CH4 Evaluating Flashcards
When an auditor is asked to report on the fair presentation of financial statements of a regulated entity that are prepared in accordance with a basis of accounting prescribed by a regulatory agency, the auditor’s report should:
A.
include a standard unmodified opinion if the entity has complied in all material respects with the basis prescribed by the regulatory agency.
B.
include a standard audit report modified as appropriate because of the departures from generally accepted accounting principles and in an additional paragraph express an opinion on whether the financial statements are presented in conformity with the regulatory basis of accounting.
C.
indicate that the financial statements are prepared on a comprehensive basis of accounting other than GAAP and include a paragraph that explains how the basis differs from GAAP.
D.
include an emphasis-of-matter paragraph describing the regulatory basis of accounting and indicating that the statements should not be used by those unfamiliar with the regulatory basis.
B.
include a standard audit report modified as appropriate because of the departures from generally accepted accounting principles and in an additional paragraph express an opinion on whether the financial statements are presented in conformity with the regulatory basis of accounting.
When an auditor is asked to report on the fair presentation of financial statements prepared in conformity with a regulatory basis of accounting, he or she is required to issue a standard report modified for the departures from GAAP. An additional paragraph is added to this report which expresses the auditor’s opinion on whether the financial statements are presented in conformity with the prescribed basis of accounting.
An auditor is considering whether the omission of the confirmation of investments impairs the auditor’s ability to support a previously expressed unmodified opinion. The auditor need not perform this omitted procedure if:
A.
the results of alternative procedures that were performed compensate for the omission.
B.
the auditor’s assessed level of detection risk is low.
C.
the omission is documented in a communication with the audit committee.
D.
no individual investment is material to the financial statements taken as a whole.
A.
the results of alternative procedures that were performed compensate for the omission.
If other audit procedures compensate for an omitted procedure, the auditor does not need to perform the omitted procedure.
If an auditor’s assessed level of detection risk is low, this would provide a further reason to perform the omitted procedure or an alternative procedure to confirm the investment balance.
An auditor would still need to apply the omitted procedure (or alternative procedure) even if the omission is documented in a communication with the audit committee.
An auditor would need to perform the omitted procedure or an alternative procedure, as the aggregate amount of investments may be material to the financial statements taken as a whole.
An auditor would least likely initiate a discussion with those charged with governance concerning:
A.
the methods used to account for significant unusual transactions.
B.
the maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated.
C.
indications of fraud committed by a corporate officer that were discovered by the auditor.
D.
disagreements with management as to accounting principles that were resolved during the current year’s audit.
B.
the maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated.
A determination of the maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated is not an issue likely to be discussed with those charged with governance.
AU-C 240.10–.11, .29 and AU-C 260.12
The written communication regarding significant deficiencies and material weaknesses identified during the audit should include all of the following except:
A.
a statement that the purpose of the auditor’s consideration of internal control was to express an opinion on the financial statements, but not to express an opinion on the effectiveness of the entity’s internal control.
B.
the definition of the term “material weakness” and, where relevant, the definition of the term significant deficiency.
C.
a paragraph describing management’s assertion concerning the effectiveness of internal control.
D.
the matters that are considered to be significant deficiencies and those that are considered to be material weaknesses.
C. a paragraph describing management’s assertion concerning the effectiveness of internal control.
The written communication regarding significant deficiencies and material weaknesses identified during the audit of financial statements should include:
- the definition of the term material weakness and, when relevant, the definition of the term significant deficiency.
a description of the significant deficiencies and material weaknesses and an explanation of their potential effects.
- sufficient information to enable those charged with governance and management to understand the context of the communication.
In particular, the auditor should include in the communication the following elements that explain that the purpose of the audit was for the auditor to express an opinion on the financial statements:
- The audit included consideration of internal control over financial reporting in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of internal control.
- The auditor is not expressing an opinion on the effectiveness of internal control.
- The auditor’s consideration of internal control was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies, and therefore, material weaknesses or significant deficiencies may exist that were not identified.
- A paragraph describing management’s assertion concerning the effectiveness of internal control is not a required communication.
Audit documentation serves mainly to:
A.
provide the principal support for the auditor’s report.
B.
satisfy the auditor’s responsibilities concerning the Code of Professional Ethics.
C.
monitor the effectiveness of the CPA firm’s quality control procedures.
D.
document the level of independence maintained by the auditor.
A.
provide the principal support for the auditor’s report.
Audit documentation serves mainly to provide the principal support for the auditor’s report, including how the auditor has complied with the standards of fieldwork.
When performing an audit, a CPA notes that bad debt expense is unusually high relative to similar firms in the industry. The CPA should recommend which of the following controls?
A.
Use approved price lists for customer billing
B.
Send monthly statements of account to customers with outstanding balances
C.
Require credit checks on all new customers
D.
Reconcile accounts receivable in the general ledger with the subsidiary ledger
C.
Require credit checks on all new customers
When an auditor notes that bad debt expense is unusually high relative to similar firms in the industry, the auditor may recommend that management require credit checks on all new customers. The other controls given in the answer choices would not have a direct impact on reducing bad debt expense.
An accountant’s standard report on a compilation of a projection should not include a statement that:
A.
there will usually be differences between the forecasted and actual results.
B.
the hypothetical assumptions used in the projection are reasonable in the circumstances.
C.
the accountant has no responsibility to update the report for future events and circumstances.
D.
the compilation of a projection is limited in scope.
B. the hypothetical assumptions used in the projection are reasonable in the circumstances.
In a compilation of a projection, the CPA would assemble the financial statements based on management’s assumptions, perform compilation procedures and consider whether the financial statements are presented according to AICPA guidelines, and issue a compilation report. A compilation provides no assurance on the financial statements or on the assumptions underlying the statements.
The compilation report should:
identify the prospective financial statements,
state that the compilation was performed in accordance with attestation standards established by the American Institute of Certified Public Accountants (AICPA),
state that the compilation is limited in scope and that the CPA does not issue an opinion or any assurance on the financial statements,
contain the statement that forecasted results may not be achieved (there will usually be differences between the forecasted and actual results),
explain that the CPA assumes no responsibility to update the report for future events and circumstances occurring after the date of the report, and
be dated and signed by the practitioner’s firm.
The compilation report will not state that the hypothetical assumptions used in the projection are reasonable in the circumstances. This statement would imply some type of assurance on the assumptions.
What is the most likely source of the following statement?
“As discussed in Note 14 to the financial statements, the Company has had numerous dealings with businesses controlled by, and people who are related to, the officers of the Company.”
A.
Management representation letter
B.
Auditor’s communication with the audit committee
C.
Auditor’s report
D.
Letter for underwriters
C.
Auditor’s report
An auditor’s report would contain explanatory language concerning related party transactions if the auditor thought it was appropriate.
Which of the following types of audit evidence generally is the most appropriate?
A.
Inquiries made of management
B.
Confirmation of account information
C.
Analytical procedures
D.
Review of prior-year audit procedures
B. Confirmation of account information
Evidence is appropriate if it is reliable and relevant.
In general, the reliability of evidence is greater:
when it is obtained from knowledgeable independent sources outside the entity,
when the related controls imposed by the entity are effective,
when the evidence is personally obtained by the auditor, versus obtained indirectly or by inference,
when it exists in documentary form (written versus oral), and
when it is provided by original documents instead of photocopies or facsimiles.
In this light, the evidence with the greater reliability (and therefore the more appropriate evidence) would be a confirmation of account information (an original document in written form) that is mailed directly to the auditor from a source outside the entity.
Helpful Co., a nonprofit entity, prepared its financial statements on an accounting basis prescribed by a regulatory agency solely for filing with that agency. Green audited the financial statements in accordance with generally accepted auditing standards and concluded that the financial statements were fairly presented on the prescribed basis. Green should issue an audit report:
A.
with a qualified opinion.
B.
with an unmodified opinion with reference to footnote disclosure.
C.
with a disclaimer of opinion.
D.
on special-purpose financial statements.
D.
on special-purpose financial statements.
An entity’s compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements is specifically listed as a special report in AU-C 800.04 and .07. If Green audited the financial statements in accordance with generally accepted auditing standards and concluded that the financial statements were fairly presented on the prescribed basis, a qualified opinion, an unmodified opinion with reference to footnote disclosure, or a disclaimer of opinion would not be appropriate.
Comfort letters ordinarily are signed by the client’s:
A.
independent auditor.
B.
underwriter of securities.
C.
audit committee.
D.
senior management.
A.
independent auditor.
A comfort letter is a letter issued to underwriters concerning the financial information contained in registration statements filed with the SEC in connection with the issuance of securities.
A comfort letter is sent (and signed) by the independent auditor to the underwriter.
An entity’s comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented. If the predecessor’s report was qualified, the successor should:
A.
issue an updated comparative audit report indicating the division of responsibility.
B.
explain to the client that comparative financial statements may not be presented under these circumstances.
C.
express an opinion only on the current year’s financial statements and make no reference to the prior year’s statements.
D.
indicate the substantive reasons for the qualification in the predecessor auditor’s opinion.
D. indicate the substantive reasons for the qualification in the predecessor auditor’s opinion.
When a prior year’s financial statements being used for comparative purposes were audited by another auditor who expressed a qualified opinion and whose report is not being presented, the management’s responsibility paragraph of the successor’s report is changed to include a statement that the prior year’s statements were audited by another auditor, the date of the other auditor’s report, the opinion issued, and an explanation if the opinion was other than unmodified. The name of the predecessor auditor should not be mentioned if his or her report is not presented.
Which of the following is correct about reporting on compliance with laws and regulations in a financial audit under Government Auditing Standards (the “Yellow Book”)?
A.
Auditors are not required to report fraud, noncompliance with laws and regulations, and other material noncompliance in the audit report.
B.
In some circumstances, auditors are required to report fraud and noncompliance with laws and regulations directly to parties external to the audited entity.
C.
The auditor’s key findings of the audit of the financial statements should be communicated in a separate report.
D.
The reporting standards in a governmental audit modify the auditor’s responsibilities under generally accepted auditing standards.
B.
In some circumstances, auditors are required to report fraud and noncompliance with laws and regulations directly to parties external to the audited entity.
In the following circumstances, the auditor should recognize the need to disclose the fraud to parties outside the entity:
To comply with legal and regulatory requirements
To a successor auditor when the successor makes inquiries in accordance with SAS 84
In response to a subpoena
To a funding agency or other specified agency in accordance with requirements for the audits of entities that receive governmental financial assistance
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.
I only
D.
II only
C. I only
An auditor may perform an examination of internal control only if the following conditions are met:
Management accepts responsibility for the effectiveness of the entity’s internal control.
Management evaluates the effectiveness of the entity’s internal control using suitable and available criteria.
Management supports its assertion about the effectiveness of the entity’s internal control with sufficient appropriate evidence…
Management provides its assertion about the effectiveness of the entity’s internal control in a report that accompanies the auditor’s report.
A CPA concludes that the unaudited financial statements on which the CPA is disclaiming an opinion are not in conformity with an applicable financial reporting framework because management has failed to capitalize leases. The CPA suggests appropriate revisions to the financial statements, but management refuses to accept the CPA’s suggestions. Under these circumstances, the CPA ordinarily would:
A.
express limited assurance that no other material modifications should be made to the financial statements.
B.
restrict the distribution of the CPA’s report to management and the entity’s board of directors.
C.
issue a qualified opinion or adverse opinion depending on the materiality of the departure from an applicable financial reporting framework.
D.
describe the nature of the departure from an applicable financial reporting framework in the CPA’s report and state the effects on the financial statements, if practicable.
D.
describe the nature of the departure from an applicable financial reporting framework in the CPA’s report and state the effects on the financial statements, if practicable.
The key to this question is the phrase “unaudited financial statements.” A CPA would disclaim an opinion on the unaudited financial information of a public entity (an issuer) when he is associated with the financial statements but has not reviewed or audited them. The disclaimer would state that the financial statements “were not audited by us and, accordingly, we do not express an opinion on them.” If there should be a material departure from an applicable financial reporting framework that management refuses to correct, the CPA should modify the language in the report to describe the departure.
The CPA is not expressing limited assurance in this circumstance; he is expressing no assurance when there is a disclaimer. The report cannot be restricted to the entity’s management and board of directors if it is accompanying financial information required to be submitted to a third party. As an audit has not been performed, the CPA would not issue a qualified or adverse opinion.
What is an auditor’s responsibility for supplementary information required by the GASB that is placed outside the basic financial statements?
A.
Label the information as unaudited and expand the auditor’s report to include a disclaimer on the information.
B.
Add an emphasis-of-matter paragraph to the auditor’s report and refer to the information as “required supplementary information.”
C.
Apply limited procedures to the information and report deficiencies in, or the omission of, the information.
D.
Audit the required supplementary information in accordance with generally accepted governmental auditing standards.
C.
Apply limited procedures to the information and report deficiencies in, or the omission of, the information.
The auditor’s responsibility for supplementary information required by the GASB that is placed outside the basic financial statements is to apply limited procedures consisting primarily of inquiry of management regarding methods of measurement and presentation. Any deficiencies in, or omissions of, such information found should be reported (AU-C 730.05).
The auditor does label the information as unaudited and expands the auditor’s report to include a disclaimer on the information. However, this is a procedure, not a responsibility.
Which of the following is incorrect with regard to communicating internal control related matters indentified in an audit of a nonissuer?
A.
Significant deficiencies and material weaknesses should be communicated, in writing, to management and those charged with governance.
B.
Management or those charged with governance may choose to not remediate certain significant deficiencies or material weaknesses due to cost/benefit considerations.
C.
Significant deficiencies and material weaknesses communicated in prior audits that have not yet been remediated need not be communicated again.
D.
The written communication is best made by the report release date.
C.
Significant deficiencies and material weaknesses communicated in prior audits that have not yet been remediated need not be communicated again.
Deficiencies identified during the audit that upon evaluation are considered significant deficiencies or material weaknesses should be communicated, in writing, to management and those charged with governance as a part of each audit, including significant deficiencies and material weaknesses that were communicated to management and those charged with governance in previous audits and have not yet been remediated.
For uncorrected misstatements, the auditor should document all of the following, except:
A.
all misstatements accumulated during the audit and whether they have been corrected.
B.
the amount below which misstatements would be regarded as clearly trivial.
C.
the size and nature of the misstatement.
D.
the auditor’s conclusion about whether uncorrected misstatements are material, individually or in the aggregate, and the basis for that conclusion.
C.
the size and nature of the misstatement.
The auditor should include in the audit documentation:
the amount below which misstatements would be regarded as clearly trivial;
all misstatements accumulated during the audit and whether they have been corrected; and
the auditor’s conclusion about whether uncorrected misstatements are material, individually or in aggregate….
When unaudited financial statements of a nonissuer are presented in comparative form with audited financial statements in the subsequent year, the unaudited financial statements should be clearly marked to indicate their status and:
I. the report on the unaudited financial statements should be reissued.
II. the report on the audited financial statements should include a separate paragraph describing the responsibility assumed for the unaudited financial statements.
A.
I only
B.
II only
C.
Both I and II
D.
Either I or II
D.
Either I or II
Unaudited financial statements presented comparatively with audited financial statements should be clearly marked as unaudited. The accountant is associated with the unaudited statements since they are presented in comparison to the audited statements. To clearly define the responsibility the auditor is assuming, a separate paragraph is included in the audit report, or the report on the unaudited financial statements is reissued.
When a broker-dealer or other financial intermediary, besides an underwriter or other party with a due diligence defense under section 11 of the Securities Act of 1933, requests a comfort letter but does not provide a representation letter, the accountant should:
A.
qualify the report issued in connection with the comfort letter due to the scope limitation related to the engagement.
B.
indicate in a separate paragraph of his or her report that the required representation letter has not been received and the substantive reasons therefore.
C.
not provide a comfort letter but may provide another form of letter.
D.
provide negative assurance related to the engagement due to the failure to receive a representation letter.
C.
not provide a comfort letter but may provide another form of letter.
When a party such as a broker-dealer or other financial intermediary, other than an underwriter or other party with a due diligence defense under section 11 of the Securities Act of 1933, requests a comfort letter but does not provide the required representation letter, accountants should not provide a comfort letter but may provide another form of letter.
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
A.
The auditor is unable to determine the amounts associated with an employee fraud scheme.
B.
Management does not provide reasonable justification for a change in accounting principles.
C.
The client refuses to permit the auditor to confirm certain accounts receivable or apply alternative procedures to verify their balances.
D.
The chief executive officer is unwilling to sign the management representation letter.
B.
Management does not provide reasonable justification for a change in accounting principles.
The auditor is required to state whether the financial reporting framework has been consistently applied. Inconsistency in the application of the framework is a common reason for qualified opinions by auditors. A change in accounting principle must be reasonably justified. If not, the auditor’s report should state that fact. A disclaimer of opinion would not be appropriate when management does not provide reasonable justification for a change in accounting principles. This would result in a qualified opinion or, if the effect of the change is sufficiently material, an adverse opinion. Only when an auditor is not independent or the scope of an audit has been severely limited or there is an unresolved uncertainty that is far-reaching and serious, should an auditor disclaim an opinion.
In auditing compliance with requirements governing major federal financial assistance programs under the Single Audit Act, the auditor’s consideration of materiality differs from materiality under generally accepted auditing standards. Under the Single Audit Act, materiality is:
A.
calculated in relation to the financial statements taken as a whole.
B.
determined separately for each major federal financial assistance program.
C.
decided in conjunction with the auditor’s risk assessment.
D.
ignored, because all account balances, regardless of size, are fully tested.
B.
determined separately for each major federal financial assistance program.
The Single Audit Act requires the auditor to determine two levels of materiality for the purposes of performing the single audit fieldwork and for reporting material noncompliance on the auditor’s schedule of findings and questioned costs. Materiality is determined separately for each major federal financial assistance program.
In an electronic environment, auditors and practitioners frequently carry forward and update files or schedules from one audit or attest period to the next. The auditor or practitioner must be careful, however, to adopt reasonable procedures that:
A.
all such files or schedules be printed and bound in the firm’s working papers.
B.
enable him or her to access the electronic audit or attest documentation throughout the entire retention period.
C.
Both of the answer choices are correct.
D.
Neither of the answer choices is correct.
B.
enable him or her to access the electronic audit or attest documentation throughout the entire retention period.
AT 101.104, footnote 25, states that “the procedures should enable the practitioner to access electronic attest documentation throughout the retention period.” The same is true for audit engagements.
Accepting an engagement to compile an entity’s financial projection most likely would be inappropriate if the projection is to be included in:
A.
a mortgage application for the purpose of expanding the entity’s facilities.
B.
an offering statement of the entity’s initial public offering of common stock.
C.
a comprehensive document to be used in negotiating a new labor contract.
D.
a report to the audit committee that is not sent to the stockholders.
B.
an offering statement of the entity’s initial public offering of common stock.
A financial projection is appropriate for limited use only. This means that it can be used by the responsible party alone or by the responsible party and third parties with whom the responsible party is negotiating directly. The following would be examples of limited use:
With a mortgage application (negotiating directly with the bank)
With a report to the audit committee (for use by the responsible party)
With a document for negotiating a labor contract (negotiating directly with the union)
A prospective financial statement included in an offering statement would have to be a financial forecast, as it is the prospective financial statement that is appropriate for use by persons with whom the entity is not negotiating directly (general use).
Which of the following matters is an auditor required to communicate to an entity’s audit committee?
A.
Adjustments that were suggested by the auditor and recorded by management that have a significant effect on the entity’s financial reporting process
B.
The auditor’s consideration of risk factors in assessing the risk of material misstatement arising from the misappropriation of assets
C.
The results of the auditor’s analytical procedures performed in the review stage of the engagement that indicate significant variances from expected amounts
D.
Changes in the auditor’s preliminary judgment about materiality that were caused by projecting the results of statistical sampling for tests of transactions
A. Adjustments that were suggested by the auditor and recorded by management that have a significant effect on the entity’s financial reporting process
The auditor should communicate with those charged with governance (the audit committee):
- the auditor’s responsibilities under generally accepted auditing standards,
- an overview of the planned scope and timing of the audit, and significant findings from the audit.
The significant findings from the audit that should be communicated include:
- the auditor’s view about qualitative aspects of the entity’s significant accounting practices, significant difficulties encountered during the audit, uncorrected misstatements (that are not trivial), disagreements with management, other findings or issues that the auditor believes to be significant or relevant to the audit committee’s oversight of the financial reporting process,
material, corrected misstatements that were brought to the attention of management as a result of audit procedures, representations the auditor is requesting from management, management’s consultations with other accountants about accounting and auditing matters, and significant issues arising from the audit that were discussed with management.
Accordingly, the correct answer choice is, “Adjustments that were suggested by the auditor and recorded by management that have a significant effect on the entity’s financial reporting process.”
Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern?
A.
Cash flows from operating activities are negative.
B.
Research and development projects are postponed.
C.
Significant related party transactions are pervasive.
D.
Stock dividends replace annual cash dividends.
A.
Cash flows from operating activities are negative.
An entity’s ability to continue as a going concern is affected when cash flows from operating activities are negative. This negative trend is specifically mentioned as one of the conditions that may cause an auditor to have substantial doubt about the going concern assumption. Management may have plans to deal with this condition by postponing research and development projects and using stock dividends to conserve cash flow.
Significant related party transactions that are pervasive may need to be emphasized in a separate emphasis-of-matter paragraph in the auditor’s report, but are generally unrelated to the going concern assumption.
The auditor is precluded from including which of the following statements in his or her communication of internal control related matters identified in an audit?
A.
No significant deficiencies were identified during the audit.
B.
No material weaknesses were identified during the audit.
C.
Both of the answer choices are correct.
D.
Neither of the answer choices is correct.
A.
No significant deficiencies were identified during the audit.
While the auditor may communicate there were no material weaknesses identified during the audit, AU-C 265.16 precludes “a written communication stating that no significant deficiencies were identified during the audit.”
Subsequent to the issuance of an auditor’s report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:
A.
determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
B.
request that management disclose the newly discovered information by issuing revised financial statements.
C.
issue revised pro forma financial statements taking into consideration the newly discovered information.
D.
give public notice that the auditor is no longer associated with financial statements.
A.
determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
After becoming aware of facts that existed at the report date (that are reliable and that would have affected the report), the auditor should first determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. The auditor also considers how long the financial statements have been issued. Then, once the above has been determined, the auditor should request that management disclose the newly discovered information and consider issuing revised (not pro forma) financial statements.
The auditor is already responsible for and associated with the financial statements and therefore must ensure that all the information is properly disclosed in relation to the original financial statements.
In the first audit of a client, an auditor was not able to gather sufficient appropriate audit evidence about the consistent application of accounting principles between the current and the prior year, as well as the amounts of assets or liabilities at the beginning of the current year. This was due to the client’s record retention policies. If the amounts in question could materially affect current operating results, the auditor would:
A.
be unable to express an opinion on the current year’s results of operations and cash flows.
B.
express a qualified opinion on the financial statements because of a client-imposed scope limitation.
C.
withdraw from the engagement and refuse to be associated with the financial statements.
D.
specifically state that the financial statements are not comparable to the prior year due to an uncertainty.
A.
be unable to express an opinion on the current year’s results of operations and cash flows.
If an auditor is unable to apply all necessary audit procedures he or she considers necessary, regardless of the reason, a scope limitation has occurred. In the case where an auditor is unable to verify beginning balances because he was hired at some point during the year being audited, then those accounts which are measured over a period of time (such as revenues and expenses) cannot be verified. The auditor may not issue an opinion on the income statement and statement of cash flows for this period. However, the auditor would be able to express an opinion on the balance sheet since it is dated on the last day of the period.
On March 15, 20X2, Kent, CPA, issued an unmodified opinion on a client’s audited financial statements for the year ended December 31, 20X1. On May 4, 20X2, Kent’s internal inspection program disclosed that engagement personnel failed to observe the client’s physical inventory. Omission of this procedure impairs Kent’s present ability to support the unmodified opinion. If the stockholders are currently relying on the opinion, Kent should first:
A.
advise management to disclose to the stockholders that Kent’s unmodified opinion should not be relied on.
B.
undertake to apply alternative procedures that would provide a satisfactory basis for the unmodified opinion.
C.
reissue the auditor’s report and add an emphasis-of-matter paragraph describing the departure from generally accepted auditing standards.
D.
compensate for the omitted procedure by performing tests of controls to reduce audit risk to a sufficiently low level.
B.
undertake to apply alternative procedures that would provide a satisfactory basis for the unmodified opinion.
When a generally accepted auditing procedure (e.g., observation of the client’s physical inventory) is not performed and an unmodified opinion has been issued, the auditor should undertake to apply alternative procedures that would provide satisfactory basis for the unmodified opinion. Through the alternative procedures in 20X2, the auditor may become satisfied as to the December 31, 20X1, inventory. Since the unmodified opinion has been issued by the auditor, and an observation should always be held, the CPA has placed a burden of justifying the opinion on himself. Reissuing the auditor’s report and explaining the departure from GAAS is not required by the standards. Performing tests of controls to reduce audit risk to a sufficiently low level would not provide sufficient substantive evidence to overcome the lack of an inventory observation or alternative procedures.
AU-C 585.07 states, “If the auditor concludes that an omitted procedure of which the auditor has become aware impairs the auditor’s present ability to support a previously expressed opinion on the financial statements and the auditor believes that there are users currently relying, or likely to rely, on the previously released report, the auditor should promptly perform the omitted procedure, or alternative procedures, to determine whether there is a satisfactory basis for the auditor’s previously expressed opinion.”
A CPA is permitted to accept a separate engagement (not in conjunction with an audit of financial statements) to audit an entity’s:
A.
schedule of accounts receivable.
B.
schedule of royalties.
C.
schedule of accounts receivable and schedule of royalties.
D.
None of the answer choices are correct.
C.
schedule of accounts receivable and schedule of royalties.
An independent auditor may undertake an engagement to express an opinion on one or more specified elements, accounts or items of a financial statement as a separate engagement the result of which is a special report whose distribution is restricted to named parties involved. This restriction is required due to the nature of the report and the potential for the report to be taken out of the context in which the auditor’s report was intended to be used. Engagements to audit a schedule of accounts receivable or a schedule of royalties are examples of engagements on specified items or accounts in financial statements.
Kane, CPA, concludes that there is substantial doubt about Lima Co.’s ability to continue as a going concern for a reasonable period of time. If Lima’s financial statements adequately disclose its financial difficulties, Kane’s auditor’s report is required to include an emphasis-of-matter paragraph that specifically uses the phrase:
I. “possible discontinuance of operations.”
II. “reasonable period of time, not to exceed one year.”
A.
Both I and II
B.
I only
C.
II only
D.
Neither I nor II
D. Neither I nor II
The following is an example of a going concern emphasis-of-matter paragraph:
The accompanying financial statements have been prepared assuming that Company Y will continue as a going concern. As discussed in Note X to the financial statements, the company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note X. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The phrases “possible discontinuance of operations” and “reasonable period of time, not to exceed one year,” although part of the consideration regarding an entity’s ability to continue as a going concern, do not appear in this example emphasis-of-matter paragraph.
An auditor most likely would issue a disclaimer of opinion because of:
A.
inadequate disclosure of material information.
B.
the omission of the statement of cash flows.
C.
a material departure from generally accepted accounting principles.
D.
management’s refusal to furnish written representations.
D.
management’s refusal to furnish written representations.
A management representation letter is written representation from management that affirms the fair presentation of the financial statements and management’s responsibility for them; the completeness of all information provided to the auditor and in the financial statements; representations relating to recognition, measurement, and disclosure (including the absence of knowledge of fraud or suspected fraud); and information concerning subsequent events.
If management refuses to furnish a written representation as part of an examination engagement, the auditor may either withdraw from the engagement or disclaim an opinion.
An auditor decides to issue a qualified opinion on an entity’s financial statements because a major inadequacy in its computerized accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the auditor’s report should state that the qualification pertains to:
A.
a client-imposed scope limitation.
B.
a departure from generally accepted auditing standards.
C.
the possible effects on the financial statements.
D.
lack of access to necessary information.
C.
the possible effects on the financial statements
When an auditor qualifies his or her opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself.
Mead, CPA, had substantial doubt about Tech Co.’s ability to continue as a going concern when reporting on Tech’s audited financial statements for the year ended June 30, 20X1. That doubt was removed in 20X2. What is Mead’s reporting responsibility if Tech presented its financial statements for the year ended June 30, 20X2, on a comparative basis with those of 20X1?
A.
The emphasis-of-matter paragraph included in the 20X1 auditor’s report should not be repeated.
B.
The emphasis-of-matter paragraph included in the 20X1 auditor’s report should be repeated in its entirety.
C.
A different emphasis-of-matter paragraph describing Mead’s reasons for the removal of doubt should be included.
D.
A different emphasis-of-matter paragraph describing Tech’s plans for financial recovery should be included.
A.
The emphasis-of-matter paragraph included in the 20X1 auditor’s report should not be repeated.
A previously issued report that is not appropriate for the current status of the entity should not be reissued or referred to in the report of the financial statements of the current period. Therefore, the no longer applicable emphasis-of-matter paragraph included in the 20X1 auditor’s report should not be repeated.
An entity prepares its financial statements on its income tax basis. A description of how that basis differs from GAAP should be included in the:
A.
notes to the financial statements.
B.
auditor’s engagement letter.
C.
management representation letter.
D.
introductory paragraph of the auditor’s report.
A.
notes to the financial statements.
If an entity prepares its financial statements on its income tax basis, a note to the financial statements should describe the special-purpose framework.
An auditor determines that the entity is presenting certain supplementary financial disclosures of pension information that are required by the GASB. Under these circumstances, the auditor should:
A.
add an emphasis-of-matter paragraph to the auditor’s report that refers to the required supplementary information only if some of the required supplementary information is omitted.
B.
state that the audit is not being performed in accordance with generally accepted auditing standards.
C.
document in the working papers that the required supplementary information is presented, but should not apply any procedures to the information.
D.
compare the required supplementary information for consistency with the audited financial statements.
D.
compare the required supplementary information for consistency with the audited financial statements.
The auditor should apply the following procedures to required supplementary information:
Make inquiries of management regarding the measurement and presentation of the information (Was it according to specified guidelines? Were there any changes from the way it was prepared in previous years? What are the significant assumptions underlying the preparation?)
Compare the information for consistency with management’s responses to the inquiries, the audited financial statements, and other knowledge obtained during the audit
Consider adding the supplementary information to management’s representations
Apply any other prescribed additional procedures (which would vary according to the specific type of supplementary information)
Which of the following pairs of accounts would an auditor most likely analyze on the same workpaper?
A.
Notes receivable and interest income
B.
Accrued interest receivable and accrued interest payable
C.
Notes payable and notes receivable
D.
Interest income and interest expense
A.
Notes receivable and interest income
When workpapers are developed, related accounts, especially those whose balances or transactions are dependent on each other, will often be placed on the same workpaper. Of the responses listed, only one pair—notes receivable and interest income—contains accounts whose activities are related in such a way that evaluating their respective balances simultaneously makes sense.
An auditor was engaged to conduct a performance audit of a governmental entity in accordance with Government Auditing Standards. These standards do not require, as part of this auditor’s report:
A.
the objectives, scope, and methodology of the audit.
B.
the audit results.
C.
the nature of any privileged and confidential information omitted.
D.
a concurrent opinion on the financial statements taken as a whole.
D.
a concurrent opinion on the financial statements taken as a whole.
The auditor’s report for a performance audit of a governmental entity in accordance with Government Auditing Standards should contain:
the objectives, scope, and methodology of the audit,
the audit results, including findings, conclusions, and recommendations, as appropriate,
a reference to compliance with generally accepted government auditing standards,
the views of responsible officials, and
if applicable, the nature of any privileged and confidential information omitted.
A concurrent opinion on the historical financial statements is not the objective of the performance audit and is not required.
Which of the following statements is most accurate regarding sufficient and appropriate documentation?
A.
Accounting estimates are not considered sufficient and appropriate documentation.
B.
Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed.
C.
If additional evidence is required to document significant findings or issues, the original evidence is not considered sufficient and appropriate, and therefore should be deleted from the working papers.
D.
Audit documentation is the property of the client, and sufficient and appropriate copies should be retained by the auditor for at least five years.
B.
Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed.
The auditor must prepare audit documentation in connection with each engagement in sufficient detail to provide a clear understanding of the work performed and the audit evidence obtained and its source, and the conclusions reached.
In reporting on compliance with laws and regulations during a financial statement audit in accordance with Government Auditing Standards, an auditor should include in the auditor’s report:
A.
a statement of assurance that all controls over fraud and noncompliance with laws and regulations were tested.
B.
material instances of fraud and noncompliance with laws and regulations that were discovered.
C.
the materiality criteria used by the auditor in considering whether instances of noncompliance were significant.
D.
an opinion on whether compliance with laws and regulations affected the entity’s goals and objectives.
B.
material instances of fraud and noncompliance with laws and regulations that were discovered.
The reporting standards under Government Auditing Standards require that written audit reports should include weaknesses in internal control considered to be significant deficiencies; any indication of fraud, abuse, or noncompliance with laws and regulations; and significant violations of contracts or grant agreements.
Reports are considered special reports when issued in conjunction with:
A.
interim financial information reviewed to determine whether material modifications should be made to conform with GAAP.
B.
feasibility studies presented to illustrate an entity’s results of operations.
C.
compliance with aspects of regulatory requirements related to audited financial statements.
D.
pro forma financial presentations designed to demonstrate the effects of hypothetical transactions.
C.
compliance with aspects of regulatory requirements related to audited financial statements.
An entity’s compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements is specifically listed as a special report in AU-C 800.04 and .07.
Which of the following professional services would be considered an attestation engagement?
A.
Advocating on behalf of a client about trust tax matters under review by the Internal Revenue Service
B.
Providing financial analysis, planning, and capital acquisition services as a part-time, in-house controller
C.
Advising management in the selection of a computer system to meet business needs
D.
Preparing the income statement and balance sheet for one year in the future based on client expectations and predictions
D.
Preparing the income statement and balance sheet for one year in the future based on client expectations and predictions
The attestation standards define an attest engagement as one in which a practitioner is “engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter…that is the responsibility of another party.” (AT 101.01)
An engagement to prepare the income statement and balance sheet for one year in the future based on client expectations would be considered an attest engagement, because the accountant is issuing an examination, review, or agreed-upon procedures report on another party’s assertion.
The other answer choices describe consulting services that CPAs often provide to their clients.
For which of the following events would an auditor issue a report that omits any reference to consistency?
A.
A change in the method of accounting for inventories
B.
A change from an accounting principle that is not generally accepted to one that is generally accepted
C.
A change in the useful life used to calculate the provision for depreciation expense
D.
Management’s lack of reasonable justification for a change in accounting principle
C. A change in the useful life used to calculate the provision for depreciation expense
A change in accounting estimate (such as a change in the useful life of a depreciable asset) is accounted for prospectively and does not affect the comparability of financial statements between periods. Since the auditor’s standard report implies that consistency exists, no modification to the report is necessary.
A change in the method of accounting for inventories and a change from an accounting principle that is not generally accepted to one that is generally accepted both represent a change in accounting principle, which requires a consistency modification.
If management adopts an accounting principle and has not provided reasonable justification for the change, the auditor should express a qualified opinion or an adverse opinion, depending on the materiality of the item.
Which of the following most likely would cause an auditor to consider whether a client’s financial statements contain material misstatements?
A.
Management did not disclose to the auditor that it consulted with other accountants about significant accounting matters.
B.
The chief financial officer will not sign the management representation letter until the last day of the auditor’s fieldwork.
C.
Audit trails of computer-generated transactions exist only for a short time.
D.
The results of an analytical procedure disclose unexpected differences.
D.
The results of an analytical procedure disclose unexpected differences.
Analytical procedures, whether applied during the planning phase, used as substantive testing, or employed as part of the overall review stage of the audit, compare recorded amounts to expectations developed by the auditor. Any unexpected differences would cause the auditor to consider whether a client’s financial statements contain material misstatements and would lead the auditor to change the nature and extent of testing for those account balances or classes of transactions.
Misstatements relate to amounts found in the account balances and classes of transactions in the financial statements. The incorrect answer choices do not relate directly to the amounts in the financial statements.
To be effective, analytical procedures in the overall review stage of an audit engagement should be performed by which of the following?
A.
The staff accountant who performed the substantive auditing procedures
B.
The managing partner who has responsibility for all audit engagements at that practice office
C.
A manager or partner who has a comprehensive knowledge of the client’s business and industry
D.
The CPA firm’s quality control manager or partner who has responsibility for the firm’s peer review program
C. A manager or partner who has a comprehensive knowledge of the client’s business and industry
A manager or partner should perform the analytical procedures in the overall review stage because they have a more thorough understanding of the client and the industry when compared to other individuals who have less knowledge of the client and the industry.
The objective of analytical procedures used in the overall review stage of the audit is to assist the auditor in assessing the conclusions reached and in the evaluation of the overall financial statement presentation.
An auditor’s letter issued on significant deficiencies relating to an entity’s internal control observed during a financial statement audit should:
A.
include a brief description of the tests of controls performed in searching for significant deficiencies and material weaknesses.
B.
indicate that the significant deficiencies should be disclosed in the annual report to the entity’s shareholders.
C.
include a paragraph describing management’s assertion concerning the effectiveness of the internal control.
D.
indicate that the audit’s purpose was to report on the financial statements and not to provide assurance on the internal control.
D.
indicate that the audit’s purpose was to report on the financial statements and not to provide assurance on the internal control.
Any report accompanying the basic financial statements and the auditor’s standard report should state that the audit is made for the purpose of forming an opinion on the basic financial statements taken as a whole and not to provide assurance on internal control.
When third-party use of prospective financial statements is expected, an accountant may not accept an engagement to:
A.
perform a review.
B.
perform a compilation.
C.
perform an examination.
D.
apply agreed-upon procedures.
A. perform a review.
AT 301.01–.02 specifies that when an auditor is engaged to perform a service in relation to prospective financial statements and his report or the prospective financial statements is expected to be used by a third party or parties, then only an examination, a compilation, or the agreed-upon procedure is appropriate. A review is not mentioned, and thus, “perform a review” is the best answer.
An auditor would express an unmodified opinion with an emphasis-of-matter paragraph added to the auditor’s report for:
A.
an unjustified accounting change.
B.
a material weakness in internal control.
C.
both an unjustified accounting change and a material weakness in internal control.
D.
neither an unjustified accounting change nor a material weakness in internal control.
D.
neither an unjustified accounting change nor a material weakness in internal control.
The auditor is required to state whether GAAP has been consistently applied. Inconsistency in the application of GAAP is a common reason for qualified opinions by auditors. Therefore, an unjustified accounting change would not result in an unmodified opinion with an emphasis-of-matter paragraph. Auditors are required to communicate material weaknesses in internal control to both company management and those charged with governance. However, this is done in a separate communication and is not included as an emphasis-of-matter paragraph to an unmodified opinion in the auditor’s report.
A practitioner has been engaged to apply agreed-upon procedures in accordance with Statements on Standards for Attestation Engagements (SSAE) to prospective financial statements. Which of the following conditions must be met for the practitioner to perform the engagement?
A.
The prospective financial statement includes a summary of significant accounting policies.
B.
The practitioner takes responsibility for the sufficiency of the agreed-upon procedures.
C.
The practitioner and specified parties agree upon the procedures to be performed by the practitioner.
D.
The practitioner reports on the criteria to be used in the determination of findings.
C.
The practitioner and specified parties agree upon the procedures to be performed by the practitioner.
A practitioner may perform an agreed-upon procedures attest engagement on prospective financial statements provided the following conditions are met:
- The practitioner and the specified parties agree upon the procedures to be performed by the practitioner.
- The specified parties take responsibility for the sufficiency of the agreed-upon procedures for their purposes.
- The prospective financial statements include a summary of significant assumptions.
- Criteria to be used in the determination of findings are agreed upon between the practitioner and the specified parties.
After fieldwork audit procedures are completed, a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up workpaper review. This second review usually focuses on:
A.
the fair presentation of the financial statements in conformity with GAAP.
B.
fraud involving the client’s management and its employees.
C.
the materiality of the adjusting entries proposed by the audit staff.
D.
the communication of internal control weaknesses to the client’s audit committee.
A.
the fair presentation of the financial statements in conformity with GAAP.
The focus of a second or wrap-up workpaper review performed is the fair presentation of the financial statements in conformity with GAAP; that is, did the audit, performed under generally accepted auditing standards, meet its objective? The second partner review (by a partner who has not been involved in the audit) adds a last objective look at the adequacy of the workpapers in the documentation of the fieldwork standards.
The existence of fraud, the materiality of proposed adjusting entries, and internal control weaknesses (although they may affect the fair presentation of GAAP financial statements) should have been resolved during fieldwork, long before the wrap-up review.
A scope limitation sufficient to preclude an unmodified opinion always will result when management:
A.
prevents the auditor from reviewing the working papers of the predecessor auditor.
B.
engages the auditor after the year-end physical inventory is completed.
C.
requests that certain material accounts receivable not be confirmed.
D.
refuses to acknowledge its responsibility for the fair presentation of the financial statements in conformity with GAAP.
D. refuses to acknowledge its responsibility for the fair presentation of the financial statements in conformity with GAAP.
A scope limitation occurs when the auditor is not able to collect sufficient appropriate audit evidence to support an opinion regarding the financial statements being in conformity with GAAP. No scope limitation exists when auditors are limited in their activities but use alternative sources of information to support an opinion. When no alternatives are available, however, as when clients refuse to acknowledge their responsibility for the fair presentation of the financial statements in conformity with GAAP, the auditor cannot determine if the financial statements are in accordance with GAAP and cannot issue an unmodified opinion.
Lake, CPA, is auditing the financial statements of Gill Co. Gill uses the EDP Service Center, Inc., to process its payroll transactions. EDP’s financial statements are audited by Cope, CPA, who recently issued a report on management’s description of EDP’s system and the suitability of the design and operating effectiveness of controls. Lake is considering Cope’s report on EDP’s system in assessing control risk on the Gill engagement. What is Lake’s responsibility concerning making reference to Cope as a basis, in part, for Lake’s own opinion?
A.
Lake may refer to Cope only if Lake is satisfied as to Cope’s professional reputation and independence.
B.
Lake may refer to Cope only if Lake relies on Cope’s report in restricting the extent of substantive tests.
C.
Lake may refer to Cope only if Lake’s report indicates the division of responsibility.
D.
Lake may not refer to Cope under the circumstances above.
D.
Lake may not refer to Cope under the circumstances above.
A service auditor’s (Cope) report on a service organization’s (EDP Service Center, Inc.) system should not be referred to in an auditor’s (Lake) report of their mutual client (Gill). There is no division of responsibility since the service auditor did not examine Gill’s financial statements. Through inquiries, Lake should obtain satisfaction as to Cope’s professional reputation and independence. The extent of substantive tests should be restricted when the assessed level of control risk is below the maximum due to reliance on the report on EDP Service Center, Inc.’s, system.
Audit documentation should enable an experienced auditor, having no previous connection to the audit, to understand all of the following except:
A.
the nature, timing and extent of the auditing procedures performed.
B.
the results of the audit procedures performed and the audit evidence obtained.
C.
changes in the audit plan from the prior year.
D.
that the accounting records agree or reconcile with the auditing financial statements.
C.
changes in the audit plan from the prior year.
The auditor should prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand:
the nature, timing and extent of the audit procedures performed to comply with GAAS and applicable legal and regulatory requirements;
the results of the audit procedures performed, and the audit evidence obtained; and
significant findings or issues arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions.
An auditor who is unable to form an opinion on a new client’s opening inventory balances may issue an unmodified opinion on the current year’s:
A.
income statement only.
B.
statement of cash flows only.
C.
balance sheet only.
D.
statement of shareholders’ equity only.
C.
balance sheet only.
If the auditor is unable to form an opinion on a new client’s opening inventory balances, the auditor will issue an opinion on the closing balance sheet only. This scope limitation affects the income, retained earnings, and cash flow statements, but not the balance sheet. This is because cost of goods sold cannot be verified. The auditor should issue a disclaimer of opinion on the income statement, statement of cash flows, and statement of shareholder’s equity if the auditor is unable to form an opinion regarding opening inventory balances.
In an audit of financial statements, which of the following would most likely be considered a known misstatement?
A.
An unrecorded liability related to services rendered by a vendor during the period under audit
B.
Extrapolation of error resulting from inventory price testing on a sample of items to the entire population from which the sample was drawn
C.
The difference between management’s calculation of a warranty accrual and that of the independence auditor
D.
None of the answer choices are correct.
A.
An unrecorded liability related to services rendered by a vendor during the period under audit
AU-C 450.04 defines misstatement as “a difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be presented fairly in accordance with the applicable financial reporting framework.”
An unrecorded liability resulting from a specific activity or invoice would be considered a (known) misstatement. The other two answer choices are examples of (likely) misstatements.
Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern?
A.
Significant related party transactions are pervasive.
B.
Usual trade credit from suppliers is denied.
C.
Arrearage in preferred stock dividends is paid.
D.
Restrictions on the disposal of principal assets are present.
B.
Usual trade credit from suppliers is denied.
The auditor has a responsibility to judge whether an entity is likely to continue operating in the reasonable future, not to exceed one year. The denial of usual trade credit, in combination with other related business conditions, is not a good sign. The other items listed are not particularly indicative of going concern problems.
Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity’s ability to continue as a going concern?
A.
Inspecting title documents to verify whether any assets are pledged as collateral
B.
Confirming with third parties the details of arrangements to maintain financial support
C.
Reconciling the cash balance per books with the cutoff bank statement and the bank confirmation
D.
Comparing the entity’s depreciation and asset capitalization policies to other entities in the industry
B.
Confirming with third parties the details of arrangements to maintain financial support
Arrangements to maintain financial support of an entity by third parties may indicate substantial doubt about an entity’s ability to continue as a going concern. The auditor should confirm the details of the arrangements. Evidence of pledging assets as collateral is found in a review of financing statements filed in the Secretary of State’s office. Reconciling cash using a cutoff bank statement and the bank confirmation provides auditor control over the year-end reconciliation, not substantial doubt about an entity’s ability to continue as a going concern.
When communicating internal control related matters noted in an audit, an auditor’s report issued on significant deficiencies should indicate that:
A.
misstatements may occur and not be detected because there are inherent limitations in any internal control.
B.
the issuance of an unmodified opinion on the financial statements may be dependent on corrective follow-up action.
C.
the deficiencies noted were not detected within a timely period by employees in the normal course of performing their assigned functions.
D.
the purpose of the audit was to report on the financial statements and not to provide assurance on internal control.
D. the purpose of the audit was to report on the financial statements and not to provide assurance on internal control.
The written communication regarding significant deficiencies and material weaknesses identified during the audit of financial statements should:
- include a statement that indicates the purpose of the auditor’s consideration of internal control was to express an opinion on the financial statements, but not to express an opinion on the effectiveness of the entity’s internal control over financial reporting.
- include a statement that indicates the auditor is not expressing an opinion on the effectiveness of internal control.
- include a statement that indicates that the auditor’s consideration of internal control was not designed to identify all deficiencies in internal control that might be significant deficiencies or material weaknesses.
include the definition of the term material weakness and, where relevant, the definition of the term significant deficiency.
- identify the matters that are considered to be significant deficiencies and, if applicable, those that are considered to be material weaknesses.
- include a statement that indicates the communication is intended solely for the information and use of management, those charged with governance, and others within the organization and is not intended to be and should not be used by anyone other than these specified parties. If an entity is required to furnish such auditor communications to a governmental authority, specific reference to such governmental authorities may be made.
Snow, CPA, was engaged by Master Co. to examine and report on management’s written assertion about the effectiveness of Master’s internal control over financial reporting. Snow’s report should state that:
A.
because of inherent limitations of any internal control, misstatements due to error or fraud may occur and not be detected.
B.
management’s assertion is based on criteria established by the American Institute of Certified Public Accountants.
C.
the results of Snow’s tests will form the basis for Snow’s opinion on the fairness of Master’s financial statements in conformity with GAAP.
D.
the purpose of the engagement is to enable Snow to plan an audit and determine the nature, timing, and extent of tests to be performed.
A. because of inherent limitations of any internal control, misstatements due to error or fraud may occur and not be detected.
An engagement to examine and report on management’s written assertion about the effectiveness of the internal control over financial reporting (as of a specific point in time) is an attest engagement. The guidance for this type of engagement specifically requires that the report state that “because of inherent limitations of any internal control, misstatements due to error or fraud may occur and not be detected.”
The results of Snow’s tests will form the basis only for Snow’s opinion on management’s assertion about the effectiveness of Master’s internal control. Only an audit engagement provides sufficient appropriate audit evidence for an opinion on the fairness of financial statements in conformity with an applicable financial reporting framework.
Nor is the purpose of this type of engagement to enable the CPA to plan an audit and determine the nature, timing, and extent of tests to be performed. That is the purpose of obtaining an understanding of the internal control as part of an audit.
The attest report should also include a statement that the examination was conducted in accordance with standards established by the AICPA. In addition, the expression of the opinion on whether management’s assertion is fairly stated is based on criteria established by the AICPA (or other recognized organization); that is, the auditor measures the fairness of the assertion against the AICPA criteria; there is no attestation that the assertion itself is based on these criteria. (Be sure you understand specifically what the wording of each of the standard reports actually says.)
Which of the following statements is a basic element of the auditor’s standard report?
A.
The disclosures provide reasonable assurance that the financial statements are free of material misstatement.
B.
The auditor evaluated the overall internal control.
C.
An audit includes assessing significant estimates made by management.
D.
The financial statements are consistent with those of the prior period.
C. An audit includes assessing significant estimates made by management.
The auditor’s standard report states that the financial statements present fairly, in all material respects, an entity’s financial position, results of operations, and cash flows in conformity with generally accepted accounting principles accepted in the United States of America. It also identifies the financial statements audited in an opening paragraph, describes the nature of an audit, and expresses the auditor’s opinion in a separate opinion paragraph. For an unmodified opinion, each of the following items must be satisfied:
A title must include the word “independent.”
Financial statements identified were audited.
Financial statements are the responsibility of the company’s management.
Auditor responsible for expression of an opinion on financial statements.
Audit conducted in accordance with GAAS and should identify the United States of America as the country of origin of those standards.
Audit includes examining evidence, assessing principles and significant estimates, and evaluating overall statement presentation.
An opinion about whether the financial statements are presented fairly, in all material respects, in conformity with GAAP.
When applying analytical procedures during an audit, which of the following is the best approach for developing expectations?
A.
Considering unaudited account balances and ratios to calculate what adjusted balances should be
B.
Identifying reasonable explanations for unexpected differences before talking to client management
C.
Considering the pattern of several unusual changes without trying to explain what caused them
D.
Comparing client data with client-determined expected results to reduce detailed tests of account balances
B.
Identifying reasonable explanations for unexpected differences before talking to client management
Analytical procedures involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor. The auditor develops expectations using financial information, anticipated results, and relationships among financial statement elements, industry information, and relevant nonfinancial information. When the relationships do not match the expectations, the auditor needs to determine the cause and, because management’s response to questions must be corroborated, the accountant should determine reasonable expectations before inquiring of management. Data from unaudited account balances, considering unusual changes that have no explanation, and comparing client data involve relying on unaudited data which is less reliable than the analytical procedures.
An auditor issued an audit report that was dual dated for a subsequent event occurring after the original date of the auditor’s report but before issuance of the related financial statements. The auditor’s responsibility for events occurring subsequent to the original report date was:
A.
limited to include only events occurring up to the date of the last subsequent event referenced.
B.
limited to the specific event referenced.
C.
extended to subsequent events occurring through the date of the report.
D.
extended to include all events occurring since the original date of the auditor’s report.
B.
limited to the specific event referenced.
An auditor dual dates an audit report to limit the responsibility taken for subsequent events to the specific event referenced. By dual dating the report for a subsequent event that has occurred after the original date of the auditor’s report, the auditor has chosen not to extend his responsibility (and procedures) either to all subsequent events occurring through the date of the report or to all events occurring since the original date of the auditor’s report. The dual dating of the audit report references the note to the financial statements which discloses the specific subsequent event that has occurred after the original date of the auditor’s report. When dual dating is not used, the auditor’s responsibility is extended to include subsequent events occurring up to the date of the audit report.
When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor’s original invoices have been misplaced. What should the auditor do in response to this situation?
A.
Increase randomly the number of items in the substantive test to increase the reliance that may be placed on the overall test
B.
Reevaluate the risk of fraud, and design alternate tests for the related transactions
C.
Increase testing by agreeing more of the payments to this particular vendor to the photocopies of its invoices
D.
Count the missing original documents as misstatements, and project the total amount of the error based on the size of the population and the dollar amount of the errors
B.
Reevaluate the risk of fraud, and design alternate tests for the related transactions
The reliability of audit evidence is influenced by its source and by its nature and is dependent on the individual circumstances under which it is obtained. Internally generated audit evidence, as with the photocopies, is more reliable when the related controls imposed by the entity are effective. Reevaluating the risk of fraud and designing alternate tests will help the auditor determine the reliability of the audit evidence. Increasing the number of items tested does not increase the reliability because the evidence for one vendor is still photocopies and counting the document as a misstatement may not be a valid classification.
