AUD Becker A1 - Part 2 Flashcards
A CPA firm has decided to rely on the audit work performed by another audit firm. 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. Review the other firm’s audit workpapers and reperform a subset of audit testing to
validate the firm’s conclusions.
C. Reference the reliance on the other firm’s work in the first paragraph of the opinion in
the audit report.
D. Reference the reliance on the other firm’s work in a footnote disclosure to the financial
statements.
Choice “2” is correct. When a CPA firm decides to take responsibility for another firm’s audit work, the CPA firm should review the other firm’s audit workpapers and reperform a subset of audit testing to validate the firm’s conclusions.
Choice “1” is incorrect. The CPA firm would not attach a copy of the other firm’s representation letter and audit report to the opinion that the CPA firm issues.
Choice “3” is incorrect. The CPA firm would not reference the other’s firm’s work in the audit report because the CPA firm decided to take responsibility for another firm’s audit work. No reference to the other auditor should be made in the auditor’s report because to do so may cause a reader to misinterpret the degree of responsibility assumed.
Choice “4” is incorrect. The CPA firm would not reference the other’s firm’s work in a footnote disclosure to the financial statements when a CPA firm decides to take responsibility for another firm’s audit work. Furthermore, management is responsible for the financial statements. The auditor may not make their own footnote disclosures in the client’s financial statements.
Which of the following terms used within standards indicates a presumptively mandatory requirement? A. May B. Should C. Must D. Might
Choice “2” is correct. The term “should” indicates a presumptively mandatory requirement, which must be followed in all cases in which the requirement is relevant, except in rare circumstances when departure from the requirement is permitted if there is appropriate justification, performance of sufficient alternative procedures, and thorough documentation.
Choice “1” is incorrect. The term “may” indicates explanatory material that does not impose a professional requirement for performance.
Choice “3” is incorrect. The term “must” indicates an unconditional requirement, which must be followed in all cases in which the requirement is relevant.
Choice “4” is incorrect. The term “might” indicates explanatory material that does not impose a professional requirement for performance.
After issuing a report, an auditor has no obligation to make continuing inquiries or perform
other procedures concerning the audited financial statements, unless:
A. Information, which existed at the report date and may affect the report, comes to the
auditor’s attention.
B. Information about an event that occurred after the date of the auditor’s report comes to
the auditor’s attention.
C. Management of the entity requests the auditor to reissue the auditor’s report.
D. Final determinations or resolutions are made of contingencies that had been disclosed
in the financial statements.
Choice “1” is correct. After issuing a report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning the audited financial statements, unless information, which existed at the report date and may affect the report, comes to the auditor’s attention. In this case the auditor would perform procedures to determine if the information affects the report and is important to the external users.
Choice “2” is incorrect. The auditor has no obligation to perform other procedures if information about an event that occurred after the date of the auditor’s report comes to the auditor’s attention (and the auditor has not been asked to reissue the report).
Choice “3” is incorrect. The auditor has no obligation to perform other procedures if management of the entity requests the auditor to reissue the auditor’s report (if no significant changes have occurred since the report date).
Choice “4” is incorrect. Most contingencies are eventually resolved; however, such resolution does not require the auditor to perform other procedures.
An auditor’s responsibility to express an opinion on the financial statements of a nonissuer
under U.S. auditing standards is:
A. Explicitly represented in an emphasis-of-matter paragraph of the auditor’s report.
B. Explicitly represented in the Introductory paragraph of the auditor’s report.
C. Explicitly represented in the Auditor’s Responsibility paragraph.
D. Implicitly represented in the auditor’s report.
Choice “3” is correct. The auditor’s responsibility to express an opinion on the financial statements under U.S. auditing standards is explicitly represented in the first sentence of the Auditor’s Responsibility section of the nonissuer audit report. It says “Our responsibility is to express an opinion on these financial statements based on our audit.”
Choice “1” is incorrect. An emphasis-of-matter paragraph does not explicitly represent the auditor’s opinion to express an opinion. Emphasis-of-matter and other-matter paragraphs are used in certain circumstances to add additional communications to the auditor’s report without modifying the auditor’s opinion.
Choice “2” is incorrect. There are no words in the Introductory paragraph of a nonissuer report that represent an auditor’s responsibility to express an opinion. The Introductory paragraph (titled Report on the Financial Statements) states the name of the entity under audit, as well as the financial statements being audited (e.g., balance sheet, income statements, etc.).
Choice “4” is incorrect. The responsibility to express an opinion is explicitly represented (i.e., clearly stated), not implicitly represented (i.e., assumed).
Which of the following procedures would an auditor most likely perform to obtain evidence
about the occurrence of subsequent events?
A. Review tax returns prepared by management after year end.
B. Investigate changes in capital stock recorded after year end.
C. Inquire about payroll checks that were recorded before year end but cashed after year
end.
D. Determine whether inventory ordered before the year end was included in the physical
count.
Choice “2” is correct. A change in capital stock that is recorded after the year end is an example of a subsequent event that might require disclosure in the footnotes to the financial statements.
Choice “1” is incorrect. Tax returns prepared after year end would not be considered a subsequent event issue.
Choice “3” is incorrect. If the payroll checks were recorded prior to year end, there is no subsequent event issue.
Choice “4” is incorrect. The inventory issue would not be considered a subsequent event because the inventory was ordered before year end.
During an audit, the auditor notes that the client’s financial statements are not in conformity
with GAAP regarding the recording of leases. Based on this situation, which opinion is least
likely to be rendered?
A. An unmodified opinion.
B. A qualified opinion.
C. An adverse opinion.
D. A disclaimer of opinion
Choice “4” is correct. A disclaimer of opinion is issued when there is a significant scope limitation, when the auditor is not independent, or when the financial statements are not audited, which is not the case in this question.
Choice “1” is incorrect. An unmodified opinion may be issued when the effect of the GAAP departure is deemed to be immaterial.
Choice “2” is incorrect. A qualified opinion may be issued when the effect of the GAAP departure is material.
Choice “3” is incorrect. An adverse opinion may be issued when the effect of the GAAP departure is material and pervasive.
Reports on special purpose frameworks are issued in conjunction with:
A. Compliance with reporting requirements to be filed with a specific regulatory agency.
B. Interim financial information reviewed to determine whether material modifications
should be made to conform with GAAP.
C. Feasibility studies presented to illustrate an entity’s results of operations.
D. Pro forma financial presentations designed to demonstrate the effects of hypothetical
transactions.
Choice “1” is correct. A special purpose framework is a financial basis of accounting other than GAAP that includes cash basis, tax basis, regulatory basis, and contractual basis. Reporting to comply with required regulatory requirements fits a special purpose framework that deviates from traditional GAAP reporting.
Choice “2” is incorrect. A report on interim financial information reviewed to determine whether material modifications should be made to conform with GAAP is not included in the definition of a special purpose framework report.
Choice “3” is incorrect. Reports related to feasibility studies presented to illustrate an entity’s results of operations are not special purpose framework reports.
Choice “4” is incorrect. Reports on pro forma financial presentations designed to demonstrate the effects of hypothetical transactions are attestation reports, not special purpose framework reports.
Which of the following statements is a basic element of the independent auditor’s report?
A. The financial statements are consistent with those of a prior period.
B. An audit involves performing procedures to obtain audit evidence about the amounts
and disclosures in the financial statements.
C. The financial statements disclose all information required by accounting principles
generally accepted in the United States of America.
D. The procedures selected depend on management’s judgment, including the
assessment of the risk of material misstatement of the financial statements.
hoice “2” is correct. The independent auditor’s report states that an audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.
Choice “1” is incorrect. Consistency is implied in the auditor’s standard report, but is not specifically mentioned.
Choice “3” is incorrect. Adequate disclosure is implied in the independent auditor’s report, but is not specifically mentioned.
Choice “4” is incorrect. The procedures selected depend on the auditor’s judgment, not management’s judgment.
Grant Company’s financial statements adequately disclose uncertainties that concern future
events, the outcome of which are not susceptible of reasonable estimation. The auditor’s
report should include a (an):
A. Unmodified opinion.
B. “Subject to” qualified opinion.
C. “Except for” qualified opinion.
D. Adverse opinion.
Choice “1” is correct. The auditor should issue an “unmodified opinion” when management adequately discloses future events, the outcome of which are not susceptible of reasonable estimation. Under U.S. auditing standards an emphasis-of-matter paragraph may be added by the auditor if the matter is of such importance that it is fundamental to the users’ understanding of the financial statements. International Standards on Auditing recommend the addition of a paragraph describing the significant uncertainty.
Choice “2” is incorrect. “Subject to” qualified opinions are not permitted.
Choice “3” is incorrect. An “except for” qualified opinion would not be used as there is adequate disclosure and there are no scope limitations.
Choice “4” is incorrect. An adverse opinion would not be used because the FS are presented “fairly” in conformity with GAAP.
An auditor most likely would issue a disclaimer of opinion due to:
A. Management’s refusal to furnish a client representation letter.
B. A material departure from a generally accepted accounting principle.
C. An inconsistent application of a generally accepted accounting principle.
D. Inadequate disclosure of material information.
Choice “1” is correct. A disclaimer results from scope limitations, such as management’s refusal to furnish a client representation letter.
Choices “2”, “3”, and “4” are incorrect. Departures from GAAP (including inadequate disclosure) or inconsistent applications of GAAP might lead to a qualified or adverse opinion, but not to a disclaimer of opinion.
If information accompanying the basic financial statements has been subjected to auditing
procedures, the auditor may include in the auditor’s report on the financial statements an
opinion that the accompanying information is fairly stated in:
A. Accordance with generally accepted auditing standards.
B. Conformity with generally accepted accounting principles.
C. All material respects in relation to the financial statements as a whole.
D. Accordance with attestation standards expressing a conclusion about management’s
assertions.
Choice “3” is correct. When information accompanying the basic financial statements has been subjected to auditing procedures, the auditor may include in the auditor’s report an opinion that the information is fairly stated in all material respects in relation to the financial statements as a whole. This statement would appear in an other-matter or explanatory paragraph for a nonissuer or issuer, respectively, following the opinion paragraph. The information may be included in a separate report instead of the opinion report.
Choice “1” is incorrect. An opinion on supplementary information that is presented in the auditor’s report on the financial statements does not state that information is fairly presented in accordance with GAAS. Instead, the opinion states that “the information is fairly stated in all material respects in relation to the financial statements as a whole.”
Choice “2” is incorrect. The auditor would not state that information accompanying the basic financial statements was fairly stated in accordance with GAAP.
Choice “4” is incorrect. Attestation standards do not apply to this engagement.
March, CPA, is engaged by Monday Corp., a client, to audit the financial statements of Wall
Corp., a company that is not March’s client. Monday expects to present Wall’s audited
financial statements with March’s auditor’s report to 1st Federal Bank to obtain financing in
Monday’s attempt to purchase Wall. In these circumstances, March’s auditor’s report would
usually be addressed to:
A. Both Monday Corp. and 1st Federal Bank.
B. Monday Corp., the client that engaged March.
C. Wall Corp., the entity audited by March.
D. 1st Federal Bank.
Choice “2” is correct. The auditors should address their report to the entity that engaged them. In this case, Monday Corp. engaged the auditor to perform an acquisition audit and the report should be addressed to Monday.
Choice “3” is incorrect. Wall Corp. did not engage the auditors and thus the report should not be addressed to them.
Choices “4” and “1” are incorrect. Even though the bank will be relying on the audited financial statements in determining whether to make the loan, the bank did not directly engage the auditing firm and accordingly, the report should not be addressed to them.
Restrictions imposed by a client prohibit the observation of physical inventories, which
account for 35% of all assets. Alternative audit procedures cannot be applied, although the
auditor was able to examine satisfactory evidence for all other items in the financial
statements. The auditor should issue a(an):
Unmodified opinion with an explanation in an emphasis-of-matter paragraph.
“Except for” qualified opinion.
Disclaimer of opinion.
Qualified opinion with a basis for modification paragraph.
Choice “3” is correct. Restrictions of scope imposed on the audit of such a large (35%) asset would require a disclaimer of opinion.
Choice “1” is incorrect. An unmodified opinion is not appropriate, given the size of the inventory (35% of assets).
Choices “2” and “4” are incorrect. The asset not audited is too large for a qualified opinion.
When audited financial statements are presented in a client’s document containing other
information, the auditor should:
Perform inquiry and analytical procedures to ascertain whether the other information is
reasonable.
Read the other information to determine that it is consistent with the audited financial
statements.
Perform the appropriate substantive auditing procedures to corroborate the other
information.
Add an other-matter paragraph to the auditor’ s report without changing the opinion on
the financial statements.
Choice “2” is correct. The auditor should read the “other information” in a client’s document containing audited financial statements to determine that it is consistent with the audited financial statements.
Choice “1” is incorrect. Performing analytical procedures or any other procedure is not necessary.
Choice “3” is incorrect. The auditor has no obligation to perform any procedure to corroborate “other information” contained in a document such as an annual report.
Choice “4” is incorrect. An other-matter paragraph may be added, but is not required.
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. Qualified opinion.
B. Disclaimer of opinion.
C. Unmodified opinion with an emphasis-of-matter paragraph.
D. Review report.
Choice “1” is correct. 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 the opinion.
Choice “2” is incorrect. If the company fails to present its statement of cash flows, this is considered inadequate disclosure. The auditor would not issue a disclaimer of opinion for inadequate disclosure.
Choice “3” is incorrect. The auditor cannot issue an unmodified report if the client omits a statement of cash flows from the financial statements.
Choice “4” is incorrect. The auditor would not issue a review report when performing an audit.
