2.23.19 Flashcards
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.
In a financial statement audit, an auditor disclaims an opinion because of an inability to obtain sufficient appropriate audit evidence. The most likely reason for this result is
Management’s prevention of the confirmation of receivables.
The auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit evidence after concluding that the possible effects on the financial statements of undetected misstatements, if any, could be material and pervasive. This scope limitation may result from (1) circumstances not controlled by the entity, such as destruction or government seizure of accounting records; (2) circumstances related to the nature or timing of the work, such as not being able to observe inventory or determining that controls are ineffective; or (3) limitations imposed by management, such as preventing the auditor from (a) observing inventory or (b) confirming receivables.
In testing plant and equipment balances, an auditor physically examines new additions listed on an analysis of plant and equipment. This procedure most likely obtains evidence concerning management’s assertion of
Existence.
When an auditor inspects assets identified as new additions, (s)he determines whether the assets recorded in the balance actually exist.
Which of the following would be used on a review engagement?
Comparison of current-year to prior-year account balances.
Review procedures consist of (1) making inquiries of management and other personnel, (2) applying analytical procedures, and (3) obtaining management representations. Comparison of current-year to prior-year account balances is an analytical procedure.
When engaged to compile the financial statements of a nonissuer, an accountant should possess a level of knowledge of the entity’s accounting principles and practices. This most likely will include obtaining a general understanding of the
Significant accounting policies adopted by management.
To perform a compilation, the accountant should obtain an understanding of (1) the applicable financial reporting framework and (2) the significant accounting policies adopted by management.
Baker, CPA, was engaged to review the financial statements of Hall Company, a nonissuer. Evidence came to Baker’s attention that indicated substantial doubt as to Hall’s ability to continue as a going concern. The principal conditions and events that caused the substantial doubt have been fully disclosed in the notes to Hall’s financial statements. Which of the following statements best describes Baker’s reporting responsibility concerning this matter?
Baker is not required to modify the accountant’s review report.
AR-C 90 states that, normally, neither an uncertainty about an entity’s ability to continue as a going concern nor an inconsistency in the application of accounting principles should cause the accountant to modify the report, provided the financial statements appropriately disclose such matters. Nothing in this statement, however, is intended to preclude an accountant from including an emphasis-of-matter paragraph in the report describing a matter regarding the financial statements. Nevertheless, if management’s conclusions about a going-concern issue are unreasonable, or if disclosure is inadequate, the accountant must follow the guidance for departures from the applicable reporting framework.
A client using U.S. GAAP has capitalizable leases but refuses to capitalize them in the financial statements. Which of the following reporting options does an auditor have if the effects on the financial statements are material and pervasive?
Adverse opinion.
An adverse opinion is expressed when the financial statements are not presented fairly in accordance with the applicable reporting framework. An adverse is appropriate when a material misstatement exists that has pervasive effects on the financial statements.
Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?
The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements.
The opinion of a suitably qualified, independent, outside party lends credibility to the financial statements and provides some protection to third parties who may rely upon them when making investment decisions. The opinion contained in the audit report, which accompanies audited financial statements, is the result of the auditor’s performance of the attest function, that is, the gathering of evidence during the audit and the issuance of an opinion on the fairness of the presentation of the statements.
To obtain assurance that items reflected in a client’s perpetual inventory records actually exist, an auditor would most likely trace
Items in the inventory perpetual records to inventory tags and the auditor’s test counts.
To test whether records reflect actual inventory, the auditor most likely will select a sample of items from the records and trace them to evidence supporting existence. The inventory tags created during the client’s count and confirmed by the auditor’s test counts provide evidence of existence.
The refusal of a client’s legal counsel to provide a representation on the legality of a particular act committed by the client is ordinarily
A scope limitation.
Legal counsel’s refusal either orally or in writing to provide the requested information may be a scope limitation sufficient to preclude an unmodified opinion. The reason is that the letter of inquiry to the client’s legal counsel is the primary means of corroborating management’s representations about litigation, claims, and assessments. However, a statement in the letter such as, “It would be inappropriate for this firm to respond to a general inquiry relating to the existence of unasserted possible claims and assessments,” is not considered a scope limitation. The quoted language is based on the preamble of the American Bar Association’s statement of policy regarding lawyers’ responses to auditors’ requests for information.
The use of the ratio estimation sampling technique is most effective when
The calculated audit amounts are approximately proportional to the client’s carrying amounts.
Ratio estimation calculates the population misstatement by multiplying the carrying amount of the population by the ratio of the total audit amount of the sample items to their total carrying amount. The precision is determined by considering the variances of the ratios of carrying amount to audited amount. Thus, the more homogeneous the ratios, the smaller the precision.
In assessing the objectivity of internal auditors, an independent auditor should
Determine the organizational level to which the internal auditors report.
If the external auditor plans to use the work of the internal auditors to obtain audit evidence or to provide direct assistance, their competence and objectivity should be evaluated. Objectivity is promoted when the internal auditors (1) report to those charged with governance rather than management, (2) are free of any conflicting responsibilities, (3) work without constraints, and (4) are members of professional organizations that obligate them to be objective. The external auditor should assess each of these factors in evaluating objectivity.
Which of the following situations would preclude an accountant from issuing a review report on a company’s financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARSs)?
The owner of a company is the accountant’s father.
The accountant should be independent to perform review services. The relationship of the accountant with the owner of the firm (the accountant’s father) impairs independence because a close relative has a key position with the client.
Which of the following portions of a continuing auditor’s report on comparative financial statements of a nonissuer is incorrect?
“Applied on a basis consistent with that of the preceding year.”
The auditor’s report is silent as to consistency unless the comparability of the financial statements has been materially affected by a change in accounting principle or by correction of a material misstatement in previous statements. The change should be referred to in an emphasis-of-matter paragraph following the opinion paragraph. Agreement with the change is implied unless the auditor takes exception to it.
Which of the following examination reports on prospective financial statements is(are) appropriate for general use?
Financial forecast:
Financial position:
Yes
No
A financial forecast is based on conditions the responsible party expects to exist and the course of action it expects to take. A projection is sometimes prepared to present one or more hypothetical courses of action for evaluation, as in response to a question such as “What would happen if . . .?” Only an examination report on a forecast is appropriate for general use. All other engagement services are for limited use.
