AICPA Blueprint #4 Flashcards
If an auditor of a nonissuer concludes that reasonable justification exists to change an audit engagement to an agreed-upon procedures engagement, then the report should
A
Not include a reference to the original audit engagement but may include a reference to procedures that have been performed.
B
Generally not include a reference to the original audit engagement but include an explanatory paragraph discussing the change requested by management.
C
Refer to the original audit engagement only if requested by management and approved by those charged with governance.
D
Refer to the original engagement only if the work performed to the date of the change was not sufficient to complete the revised engagement.
The correct answer is (A).
If an auditor of a nonissuer agrees to change in terms of the engagement (when reasonable justification exists) and agrees to a downgrade of service from audit to an agreed-upon procedures engagement, the auditor’s report should be issued on the lower level of service ,i.e. agreed-upon procedures report with no reference to the original engagement, i.e. audit.
However, the auditor/accountant should carefully consider:
Reasons for the downgrade request, particularly the implications of a restriction on the scope of the audit engagement, whether imposed by management or by circumstances.
Additional effort needed to complete the original engagement
Estimated additional cost needed to complete the original engagement
In which of the following situations would an auditor ordinarily issue an unqualified audit opinion on a public company’s financial statements without an explanatory paragraph?
A
The auditor wishes to emphasize that the entity had significant related party transactions.
B
The auditor decides to make reference to the report of another auditor as a basis, in part, for the auditor’s opinion.
C
The entity issues financial statements that present financial position and results of operations, but omits the statement of cash flows.
D
The auditor has substantial doubt about the entity’s ability to continue as a going concern, but the circumstances are fully disclosed in the financial statements.
The correct answer is (B).
If reference is made to the report of another auditor as a basis, in part, for the opinion, this divided responsibility is indicated in the opinion paragraph of the report without an explanatory paragraph.
In some circumstances, the auditor may wish to emphasize a matter regarding the financial statements but nevertheless intends to express an unqualified opinion. For example, the auditor may wish to emphasize that the entity has had significant transactions with related parties. Such explanatory information should be presented in a separate explanatory paragraph (following the opinion paragraph) of the auditor’s report resulting in an Unqualified Opinion but with an explanatory paragraph.
If a company issues financial statements that purport to present financial position and results of operations but omits the related statement of cash flows, the auditor will normally conclude that the omission requires qualification of his opinion.
As such, it will not be an unqualified audit opinion.
If the auditor concludes that substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time remains, the audit report should include an explanatory paragraph (following the opinion paragraph) to reflect that conclusion resulting in an Unqualified Opinion but with an explanatory paragraph.
The auditor should test the operating effectiveness of controls over each applicable compliance requirement to which the condition applies in a compliance audit under which of the following conditions?
A
The use of audit evidence about the operating effectiveness of controls applied to prior audits
B
Substantive procedures alone do not provide sufficient appropriate audit evidence
C
Tests of controls over compliance are not required by the governmental audit requirement
D
The auditor’s risk assessment includes no expectation of the operating effectiveness of controls over compliance related to the applicable compliance requirements
The auditor should test the operating effectiveness of controls over each applicable compliance requirement to which the conditions apply in each compliance audit if any of the following conditions are met: the auditor’s risk assessment includes an expectation of the operating effectiveness of controls over compliance related to the applicable compliance requirements; substantive procedures alone do not provide sufficient appropriate audit evidence; and such tests of controls over compliance are required by the governmental audit requirement. The use of audit evidence about the operating effectiveness of controls obtained in prior audits is not applicable to a compliance audit.
An auditor determines that a client who received a federal grant fraudulently reported information to the federal government. The client’s management refuses to acknowledge the fraud. Which of the following parties should the auditor contact first?
A
The state accountancy board.
B
The state attorney general’s office.
C
The agency that provided the grant.
D
The recipients of the client’s services.
The correct answer is (C).
The first course of action would be to contact the agency that provided the grant. The auditor’s client received a federal government grant by reporting fraudulent information. The auditor needs to immediately get in touch with the agency of the federal government that provided the contract as the client’s management has refused to acknowledge the fraud.
Which of the following statements is not true of both an engagement to review interim financial statements according to PCAOB auditing standards and SSARS?
A
The objective of a review differs significantly from that of an audit.
B
A review includes primarily applying analytical procedures and making inquiries.
C
A review requires obtaining an understanding of the entity’s internal control over financial reporting.
D
The CPA should possess an understanding of the entity’s industry, including the accounting principles and practices generally used.
A review performed in accordance with SSARS does not contemplate obtaining an understanding of the entity’s internal control.
Wale Company plans to present comparative financial statements for the years ended December 31, year 7, and year 8, respectively. Dauphin, CPA, audited Wale’s financial statements for both years and plans to report on the comparative financial statements on March 1, year 9. Dauphin’s audit is subject to the requirements of the Public Company Accounting Oversight Board (PCAOB). What time is covered by Dauphin’s opinion on internal control over financial reporting (ICFR)?
A
The end of year 7 and the end of year 8
B
The end of year 8
C
Year 7 and year 8
D
Year 8
The auditor’s opinion on ICFR is as of a specified date rather than a period of time. When the auditor elects to issue a combined report, the audit opinion will address multiple periods for the financial statements presented, but only the end of the most recent fiscal year for the effectiveness of ICFR.
Brown, CPA, has accepted an engagement to examine the effectiveness of internal control over financial reporting of Crow Company (a nonissuer). Crow Company’s written assertion about the effectiveness of internal control should be presented
I. In a separate report that will accompany Brown’s report II. In a representation letter to Brown
A
Neither I nor II
B
Either I or II
C
Both I and II
D
II only
The correct answer is (C).
Management must present its written assertion about the effectiveness of the entity’s internal control in a report that accompanies the auditor’s report as well as in a representation letter to the accountant.
If an accountant compiles financial statements for an entity and a member of the engagement team has a direct financial interest in the entity, then the accountant should
A
Issue a report for the preparation of client financial statements.
B
Indicate the accountant’s lack of independence in a final paragraph of the compilation report.
C
Include a statement on each page of the financial statements that the accountant is not independent.
D
Disclose in the notes to the financial statements a description of the reason the accountant’s independence is impaired.
Independence would be considered to be impaired if, during the period of the professional engagement, or at the time of expressing an opinion, the member or the member’s firm had or was committed to acquire any direct or material indirect financial interest in the enterprise.
A CPA does not have to be independent to perform a compilation engagement, but a separate paragraph should be added to the report that discloses the lack of independence. Additionally, the CPA may include the reasons for the lack of independence in the same paragraph. The disclosure of the reason(s) is not required, but if the CPA elects to do so, all the reasons must be included.
