Audits of Group Financial Statements Flashcards
When the report of a group auditor makes reference to the examination made by another auditor, the other auditor may be named if express permission to do so is given and
The report of the group auditor names the other auditor in both the scope and opinion paragraphs.
The group auditor accepts responsibility for the work of the other auditor.
The report of the other auditor is presented together with the report of the group auditor.
The other auditor is not an associate or correspondent firm whose work is done at the request of the group auditor.
The report of the other auditor is presented together with the report of the group auditor.
This answer is correct because in making reference to the other auditor, they may be expressly named only if permission has been granted and the report of the other auditor is presented along with the principal auditor’s report.
Thomas, CPA, has examined the consolidated financial statements of Kass Corporation. Jones, CPA, has examined the financial statements of the sole subsidiary which is material in relation to the total examined by Thomas. It would be appropriate for Thomas to serve as the group engagement partner, but it is impractical for Thomas to review the work of Jones. Assuming an unmodified opinion is expressed by Jones, one would expect Thomas to
Refuse to express an opinion on the consolidated financial statements.
Express an unmodified opinion on the consolidated financial statements and not refer to the work of Jones.
Express an unmodified opinion on the consolidated financial statements and refer to the work of Jones.
Express a qualified opinion on the consolidated financial statements and refer to the work of Jones.
Express an unmodified opinion on the consolidated financial statements and refer to the work of Jones.
This answer is correct because when the group engagement partner finds it impractical to review the work of another auditor, he or she will make reference to the examination of the component auditor and issue an unmodified report. This reference will indicate the division of responsibility between that portion of the financial statements covered by the two CPA firms.
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?
Review the other firm’s audit workpapers and reperform a subset of audit testing to validate the firm’s conclusions.
Reference the reliance on the other firm’s work in a footnote disclosure to the financial statements.
Reference the reliance on the other firm’s work in the first paragraph of the opinion in the audit report.
Obtain and attach a copy of the other firm’s representation letter and audit report to the opinion that the CPA firm issues.
Review the other firm’s audit workpapers and reperform a subset of audit testing to validate the firm’s conclusions.
This answer is correct because a CPA firm relying on the work performed by another audit firm (e.g., a component auditor under the Statements on Auditing Standards) ordinarily will be required to review the other firm’s audit workpapers and reperform certain tests, depending upon the significance of the component audited by the other audit firm.
The auditor’s responsibility section of a nonpublic company’s auditor’s report contains the following sentences:
We did not audit the financial statements of EZ Inc., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 27% and 29%, respectively, of the related consolidated totals. 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 EZ Inc., is based solely on the report of the other auditors.
These sentences
Indicate a division of responsibility.
Assume responsibility for the other auditor.
Require a departure from an unmodified opinion.
Are an improper form of reporting.
Indicate a division of responsibility.
The professional standards provide that such a statement indicates a division of responsibility.
Jones, CPA, is the group engagement partner who is auditing the consolidated financial statements of his client. Jones plans to refer to a component auditor's examination of the financial statements of a subsidiary company but does not wish to present the other CPA’s audit report. Both Jones and the other CPA’s audit reports have noted no exceptions to generally accepted accounting principles. Under these circumstances the opinion paragraph of Jones’ consolidated audit report should express An unmodified opinion. A disclaimer of opinion. Qualified opinion. A principal opinion.
An unmodified opinion.
This answer is correct because when a group engagement partner refers to a component auditor’s examination, in this circumstance (neither report includes an exception from GAAP) the audit report is considered an unmodified opinion. The report of the component auditor is only required to be presented if the component auditor is named (note that the component auditor does not have to be and is usually not named).
A group engagement partner (principal auditor) decides not to refer to the audit of a component (other) auditor who audited a subsidiary of the consolidated financial statements. After making inquiries about the component auditor’s professional reputation and independence, the group engagement partner most likely would
Document in the engagement letter that the principal auditor assumes no responsibility for the other CPA’s work.
Obtain written permission from the other CPA to omit the reference in the principal auditor’s report.
Consider the significance of the component and design audit procedures accordingly.
Add an emphasis-of-matter paragraph to the auditor’s report indicating that the subsidiary’s financial statements are not material to the consolidated financial statements.
Consider the significance of the component and design audit procedures accordingly.
This is correct because the procedures to be followed by the group engagement partner (and engagement team) require a consideration of the significance of the subsidiary—as it increases in significance more procedures are required.
In the group auditor’s report, the group engagement partner decides not to make reference to a component auditor who audited a client’s subsidiary. The group auditor could justify this decision if, among other requirements, the group engagement partner
Issues an unmodified opinion on the consolidated financial statements.
Learns that the component auditor issued an unmodified opinion on the subsidiary’s financial statements.
Is unable to review the audit programs and audit documentation of the component auditor.
Is satisfied as to the independence and professional reputation of the component auditor.
Is satisfied as to the independence and professional reputation of the component auditor.
The group engagement partner can elect to take full responsibility for the financial statements, so long as satisfaction with the independence, and professional reputation, and competence of the component auditor is obtained and the additional requirements for assuming responsibility have been met.
Which of the following procedures would the group auditor most likely perform after deciding to make reference to a component auditor who audited a subsidiary of the reporting entity?
Review the audit documentation and the audit programs of the component auditor.
Visit the other CPA and discuss the results of the component auditor’s procedures.
Make inquiries about the professional reputation and independence of the component auditor.
Determine that the component auditor has a sufficient understanding of the subsidiary’s internal control.
When part of the audit is performed by a component auditor, the group auditor is required to make inquiries concerning the professional reputation, independence, and competence of the component auditor.
When an auditor of a parent nonissuer is also the auditor of a component, then each of the following factors would ordinarily influence the decision to obtain a separate engagement letter from the component except
The legal requirements regarding the appointment of the auditor.
Whether a separate audit report is to be issued on the component.
Whether there has been any turnover of the component’s board members.
The degree of independence of the component management from the parent entity.
Whether there has been any turnover of the component’s board members.
CORRECT! AICPA Professional Standards, specifically Terms of Engagement (AU-C 210.A26), identify five considerations that may influence the decision to obtain a separate engagement letter under these circumstances: (1) who engages the component auditor; (2) whether a separate auditor’s report is to be issued on the component; (3) legal requirements regarding the appointment of the auditor; (4) the degree of ownership by the parent; and (5) the degree of independence of the component management from the parent entity. The turnover of the component’s board members is not a relevant consideration.
The group engagement partner decides not to refer to the audit of a component auditor who audited a subsidiary of the group auditor’s client. After making inquiries about the component auditor’s professional reputation and independence, the group engagement partner most likely would
Add an emphasis-of-matter paragraph to the auditor’s report indicating that the subsidiary’s financial statements are not material to the consolidated financial statements.
In the engagement letter that the group auditor assumes no responsibility for the component auditor’s work and opinion.
Obtain written permission from the component auditor to omit the reference in the group engagement partner’s audit report.
Contact the component auditor and review the audit programs and documentation pertaining to the subsidiary.
Contact the component auditor and review the audit programs and documentation pertaining to the subsidiary.
You Answered Correctly!
The group engagement partner may decide not to make reference to the audit of a component auditor after obtaining satisfaction as to the professional reputation, independence, and competence of the component auditor and the work performed. Satisfaction with the work performed might be obtained by visiting the component auditor and discussing the procedures performed and the related results, reviewing the audit programs, and/or reviewing the documentation of the component auditor, including the internal control work performed.
The auditor’s report contains the following sentences:
We did not audit the financial statements of EZ Inc., a wholly-
owned subsidiary, whose statements reflect total assets and
revenues constituting 27 percent and 29 percent, respectively,
of the related consolidated totals. 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 EZ Inc., is based solely on the report of the
other auditors.
These sentences
Indicate a division of responsibility.
Assume responsibility for the other auditor.
Require a departure from an unmodified opinion.
Are an improper form of reporting.
Indicate a division of responsibility.
The language used indicates a division of responsibility. When the group engagement partner decides not to accept responsibility for the work performed by a component auditor, the group engagement partner must disclose this fact in the audit report.
In which of the following situations would a group engagement partner least likely make reference to a component auditor who audited a subsidiary of the entity?
The component auditor was retained by the group auditor and the work was performed under the group auditor’s guidance and control.
The group auditor finds it impracticable to review the component auditor’s work or otherwise be satisfied as to the component auditor’s work.
The group engagement partner is unable to be satisfied as to the independence and professional reputation of the component auditor.
The principal auditor is unable to be satisfied as to the independence and professional reputation of the other auditor.
The component auditor was retained by the group auditor and the work was performed under the group auditor’s guidance and control.
The group engagement partner is not as likely to refer to a component auditor when the component auditor was retained by the group auditor and the work was performed under the group auditor’s guidance and control.
