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Audit > Chapter 16 -- Reports (Other Modifications) > Flashcards

Chapter 16 -- Reports (Other Modifications) Flashcards

1
Q

Section 16.1: Group Audits and Component Auditors

When should a component auditor be mentioned in a group audit engagement?

A
  • The component auditor is mentioned when the engagement partner does not take responsibility of the component auditor’s work.
  • The component auditor’s conclusion is reported in the Opinion section of the report.
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2
Q

Section 16.1: Group Audits and Component Auditors

What are the responsibilities of the group engagement team in regard to the component auditor?

A
  • The group engagement team should have an understanding of the component auditor’s professional competance and compliance with ethical requirements.
  • Confirm that the component auditor meets the same ethical requirements as the group engagement team.
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3
Q

Section 16.1: Group Audits and Component Auditors

How is the component auditor’s work reported with the Group engagement partner assumes responsibility for the work?

A
  • The component auditor is not referred to in the report of the group financial statements.
  • The group engagement team should either audit the component directly or have the component auditor audit the information.
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4
Q

Section 16.1: Group Audits and Component Auditors

What are the responsibilities of the group engagement partner?

A
  • The engagement partner is assigned by the firm.
  • The engagement partner is responsible for the group engagement, its performance and the report on the group statements.
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5
Q

Section 16.1: Group Audits and Component Auditors

What are the objectives of a group engagement partner?

A
  • Determine whether to refer to the component auditor’s report.
  • Communicate with the component auditor or other auditors
  • Obtain sufficient appropriate evidence about the financial information of the components and the consolidation process.
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6
Q

Section 16.1: Group Audits and Component Auditors

What are the factors to act as a group auditor?

A
  • The financial signficance of the individual components
  • The significant risk of material misstatement of the group statements from assuming responsibility for the components
  • The group engagement team’s knowledge of the overall financial statements
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7
Q

Section 16.1: Group Audits and Component Auditors

What is the responsibility of a group auditor when a component financial statement audit is based on the equity method?

A
  • The group auditor should obtain the component auditor’s audited financial statements.
  • The group auditor should make inquiries regarding the component auditor’s professional reputation and independence.
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8
Q

Section 16.1: Group Audits and Component Auditors

What if the component auditor does not meet the requirements of the group engagement team?

A
  • The group engagement may decide not to assume responsibility for the component auditor’s work.
  • Refer to the component auditor’s report. The group engagement report can be an unmodified opinion if the component auditor’s report is referenced in the group report.
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9
Q

Section 16.1: Group Audits and Component Auditors

What is component materiality?

A
  • Component materiality is lower than the materiality for the group statements.
  • The purpose of component materiality is to reduce the risk that the sum of uncorrected and undetected misstatements in the component is greater than the materiality of the group as a whole.
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10
Q

Section 16.2: Consistency of Financial Statements

How is a change in accounting principle reported in the auditor’s report of comparative financial statements?

A
  • If the auditor concurs with the change, a separate paragraph is required
  • If the effect of the change is not material to the financial statements, then the change is not referred to in the auditor’s report
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11
Q

Section 16.2: Consistency of Financial Statements

What are the criteria to report a change in accounting principle reported in the auditor’s report of comparative financial statements?

A
  • The new principal and the method of accounting are in accordance with the reported framework.
  • Appropriate disclosures are made
  • The entity has justified that the change is preferable.
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12
Q

Section 16.2: Consistency of Financial Statements

How is a change in accounting principle reported if the change in principle is not material to the financial statements?

A

If a change in principle is not material to the financial statements, then the auditor does not refer to the change in the current-year report.

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13
Q

Section 16.2: Consistency of Financial Statements

How is a change in accounting principle reported if the change in principle is material to the financial statements?

A

If a change in principle is material to the financial statements:
* The change is reported in the emphasis-of-matter paragraph.
* The paragraph includes describes the change in principle
* Refers to the entity disclosure
* Indicates that the opinion is not modified with regard to the matter emphasized.

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14
Q

Section 16.2: Consistency of Financial Statements

What is the process when the segments use different accounting principles?

A
  • If multiple segments use different accounting principles, the difference is not a consistency issue.
  • If the use of different methods is appropriate, then the auditor will issue an unmodified opinion.
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15
Q

Section 16.2: Consistency of Financial Statements

How is a material change in estimate reported if it is inseparable from a change in accounting principle?

A
  • The change is reported prospectively as a change in principle.
  • The change is recognized in the auditor’s report as to consistency.
  • If the change results prior period adjustments that will cause material misstatement in prior financial statements, then the opinion will be either qualified or adverse.
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16
Q

Section 16.3: Uncertainties and Going Concern

How is a going concern reported in the auditor’s report?

A
  • A separate paragraph is included in the auditor’s report titled “Substantial Doubt about the Entity’s Ability to Continue as a Going Concern”
  • The section does not use conditional language (i.e. “If the assets were reported…”)
  • The substantial doubt is not a basis for a qualified or adverse opinion.
  • If there is material uncertainty, then a disclaimer of opinion may be reported.
17
Q

Section 16.3: Uncertainties and Going Concern

What would cause a modification to a report regarding a going concern?

A
  • The report may be modified if the going concern is material and not adequately disclosed in the financial statements.
  • This may result in a qualified or adverse opinion.
  • A disclaimer of opinion will occur when the auditor cannot obtain sufficient evidence, a scope limitation, as to the going concern.
18
Q

Section 16.4: Comparative Financial Statements

What are the responsibilities of a predecessor auditor in regard to comparative financial statements?

A
  • Read the current period’s financial statements
  • Compare the prior year financial statements with the current year
  • Obtain a representation letter from the current auditor
  • Obtain a representation letter from management
19
Q

Section 16.4: Comparative Financial Statements

In comparative financial statements, what is reported as it pertains to the precessor auditor’s report in the current year’s auditor report?

A
  • The prior year’s financial statement were auditor by another auditor (do not provide the auditor’s name).
  • The date of the report
  • The type of opinion expressed
  • The reason for any modifications
  • The nature of any emphasis-of-matter or other-matter paragraph
20
Q

Section 16.4: Comparative Financial Statements

How does the continuing auditor report on previous financial statements when issuing comparative financial statements?

A

The auditor updates the report on the previous financial statements, regardless of the opinion previoulsly expressed.

21
Q

Section 16.4: Comparative Financial Statements

What date is used when issuing a report on comparative financial statements?

A
  • The date of the report is based on the most recent audit.
  • The auditor dates the report no earlier than the date the auditor obtained sufficient appropriate evidence for the opinion of the most recent audit.
22
Q

Section 16.5: Emphasis-of-Matter and Other-Matter Paragraphs

What is purpose of the Other-Matter paragraph?

A
  • The Other-Matter paragraph is used to enhance the user’s understanding.
  • It reports matters that are not required to be presented or disclosed on the financial statements.
23
Q

Section 16.5: Emphasis-of-Matter and Other-Matter Paragraphs

What is the purpose of the Emphasis-Of-Matter paragraph?

A
  • The Emphasis-of-Matter paragraph is used to enhance the user’s understanding of matters that are already presented or disclosed on the financial statements.
  • It is necessary to draw the attention to the matter.
  • The matter is appropriately presented and disclosed in the financial statements.
24
Q

Section 16.5: Emphasis-of-Matter and Other-Matter Paragraphs

What is included in the Emphasis-Of-Matter paragraph?

A
  • An event that has, or will have, a significant effect on the entity’s financial position (i.e. a departure from GAAP to prevent missleading reports).
  • A material change in an accounting principle occurs
  • An uncertainty related to a future outcome (i.e. litigation)
  • Significant transactions with related parties
  • Unusually important subsequent events
  • A major catastrophe that has a significant impact on the financial position
25
Q

Section 16.5: Emphasis-of-Matter and Other-Matter Paragraphs

How are emphasis parapgraphs reported for an issuer (PCAOB)?

A

Under PCAOB, an emphasis paragraph is
* Never required
* Not a substitute for Critical Audit Matters (CAM)
* Not ereferred to in the opinion section

26
Q

Section 16.5: Emphasis-of-Matter and Other-Matter Paragraphs

How are the prior year’s unaudited financial statements presented in comparison with this year’s audited financial statements?

A

An Other-Matter paragraph is used for unaudited prior-period statement.

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