Audit Chapter 7

Question 1

When accepting an engagement to compile a financial projection - what do you make the client aware of:

Answer 1

That the engagement does NOT include an evaluation of the support for the assumptions underlying the projection.. This is because the projection is based on the judgement of management and the accountant is not qualified to evaluate them

Question 2

What are the rules and limitations when you are asked to submit a written personal financial plan containing unaudited personal financial statements

Answer 2

You do not need to submit a report - as long as they WONT be used to obtain credit.

• You can do them in comparative form
• it is common for disclosures to be omitted

Question 3

If you are doing a review - what documents must you get

Answer 3

engagement letter and mgmt rep letter

Question 4

In a review engagement - what is normally performed first

Answer 4

1- obtain knowledge of the client and its industry - which includes making inquiries as to the client’s principles and practices

Question 5

What is included in a SSARS engagement Letter for f/s prep engagements?

Answer 5

That the management agrees that on each page there is a statement that no assurance is provided or allow the accountant to attach a disclaimer so indicating

Question 6

When performing a review - acct must have a general understanding of the nature of the entity’s business which includes

Answer 6

• The Nature of the entities transactions
  -The form of its accounting records
• the stated qualifications of its accounting personnel
  NO need to gain an understanding of the I/C - this is an audit

Question 7

A compilation provides No assurance - therefore the report is required to indicate

Answer 7

That they did Not perform an audit or review and no opinion, conclusion, or other assurance is provided

Question 8

In a preparation engagement - the accountant assists management with significant judgements used in preparing the F/S. Therefore the account should . . .

Answer 8

discuss the judgements with management so that management understands their significance and accepts responsibility for them

Question 9

When management wont agree to mark each page of a financial statement prep engagement with no assurance provided - what can you do

Answer 9

• the accountant will have to issue a disclaimer that there is no assurance provided to them.
• Id there are no otters issues, then there is no reason to withdraw though you can

Question 10

When downgrading from an audit to a review the accountant will consider:

Answer 10

• the cost and effort to complete the engagement -if negligible then reject the downgrade
• evaluate the possibility that the information affect by the limitation may be incorrect or incomplete and therefore a downgrade will hide material misstatement
• evaluate mgmt reason for request- make sure it is not to prevent the accountant from becoming aware of a material misstatement

Question 11

When doing a compilation and client has omitted most all disclosures - how do you handle

Answer 11

The compilation report will mention the lack of disclosures and say that they may affect the conclusions of users.
-If the disclosure cause the statements to be misleading - this is a problem - maybe withdraw

Question 12

What does a client have to represent in the management rep letter

Answer 12

• subsequent events
• DIM
• responsible for detection and prevention of fraud
• Have made all records available

Question 13

Auditor cant accept commissions from attest clients but can from

Answer 13

Non attest clients

Question 14

Doing going concern issues make you have to give an adverse opinion on f/s?

Answer 14

No

Question 15

A review report provides limited assurance by indicating that the accountant is . .

Answer 15

not aware of any material modifications that should be made to the financial statements in order for them to be in conformity with the applicable financial framework

Question 16

Evidence obtained directly by an auditor is most reliable, but what is the exception

Answer 16

• If the nature of the evidence is something like a schedule of estimates from a client created by an auditor is less persuasive than a outside source like a confirmation from the bank because the estimates are subjective

Question 17

You are asked to report on a service organizations I/C and express an opinion on the policies and procedures put in place (Type 1) as of a specific date . . .

Answer 17

Your report will include:

• a reference to the service or products covered in the report
• a description of the scope and nature of the auditors’s procedures
• what is the purpose of the audit
• express an opinion ONLy on the policies and procedures because- didn’t ask you to give an opinion on the effectiveness (type 2)

Question 18

Evidence obtained directly by an auditor is most reliable, but what is the exception

Answer 18

• If the nature of the evidence is something like a schedule of estimates from a client created by an auditor is less persuasive than a outside source like a confirmation from the bankbecause the estimates are subjective

Question 19

For either Compilation or Review and you have Inadequate Disclosures - what do you add to the additional paragraph

Answer 19

Compilation - additional paragraph that states - there were inadequate disclosures and therefore the report is for Limited Use

Review - add a 5th paragraph - either emphasis of matter or Other Matter that states that there are omitted disclosures and therefore the report is for Limited Use

Question 20

what happens to income if you increase your product warranty periods without increasing warranty reserves

Answer 20

An increase in warranty reserve results in an increase in warranty expense which reduces income. Therefore you need need increase your warranty reserve so income wont be overstated

Question 21

Why would relaxing credit policies without changing A/R receivable collectability assumptions might be actions by mgmt to overstate income

Answer 21

relaxing credit policies will increase A/R. and by not changing collectability assumptions - - bad debt would be understated and income overstated.

Question 22

What is included in the mgmt responsibility paragraph of a standard unmodified opinion audit report

Answer 22

• prep and fair present of F/S in accordance to the APPICABLE FRAMEWORK
• DIM
• NOT anything about the detection of fraud