting on statements prepared using a special purpose framework.
Blue, CPA, has been asked to report on the application of a financial reporting framework to a specific transaction by an entity that is audited by another CPA. Blue may accept this engagement but should
Consult with the continuing accountant to obtain information relevant to the transaction.
The reporting accountant should consult with the continuing accountant to determine the available facts relevant to a professional judgment. The continuing accountant may provide information not otherwise available to the reporting accountant. (S)he should (1) explain to the entity’s management the need to consult with the continuing accountant, (2) request permission to do so, and (3) request authorization for the continuing accountant to respond fully.
An auditor is reporting on a single financial statement. How should materiality be determined?
Based on the single financial statement being reported on.
The auditor should determine materiality for the single financial statement being reported on, not for the complete set of financial statements. The auditor will express an opinion on the fairness of the single financial statement.
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.
A registration statement filed with the Securities and Exchange Commission may contain the reports of two or more independent auditors on their audits of the financial statements for different periods. What responsibility does the auditor who has not audited the most recent financial statements have relative to events occurring after the date of his or her report that may affect the financial statements on which (s)he reported?
The auditor has responsibility for events up to the effective date of the registration statement.
An auditor who has audited the financial statements for a prior period but not for the most recent audited period has a responsibility for events occurring after the date of the prior-period financial statements through a date at or shortly before the effective date of the registration statement. The predecessor auditor should (1) read the statements for the subsequent period and compare them with the statements the predecessor reported on, (2) obtain management representations, and (3) obtain a letter of representations from the auditor regarding whether the audit revealed any matters that might have a material effect on the financial statements reported on by the predecessor.
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.
When reporting on financial statements prepared on the same basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that
States that the income tax basis of accounting 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.
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.
An auditor’s report on financial statements prepared on the cash receipts and disbursements basis of accounting should include all of the following except
A statement that the cash receipts and disbursements basis of accounting is not a special purpose framework.
The basis of accounting (emphasis-of-matter) paragraph should state that the cash basis of accounting is a basis of accounting other than GAAP.
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.
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 the 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).
When an auditor’s report is incorporated by reference in an SEC registration statement, a prospectus that includes a statement about the auditor’s involvement should refer to the auditor as
Expert in auditing and accounting.
In filings under the Securities Act of 1933, the prospectus often states that certain information is included in the registration statement in reliance on the report of a named expert. Accordingly, the prospectus may state that the report of the auditor is relied on because of his or her authority as an expert in auditing and accounting (AU-C 925).
