A1 - Audit Reports

Question 1

The audit standard guideline “Statements on Auditing Standards” or SAS (AU-C) provides generally accepted auditing standards for whom? What is the standard-setting body of SAS?

Answer 1

SAS provides services to non-issuers (private companies) and the standard setting body is the AICPA ASB

Question 2

The audit standard guideline “Public Company Accounting Oversight Board Auditing Standards” or PCAOB AS provides generally accepted auditing standards for whom? What is the standard-setting body of PCAOB AS?

Answer 2

PCAOB AS provides services to issuers (public companies) and the standard setting body is the PCAOB

Question 3

The audit standard guideline “Generally Accepted Government Auditing Standards” or GAGAS provides guidance for audits of what? What is the standard-setting body of GAGAS?

Answer 3

GAGAS provides guidance to audits of governmental organizations, programs, activities, and of entities that receive government funds and the standard setting body is the Governmental Accountability Office

Question 4

Other engagements standard guideline “Statements on Standards for Attestation Engagement” or SSAE (AT-C) provides guidance for what engagements? What is the standard-setting body of SSAE?

Answer 4

SSAE provides guidance for attestation engagements and the standard setting body is the AICPA

Question 5

Other engagements standard guideline “Statements on Standards for Accounting and Review Services” or SSARS (AR-C) provides guidance for whom? What is the standard-setting body of SSARS?

Answer 5

SSARS provides guidance to non-issuers (private companies) and the standard setting body is the AICPA

Question 6

Standard guideline “Code of Professional Conduct” (ET) provides guidance for whom? What is the standard-setting body of Code of Professional Conduct?

Answer 6

Code of Professional Conduct provides guidance to AICPA members and the standard setting body is the AICPA

Question 7

Standard guideline “Statement on Quality Control Standards” (QC) provides guidance for whom? What is the standard-setting body of Statement on Quality Control Standards?

Answer 7

Code of Professional Conduct provides guidance to CPA firms about quality control systems and the standard setting body is the AICPA

Question 8

public companies (must perform an integrated audit of FS and internal controls with PCAOB standards)

Answer 8

issuers

Question 9

private companies (must perform either a FS audit only or an integrated audit of FS and internal controls with AICPA ASB standards)

Answer 9

non-issuers

Question 10

Summary of the audit process

Answer 10

1. Engagement Acceptance
2. Assess Risk and Plan Response
3. Perform Procedures and Obtain Evidence
4. Form Conclusions
5. Reporting

Question 11

Acceptable financial reporting frameworks

Answer 11

1. US GAAP
2. IFRS
3. Special purpose frameworks

Question 12

Management’s responsibilities:

Answer 12

1. preparation and fair presentation of FS in accordance with the appropriate framework
2. design, implementation, and maintenance of internal controls
3. providing the auditors with access to information and the appropriate personnel to complete the audit

Question 13

Management’s preparation and fair presentation of FS requires:

Answer 13

1. identification and application of the framework
2. preparation and fair presentation of FS in accordance with the appropriate framework
3. inclusion of an adequate description of the framework in the FS

Question 14

Auditor’s responsibilities:

Answer 14

expressing an opinion of the FS

• maintaining professional skepticism
• complying with ethical requirements
• exercising professional judgment
• obtaining sufficient appropriate audit evidence
• complying with GAAS

Question 15

(T/F) An auditor should neither assume that management is dishonest nor assume unquestioned honesty. A belief that management is honest and has integrity does not relieve the auditor of the need to maintain professional skepticism or allow the auditor to be satisfied with less than persuasive evidence.

Answer 15

T

Question 16

(T/F) The auditor must be independent of an entity when performing an engagement in accordance with GAAS unless: a) GAAS provides other guidance; or b) the auditor is required by law or regulation to accept the engagement and report on the FS

Answer 16

T

Question 17

(T/F) Weak internal controls = adverse opinion

Answer 17

F

Question 18

In certain engagements, auditors may be required to comply with other audit requirements in addition with GAAS. The auditor may conduct the audit in accordance with both GAAS and:

Answer 18

• auditing standards issued by the PCAOB
• International Standards on auditing (ISAs)
• government auditing standards (GAGAS)
• auditing standards of a specific jurisdiction or country

Question 19

Reasonable assurance

Answer 19

high, but not absolute, level of assurance

The auditor must obtain sufficient appropriate audit evidence to afford a reasonable basis for the opinion

Question 20

In order to obtain reasonable assurance, an auditor must:

Answer 20

1. plan the work and properly supervise any assistants
2. determine and apply appropriate materiality levels
3. identify and assess risks of material misstatement
4. obtain sufficient appropriate audit evidence

Question 21

Objectives of FS audit:

Answer 21

1. to obtain reasonable assurance

2. to report on the FS

Question 22

Objectives of audit of internal controls over FS:

Answer 22

1. express an opinion on the effectiveness of internal controls
2. plan and perform the audit to obtain reasonable assurance

Question 23

(T/F) The auditor refers to GAAS for guidelines on how to perform the audit

Answer 23

T

Question 24

(T/F) The auditor refers to the financial reporting framework to evaluate whether the transactions are recorded and reported fairly in the FS

Answer 24

T

Question 25

(T/F) When an auditor expresses an adverse opinion or a disclaimer of opinion on the complete FS, the auditor’s report should not also include an unmodified (unqualified) opinion on a single financial item

Answer 25

T

Question 26

Unmodified or Unqualified Opinion (clean)?

Answer 26

states that the financial statements present fairly in all material respects the information of the entity in conformity with the applicable financial reporting framework

“Unmodified” is used for nonissuers
“Unqualified is used for issuers

Question 27

Three types of modified opinions:

Answer 27

1. Qualified opinion
2. Adverse opinion
3. Disclaimer of opinion

Question 28

Qualified opinion? (GAAP FS issues)

Answer 28

misstatements (individually or in the aggregate) are material, but not pervasive to the financial statements

Question 29

Adverse opinion? (GAAP FS issues)

Answer 29

misstatements (individually or in the aggregate) are material and pervasive to the financial statements

Question 30

(T/F) The auditor’s report date shows the final date of auditor responsibility (unqualified). For comparative FS, the audit report date for the most recent audit should be used.

Answer 30

T

Question 31

Presentation of an unmodified opinion (nonissuer = private company):

Answer 31

Title: “Independent Auditor’s Report”

1. Report on the FS (introductory paragraph): identify entity being audited, state that the FS have been audited, identify the titles of the FS, and specify dates covered
2. Management Responsibilities: FS, internal controls, and providing auditors with evidence
3. Auditor’s Responsibilities: express an opinion, statement that states the audit was conducted in accordance to standards, statement that describes “to obtain reasonable assurance about whether the FS are free from material misstatement, a description of the audit, etc.
4. Opinion: identification of the auditing reporting framework and its origin
5. Report on other legal and regulatory requirements: not required unless there are additional responsibilities
6. Signature of the auditor
7. Audit firm address
8. Date of auditor’s report: should not be dated earlier than the date on which the auditor obtained sufficient appropriate audit evidence

Question 32

Within the unmodified audit opinion (nonissuer), which paragraph gives reference to GAAS?

Answer 32

Auditor’s responsibility paragraph

Question 33

Within the unmodified audit opinion (nonissuer), which paragraph gives reference to GAAP?

Answer 33

Management’s responsibility paragraph & the opinion paragraph

Question 34

Presentation of an unqualified opinion (issuer = public company):

Answer 34

Title: “Report of Independent Registered Public Accounting Firm”
Addressed to shareholders and board of directors

1. Opinion Section (introductory paragraph): mix of the unmodified report’s introductory & opinion paragraphs
2. Basis for Opinion Section: mix of the unmodified reports’ auditor and management responsibility paragraphs
3. Critical Accounting Matters: any CAMs identified should be described in this section
4. Signature, Tenure, and Location
5. Report date: shows final date of audit responsibilities

Question 35

If a CAM (Critical Audit Matter) is identified, the auditor must: (IPAD)

Answer 35

1. identify the CAM
2. principle considerations that led to the CAM must be described
3. address how the CAM was part of the audit
4. disclosures must be referenced

Question 36

Within the unqualified audit opinion (issuer), which paragraph gives reference to PCAOB?

Answer 36

Basis for Opinion Section

Question 37

Within the unqualified audit opinion (issuer), which paragraph gives reference to GAAP?

Answer 37

Opinion on the FS section

Question 38

Common GAAP problems identified in the process of creating an audit opinion:

Answer 38

1. GAAP consistency change (not justified)
2. Inadequate disclosures
3. Departure from GAAP (not justified)
4. Unreasonable accounting estimates

Question 39

(T/F) By omitting the statement of CF, the auditor may create a qualified or an adverse opinion depending on the materiality level.

Answer 39

T

Question 40

Presentation of a qualified opinion due to FS issues or audit issues (NONissuer = private company):

Answer 40

Title: “Independent Auditor’s Report”

1. Report on the FS (introductory paragraph): identify entity being audited, state that the FS have been audited, identify the titles of the FS, and specify dates covered
2. Management Responsibilities: FS, internal controls, and providing auditors with evidence
3. Auditor’s Responsibilities: “auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the qualified audit opinion”
4. Basis for Qualified Opinion: description and quantification of the effects of any misstatement, explanation of how any disclosures may be misstated, description of the nature of omitted information and inclusion of the omitted information, when practicable.
5. Qualified Opinion: “except for the effects of the matter described in the basis for qualified opinion paragraph, the FS are presented fairly

Question 41

“Practicable”

Answer 41

providing the information in the auditor’s report does not require the auditor to assume the position of a preparer of financial information.

Ex.: it is practicable for the client to provide the auditor with basic financial statements, such as a statement of CF, since that is something management should provide. The auditor is not expected to prepare any FS

Question 42

Presentation of an adverse opinion due to FS issues (NONissuer = private company):

Answer 42

Title: “Independent Auditor’s Report”

1. Report on the FS (introductory paragraph): identify entity being audited, state that the FS have been audited, identify the titles of the FS, and specify dates covered
2. Management Responsibilities: FS, internal controls, and providing auditors with evidence
3. Auditor’s Responsibilities: “auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the adverse audit opinion”
4. Basis for Adverse Opinion: description and quantification of the effects of any misstatement, explanation of how any disclosures may be misstated, description of the nature of omitted information and inclusion of the omitted information, when practicable.
5. Adverse Opinion: “because of the significance of the matter described in the basis for adverse opinion paragraph, the FS do not present fairly in accordance with the framework”

Question 43

Presentation of a qualified opinion due to FS issues or audit issues (issuer = public company):

Answer 43

Title: “Report of Independent Registered Public Accounting Firm”
Addressed to shareholders and board of directors

1. Opinion Section (introductory paragraph): “except for or with the exception of”
2. (No title) - all of the substantive reasons that lead the auditor to conclude that there has been a departure from GAAP or GAAS, disclosures of the principal effects of the FS, if practicable
3. Basis for Opinion Section: mix of the unmodified reports’ auditor and management responsibility paragraphs
4. Critical Accounting Matters: any CAMs identified should be described in this section
5. Signature, Tenure, and Location
6. Report date: shows final date of audit responsibilities

Question 44

Presentation of an adverse opinion due to FS issues (issuer = public company):

Answer 44

Title: “Report of Independent Registered Public Accounting Firm”
Addressed to shareholders and board of directors

1. Opinion Section (introductory paragraph): “because of the effects of matters discussed, the FS do not present fairly in conformity with GAAP”
2. (No title) - all of the substantive reasons that lead the auditor to conclude that there has been a departure from GAAP, disclosures of the principal effects of the FS, if practicable
3. Basis for Opinion Section: mix of the unmodified reports’ auditor and management responsibility paragraphs
4. Signature, Tenure, and Location
5. Report date: shows final date of audit responsibilities

Question 45

(T/F) An auditor should express a disclaimer of opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion

Answer 45

T

Question 46

(T/F) An auditor should express an unmodified opinion when there is a justified departure from GAAP.

Answer 46

T

But, must include an emphasis-of-matter paragraph to the unmodified opinion

Question 47

(T/F) An auditor should express an unmodified opinion when there is a change in accounting principle that has a material effect on the FS.

Answer 47

T

But, must include an emphasis-of-matter paragraph to the unmodified opinion

Question 48

(T/F) An auditor should express an unmodified opinion when there is a use of an accounting principle at variance with GAAP that has a material effect on the FS.

Answer 48

F

A qualified opinion should be used in this case

Question 49

(T/F) An auditor should express an unmodified opinion when there is substantial doubt with regarding to the entity’s ability to continue as a going concern.

Answer 49

T

But, must include an emphasis-of-matter paragraph to the unmodified opinion

Question 50

(T/F) An auditor should express a qualified opinion when the client refuses to provide access to the minutes of the Board of Directors’ meetings.

Answer 50

F

A disclaimer of opinion should be use in this case

Question 51

(T/F) An auditor should express an adverse opinion when the auditor is unable to observe physical inventory and is unable to become satisfied with alternative procedures.

Answer 51

F

Scope limitations result in either a qualified opinion or a disclaimer of opinion

Question 52

Qualified opinion? (GAAS audit issue - unable to obtain appropriate sufficient evidence)

Answer 52

possible effects of undetected misstatements (individually or in the aggregate) are material, but not pervasive to the financial statements

Question 53

Disclaimer of opinion? (GAAS audit issue - unable to obtain appropriate sufficient evidence)

Answer 53

possible effects of undetected misstatements (individually or in the aggregate) are material and pervasive to the financial statements

A disclaimer of opinion should also be expressed if the auditor is not independent or if the FS are unaudited

Question 54

(T/F) The inability to perform a specific procedure is not a limitation on the scope of the audit if the auditor is able to obtain sufficient appropriate audit evidence by performing alternative procedures

Answer 54

T

Question 55

(T/F) When the auditor is not independent but is required by law or regulation to report on the FS, the auditor should disclaim an opinion and should specifically state that the auditor is not independent.

Answer 55

T

Question 56

Accountant, who is associated with the FS of an engagement that is conducted in accordance with PCAOB without auditing or reviewing them, should issue a disclaimer of opinion. Other requirements involve:

Answer 56

1. Must read through the FS for obvious errors
2. Must add the disclaimer
3. The term “Unaudited” should be clearly marked on each page of the FS
4. If the client refuses to correct an obvious error, the auditor should add a paragraph modifying the disclaimer to describe the nature and effect of the departure from GAAP. If the client refuses to accept the disclaimer, then the auditor must withdraw from the engagement

Question 57

(T/F) When exam questions indicate that the financial statements are false, fraudulent, deceptive or misleading, that management refuses to correct then, and that modification of the CPA’s report is not sufficient to correct the item, the CPA should consider withdrawing from the engagement

Answer 57

T

Question 58

(T/F) When the auditor expresses a qualified opinion due to a scope limitation, the opinion paragraph states that the qualification relates to the possible effect of the matter on the FS and not the scope limitation itself. Wording such as, “In our opinion, except for the above-mentioned limitation on the scope of the audit…” is not acceptable.

Answer 58

T

The opinion must use the exact wording: “except for the effects of the matter described in the basis for qualified opinion paragraph, the FS are presented fairly…”

Question 59

Presentation of a disclaimer of opinion due to GAAS audit issues (nonissuer=private company):

Answer 59

Title: “Independent Auditor’s Report”

1. Report on the FS (introductory paragraph): the auditor was engaged to audit the FS
2. Management Responsibilities: FS, internal controls, and providing auditors with evidence
3. Auditor’s Responsibilities: “Our responsibility is to express an opinion on the FS based on conducting the audit in accordance with GAAS. Because of the matter described in the basis for disclaimer of opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.”
4. Basis for Disclaimer of Opinion: describe the reasons for the inability
5. Disclaimer of Opinion: “Because of the significance of the matter described in the basis for disclaimer of opinion paragraph, the auditor has not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, the auditor does not express an opinion on the FS.”
6. Signature of the auditor
7. Audit firm address
8. Date of auditor’s report: should not be dated earlier than the date on which the auditor obtained sufficient appropriate audit evidence

Question 60

Presentation of a disclaimer of opinion due to GAAS audit issues (issuer=public company):

Answer 60

Title: “Report of Independent Registered Public Accounting Firm”
Addressed to shareholders and board of directors

1. Disclaimer of Opinion (introductory paragraph): the auditor was engaged to audit the FS. “Because of the significance of the matter described in the basis for disclaimer of opinion paragraph, the auditor has not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, the auditor does not express an opinion on the FS.”
2. (no title): all substantive reasons for the disclaimer
3. Basis for Disclaimer of Opinion: Because of the matter described in the basis for disclaimer of opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.”
4. Signature, Tenure, and Location
5. Report date: shows final date of audit responsibilities

Question 61

Presentation of a disclaimer of opinion due to lack of independence (issuer=public company):

Answer 61

“We are not independent with respect to XYZ, and the accompanying BS as of the date, and the related statements of income, RE, and CF for the year then ended were not audited by us and, accordingly we do not express an opinion on them”

Question 62

Uncertainty (public) - No material misstatement and sufficient evidence:

Answer 62

unmodified

Question 63

Uncertainty (public)- material misstatement related to uncertainty

Answer 63

qualified or adverse

Question 64

Uncertainty (public)- insufficient evidence scope limitation

Answer 64

qualified or disclaim

Question 65

compilation report

Answer 65

report related to a non-public entity

Question 66

(T/F) Management sends the engagement letter, specifying the responsibilities of both the entity and the auditor, to the auditor

Answer 66

F

Vice versa

Question 67

(T/F) When the auditor is unable to satisfy herself regarding the amount of beg. inv., she must disclaim an opinion on the IS because of the inability to verify the COGS during the year. The auditor may, however, still be able to issue an unmodified opinion on the balance sheet, since inventory can be verified as of the BS date

Answer 67

T

Question 68

An emphasis-of-matter paragraph is required in the following circumstances: (GAASP)

Answer 68

1. (G) substantial doubt about the entity’ ability to continue as a Going concern
2. (A) justified change in Accounting principle
3. (A) subsequently discovered facts lead to a change in Audit opinion
4. (S) FS are prepared in accordance with an applicable Special purpose framework

Question 69

(T/F) An emphasis-of-matter paragraph may be necessary. An auditor on a private engagement can use an emphasis-of-matter paragraph when referring to any matter that is appropriately presented or disclosed in the FS and is such importance that it is fundamental to the user’s understanding of the FS. It is on the auditor to use professional judgement.

Answer 69

T

Question 70

(T/F) The auditor on a private engagement will normally not add an emphasis-of-matter paragraph for uncertainties that are appropriately accounted for. However, if a question indicates that the uncertainty is “unusually important” then an emphasis-of matter paragraph may be added.

Answer 70

T

Question 71

Difference between an emphasis-of-matter paragraph and an other-matter paragraph: (nonissuers)

Answer 71

1. An emphasis-of-matter paragraph is used when referring to a matter already in the FS, while an other-matter paragraph is used when referring to a matter not presented or disclosed
2. An EOM is placed after the opinion paragraph, while an OM is placed after the both if there is an EOM
3. Both an EOM and an OM are included when required by GAAS or at the auditor’s discretion

Question 72

(T/F) The circumstances that require an auditor to add an explanatory (issuers) paragraph in an issuer audit report are very similar to the circumstances that require an auditor to add an emphasis-of-matter or other-matter paragraph to a nonissuer audit report

Answer 72

T

Question 73

(T/F) The use of the emphasis-of-matter (nonissuer), other-matter (nonissuer), and explanatory paragraphs still represent an unmodified or unqualified opinion

Answer 73

T

Question 74

Before reissuing the prior year’s audit report on the FS of a former client, the (predecessor) auditor should:

Answer 74

1. Read the FS of the current period
2. Compare the PY information that the auditor reported on the FS to the current year
3. Obtain letters of representation from management of the former client and from the successor auditor

Management rep letter - should indicate whether any of management’s previous representations should be modified and whether there have been any subsequent events that would affect the previous FS
Successor auditor rep letter - should state whether the successor auditor’s audit disclosed any issues of a material nature that might affect the previous FS

Question 75

When a group engagement partner decides to make reference to a component auditor’s audit under US GAAS, the group engagement partner should state:

Answer 75

“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 X company, is based solely on the report of the other auditors”

It is included in the Auditor’s Responsibility paragraph

Question 76

(T/F) An auditor ordinarily should change the previously issued opinion on the PY’S FS if the auditors become aware of circumstances or events that affect the FS of a prior period, they should consider such matters when updating the report on the FS of the PY.

Answer 76

T

Example: An auditor expressed a qualified opinion in the PY’S FS because of a lack of adequate disclosure. These FS are properly restated in the current year and presented in comparative form with the current year’s FS. The auditor’s updated report on the PY’s FS should express an unmodified opinion on the restated FS of the PY

Question 77

A former client requests a predecessor auditor to reissue an audit report on a prior period’s financial statements. If the FS are not restated nor revised, then what date should the predecessor auditor use in the reissued report?

A. The date of the prior-period report
B. The date of reissue
C. The dual-dates
D The date of the client’s request

Answer 77

A (CORRECT ANSWER) - The date of the prior-period report should be used as long as the FS are not restated, the report is not revised and no significant changes have occurred that would affect the PY FS

C - The auditor may dual date the report if a material subsequent event has occurred, but dual dating is not used for reissuing a report

Question 78

In the auditor’s report under U.S. GAAS, the group engagement partner decides not to make reference to another CPA who audited a client’s subsidiary. The group engagement partner could justify this decision if, among other requirements, the group engagement partner:

A. Issues an unmodified opinion on the consolidated FS
B. Is satisfied as to the independence and professional reputation of the component auditor
C. Is unable to review the audit programs and audit documentation of the component auditor
D. Learns that the component auditor issued an unmodified opinion on the subsidiary’s FS

Answer 78

B. (CORRECT ANSWER)

C. If the group engagement partner is unable to review the audit programs and audit documentation of the component auditor, he or she is likely to divide responsibility by making reference to the component auditor’s report

Question 79

If the FS of a PY have been audited by a predecessor auditor whose report is not presented, the successor auditor should indicate in an Other-Matter (nonissuers) or Explanatory (issuers) paragraph:

Answer 79

1. that the FS of PY were audited by another auditor
2. the date of the previous report
3. the type of report issued by the predecessor auditor, and if the report was modified, the substantive reasons therefor
4. the nature of any emphasis-of-matter, other-matter, or explanatory paragraph included in the previous report.

The successor auditor may name the predecessor auditor only if the predecessor auditor’s practice was acquired by or merged with that of the successor auditor

Question 80

(T/F) Under U.S. GAAS, if the group engagement partner chooses to assume responsibility, no reference to the component auditor should be made in the auditor’s report because to do so may cause a reader to misinterpret the degree of responsibility being assumed.

Answer 80

T

Furthermore, the group engagement team should determine the division of responsibilities

Question 81

(T/F) When the group engagement auditor accepts responsibility for the work performed by a component auditor, the group engagement partner does not need to contact the component auditor and review the audit program and working papers pertaining to the component

Answer 81

F

Question 82

(T/F) Dual dating is used when there is a subsequent event occurring after the original date of the auditor’s report and the auditor wishes to extend responsibility only for the one event.

Answer 82

T

Question 83

(T/F) Dual dating is used for comparative FS

Answer 83

F

The date appropriate for the most recent audit is used in this case

Question 84

What is a subsequent event?

Answer 84

An event or transaction that occurs after the BS date but before the FS are issued or are available to be issued

Question 85

Recognized subsequent event?

Answer 85

subsequent events that provide additional information about conditions that existed at the BS date

Examples:
Settlement of litigation
Loss on an uncollectible receivable

Question 86

Nonrecognized subsequent event?

Answer 86

subsequent events that provide additional information about conditions that existed after the BS date

Examples:
Sale of bond or capital stock
Business combination
Settlement of litigation, if the litigation arose after BS date
Loss of plant or inventory due to fire or natural disaster
Changes in the FV of assets or liabilities or foreign exchange rates
Entering into significant commitments or contingent liabilities

Question 87

Which of the following procedures would an auditor ordinarily perform during the review of subsequent events?
A. Investigate significant deficiencies in internal control previously communicated to the client
B. Inquire of the client’s legal counsel concerning litigation
C. Review the cut-off bank statements for the period after the year-end
D. Analyze related party transactions to discover possible irregularities

Answer 87

B (CORRECT ANSWER) - An auditor would most likely obtain a letter from the entity’s legal counsel describing any pending litigation, unasserted claims, or loss contingencies, to obtain evidence that might impact the year-end FS

A To investigate significant deficiencies in internal control previously communicated to the client would be part of the planning process

C Reviewing the cut-off bank statements for the period after the year-end generally is performed to evaluate the YE cash balance, not to identify subsequent events

D Analyzing related party transactions to discover possible irregularities generally is performed to evaluate FS disclosure

Question 88

(T/F) Conditions that did not exist at YE are nonrecognized subsequent events that must be disclosed to keep the FS from being misleading

Answer 88

T

Question 89

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?
A. Inquire about payroll checks that were recorded before YE but cashed after YE
B. Recompute depreciation charges for plant assets sold after YE
C. Investigate changes in LT Debt occurring after YE
D. Determine that changes in employee pay rates after YE were properly authorized

Answer 89

C (CORRECT ANSWER) - LT Debt that matures within one year is reported as a current liability on the BS. An auditor reviews changes in LT Debt occurring after YE to evaluate whether such debt is appropriately classified on the BS

A - Payroll checks that were recorded close to (but before) year-end often are not cashed until the subsequent period. The auditor would not be particularly concerned about this

B - DEPR charges sold in subsequent period not relevant in current year’s audit report

D - Subsequent changes in employee pay rates are not relevant in current year’s audit report

Question 90

(T/F) If an auditor becomes aware of material information that would have affected the report, and that persons are currently relying or are likely to rely on the FS covered by the report, the auditor should take appropriate action. In order to do this, the auditor must first determine whether there are indeed persons relying or likely to rely on the FS

Answer 90

T

Question 91

Comprehensive bases of accounting other than GAAP that may be used to prepare FS?

Answer 91

1. Basis of accounting used by an entity to file its income tax return
2. Cash receipts and disbursements basis of accounting
3. A basis prescribed by a regulatory agency
4. Contractual basis

Question 92

(T/F) When reporting on FS prepared in conformity with a basis of accounting other than GAAP, the auditor should include an emphasis-of-matter paragraph that states that the special purpose framework is a basis of accounting other than GAAP

Answer 92

T

Question 93

Special purpose frameworks include:

Answer 93

1. Cash basis and modified cash basis
2. Tax basis
3. Regulatory basis
4. Contractual basis
5. Other basis

Question 94

(T/F) An entity presents its FS on its income tax basis. A description of how that basis differs from GAAP should be included in the notes to the FS

Answer 94

T

Question 95

Who bears the ultimate responsibility for proper accounting treatment?

Answer 95

the preparers of the FS

Question 96

When FS are prepared in accordance with a financial reporting framework generally accepted in the parent’s country and are for use only in that country, the auditor may report using:

Answer 96

Either a U.S.- style report modified to report on the financial reporting framework of the parent’s country or the report form of the parent’s country

Question 97

(T/F) A reporting accountant is prohibited from providing a report on the application of the requirements of an applicable financial reporting framework to a proposed future transaction involving the facts and circumstances of a specific entity

Answer 97

F

Question 98

(T/F) A reporting accountant’s written report on the application of the requirements of an applicable financial reporting framework should include an identification of the specific entity involved

Answer 98

T

Question 99

(T/F) A reporting accountant is prohibited from providing a report on the application of the requirements of an applicable financial reporting framework to a transaction not involving the facts and circumstances of a specific entity

Answer 99

T

Question 100

(T/F) The reporting accountant’s written report on the applicable financial reporting framework should include a paragraph restricting the use of the report

Answer 100

T

Question 101

(T/F) The reporting accountant’s written report on the applicable financial reporting framework should include a paragraph restricting the use of the report

Answer 101

T

Question 102

(T/F) FS prepared in accordance with a comprehensive basis of accounting other than GAAP that are not suitably titled require a qualified opinion with a basis for modification paragraph

Answer 102

T