Ch 15 - Quiz Flashcards
When issuing an unmodified opinion, the auditor who evaluates the audit findings should be satisfied that the
A.) Estimate of the total likely misstatement includes the adjusting entries already recorded by the client.
B.) Amount of known misstatement is documented in the management representation letter.
C.) Amount of known misstatement is acknowledged and recorded by the client.
D.) Estimate of the total likely misstatement is less than a material amount.
D.) Estimate of the total likely misstatement is less than a material amount.
In order to issue an unmodified opinion, the auditor must be confident that no material misstatements exist in the financial statements. While misstatements may exist, in total they must be believed to be less than a material amount.
Which of the following statements is not correct about the auditor’s report under PCAOB auditing standards?
A.) Critical audit matters must be identified and discussed in the auditor’s report.
B.) Each section of the audit report must have an appropriate label.
C.) The auditor’s opinion is expressed at the beginning of the audit report.
D.) The date of the auditor’s report has been changed to the date that the issuer filed the applicable financial statements with the Securities and Exchange Commission.
D.) The date of the auditor’s report has been changed to the date that the issuer filed the applicable financial statements with the Securities and Exchange Commission.
The PCAOB requires the auditor’s report to be dated at the point at which the auditor obtained sufficient appropriate audit evidence as a basis for the opinion. The date of the audit report is unrelated to when the company files its financial statements with the SEC.
An auditor most likely would express an unmodified opinion and would not add an emphasis-of-matter or other-matter paragraph to the report if the auditor
A.) Discovers that supplementary information required by FASB has been omitted.
B.) Believes that there is a remote likelihood of a material loss resulting from an uncertainty.
C.) Concurs with the entity’s change in its method of accounting for inventories.
D.) Wishes to emphasize that the entity had significant transactions with related parties
B.) Believes that there is a remote likelihood of a material loss resulting from an uncertainty.
An unmodified audit report would be appropriate, since there is no need for disclosure if the likelihood of a material loss is indeed remote.
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
A.) Express a qualified opinion on the consolidated financial statements and refer to the work of Jones.
B.) Express an unmodified opinion on the consolidated financial statements and not refer to the work of Jones.
C.) Express an unmodified opinion on the consolidated financial statements and refer to the work of Jones.
D.) Refuse to express an opinion on the consolidated financial statements.
C.) 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.
An auditor was unable to obtain audited financial statements or other evidence supporting an entity’s investment in a foreign subsidiary.
Between which of the following opinions should the entity’s auditor choose?
A.) Qualified and disclaimer.
B.) Qualified and adverse.
C.) Disclaimer and unmodified with an emphasis-of-matter paragraph added.
D.) Adverse and unmodified, with an emphasis-of-matter paragraph added.
A.) Qualified and disclaimer.
The auditor’s inability to obtain audited financial statements or other evidence supporting an entity’s investment in a foreign subsidiary represents a scope limitation. Either a qualified opinion or a disclaimer would be issued.
Zag Co. issues financial statements that present financial position and results of operations but Zag omits the related statement of cash flows. Zag would like to engage Brown, CPA, to audit its financial statements without the statement of cash flows although Brown’s access to all of the information underlying the basic financial statements will not be limited. Under these circumstances, Brown most likely would
A.) Refuse to accept the engagement as proposed because of the client-imposed scope limitation.
B.) Add an emphasis-of-matter paragraph to the standard auditor’s report that justifies the reason for the omission.
C.) Prepare the statement of cash flows as an accommodation to Zag and express an unmodified opinion.
D.) Explain to Zag that the omission requires a qualification of the auditor’s opinion.
D.) Explain to Zag that the omission requires a qualification of the auditor’s opinion.
When an entity omits a statement of cash flows, the auditor may accept an engagement to audit the other financial statements, but should qualify the opinion, since a statement of cash flows is required when general-purpose financial statements present financial position and results of operation.
In which of the following circumstances would an auditor be most likely to express an adverse opinion?
A.) The chief executive officer refuses the auditor access to minutes of board of directors’ meetings.
B.) Tests of controls show that the entity’s internal control structure is so ineffective that it cannot be relied upon.
C.) Information comes to the auditor’s attention that raises substantial doubt about the entity’s ability to continue as a going concern.
D.) The financial statements are not in conformity with the FASB Statements regarding the capitalization of leases.
D.) The financial statements are not in conformity with the FASB Statements regarding the capitalization of leases.
An adverse opinion is issued when a material and pervasive GAAP departure is present in the financial statements. If the financial statements do not conform with FASB requirements for the capitalization of leases, a GAAP departure is present. If considered to be of sufficient magnitude to cause the financial statements to be misleading, the auditor would issue an adverse opinion.
Morris, CPA, suspects that a pervasive scheme of illegal bribes exists throughout the operations of Worldwide Import-Export, Inc., a new audit client.
Morris notified the audit committee and Worldwide’s legal counsel, but neither could assist Morris in determining whether the amounts involved were material to the financial statements or whether senior management was involved in the scheme.
Under these circumstances, Morris should
A.) Express an adverse opinion on the financial statements.
B.) Disclaim an opinion on the financial statements.
C.) Express an unmodified opinion with a separate other-matter paragraph.
D.) Express an unmodified opinion with a separate emphasis-of-matter paragraph.
B.) Disclaim an opinion on the financial statements.
Morris should disclaim an opinion because of the pervasiveness of the scheme and the nature of the items involved.
Although the auditor was not precluded by the client from obtaining sufficient evidence to evaluate the impact of the illegal bribes on the financial statements, the fact that they could not ascertain whether senior management was involved is a critical deficiency.
When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should
A.) Refer to the change in an emphasis-of-matter paragraph.
B.) Refer to the note in the financial statements that discusses the change.
C.) Not refer to the change in the auditor’s report.
D.) Explicitly state whether the change conforms with GAAP.
C.) Not refer to the change in the auditor’s report.
The auditor’s report should not mention a change in accounting principle that has an immaterial effect on comparability. Only material matters are relevant to the auditor’s report.
Which of the following factors should an auditor consider most important upon subsequent discovery of facts that existed at the date of the audit report and would have affected the report?
A.) The client’s willingness to issue revised financial statements or other disclosures to persons known to be relying on the financial statement.
B.) The potential impact on financial statements and associated audit reports for the previous five years.
C.) The cost-to-benefit ratio of performing additional procedures to better determine the impact of the newly discovered facts.
D.) The client’s willingness to pay additional fees for the additional procedures to be performed.
A.) The client’s willingness to issue revised financial statements or other disclosures to persons known to be relying on the financial statement.
When such facts are discovered after the report release date, the auditor has an obligation to discuss the matter with management and determine whether the financial statements require revision. If so, then management’s willingness to issue revised financial statements to known users of the entity’s financial statements is a primary concern to the auditor.
An auditor’s decision concerning whether or not to “dual date” the audit report is based upon the auditor’s willingness to
A.) Accept responsibility for subsequent events.
B.) Assume responsibility for events subsequent to the issuance of the auditor’s report.
C.) Extend auditing procedures.
D.) Permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor’s report.
C.) Extend auditing procedures.
If the auditor becomes aware of a subsequent event that has occurred after the completion of fieldwork, but before the issuance of the report (which should be disclosed), the auditor may dual date the report. Additionally, the auditor may date the report as of the date of the subsequent event and extend the procedures for review of subsequent events to that date. Thus, the decision whether or not to dual date the report is based upon the auditor’s willingness to extend audit procedures.
Which of the following statements concerning a compilation of specific elements, accounts, or items of a financial statement is correct
A.) The accountant performing the compilation must be independent with regard to the client.
B.) The compilation involves compiling financial statements for different subsidiaries of the company.
C.) The compilation must be performed in conformance with an accounting basis consistent with GAAP.
D.) The compilation cannot be relied upon to disclose errors, fraud, or illegal acts.
D.) The compilation cannot be relied upon to disclose errors, fraud, or illegal acts.
A compilation engagement involves assembling in appropriate form the data that is the responsibility of management without any form of assurance. It does not involve the performance of any verification procedures, so it likely would not result in the detection of errors, fraud, or illegal acts.
Which of the following statements is correct regarding a review of a nonpublic entity’s financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARS)?
A.) It is not necessary for the accountant to obtain a management representation letter.
B.) The accountant must be independent to issue the review report.
C.) An opinion is expressed in the review report.
D.) The accountant is required to assess the risk of fraud.
B.) The accountant must be independent to issue the review report.
A review provides “negative assurance” for which the accountant is required to be independent.
On February 9, Brown, CPA, expressed an unmodified (unqualified) opinion on the financial statements of Web Co. On October 9, during a peer review of Brown’s practice, the reviewer informed Brown that engagement personnel failed to perform a search for subsequent events for the Web engagement. Brown should first
A.) Assess the importance of the omitted procedures to Brown’s present ability to support the opinion.
B.) Inquire of Web whether there are persons currently relying, or likely to rely, on the financial statements.
C.) Request Web’s permission to perform substantive procedures that would provide a satisfactory basis for the opinion.
D.) Take no additional action because subsequent events have no effect on the financial statements that were reported on.
A.) Assess the importance of the omitted procedures to Brown’s present ability to support the opinion.
This answer is correct because the Professional Standards require that an auditor in such a situation first assess the importance of the omitted procedure to his/her present ability to support the previously expressed opinion.
An emphasis-of-matter paragraph is used with an unmodified opinion when:
A.) a significant uncertainty exists that should be brought to the financial statements user’s attention.
B.) there is a disagreement with those charged with governance regarding the selection of accounting policies.
C.) a client has an unjustified change in accounting principle.
D.) an extreme limitation of the scope of the audit exists.
A.) a significant uncertainty exists that should be brought to the financial statements user’s attention.
