A1: Audit Reports

Question 1

An auditor’s responsibilities for audited financial statements are confined to the expression of the auditor’s opinion

Answer 1

An auditor’s responsibility is to express an opinion on financial statements based on an audit

Question 2

The phrase “U.S. generally accepted accounting principles” is an accounting term that:

Answer 2

Encompasses the conventions, rules, and procedures necessary to define U.S. accepted accounting practice at a particular time

The literature pertaining to U.S. GAAP changes over time, and therefore U.S. generally accepted accounting principles can be said to encompass the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. U.S. GAAP is one of the financial reporting frameworks acceptable for preparation of financial statements. IFRS is another one.

Question 3

Which of the following terms identifies a requirement for audit evidence?

Answer 3

Appropriate

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

Question 4

Which of the following correctly defines the term reasonable assurance?

Answer 4

A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement

Reasonable assurance is a high, but not absolute, level of assurance

Question 5

Which of the following provides the most authoritative guidance for the auditor of a nonissuer?

Answer 5

General guidance provided by a Statement on Auditing Standards

General guidance provided by a Statement of Auditing Standards is the most authoritative level of auditing guidance for audits of nonissuers. Auditors are required to comply with SASs, and should be prepared to justify any departures

Question 6

Which of the following accurately depicts the auditor’s responsibility with respect to Statements on Auditing Standards?

Answer 6

The auditor is generally required to follow guidance provided by the Standards, and should be able to justify any departures

Question 7

An auditor of a nonissuer must conduct the audit in accordance with:

Answer 7

ASB standards

Question 8

Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of:

Answer 8

Professional Skepticism

The auditor should plan and perform the audit with an attitude of professional skepticism. This attitude includes a questioning mind and a critical assessment of audit evidence, and recognizes that circumstances may exist that cause financial statements to be materially misstated

Question 9

Which of the following is not an example of the application of professional skepticism?

Answer 9

Inquiring of prior year engagement personnel regarding their assessment of management’s honesty & integrity

The auditor should consider that fraud might occur regardless of any past experience with the entity. An assessment of management’s honesty and integrity performed during the previous year would not necessarily be relevant to the current year’s audit

Question 10

Which of the following actions should a CPA firm take to comply with the AICPA’s quality control standards?

Answer 10

Establish policies to ensure that the audit work meets applicable professional standards

A quality control system consists of policies and procedures designed, implemented, and maintained to ensure that the firm complies with professional standards and appropriate legal & regulatory requirements, and that any reports issued are appropriate in the circumstances

Question 11

When financial statements contain a departure from GAAP because, due to unusual circumstances, the financial statements would otherwise be misleading, the auditor should express an opinion that is:

Answer 11

Unmodified

When circumstances indicate that financial presentation in accordance with U.S. GAAP would be misleading, a departure from U.S. GAAP is permissible. In such cases, the auditor should issue an unmodified opinion because the financial statements are not materially misstated.

Question 12

When a PCAOB auditing standards indicates that an auditor “could” perform a specific procedure, how should the auditor decide whether and how to perform the procedure?

Answer 12

By exercising professional judgement in the circumstances

The words “may”, “might”, and “could” describe actions and procedures that auditors have a responsibility to consider. Matters described in this fashion require the auditor’s attention and understanding. How and whether the auditor implements these matters in the audit will depend on the exercise of professional judgement in the circumstances consistent with the objectives of the standard

Question 13

An auditor of a nonissuer exercising professional skepticism with respect to the risks of material misstatement due to fraud will most appropriately:

Answer 13

Consider the reliability of information to be used as audit evidence

An auditor exercising professional skepticism with respect to the risks of material misstatement due to fraud will most appropriately consider the reliability of information to be used as audit evidence

Question 14

For an entity’es financial statements to be presented fairly in accordance with an applicable financial reporting framework, the framework selected should:

Answer 14

Include an adequate description of the framework in the financial statements

The preparation and fair presentation of the financial statements requires identification of the applicable financial reporting framework and inclusion of an adequate description of the framework, as well as preparation and fair presentation in accordance with the framework.

Question 15

When disclaiming an opinion because of an insufficiency of audit evidence an auditor should refer to the situation in the:

Answer 15

Auditor’s Responsibility Paragragh: YES
Notes to the FS: NO

When a disclaimer of opinion is issued due to lack of sufficient audit evidence, the lack of evidence should be disclosed in the Auditor’s Responsibility paragraph and discussed in an additional paragraph before the opinion paragraph. This paragraph should be titled Basis for Disclaimer of Opinion

Question 16

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:

Answer 16

Increase ownership equity

The auditor considers any of management’s plans that might serve to mitigate the adverse effects of particular conditions & events. Typically, plans to increase ownership equity, to borrow money, to restructure debt, to sell assets, and/or to reduce or delay expenditures might all be considered mitigating factors

Question 17

Auditor’s Report for an Unmodified Opinion “MR DIM REPPORTS CRAME”

Answer 17

Introduction
Management’s Responsibility (MR)
-> Design, Implementation, & Maintenance (DIM)
Auditor’s Responsibility (R)
-> Express an opinion (E)
-> Plan and perform an audit (P)
-> Perform procedures (P)
-> Obtain audit evidence (O)
-> assess Risk of material misstatement (R)
-> “Test” internal controls (T)
-> ensure fair presentation of the financial Statements (S)

does not express an opinion on internal Controls (C)

• > audit evaluates Reasonableness (R)
• > of significant Accounting policies/estimates (A)
• > made by Management (M)
• > as well as Evaluating the overall presentation (E)

Question 18

State the primary purpose of an audit:

Answer 18

To provide FS users with an opinion on whether the financial statements are fairly presented, in all material respects, in accordance with the applicable financial reporting framework

Question 19

Identify 3 inherent limitations of an audit:

Answer 19

1. Nature of financial reporting
2. Nature of audit procedures
3. Timeliness of financial reporting and the balance of benefit and cost

Question 20

Which standards provide the most authoritative U.S. auditing guidance for nonissuers and issuers, and who issues those standards?

Answer 20

Nonissuers: Statements on Auditing Standards (SASs), issued by the AICPA Auditing Standards Board (ASB)

Issuers: Auditing Standards (ASs), issued by the PCAOB plus all SASs adopted by PCAOB

Question 21

Describe the role of International Auditing & Assurance Standards Board (IAASB) and the use of International Standards of Auditing (ISAs):

Answer 21

IAASB is a standard-setting board of the International Federation of Accountants (IFAC) that establishes (ISAs)

Currently, over 100 countries are using or are in the process of adopting ISAs

ISAs do not override local laws/regulations or national standards that govern the audits of financial statements in a given country

Question 22

What are the five general GAAS requirements related to the conduct of an audit? “SEJEC”

Answer 22

S: professional Skepticism
E: Ethical requirements
J: professional Judgement
E: sufficient & appropriate audit Evidence
C: Compliance with GAAS

Question 23

What should be included in the introductory paragraph of the unmodified audit opinion?

Answer 23

• The entity whose FS have been audited
• A statement that the FS were audited
• The title of each FS audited
• Dates or periods covered by each financial statement

Question 24

What should be included in the Management’s Responsibility paragraph of the unmodified audit opinion?

Answer 24

• An explanation that management is responsible for the preparation and fair presentation of the financial statements
• A statement that this responsibility includes the design, implementation, and maintenance of internal controls

Question 25

What should be included in the Auditor’s Responsibility paragraph of the unmodified audit opinion?

Answer 25

• A statement that it is the auditor’s responsibility to express an opinion on the financial statements based on the audit
• A statement that the audit was conducted in accordance with auditing standards generally accepted in the U.S.
• A statement that standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement
• A description of the audit

Question 26

What should be included in the opinion paragraph of the unmodified audit opinion?

Answer 26

1. A statement that the FS present fairly, in all material respects, the financial position of the entity as of the balance sheet date and the results of operations and its cash flows for the period then ended, in accordance with the applicable financial reporting framework
2. Identification of the applicable financial reporting framework and its origin

Question 27

Which of the following statements is a basic element of the auditor’s report under U.S. auditing standards?

Answer 27

An audit include evaluating significant estimates made by management

Under U.S. auditing standards, the auditor’s audit report includes a statement that “An audit includes evaluating…. significant estimates made by management”

Question 28

An auditor most likely would express an unmodified opinion and would NOT add an emphasis-of-matter or other-matter paragraphs to the report if the auditor:

Answer 28

Believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed

An auditor most likely would express an unmodified opinion and would not add an additional paragraph to the report if the auditor believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported & disclosed

Question 29

In the first audit of a new client, an auditor was able to extend auditing procedures to gather sufficient evidence about consistency. Under these circumstances, the auditor should:

Answer 29

NOT refer to consistency in the auditor’s report

The auditor’s standard report implies that the auditor is satisfied that the comparability of financial statements between periods has not been materially affected by changes in accounting principles and that such principles have been consistently applied between or among periods. Since the auditor has gathered sufficient evidence about consistency, no reference need be made in the report

Question 30

Under which of the following circumstances would a disclaimer of opinion NOT be appropriate?

Answer 30

Management does not provide reasonable justification for a change in accounting principle

A disclaimer of opinion means that the auditor was unable to obtain sufficient appropriate audit evidence to provide a reasonable basis for an opinion, thus, no opinion is expressed. An unjustified change in accounting principle could result in a material misstatement of the financial statements that would result in a qualified or adverse opinion, not a disclaimer or opinion.

Question 31

Mead, CPA, had substantial doubt about Tech Co.’s ability to continue as a going concern when reporting on Tech’s audited financial statements for the year ended June 30, Year 4. That doubt has been removed in Year 5. What is Mead’s reporting responsibility if Tech is presenting its financial statements for the year ended June 30, Year 5, on a comparative basis with those of Year 4?

Answer 31

The emphasis-of-matter paragraph included in the Year 4 auditor’s report should not be reported

If substantial doubt about the entity’s ability to continue as a going concern has been removed in the current period, the emphasis-of-matter paragraph included in the prior period auditor’s report should not be repeated, and no description of the reasons or plans for recovery need be included.

Question 32

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 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 other auditors. These sentences:

Answer 32

Indicate a division of responsibility

The paragraph presented is the proper form of disclosure when another auditor performs a substantial portion of the audit. When the group engagement partner makes reference to the audit of another auditor (component auditor), the report should indicate clearly the division of responsibility between the portion of the financial statements covered by each audit.

Question 33

Which of the following statements is NOT true regarding the auditor’s responsibility for subsequent events?

Answer 33

The auditor has an active responsibility to make continuing inquiries between the date of the auditor’s report and the date on which the report is submitted.

The auditor has not active responsibility to make continuing inquiries between the date of the auditor’s report and the date on which the report is submitted. Active responsibility stops on the date of the auditor’s report

Question 34

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

Answer 34

Inquiring as to whether any unusual adjustments were made after year-end

The auditor would do this to see if the year-end financial statements would need to be adjusted/restated

Question 35

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

Answer 35

Investigate changes in long-term debt occurring after year-end

In obtaining evidence about subsequent events, an auditor would investigate changes in LT debt occurring after year-end to determine if there was an unrecorded liability as of the end of the year. In addition, subsequent sales of LT debt require footnote disclosure

Question 36

Which of the following is NOT true regarding an engagement to provide a written report on the application of the requirements of an applicable financial reporting framework?

Answer 36

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