2.18.19 Flashcards
In auditing for unrecorded noncurrent bonds payable, an auditor most likely will
Compare interest expense with the bond payable amount for reasonableness.
The recorded interest expense should reconcile with the outstanding bonds payable. If interest expense appears excessive relative to the recorded bonds payable, unrecorded noncurrent liabilities may exist.
A CPA firm has decided to rely on the audit work performed by another audit firm. Which of the following procedures should the CPA firm perform when taking responsibility for the other firm’s audit work?
Review the other firm’s audit workpapers and reperform a subset of audit testing to validate the firm’s conclusions.
When the group engagement partner assumes responsibility for the work of a component auditor, the auditor’s report on the group statements does not refer to the component auditor. However, the group engagement partner still must be satisfied that those performing the engagement, including component auditors, collectively possess the necessary competence. Moreover, the assumption of responsibility requires involvement in the work of the component auditor. Involvement may include (1) performing risk assessment procedures, (2) performing further procedures, and (3) reviewing the component auditor’s documentation (AU 600).
A separate paragraph of an auditor’s report of a nonissuer describes an uncertainty as follows:
As discussed in Note X to the financial statements, the Company is a defendant in a lawsuit alleging infringement of certain patent rights and claiming damages. Discovery proceedings are in progress.
What type of opinion should the auditor express under these circumstances?
Unmodified opinion.
Audit standards do not require the addition of an uncertainties paragraph. However, standards provide the auditor with the option of emphasizing a matter regarding the financial statements by adding an emphasis-of-matter paragraph (an emphasis paragraph for an issuer). This paragraph does not affect the opinion expressed on the financial statements.
Which of the following circumstances would not be considered a departure from the auditor’s unmodified report?
The auditor is asked to report only on the balance sheet, and the auditor can comply with relevant standards.
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.
Which of the following procedures will an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
Inquiring of the entity’s legal counsel concerning litigation, claims, and assessments arising after year end.
Subsequent events procedures include (1) reading the latest subsequent interim statements, if any; (2) inquiring of management and those charged with governance about the occurrence of subsequent events and various financial and accounting matters; (3) reading the minutes of meetings of owners, management, and those charged with governance; (4) obtaining a letter of representations from management; (5) inquiring of client’s legal counsel; and (6) obtaining an understanding of management’s procedures for identifying subsequent events.
Thomas, CPA, has audited the consolidated financial statements of Kass Corporation. Jones, CPA, has audited the financial statements of its sole subsidiary, which is significant in relation to the total audited by Thomas. It would be appropriate for Thomas to serve as the group auditor, but it is impracticable for Thomas to review the work of Jones. Assuming an unmodified opinion is expressed by Jones, Thomas should
Express an unmodified opinion on the consolidated financial statements and refer to the work of Jones.
The group engagement team should obtain an understanding of the component auditor, a process that includes determining the extent, if any, to which the team will be able to be involved in the component auditor’s work. The group engagement partner then may decide to refer to the component auditor if (1) the component auditor meets relevant independence requirements for the group audit, (2) the group engagement team has no serious concerns about his or her professional competence or other ethical issues, (3) the component’s statements are prepared using the same reporting framework as that of the group statements (or responsibility is taken for adjustments to the group framework), (4) the component auditor’s report is not use-restricted, and (5) the component auditor has performed an audit in accordance with PCAOB standards (if required by law or regulation) or GAAS. If these requirements are met, the group engagement partner may decide (1) not to assume responsibility for the audit of the component auditor and (2) to refer to that audit. Moreover, the reference to the component auditor does not prohibit an unmodified opinion.
An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the
Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable population deviation rate.
If the sample deviation rate plus the allowance for sampling risk exceeds the tolerable population deviation rate, the sample results do not support the planned risk of overreliance. Thus, the risk of overreliance should be assessed at a higher level. The result is a lower acceptable level of detection risk for a given audit risk and an increase in the assurance to be provided by substantive testing.
On January 2, Year 2, the Retail Auto Parts Co. received a notice from its primary suppliers that effective immediately all wholesale prices would be increased 10%. On the basis of the notice, Retail Auto Parts Co. revalued its December 31, Year 1, inventory to reflect the higher costs. The inventory constituted a material proportion of total assets. However, the effect of the revaluation was material to current assets but not to total assets or net income. In reporting on the company’s financial statements for the year ended December 31, Year 1, in which inventory is valued at the adjusted amounts, the auditor would most likely
Express a qualified opinion.
The auditor should express a qualified opinion when the financial statements are materially misstated, but the effects are not pervasive. Inventory is misstated because it should be recorded at lower of cost or market. Holding gains should not be recognized until realized, i.e., when inventory is sold. Furthermore, the effect on current assets is material. However, it (1) is confined to specific elements, accounts, or items and (2) is not a substantial proportion of the financial statements.
Which of the following procedures would be appropriate to test the existence assertion during an audit of accounts receivable?
Send confirmations to customers.
The existence assertion about account balances at period end is that assets (e.g., accounts receivable), liabilities, and equity interests exist. Thus, external confirmation of accounts receivable by sending requests to customers tests for existence. They must be confirmed unless (1) they are immaterial, (2) confirmation would be ineffective, or (3) the assessed risk of material misstatement is low and other procedures address the risk.
In which of the following circumstances would an auditor of a nonissuer most likely add an emphasis-of-matter paragraph to the auditor’s report while expressing an unmodified opinion?
There is substantial doubt about the entity’s ability to continue as a going concern.
An auditor may have a substantial doubt about the entity’s ability to continue as a going concern after (1) identifying conditions and events that create such doubt and (2) evaluating management’s plans to mitigate their effects. In this circumstance, (s)he should (1) consider the adequacy of disclosure and (2) include an emphasis-of-matter paragraph (after the opinion paragraph) in the report. The auditor must use language in the emphasis-of-matter paragraph that includes the words “substantial doubt” and “going concern.” By itself, however, the substantial doubt is not a basis for modifying the opinion.
An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1,000,000. The auditor selected a sample of every twentieth item from the population that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, the auditor most likely would conclude that
There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement.
By taking every twentieth item, the auditor chose a sample containing 5% (1 ÷ 20) of the items in the population. If the sample contains $3,700 of overstatements and $200 of understatements, the projected overstatements and understatements are $74,000 and $4,000, respectively, a projected misstatement of $78,000. Furthermore, sampling risk should be considered. The allowance for sampling risk calculated for a specified level of confidence is an interval around the sample result that is expected to contain the true amount of misstatement. The upper limit of this interval equals $78,000 plus the calculated allowance. Accordingly, given that projected misstatement exceeds tolerable misstatement, the auditor most likely will conclude that the risk that actual misstatement exceeds tolerable misstatement is unacceptably high.
Which of the following parts of the auditor’s report on the financial statements of a nonissuer are changed when an adverse opinion is expressed?
Introductory paragraph:
Auditor’s responsibility section:
Opinion paragraph:
no
yes
yes
The opinion should state that, because of the significance of the matter(s) described in the basis for adverse opinion paragraph, the financial statements are not presented fairly in accordance with the framework. The following are other effects on the auditor’s report when an adverse opinion is expressed: (1) The introductory paragraph is unchanged; (2) the management’s responsibility paragraph is unchanged; and (3) the auditor’s responsibility section is changed to state, “We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our adverse audit opinion.”
To achieve effective internal control over fixed-asset additions, a company should require
Authorization and approval of major fixed asset additions.
Effective control requires proper authorization of transactions and activities. Authorization and approval of major fixed-asset additions by an appropriate level of management is essential to prevent purchase of property, plant, or equipment not needed by the company, thereby safeguarding assets.
Although planning continues throughout the audit, it initially involves
Developing an over audit strategy.
The audit plan is based on the overall audit strategy. It addresses, among other things, the reporting objectives, the timing of the audit, areas of high risk, industry specific issues, and the audit resources required.
Stratified mean-per-unit (MPU) sampling is a statistical technique that may be more efficient than unstratified MPU because it usually
Produces an estimate having a desired level of precision with a smaller sample size.
The primary objective of stratification is to reduce the effect of high variability by dividing the population into subpopulations. Reducing the variance within each subpopulation allows the auditor to sample a smaller number of items while holding precision and confidence level constant.
