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Audit final > Chapter 19 > Flashcards

Chapter 19 Flashcards

1
Q

See Slide 2 for list of Engagements that involve historical information

A

Slide 2

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2
Q

Auditors who have audited financial statements of an organization are sometimes asked to use audit results as a starting point for providing additional assurance services in areas such as:
(name one of the three)

A
  • Compliance with Contracts/Regulations
  • Letters for Underwriters
  • Summary Financial Information
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3
Q

Auditor’s Compliance Report includes:

A
  • Introductory paragraph summarizing audit opinion on financials
  • Opinion paragraph providing negative assurance (e.g., “nothing came to our attention that caused us to believe the Company was not in compliance with…”)
  • Paragraph indicating report is solely for client and specified third party use
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4
Q

Auditor Reports on Compliancerequired by regulatory (are/ are not) requirements

A

Auditor Reports on Compliance Often arerequired by regulatory requirements and/or debt agreements from independent auditors. To provide this service, auditor must have first performed an audit of related financial statements

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5
Q

Define Letters for Underwriters

A

Investment banking firms that underwrite securities issues often request a letter from the company’s independent financial statement/registration auditors (a.k.a. comfort letter). Auditors may aid underwriters in their “reasonable investigation” of the securities registration statement

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6
Q

Auditors may sometimes be engaged to audit financial statements prepared using a non-GAAP financial reporting framework. These include financial statements prepared: (name one of the two)

A
  • In accordance with special purpose financial reporting frameworks
  • Using a financial reporting framework generally accepted in another country
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7
Q

Special Purpose Financial Reporting Frameworks include Comprehensive bases of accounting other than GAAP, such as (name one of the four)

A
  • Cash basis
  • Tax basis
  • Contractual basis
  • Regulatory basis

In addition to modifying the accounting basis throughout the opinion, report must include an emphasis-of-matter paragraph describing the use of a special-purpose (non-GAAP) framework

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8
Q

True or False:

If Cash or tax basis, report should include an other-matter paragraph alerting users of the restricted use of the report (e.g., for those within entity, parties of contract/agreement, regulatory entity)

A

False. If CONTRACTUAL/REGULATORY basis, report should include an other-matter paragraph alerting users of the restricted use of the report (e.g., for those within entity, parties of contract/agreement, regulatory entity)

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9
Q

When an auditory may make a Summary Financial Statements, the report must indicate that

A

summary statements are consistent, in all material respects, with the audited financial statements from which they have been derived.

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10
Q

True or False: A US company may prepare financial statements using another country’s framework for use in the other country

A

True. For example, a US company with subsidiary in Germany may prepare financial statements for that subsidiary. Auditors should follow US auditing standards as appropriate (or other country or international standards if specified), and should obtain an understanding of the other country’s accounting framework.

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11
Q

The audit report of a company with fanancial statements using another country’s framework has implications on Report depends on the expected use of the financial statements. What if use is in the US and outside the US?

A

Non-public companies: US unmodified report with emphasis of matter paragraph indicating the non-GAAP basis of accounting

Public companies: PCAOB requires additional opinion on whether financial statements follow GAAP

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12
Q

List out the additional types of GAAS audits (there are two)

A
  • Single Financial Statements (e.g., an income statement, and not the other financial statements) & Specified Elements, Accounts, or Items of Financial Statements (e.g., a schedule of accounts receivable)
  • Personal Financial Statements
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13
Q

The audit report of a company with financial statements using another country’s framework has implications on Report depends on the expected use of the financial statements. What if use is only outside the US?

A

-Issue a US report modified to reflect other country framework

OR

-Issue a report form of the other country

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14
Q

True or False: Auditors may be engaged to audit only a single financial statement, they can’t to a specified element of it.

A

False:

Auditors may be engaged to audit only (#1) a single financial statement, or (#2) a specified element of a financial statement – generally requested by another company based on an existing agreement with specific terms.

Examples include:

(#1) A loan agreement that requires only the balance sheet be audited annually.

(#2) A lease agreement that requires annual revenues be audited because lease payment’s are based partly on lessee revenue

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15
Q

What are audits of personal financial statements like?

A

GAAP of personal financial statements:

  • Assets shown at estimated current values
  • Liabilities shown at estimated current amounts
  • Balance sheet = statement of financial condition (shows individual’s net worth)
  • Income statement = statement of changes in net worth.

Completeness of statements is a particular audit concern (e.g., individual may want to conceal assets or income)

Examples:
-Individual seeks a large loan

  • Individual seeks to purchase a business using personal credit
  • Politicians seek election
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16
Q

In addition to an audit of single statement or element, may perform a review (will discuss later) or agreed-upon procedures (specific procedures agreed upon by the parties involved, with results intended only for their use). True or false?

A

True

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17
Q

Reviews and compilations (more/less) commonly performed than audits on personal financial statements

A

More

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18
Q

When performing a review, accountants do what?

A
  • Perform analytical procedures
  • Make inquiries of management and others within organization
  • Perform other procedures considered necessary
  • Obtain representations from management relating to the financial statements
  • Provide a limited (negative) assurance report
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19
Q

Define a Review

A

An attestation service much less thorough than an audit/examination. Accountant must still be independent to provide any assurance

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20
Q

Who Provides guidance for CPA firms providing services for nonaudited financial information of nonpublic (nonissuer) clients?

A

AICPA’s Accounting and Review Services Committee

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21
Q

Nonpublic companies may not need an full audit of annual financial information – a review may suffice. True or False?

A

True.

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22
Q

Reviews are generally performed on

A

Provide a limited (negative) assurance report

Generally performed on financial statements of nonpublic companies, and interim statements of public companies

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23
Q

When do SSAR Reviews occur?

A

Apply when no annual audit has been performed (when annual audit of nonpublic company has been performed, company may have an interim review performed under ASB standards). The objective is to obtain limited assurance that there are no material modifications to be made for financial statements to be in conformity with GAAP (or other specified framework)

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24
Q

What does the second paragraph look like for a Review Report for Nonpublic Companies?

A

A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

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25
Q

What does the third paragraph look like for a Review Report for Nonpublic Companies?

A

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles.

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26
Q

Review Procedures for a Nonpublic Company (SSARS Review) include

A
  • Screening of Client
  • engagement letter
  • Understand client and industry
  • Review procedures (analytical procedures, inquiries, and other review procedures)
  • Obtain representation letter -
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27
Q

For Review of Public Companies, Public companies (issuers) required to have annual audits and interim reviews of first three quarters of the year. True or False?

A

True. Must file quarterly financial information with SEC on 10-Q. Auditor reviews (not audits) information following PCAOB review standards – similar to SSARS reviews

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28
Q

If there is a Nonpublic Company Review Report, no review report modifications required for (name one of the four)

A
  • Lack of consistent application of GAAP
  • Existence of major uncertainties (including going-concern uncertainties) that have been properly reported in financials
  • Scope limitation – no review report should be issued
29
Q

The objective of a review of a public company is to

A

Objective of review

Provide accountants a basis for communicating whether they are aware of any material modifications to conform with GAAP

30
Q

If there is a Nonpublic Company Review Report Modifications indiction a departure from GAAP, one must

A

Modify third paragraph and describe departure in separate paragraph

31
Q

Steps in Review of a public company

A

1, Engagement letter to document understanding
2,Understand the client’s business and internal control
(This required understanding of internal control for public company reviews is not required for nonpublic company reviews)
3. Other Review procedures—similar to nonpublic companies
4.Communicate Results

32
Q

PCAOB/ASB reviews: performed on interim information of companies that have had annual audits. True or False?

A

True. Not true for SSARS reviews)

33
Q

Public companies and nonpublic must undergo PCAOB interim reviews. True or False?

A

False -

Public companies must undergo PCAOB interim reviews; only an option for nonpublic companies

34
Q

True or False? Reviews of interim statements do not generally require a review report – decision made by accountant and client

A

True

35
Q

SSAR reviews require more detailed understanding of company’s business, particularly internal control. True or False?

A

False - require more detailed understanding of company’s business, particularly internal control.

36
Q

If CPA is not independent and compiling financial statements, should they indicate that in the compilation report?

A

Yes. Independence is not required because no assurance in provided (but if CPA is not independent, should indicate in compilation report)

37
Q

If compilation report is to be used only by managemnet:

A

If to be used only by management, may or may not issue report, but should document understanding of limited use in engagement letter and indicate limited use on each page of financials (“Restricted for Management’s Use Only”)

38
Q

What would the first paragraph of a compilation report look like?

A

We have compiled the accompanying balance sheet of XYZ Company as of December 31, 19XX, and the related statements of income, retained earnings, and cash flows for the year then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants.

39
Q

What would the second paragraph of a compilation report look like?

A

A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them.

40
Q

See slide 25 for final comparison

A

slide 25

41
Q

Which of the following is not typically performed when the auditors are performing a review of client financial statements?

A

Confirmation of accounts receivable.

42
Q

Which of the following must be obtained in a review of a nonpublic company?

A

both enggement and representation letter

43
Q

Independence is only required for attestation services. Since compilation is not an attestation service, independence is not required. Independence is required on a review engagement. True or false?

A

True

44
Q

Comfort letters to underwriters are normally signed by the:

A

Independent auditor.

45
Q

The special purpose financial reporting frameworks include cash basis, tax basis, regulatory basis, and contractual basis. True or false?

A

true - NOT IFRS

46
Q

Which of the following forms of accountant association always leads to a report intended solely for certain specified parties?

A

Agreed-upon procedures

47
Q

Which assertion is generally most difficult to attest to with respect to personal financial statements?

A

Compelteness, NOT valuation,
Completeness is generally the most difficult assertion with respect to personal financial statements due to poor internal control and motivation by some individuals to omit assets and income.

48
Q

When performing a review of a nonpublic company, which is least likely to be included in auditor inquiries of management members with responsibility for financial and accounting matters?

A

Communications with related parties.

49
Q

On a review report, _____ page of the report should include a caption with words like “Independent Accountant’s Review Report.”

A

each

50
Q

udit standards require that auditors apply analytical procedures during every audit to a client’s preliminary and final ________ data.

A

financial

51
Q

3.

SSARS reviews are performed on clients that ______an annual audit.

A

do not need. SSARS reviews are performed for clients that prefer a review rather than an annual audit.

52
Q

departure from GAAP is included as a _____ paragraph to the report.

A

4th

53
Q

Nonpublic companies that are audited may also want interim reviews. Auditors must then follow the _______.

A

ASB standards

54
Q

Nonpublic companies _____choose to have interim reviews.

A

may

55
Q

An audit report on financial statements that are prepared using a special-purpose framework must include an emphasis-of-matter paragraph alerting users that the financial statements were prepared in accordance with the framework. True or false?

A

True

56
Q

2.

A(n)_______provides the highest form of assurance CPAs can offer.

A

audit

57
Q

If a regulatory agency requires a particular layout for the audit report, the auditor may be able to use that layout rather than the suggested report included in the Professional Standards. true or false?

A

true

58
Q

A(n) ____is generally limited to inquiry and analytical procedures.

A

review

59
Q

An audit opinion on financial statements that use a special-purpose framework may be unmodified. True or false?

A

True

60
Q

Tax basis financial statements are ordinarily restricted to use by the company and the taxing authority. True or false?

A

falsity

61
Q

One advantage to CPAs of performing a compilation or review is that they cannot be held liable to third parties for not identifying misstatements or omissions in the client’s financial statements.

A

False -they can

62
Q

Which of the following procedures is ordinarily included in a review of the interim financial statements of an issuer (public company)?

A

Consideration of internal control.

63
Q

In compiled financial statements, management may omit substantially all of the disclosures required by generally accepted accounting principles if this omission is clearly indicated in the accountants’ report. True or false

A

truth

64
Q

In performing a compilation of the financial statements of a nonissuer company, the CPA concludes that modification of the accountants’ report is not adequate to indicate the deficiencies in the statements. If the client is not willing to correct these deficiencies, the CPAs should:

A

withdraw from the engagement.

65
Q

Engagement letters are required for review engagements and compilations. True or false

A

true

66
Q

An auditor must be independent to:

A

issue a review report.

67
Q

Comfort letters help underwriters in fulfilling their obligation to perform a reasonable investigation of a(n):

A

egistration statement for the sale of securities.

68
Q

Which of the following is a particular concern relating to audits of personal financial statements?

A

completeness

69
Q

A CPA performing a compilation has discovered that the client refuses to present notes to the financial statements. The appropriate report is:

A

a compilation report with an indication that all required disclosures under generally accepted accounting principle may not be presented with the statements.
adverse.

Audit final (6 decks)

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