2.16.19 Flashcards
Which of the following presumptions is least likely to relate to the reliability of audit evidence?
An auditor’s opinion is formed within a reasonable time to achieve a balance between benefit and cost.
Appropriate audit evidence is relevant and reliable. Evidence is usually more reliable when it (1) is obtained from independent sources; (2) is generated internally under effective internal control; (3) is obtained directly by the auditor; (4) is in documentary form, whether paper, electronic, or other medium; and (5) consists of original documents. However, the need for (1) reporting to be timely and (2) maintaining a balance between benefit and cost are inherent limitations of the audit. Thus, for the opinion to be relevant, it must be formed within a reasonable period of time.
In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion and an adverse opinion?
The financial statements fail to disclose information that is required by the applicable reporting framework.
Misstatements, including inadequate disclosures, may result in either a qualified or an adverse opinion. The auditor should exercise judgment about materiality by considering such factors as (1) benchmarks for dollar amounts, (2) significance to the statements and the entity, and (3) pervasiveness. If the misstatement is not pervasive, the auditor should express a qualified opinion.
An auditor who is unable to form an opinion on a new client’s opening inventory balances may express an unmodified opinion on the current year’s
balance sheet only.
An inability to obtain sufficient appropriate audit evidence related to beginning inventory may prevent the auditor from expressing an unmodified opinion on some of the financial statements. Opening inventories enter into the determination of net income and cash flows. Thus, the auditor may disclaim an opinion on results of operations and cash flows. However, the balance sheet reports only the ending inventory balances. Thus, the auditor may express an unmodified opinion on the balance sheet.
To obtain evidence that online access controls are properly functioning, an auditor most likely will
Enter invalid identification numbers or passwords to ascertain whether the system rejects them.
Employees with access authority to process transactions that change records should not also have asset custody or program modification responsibilities. The auditor should determine that password authority is consistent with other assigned responsibilities. The auditor can directly test whether password controls are working by attempting entry into the system by using invalid identifications and passwords.
An auditor’s report on audited financial statements is inappropriate if it refers to
The CPA’s assessment of sampling risk factors.
The auditor’s report on audited financial statements describes the general nature of an audit. But it does not directly refer to sampling or describe specific procedures.
Cash receipts should be deposited on the day of receipt or the following business day. What is the most appropriate audit procedure to determine that cash is promptly deposited?
Compare the daily cash receipts totals with the bank deposits.
A standard control over the cash receipts function is to require that daily cash receipts be deposited promptly and intact. Thus, the total of cash receipts for a day should equal the bank deposit because no cash disbursements are made from the daily receipts. To determine whether cash receipts are promptly deposited, the auditor should compare the daily cash receipts totals with bank deposits.
The financial statements of a nonissuer include a separate statement of changes in equity. This statement should
Be identified in the introductory paragraph of the report but need not be reported on separately in the opinion paragraph.
The balance sheet, statement of income, statement of changes in equity, and statement of cash flows are the financial statements upon which the auditor customarily reports. The introductory paragraph of the audit report for an audit of a nonissuer identifies the titles of the entity’s financial statements. However, the statement of changes in equity and a separate statement of comprehensive income are not separately reported on the opinion paragraph. The reason is that changes in equity and comprehensive income are included in financial position, results of operations, and cash flows.
If an accountant concludes that unaudited financial statements of an issuer on which the accountant is disclaiming an opinion also lack adequate disclosure, the accountant should suggest appropriate revision. If the client does not accept the accountant’s suggestion, the accountant should
Describe the appropriate revision to the financial statements in the accountant’s disclaimer of opinion.
PCAOB auditing standards apply to engagements involving issuers. Under these standards, inadequate disclosure is a departure from U.S. GAAP. When an accountant who is associated with the unaudited statements of an issuer suggests revision because of such a departure and the client declines to provide the necessary disclosures, the disclaimer should be modified to describe the departure. The description should refer specifically to the nature of the departure and, if practicable, state the effects on the financial statements or include the necessary information for adequate disclosure (PCAOB AS 3320).
Trotman, Inc., a nonissuer manufacturing company, has engaged a CPA to audit its financial statements for the year ended June 30, Year 2. The CPA observed the physical inventory count at June 30, Year 2, but no physical inventory had been taken at June 30, Year 1. The CPA has not been able to become satisfied as to the value of the inventory at June 30, Year 1. Assuming that the financial statements are fairly presented in all other material respects, the CPA should
Disclaim an opinion on the results of operations and cash flows but express an unmodified opinion on the balance sheet.
An inability to obtain sufficient appropriate evidence may result from, among other things, circumstances related to the nature or timing of the work. An example is not being able to observe the counting of physical inventories at the beginning of the year. These inventories enter into the determination of net income and cash flows. If the possible effects of this scope limitation are material and pervasive to the results of operations and cash flows, the auditor cannot express an opinion on them. However, the auditor can express an unmodified opinion on year-end financial position.
An audit plan for noncurrent debt should include steps that require
Examining bond trust indentures.
The bond trust indenture contains information about contractual arrangements made with bondholders, such as (1) the face amount of the bonds, (2) interest rates, (3) payment dates, (4) descriptions of collateral, (5) provisions for conversion or retirement, (6) trustee duties, and (7) sinking fund requirements. The auditor should examine any bond trust indenture to determine that the client is meeting the conditions of the contract and is in compliance with the law.
An auditor expresses a qualified opinion because of a material misstatement related to specific amounts in the financial statements. Which of the following phrases should be included in the report?
“When read in conjunction with Note X”:
“With the forgoing explanation”:
no
no
The auditor should use the phrase “except for” to qualify an opinion, and include a reference to a paragraph that describes the deficiency. Given a qualification because of a material misstatement related to specific amounts in the financial statements, the reference should describe the matter resulting in the qualification. It also should include (1) a description and quantification of the financial effects, if practicable; (2) an explanation of how narrative disclosures are misstated; or (3) omitted information, if practicable, and a description of its nature. However, if financial-effects disclosures are made in a note to the statements, the report may refer to it. Furthermore, the notes are part of the financial statements, and a phrase such as “when read in conjunction with Note X” in the report is likely to be misunderstood. Also, wording such as “with the foregoing explanation” is neither clear nor forceful enough.
Which of the following statements is true about an auditor’s communication with those charged with governance?
This communication should include disagreements with management about audit adjustments, whether or not satisfactorily resolved.
The matters to be discussed with those charged with governance include (1) the auditors’ responsibility under GAAS; (2) significant accounting policies; (3) sensitive accounting estimates; (4) uncorrected and material corrected misstatements; (5) the quality of the accounting principles used by management; (6) auditor disagreements with management, whether or not satisfactorily resolved; (7) management’s consultations with other accountants; (8) issues discussed with management prior to the auditors’ retention; and (9) any serious difficulties the auditors may have had with management during the audit.
An issuer client who disagrees with the independent auditor on a significant matter affecting its financial statements has several courses of action. Which of the following courses of action would be inappropriate?
Appeal to the FASB to review the significant matter.
The FASB does not provide services for the settlement of disputes between clients and CPAs.
The primary purpose of obtaining an understanding of the entity and its environment, including its internal control, is to provide an auditor with
A frame of reference within which to plan the audit.
Obtaining an understanding of the entity continues throughout the audit. The process of gathering, updating, and analyzing evidence provides a frame of reference within which to plan the audit and make judgments about many matters. For example, the understanding is a basis for (1) assessing RMMs at the financial statement level, (2) determining materiality, (3) evaluating the selection and application of accounting policies and the adequacy of disclosures, (4) identifying areas for special audit attention, (5) developing expectations for use in analytical procedures, (6) responding to assessed RMMs, and (7) evaluating audit evidence.
An auditor most likely would analyze inventory turnover rates to obtain evidence concerning relevant assertions about
Valuation and allocation.
Assertions about valuation and allocation address whether (1) assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and (2) resulting adjustments are properly recorded. An examination of inventory turnover pertains to identifying slow-moving, excess, defective, and obsolete items included in inventories. This audit procedure tests the valuation and allocation assertion.
