Chapter 16

Question 1

What does it signify when the CPA decides to refer the work of a component auditor?

“We did not audit the work of XTA…Those statements were audited by other auditors”

Answer 1

It signifies that the CPA assumes no responsibility for the audit of the component auditor.

Question 2

In a group engagement, the group engagement team should obtain an understanding from the component auditor , what does this process involves?

Answer 2

Determining the extent to which the team would be able to be involved in the component auditor’s work.

Question 3

After determining the extent that the group . engagement team would be involved in the component auditors work, the group engagement partner may decide to refer the component auditor if which requirements are met?

Answer 3

1. The component auditor meets relevant independence requirements for the group audit.
2. The group engagement team has no serious concerns about his or her professional competence or other ethical issues.
3. The components statements are prepared using the same reporting framework as that of the group statements (or responsibility is taken for adjustments to the group framework).
4. The component auditor’s report is not use restricted.
5. The component auditor has performed an audit in accordance with the PCAOB standards (if required by law or regulation) or GAAS.

Question 4

If the requirements are met for the group engagement partner to refer a component auditor, what may the group engagement partner decide to do?

Answer 4

Partner may decide to:

1. Not assume responsibility
2. Refer the audit

Moreover, the reference to the component auditor does not prohibit an unmodified opinion.

Question 5

What procedures should a CPA firm take when deciding to rely on the audit work performed by another audit firm and take responsibility?

Answer 5

The assumption of responsibility requires involvement in the work of the component auditor. Involvement may include:

1. performing risk assessment procedures
2. performing further procedures
3. reviewing the component auditor’s documentation.

Question 6

What if the group engagement partner assumes responsibility for the work of the component auditor?

Answer 6

The auditor’s report on the group statement does NOT refer to the component auditor.

However, the group engagement partner still must be satisfied that those performing the engagement, including component auditors, collectively possess the necessary competence.

Question 7

Who chooses the group engagement partner?

Answer 7

The audit firm chooses the group engagement partner.

Question 8

What is the group engagement partner responsible for?

Answer 8

1. The group engagement
2. its performance
3. The report on the group statements.

Question 9

What is an event that requires no modification of the opinion or recognition of the report?

Answer 9

A change in estimate.

Because it is not a change in principle or correction of a material misstatement in previously issued financial statements.

Therefore, it requires no modification of opinion or recognition in report.

Question 10

What is an exception of a change in estimate for the auditor to evaluate and report on this change as a change in principle?

Answer 10

The only exception is if there is a material change in estimate, that is inseparable from a change in principle.

Under GAAP it is recorded as a change in estimate.

Question 11

When the change in accounting principle has a material affect on comparability, what should an auditor do?

Answer 11

Add an “Emphasis of Matter” paragraph after the opinion paragraph that:

1. Uses the heading “Emphasis of Matter”
2. Describe the change in principle
3. Refer to the entity disclosure, and
4. Indicates that the opinion is not modified with regards to the matter emphasized.

Question 12

When does an auditor include an emphasis of matter paragraph in the audit report if a material change in accounting principle has occurred?

Answer 12

If:
1. The new principle and the method of accounting for the effect of the change are in accordance with the applicable reporting framework.

2. Disclosures are adequate.
3. The entity has justified that the principle is preferable, the opinion is unmodified.

Question 13

What is the objective of the evaluation of consistency of the financial statements?

Answer 13

To communicate in the report when the comparability of financial statements between periods has been materially affected by:

1. A change in accounting principle or
2. Adjustments to correct a material misstatement in previous statements.

Question 14

How should a change in accounting principle that had no material effect on financial statements in the current year, but is expected to have a material effect in later years be treated?

Answer 14

The Applicable financial reporting framework may require that the change be disclosed in the notes to the financial statements.

However, the auditor does NOT need to recognize the change in the currents period report.

Question 15

When management does not provide reasonable justification for a change in accounting principle, and it presents comparative financial statements, the auditor should express a qualified opinion

Answer 15

In the report for the year of change

Question 16

An auditor draws attention to a matter that is not presented or disclosed in the financial statement by including:

Answer 16

An “Other matters” paragraph.

Unlike the emphasis of matter paragraph, the other matters paragraph is not required to be presented or disclosed in the financial statements.