2.20.19 Flashcards

1
Q

An auditor of the financial statements of a nonissuer is considering whether to include an emphasis-of-matter paragraph in the report. In the exercise of professional judgment, the auditor is most likely to include the paragraph if

A

An uncertainty relates to the outcome of unusually important legal action.

Examples of circumstances when the auditor may consider an emphasis-of-matter paragraph to be necessary include (1) an uncertainty relating to the outcome of unusually important litigation or regulatory action, (2) a major catastrophe that has had (or continues to have) a significant effect on the entity’s financial position, (3) significant transactions with related parties, and (4) unusually important subsequent events.

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2
Q

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

A

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.

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3
Q

If the objective of a test of details is to detect overstatements of sales, the auditor should compare transactions in the

A

Accounting records with the source documents.

Overstatements of sales likely result from entries with no supporting documentation. The proper direction of testing is to sample entries in the sales account and vouch them to the shipping documents. The source documents represent the valid sales.

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4
Q

An auditor’s communication with the board of directors most likely should

A

Indicate that it is for the sole use of the board.

Communication may be either oral or in writing and should be documented. The auditor communicates significant findings from the audit in writing when (s)he judges that oral communication is inadequate. A written communication should indicate that it is for the sole use of those charged with governance.

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5
Q

To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into

A

COGS

Inventory turnover equals cost of goods sold divided by average inventory. It provides a measure of how many times inventory requires replacement.

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6
Q

Eagle Company’s financial statements contain a departure from generally accepted accounting principles because, due to unusual circumstances, the statements would otherwise be misleading. The auditor should express an opinion that is

A

Unmodified and describe the departure in an other-matter paragraph.

A material departure from GAAP prohibits expression of an opinion that financial statements are in conformity with GAAP. However, an exception is permitted when the auditor can demonstrate that because of unusual circumstances the statements would otherwise have been misleading. Given these circumstances, and if no other basis for modifying the opinion exists, the auditor may express an unmodified opinion, provided that (s)he describes in an other-matter paragraph of the report the departure, its effects, and the reasons compliance with GAAP would have been misleading.

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7
Q

Zag Co. presents financial position and results of operations but not the related statement of cash flows. Zag would like to engage Brown, CPA, to audit its financial statements without the statement of cash flows, although Brown’s access to all of the information underlying the basic financial statements will not be limited. Under these circumstances, Brown most likely would

A

Explain to Zag that the omission requires a qualification of the auditor’s opinion.

An entity that reports financial position and results of operations should provide a statement of cash flows. Thus, the omission of the cash flow statement is normally a basis for modifying the opinion. If the statements fail to disclose required information, the auditor should provide the information in the report, if practicable. However, the auditor is not required to prepare a basic financial statement. Accordingly, (s)he should qualify the opinion and explain the reason for doing so in the report.

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8
Q

When the client fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the related notes, it is the responsibility of the auditor to present the information, if practicable, in the auditor’s report and express

A

A qualified or an adverse opinion.

A material misstatement requires the auditor to express a qualified or an adverse opinion. A material misstatement may result from inappropriate or inadequate disclosure or from omission of required disclosures. If information required to be presented or disclosed is omitted, the auditor describes the nature of the information in the report. (S)he also includes the information, if practicable, and discusses the omission with those charged with governance. But an auditor is not expected to prepare a basic statement.

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9
Q

In which of the following circumstances would an auditor not express an unmodified opinion?

A

The auditor is unable to obtain audited financial statements of a long-term investee.

A qualified opinion may be based on a lack of sufficient appropriate evidence. Some common scope limitations relate to the inability to observe inventory, confirm accounts receivable, or obtain audited statements of a long-term investee.

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10
Q

A written representation from a client’s management that, among other matters, acknowledges responsibility for the fair presentation of financial statements, should normally be signed by the

A

CFO & CEO

The management representation letter should be signed by members of management who are responsible for and knowledgeable about the areas covered in the representations. AU-C 580 indicates that these members are normally the chief executive officer and the chief financial officer.

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11
Q

A primary advantage of using generalized audit software packages to audit the financial statements of a client that uses a computer system is that the auditor may

A

Access information stored on computer files while having a limited understanding of the client’s hardware and software features.

These packages permit the auditor to audit through the computer; e.g., to extract, compare, analyze, and summarize data; and to generate output for use in the audit. Although generalized audit software requires the auditor to provide certain specifications about the client’s records, computer equipment, and file formats, a detailed knowledge of the client’s system may be unnecessary because the audit package is designed to be used in many environments.

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12
Q

Green, CPA, is aware that Green’s name is to be included in the interim report of National Company, a publicly held entity. National’s quarterly financial statements are contained in the interim report. Green has not audited or reviewed these interim financial statements. Green should request that
I. Green’s name not be included in the communication.
II. The financial statements be marked as unaudited, with a notation that no opinion is expressed on them

A

Either I or II.

The accountant may become aware that his or her name is to be included in a client-prepared written communication of an issuer containing financial statements that have not been audited or reviewed. Under PCAOB standards, which apply to engagements involving issuers, (s)he should request either that (1) his or her name not be included in the communication or (2) the financial statements be marked as unaudited, with a notation included to the effect that (s)he does not express an opinion on them.

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13
Q

Which of the following controls should prevent an invoice for the purchase of merchandise from being paid twice?

A

The check signer reviews and cancels the voucher packets.

A control should be implemented to prevent an invoice from being paid twice. This can be accomplished by canceling the voucher and supporting documents.

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14
Q

In a monetary-unit sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audited amount of $4,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample is

A

$2,000.

MUS is a commonly used method of statistical sampling for tests of details of balances because it provides a simple statistical result expressed in dollars. Given that only one misstatement was detected, the projected misstatement for this sample is the product of the tainting percentage and the sampling interval. The tainting percentage is calculated as the difference between the recorded amount and the audited amount, divided by the recorded amount. In this sample, the tainting percentage is 20% [($5,000 – $4,000) ÷ $5,000]. Multiplying this number by the sampling interval results in a projected misstatement based on the sample of $2,000 ($10,000 × 20%).

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15
Q

An auditor of a nonissuer was engaged by the client to use PCAOB auditing standards to conduct the audit. The auditor should refer in the report to

PCAOB Standards:
GAAS:

A

Yes
Yes

The audit of financial statements of a nonissuer in accordance with the standards of the PCAOB is not within the jurisdiction of the PCAOB. The auditor must conduct the audit in accordance with GAAS. In such circumstances, the auditor should use the form of report required by the standards of the PCAOB, amended to state that the audit also was in accordance with GAAS.

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16
Q

An auditor most likely would limit substantive audit tests of sales transactions when the risks of material misstatement are assessed as low for the existence and occurrence assertions concerning sales transactions and the auditor has already gathered evidence supporting

A

Cash receipts and AR.

Cash receipts and accounts receivable have a direct relationship with sales. A cash sale results in a debit to cash and a credit to sales. A sale on account results in a debit to accounts receivable and a credit to sales. Thus, evidence related to cash receipts and accounts receivable provides assurances about sales.

17
Q

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

A

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.

18
Q

In connection with a proposal to obtain a new client, an accountant in public practice is asked to prepare a written report on the requirements of an applicable financial reporting framework to a specific transaction. The accountant’s report should include a statement that

A

Any difference in the facts, circumstances, or assumptions presented may change the report.

The accountant’s report is addressed to the requesting party. The report should contain (1) a description of the engagement and a statement that it was performed in accordance with AU-C 915; (2) a description of the transaction and identification of the entity; (3) a description of the financial reporting framework applied (including its country of origin), the type of report that may be issued, and the reasons for the conclusion; (4) a statement that the responsibility for proper accounting is with the preparers of the financial statements; (5) statements of the facts, circumstances, and assumptions and their sources; (6) a statement that any difference in the facts, etc., may change the report; (7) an alert restricting the use of the report to specified parties; and (8), if the accountant is not independent, a statement of the lack of independence.

19
Q

Does an auditor make the following representations explicitly or implicitly in the opinion paragraph when expressing an unmodified opinion?

Conformity with the applicable financial reporting framework:
Adequacy of disclosure:

A

Explicitly
Implicitly

The opinion paragraph of the auditor’s report explicitly states whether the financial statements are in accordance with the applicable financial reporting framework, e.g., U.S. GAAP or IFRS. The adequacy of disclosure is implicit in the auditor’s report. Adequacy of disclosure is implied if the report does not mention disclosure.

20
Q

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

A

Investigate changes in noncurrent debt occurring after year end.

Procedures that should be performed as near as practicable to the report date include investigating any increases in capital or issuance of debt, such as the issue of new shares or bonds.