6.06 - GROUP FINANCIAL AUDIT, UNCERTAINTY , AND SCOPE LIMITATION Flashcards
6.06 - GROUP FINANCIAL AUDIT, UNCERTAINTY , AND SCOPE LIMITATION
A CPA firm has decided to rely on the audit work performed by another audit rm.
Which of the following procedures should the CPA firm perform when taking responsibility for the other firm’s audit work?
A) Obtain and attach a copy of the other firm’s representation letter and audit report to the opinion that the CPA firm issues.
B) Reference the reliance on the other firm’s work in a footnote disclosure to the financial statements.
C) Review the other firm’s audit workpapers and reperform a subset of audit testing to validate the firm’s
conclusions.
D) Reference the reliance on the other firm’s work in the first paragraph of the opinion in the audit report.
C) Review the other firm’s audit workpapers and reperform a subset of audit testing to validate the firm’s conclusions.
When a group auditor decides to take responsibility for the work of a component auditor, the group auditor should
obtain satisfaction that the component auditor performed the audit of the component entity at a level that is acceptable to the group auditor.
As a result, the group auditor will generally review the component auditor’s working papers and reperform some audit testing to validate the component auditor’s conclusions
6.06 - GROUP FINANCIAL AUDIT, UNCERTAINTY, AND SCOPE LIMITATION
Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity’s ability to continue as a going concern?
A) Inspecting title documents to verify whether any assets are pledged as collateral.
B) Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation.
C) Confirming with third parties the details of arrangements to maintain financial
support.
D) Comparing the entity’s depreciation and asset capitalization policies to other entities in the industry.
C) Confirming with third parties the details of arrangements to maintain financial
support.
An entity’s ability to generate cash flow is the most essential factor to the auditor in assessing the ability to continue as a going concern.
Verifying the arrangements of future financing would be such an example.
Inspecting title documents would
provide the auditor with evidence as to the assertion of rights and obligations, reconciling cash balances would provide evidence of the accuracy of cash, and comparing depreciation and capitalization policies to other industries will provide evidence as to valuation, but they are not ways to assess a company’s ability to generate future cash inflow.
6.06 - GROUP FINANCIAL AUDIT, UNCERTAINTY, AND SCOPE LIMITATION
As a condition of obtaining a loan from First National Bank, Maxim Co. is required to submit an audited balance sheet but not the related statements of income, retained earnings, or cash flows. Maxim would like to engage a CPA to audit only its balance sheet. Under these circumstances, the CPA
A) May notaudit only Maxim’s balance sheet if Maxim is a nonissuer.
B) May audit only Maxim’s balance sheet if the CPA disclaims an opinion on the other financial statements.
C) May audit only Maxim’s balance sheet if access to the information underlying the basic financial statements is notlimited.
D) May notaudit only Maxim’s balance sheet if the amount of the loan is material to the financial statements taken as a whole.
C) May audit only Maxim’s balance sheet if access to the information underlying the basic financial statements is notlimited.
Regardless of whether an auditor is expressing an opinion on a single financial statement, a complete set of financial
statements, or one or more elements of financial statements, a limit on access to information is a scope limitation that would
preclude the auditor’s ability to express an opinion.
The auditor may accept an engagement to audit a balance sheet only of a nonissuer regardless of whether the loan is material to the financial statements.
The auditor’s report would be limited to expressing an opinion on the balance sheet and would not make reference to the other financial statements.
6.06 - GROUP FINANCIAL AUDIT, UNCERTAINTY, AND SCOPE LIMITATION
If a publicly held company issues financial
statements that purport to present its financial position and results of operations but omits the statement of cash flows,
the auditor ordinarily will express a (an)
A) Review report.
B) Disclaimer of opinion.
C) Qualified opinion.
D) Unmodified opinion with a separate explanatory paragraph.
C) Qualified opinion.
Omitting the presentation of one of the financial statements is a material departure from GAAP that will result in a qualified opinion.
A disclaimer of opinion would not be appropriate because the auditor could still give an opinion on the financial statements presented.
An unmodified opinion is inappropriate because the departure from GAAP is material.
A review report cannot be issued when the CPA has performed an audit.
6.06 - GROUP FINANCIAL AUDIT, UNCERTAINTY, AND SCOPE LIMITATION
If a publicly held company issues financial
statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a (an)
A) Review report.
B) Disclaimer of opinion.
C) Qualified opinion.
D) Unmodified opinion with a separate explanatory paragraph.
C) Qualified opinion.
Omitting the presentation of one of the financial statements is a material departure from GAAP that will result in a qualified opinion.
A disclaimer of opinion would not be appropriate because the auditor could still give an opinion on the financial statements presented.
An unmodified opinion is inappropriate because the departure from GAAP is material.
A review report cannot be issued when the CPA has performed an audit.
6.06 - GROUP FINANCIAL AUDIT, UNCERTAINTY, AND SCOPE LIMITATION
Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern?
A) Arrearages in preferred stock dividends are paid.
B) Usual trade credit from suppliers is denied.
C) Restrictions on the disposal of principal assets are present.
D) Significant related party transactions are pervasive.
B) Usual trade credit from suppliers is denied.
A client’s inability to obtain trade credit from suppliers is an indication of financial problems that may raise doubts about the client’s ability to continue as a going concern.
Pervasive related party transactions raise issues about the fairness of the financial statements and appropriate disclosure.
Restrictions on the disposal of principal assets also raise issues about disclosure
Neither, however, indicates a going concern problem.
Payment of preferred dividends in arrears indicates a cash surplus, which would also not cause doubts about the client’s ability to continue as a going concern.
6.06 - GROUP FINANCIAL AUDIT, UNCERTAINTY, AND SCOPE LIMITATION
The auditor’s responsibility paragraph of an auditor’s report contains the following sentences:
“We did not audit the financial statements of EZ Inc., a wholly-owned subsidiary, which statements reflect total assets and revenues constituting 27 percent and 29 percent, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ Inc., is based solely on the report of the other auditors.”
These sentences
A) Require a departure from an unmodified
opinion.
B) Indicate a group audit (division of responsibility).
C) Are an improper form of reporting.
D) Assume responsibility for the other auditor.
B) Indicate a group audit (division of responsibility).
If a group auditor audits a parent company and a component auditor audits a subsidiary, the primary auditor will most likely be able to rely on the work of the other auditor but may not want to take responsibility for the component auditor’s work.
A report would be issued indicating a division of responsibility by modifying the section of the report with the auditor’s
responsibilities.
The remainder of the report would not be modified, unless the opinion is to be modified due to a departure from
the applicable financial reporting framework or the inability to obtain sufficient appropriate audit evidence.
This is a proper form of reporting and does not require an otherwise modified report.
6.07 - ADVERSE, DISCLAIMER, COMPARATIVE FINANCIAL STATEMENTS
An auditor expressed a qualified
opinion on the prior year’s financial
statements because of a lack of adequate
disclosure. These financial statements are properly restated in the current year and presented in comparative form with the current year’s financial statements. The auditor’s updated report on the prior year’s financial statements should
A) Be accompanied by the auditor’s original report on the prior year’s financial
statements.
B) Continue to express a qualified opinion on the prior year’s financial statements.
C) Express an unmodified opinion on the restated financial statements of the prior year.
D) Make no reference to the type of opinion expressed on the prior year’s financial statements.
C) Express an unmodified opinion on the restated financial statements of the prior year.
When an entity restates a prior period’s financial statements to eliminate a misstatement so that the statements can be
presented in comparative form, the auditor will revise the report on the prior period financial statements to an unmodified
opinion and include an other-matter paragraph referring to the earlier report with its date, the original opinion expressed, the
reasons for changing that opinion, and the fact that the current opinion on the prior statements is unmodified.
The auditor would not reissue the prior year’s report or continue to express a qualified opinion, because that opinion has changed.
6.08 - SUMMARY OF NON-STANDARD REPORTS AND OVERVIEW
In which of the following circumstances would an auditor not express an unmodified opinion?
A) Quarterly financial data required by the SEC has been omitted.
B) There has been a material change between periods in accounting principles.
C) The auditor wishes to emphasize an unusually important subsequent event.
D) The auditor is unable to obtain audited financial statements of a consolidated investee.
D) The auditor is unable to obtain audited financial statements of a consolidated investee.
A material change in accounting principles, if justified and properly disclosed, will not result in a qualification of opinion, although the auditor may wish to draw attention to it with an emphasis-of-matter paragraph.
The omission of quarterly financial data required by the SEC would result in an other-matter paragraph but would not result in a qualification of opinion since the omission does not affect the statements on which the opinion is expressed.
The emphasis of a matter will also result in an emphasis-of-matter paragraph immediately after the opinion paragraph, but would also not result in a qualification of opinion.
The auditor’s inability to obtain audited financial statements of a consolidated investee represents a scope limitation.
Depending on materiality, the auditor may issue a qualified opinion or a disclaimer of opinion.
6.07 - ADVERSE, DISCLAIMER, COMPARATIVE FINANCIAL STATEMENTS
Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?
A) Management does notprovide reasonable justification for a change in accounting principles.
B) The auditor is unable to obtain the audited financial statements of a consolidated investee.
C) Management refuses to allow the auditor to have access to the company’s canceled checks and bank statements.
D) The company failed to make a count of its physical inventory during the year and the auditor was unable to apply alternative procedures to verify inventory quantities.
A) Management does notprovide reasonable justification for a change in accounting principles.
A disclaimer of opinion is appropriate when the auditor is unable to obtain sufficient appropriate audit evidence to be
able to form an opinion on the financial statements.
This would be the case if the auditor was unable to obtain audited financial statements for a material consolidated subsidiary; the auditor was unable to obtain satisfaction as to the quantity or value of inventory, if material; or if management imposed a scope limitation, such as not allowing the auditor to review canceled checks.
Management’s inability to provide a justification for a change in accounting principles indicates a departure from GAAP, which would require a qualified opinion, not a disclaimer.
6.06 - GROUP FINANCIAL AUDIT, UNCERTAINTY, AND SCOPE LIMITATION
After considering an entity’s negative trends and financial difficulties, an auditor has substantial doubt about the entity’s ability to continue as a going concern. The auditor’s considerations relating to management’s plans for dealing with the adverse effects of these conditions most likely would include management’s plans to
A) Reduce existing lines of credit.
B) Purchase assets formerly leased.
C) Increase current dividend distributions.
D) Increase ownership equity.
D) Increase ownership equity.
By increasing ownership equity, the entity may be able to bring additional funds into the entity mitigating the risk of being unable to continue as a going concern.
Increasing dividends, reducing lines of credit, and purchase assets under lease, would all require the entity to use cash and would lessen the entity’s ability to continue as a going concern.
6.06 - GROUP FINANCIAL AUDIT, UNCERTAINTY, AND SCOPE LIMITATION
Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity’s ability to continue as a going concern?
A) Confirming with third parties the details of arrangements to maintain financial
support.
B) Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation.
C) Comparing the entity’s depreciation and asset capitalization policies to other entities in the industry.
D) Inspecting title documents to verify whether any assets are pledged as collateral.
A) Confirming with third parties the details of arrangements to maintain financial
support.
An entity’s ability to generate cash flow is the most essential factor to the auditor in assessing the ability to continue a
a going concern.
Verifying the arrangements of future financing would be such an example.
Inspecting title documents would
provide the auditor with evidence as to the assertion of rights and obligations, reconciling cash balances would provide evidence of the accuracy of cash, and comparing depreciation and capitalization policies to other industries will provide evidence as to valuation, but they are not ways to assess a company’s ability to generate future cash inflow
6.08 - SUMMARY OF NON-STANDARD REPORTS AND OVERVIEW
Under which of the following circumstances would an auditor’s expression of an unmodified
opinion be inappropriate?
A) There are significant deficiencies
in the design and operation of the entity’s internal control.
B) The financial statements are prepared on the entity’s income tax basis.
C) Analytical procedures indicate that many year-end account balances are notcomparable with the prior
year’s balances.
D) The auditor is unable to obtain the audited financial statements of a significant
subsidiary.
D) The auditor is unable to obtain the audited financial statements of a significant subsidiary.
If the auditor is unable to obtain audited financial statements of a significant subsidiary, it is not likely that the auditor
will be able to obtain sufficient appropriate audit evidence regarding the subsidiary’s balances.
Depending on materiality, a qualified or disclaimer of opinion would be appropriate.
The auditor may issue an unmodified opinion on financial statements prepared using the tax basis of accounting, as long as the basis of accounting is adequately disclosed in the notes to the financial statements.
Deficiencies in internal control and circumstances where results of analytical procedures do not match the auditor’s
expectations, will affect the nature, timing, and extent of additional audit procedures but will not affect the opinion.
6.07 - ADVERSE, DISCLAIMER, COMPARATIVE FINANCIAL STATEMENTS
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
The client refuses to permit its attorney to furnish information requested in a letter of audit inquiry.
The auditor is unable to determine the amounts associated with noncompliance (illegal acts) committed by the client’s management.
The financial statements fail to contain adequate disclosure of related party transactions.
The auditor is engaged after fiscal
year-end and is unable to observe physical inventories or apply alternative procedures to verify their balances.
The financial statements fail to contain adequate disclosure of related party transactions.
Explanation:
A disclaimer of opinion results from scope limitations in which the auditor does not obtain enough evidence to support
an opinion.
This would be the case if the client refuses to permit its attorney to furnish an attorney’s letter, if the auditor is unable to observe physical inventories or obtain satisfaction through alternative procedures, or is unable to determine amounts associated with noncompliance (illegal acts), all of which affect items on the financial statements and all of which would prevent the auditor from being able to determine if they were correct or incorrect.
Failure to provide adequate disclosure is a departure from GAAP and would result in the auditor issuing a qualified or adverse report, depending on materiality.
6.08 - SUMMARY OF NON-STANDARD REPORTS AND OVERVIEW:
An auditor was unable to obtain sufficient
competent evidential matter concerning certain transactions due to an inadequacy in the entity’s accounting records. The auditor would choose between issuing a(an)
Unmodified opinion with an explanatory paragraph and an adverse opinion.
Disclaimer of opinion and a qualified
opinion.
Adverse opinion and a disclaimer of opinion.
Qualified opinion and an unmodified
opinion with an explanatory paragraph.
Disclaimer of opinion and a qualified
opinion.
Explanation:
Not being able to obtain sufficient competent evidential matter is considered a scope limitation and will result in a
qualified or disclaimer of opinion, depending on materiality.
An unmodified opinion would not be issued if the auditor is unable
to obtain sufficient appropriate audit evidence.
And adverse opinion would only be appropriate if the financial statements are
not fairly presented in accordance with GAAP
