2.23.19 Flashcards

1
Q

Under which of the following circumstances would an entity be expected to accrue a loss contingency for the period under audit?

A

The entity estimated the amount of a claim with a probable adverse outcome before issuance of the audit report.

A loss contingency is an existing condition, situation, or set of circumstances involving uncertainty as to possible loss that ultimately will be resolved when one or more future events occur or do not occur. A material contingent loss must be accrued (debit loss, credit liability or asset valuation allowance) when two conditions are met. Based on information available prior to the issuance (or availability for issuance) of the financial statements (and therefore the auditor’s report issued with the statements), accrual is required if (1) it is probable that, at a balance sheet date, an asset has been impaired or a liability has been incurred and (2) the amount of the loss can be reasonably estimated.

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2
Q

Harvey, CPA, is preparing an audit plan to determine the occurrence of subsequent events that may require adjustment or disclosure essential to a fair presentation of the financial statements in accordance with U.S. GAAP. Which one of the following procedures is least appropriate for this purpose?

A

Confirm as of the date of the auditor’s report accounts receivable that have increased significantly from the year-end date.

The confirmation of accounts receivable that have increased significantly from year end is not among the typical subsequent events procedures that should be performed by the auditor listed in AU-C 560. 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 the entity’s legal counsel; and (6) obtaining an understanding of management’s procedures for identifying subsequent events.

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3
Q

Which item is not included in the accountant’s documentation of a preparation engagement?

A

A statement about whether the statements were fairly presented.

Documentation in connection with each preparation engagement should provide a clear understanding of the work performed and, at a minimum, include (1) the engagement letter and (2) a copy of the financial statements that the accountant prepared. Also, significant consultations or significant professional judgments made during the engagement may be documented. However, a preparation engagement does not involve gathering evidence about the fairness of the financial statements.

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4
Q

An auditor who is engaged to report on whether supplementary information (SI) is fairly stated should determine that the

A

Auditor’s report on the financial statements did not disclaim an opinion.

The auditor who reports on SI should determine that (1) the underlying financial statements were audited and (2) the auditor’s report did not express an adverse opinion or disclaim an opinion.

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5
Q

Prior to commencing the compilation of financial statements of a nonissuer, an accountant is required to

A

Obtain an understanding of any specialized financial reporting frameworks and practices used in the entity’s industry.

The accountant should obtain an understanding of the applicable financial reporting framework and the significant accounting policies to be used in the preparation of the statements. A condition for engagement acceptance or continuation is management’s agreement that it understands its responsibility for fair presentation in accordance with the framework. This agreement extends to a description of a special purpose framework, related accounting policies, and any necessary additional disclosures.

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6
Q

When an accountant compiles a client’s financial statements accompanied by supplemental information, which of the following is a required element of the accountant’s separate report on the supplemental information?

A

A statement that the information has been compiled from information that is the representation of management without audit or review.

When the basic financial statements are accompanied by information presented for supplementary analysis purposes, the accountant should clearly indicate the degree of responsibility, if any, (s)he is taking with respect to such information. The report should state that the other data accompanying the financial statements are presented only for the purposes of additional analysis, and that the information has been compiled from information that is the representation of management, without audit or review, and that the accountant does not express an opinion or provide any assurance on such data.

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7
Q

When compiling a nonissuer’s financial statements, an accountant is least likely to

A

Perform analytical procedures designed to identify relationships that appear to be unusual.

In a compilation engagement, the accountant is not required to make inquiries or perform analytical or other procedures to verify, corroborate, or review information supplied by the entity. However, analytical procedures are necessary in review and audit engagements.

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8
Q

An auditor’s report included the following paragraph relative to substantial doubt about a client’s ability to continue as a going concern:

“The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. If the Company is not able to renew the contract described in Note X, there may be substantial doubt about the company’s ability to continue as a going concern.”

Which of the following statements is true?

A

The report should not contain conditional language.

The report should not contain conditional language. “If the Company is not able to renew the contract . . .” is not permissible language.

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9
Q

Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both

A

Record and conceal fraudulent transactions in the normal course of assigned tasks.

Proper segregation of duties and responsibilities reduces the opportunity for an individual to commit and conceal fraud in the normal course of his or her duties. Hence, different people should be assigned the responsibilities for authorizing transactions, recordkeeping, and asset custody.

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10
Q

An auditor concludes prior to the release date of the report that a material inconsistency exists in the other information in an annual report to shareholders. The report contains audited financial statements. If the auditor concludes that the financial statements do not require revision, but management refuses to revise or eliminate the material inconsistency, the auditor may

A

Revise the auditor’s report to include a separate other-matter paragraph describing the material inconsistency.

If the other information contains a material inconsistency that requires revision, and management refuses to make the revision, the auditor should communicate the matter to those charged with governance. The auditor also should (1) revise the report to include an other-matter paragraph, (2) withhold use of the report, or (3) withdraw from the engagement.

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11
Q

An auditor’s communication with those charged with governance is required to include the

A

Discussion of disagreements with management about matters that significantly affect the entity’s financial statements.

Disagreements with management may concern application of accounting principles, judgments about estimates, the scope of the audit, disclosures in the statements, and the audit report. The auditor should discuss these disagreements with those charged with governance, whether or not they were satisfactorily resolved, if their subject matter could be significant to the statements or the audit report (AU-C 260).

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12
Q

As lower acceptable levels of the risk of incorrect acceptance and performance materiality are established, the auditor should plan more work on individual accounts to

A

Find smaller misstatements.

A lower performance materiality means that the tolerable misstatement in an account is smaller. As a result, the auditor must plan for a larger sample size and more audit work on the accounts to discover smaller misstatements. For substantive tests of details, the sample size depends on the auditor’s desired assurance (1.0 – the risk of incorrect acceptance) that tolerable misstatement is not less than actual misstatement in the population. The desired assurance may be based on, among other things, the following: (1) the assessed risk of material misstatement, (2) the assurance provided by other substantive procedures related to the same assertion, (3) tolerable misstatement, and (4) expected misstatement for the population. Accordingly, as the acceptable risk of incorrect acceptance decreases, the desired assurance increases, and the auditor decreases the tolerable misstatement.

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13
Q

In the auditor’s report, the group auditor decides not to refer to another CPA who audited a client’s subsidiary. The group auditor could justify this decision if, among other requirements, the group auditor

A

Is satisfied as to the independence and professional reputation of the other CPA.

Whether or not the group auditor decides to refer to the audit of a component auditor, (s)he should obtain an understanding of the professional competence and independence of the other auditor.

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14
Q

Which of the following circumstances would generally require an accountant to decline to perform a compilation of financial statements under Statements on Standards for Accounting and Review Services?

A

The accountant was not able to come to an understanding with representatives of the organization for services to be performed.

The accountant should establish an understanding with management about the services to be performed for compilation engagements and should document the understanding through a written communication with management (e.g., an engagement letter). The understanding reduces the risk that the accountant or management might misinterpret the other party’s expectations.

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15
Q

A potential client has requested that an accountant prepare financial statements. The accountant has no understanding of the client’s industry. The accountant should

A

Accept the engagement with the expectation of obtaining an understanding in the industry.

The accountant is required to obtain an understanding of the financial reporting framework and the entity’s significant accounting policies. An accountant is not prevented from accepting an engagement to prepare financial statements for an entity in an industry in which the accountant has no previous experience. The accountant may obtain such an understanding, for example, by consulting AICPA guides, industry publications, etc.

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16
Q

When an auditor issues to an underwriter a comfort letter containing comments on data that have not been audited, the underwriter most likely will receive

A

negative assurance on capsule information.

Capsule information is (1) unaudited summarized interim information for periods subsequent to the periods covered by the audited financial statements or (2) unaudited interim financial information in the securities offering. The auditor may provide negative assurance on whether the capsule information is in accordance with the applicable financial reporting framework. The auditor must review the underlying statements in accordance with GAAS, and the capsule information must meet the framework’s disclosure requirements.

17
Q

Restrictions imposed by management prohibit the observation of physical inventories, which account for 35% of all assets. The possible effects of the omission are material and pervasive. Alternative audit procedures cannot be applied, although the auditor was able to examine satisfactory evidence for all other items in the financial statements. The auditor should express

A

A disclaimer of opinion.

The auditor may become aware of a management-imposed scope limitation after accepting the engagement that is likely to result in a qualified opinion or a disclaimer of opinion. The auditor should request removal of the limitation. If it is not removed, the auditor should communicate with those charged with governance and determine whether alternative procedures can be performed. If the auditor cannot obtain sufficient appropriate evidence because of the limitation, (s)he should determine whether the possible effects of undetected misstatements could be material and pervasive. If they are, the auditor should disclaim an opinion or withdraw from the engagement (AU-C 705).

18
Q

An auditor of the financial statements of a nonissuer includes an emphasis-of-matter paragraph in an auditor’s report. It should

A

Use the heading “Emphasis of Matter” or other appropriate heading.

If the heading “Emphasis of Matter” is not used, another appropriate heading may be used. It is considered to be appropriate if it adequately describes the nature of the matter disclosed or communicated.

19
Q

In the first audit of a new client, an auditor was able to obtain sufficient appropriate evidence that the financial statements of the current period are consistent with those of the prior period. Under these circumstances, the auditor should

A

Not refer to the consistency in the auditor’s report.

In an initial engagement, the statements for the prior period either (1) were not audited or (2) were audited by a predecessor auditor. An auditor’s objective in an initial engagement is to obtain sufficient appropriate evidence about whether (1) opening balances materially misstate the current statements, (2) accounting policies reflected in opening balances are consistently applied in the current statements, and (3) changes in accounting policies are appropriately accounted for and disclosed (AU-C 510). Achieving this objective permits the auditor to evaluate whether the comparability of the financial statements between or among periods has been materially affected by (1) a change in accounting principle or (2) adjustments to correct a material misstatement in previously issued financial statements. If the auditor’s report does not state otherwise, it implies that comparability between or among periods has not been materially affected by such changes or corrections (AU-C 708).

20
Q

In which of the following situations will a group auditor be most likely to refer to a component auditor who audited a subsidiary of the entity?

A

The component auditor performed an audit in accordance with PCAOB standards.

The group engagement partner may not refer to the audit of the component auditor unless the component auditor performed an audit in accordance with (1) GAAS or (2), if required by law or regulation, PCAOB auditing standards.