Chapt3 LO4

Question 1

The unmodified opinion audit report with emphasis-of-matter paragraph or nonstandard report wording is concerned with 2 things?

Answer 1

1. Meets the criteria of a complete audit with financial statements that are fairly presented
2. But, auditor wants to draw attention to certain matters or is required to provide additional information

Question 2

what are the 5 most important causes of the additionof an emphasis-of-matter paragraph or a modification of wording under both AICPA and PCAOB audit standards:

Answer 2

1 Lack of consistent application of generally accepted accounting principles as illustrated in Figure 3-5
2 Substantial doubt about going concern as illustrated in Figure 3-6
3 Auditor agrees with departure from promulgated accounting principles
4 Emphasis of other matters
5 Reports involving other auditors as illustrated in Figure 3-7

Question 3

which of the 5 cause of additional emphasis of matter paragrap or modifcation of wording does not require the addition of an explanatory paragraph and is the only one with differnent wording

Answer 3

the use of other auditors

Question 4

term explanatory paragraph replaced by emphasis of matter or other matter paragraphs in AICPA. what is the difference ? in PCAOB still explanatory

Answer 4

emphasis of matter- used to draw attention to info presented or disclosed in FSs
other matter- matter not presented or disclosed in FS s such as explanation by auditor of responsiblities related to a law or regulation

Question 5

GAAP requires change in accounting principals or method of application be preferred principla and natur and impact of change be adeqately disclosed. when material change occurs auditor should ?

Answer 5

add explanatory paragraph after opinion paragram that disscusses nature of the changes and points the reader to the footnote that discusses the change.materiality based on current year effect of the change.

Question 6

an explanatory paragraph is required for both what in regards to change of accounting principal (2)

Answer 6

voluntary changes

required changes due to new accounting pronouncemenet

Question 7

it is implicit that the auditor concurs with the appropriatenes of the change of accounting pricipals. if doesn’t concur then what?

Answer 7

change is violation of GAAP and auditors opinion must be qualified

Question 8

there is a differenc e between changes that affect consistency and those that affect comparability but not consistency. what is the difference for reports?

Answer 8

change affects consistency- must have explanatory paragraph if material
change affects comparablility- need no be included in report

Question 9

what are changes that affect consistency and so have explanatory paragraphs? (3)

Answer 9

1. changes in accounting principals like FIFO to LIFO or the other way around
2. changes in reporting entities, like the inclusion of an additional company in combined FSs
3. corrections of errors involving principals, by changing from an account principal that is not generally acceptable to one that is generally accepta, including correction of the resulting error

Question 10

what affects comparability but not consistency and so doesnt need to be in report? (4)

Answer 10

1. changes in accounting estimate
2. error corrections not involving principals
   3, variations in format and presentation of financial info
3. changes because of substantially different transactions or events like new R&D endeavors or sale of subsidary

Question 11

items that materailly affect comparability of FSs generally require disclosure in footnotes. if client refuses to properly disclose items, auditor should?

Answer 11

do a qualified audit report for inadequate disclosure

Question 12

the purpose of audit is not to evaluate financial health of business but auditor does have responsibility under auditing standards to evaluate whether the company is likely to contine as going concern. examples of uncertainty about ability to contine as going concern are?

Answer 12

1. significant recurring operating losses
2. inabliity to pay obligations as come due
3. working capital deficiences
4. loss of major customers
5. unisured catastrophes
6. unusual labor difficulties
7. legal proceedings , legislation, or similar mattrs that might jeopardize ability to operate

Question 13

when there is substantial doubt about entity ability to contine as a going concern what is required for a report?

Answer 13

an unmodified opinion audit report with explanatory paragraph regardless of disclosures in FSs

Question 14

when substantial doubt about going concern what do audit standards says about disclaimer of opinion?

Answer 14

they permit but do not require disclaimer of opinion

Question 15

in AICPA code of conduct, in unusal situations , a departure from GAAP may not require qualified or adverse opinion but to get unmodified opionion, auditor must what?

Answer 15

be satisfied and must state and explain, in separate paragrah in report that adhering to principlal would produce a misleading result in that situation

Question 16

Examples of emphasis of other matters include the following (5)?. this will be unmodified opinion but explanatory paragraph

Answer 16

1. existence of material related party transactions
2. important evenet occuring subsequent to B/S date
3. description of accounting matters affecting the comparability of the financial statements with those of the prior year
4. Material uncertainties disclosed in the footnotes such as unusually important litigation or regulatory action
5. A major catastrophe that has had or continues to have a significant effect on the entity’s financial position

Question 17

what is primary auditor in AICPA called? the other in AICPA?PCAOB?

Answer 17

group engagement auditor
component auditor
principal auditor

Question 18

when CPA relies on a different CPA firm to perform part of the audit, the principal CPA has 3 alternatives?

Answer 18

1. make no reference in report- standard unmodified opinion given unless other circumstances require a departure.
2. make reference in report- unmodified opinion with modified wording
3. qualify the opinion-

Question 19

when is no reference to other auditor in report done? (3)

Answer 19

1. other auditor audited an immaterial portion of statements
2. other auditor is well known or closely supervised by principal auditor
3. principal auditor thorougly reviewed other auditors wor

Question 20

when is reference to other auditor in report done?

Answer 20

shared unmodifed opinion report when the portion of FSs audited by other CPA is material in relation to the whole

Question 21

when is qualified opinion done in reference to other auditor

Answer 21

qualified or disclaimer, depending on materiality required

1. if principal auditor not willing to assume responsibility for any of the other auditors work
2. may decide qualification required in overall report if othre auditor qualified his portion of audit