NEW AUD 2 Flashcards
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
The auditor is engaged after fiscal year‐end and is unable to observe physical inventories or apply alternative procedures to verify their balances.
The auditor is unable to determine the amounts associated with illegal acts committed by the client’s management.
The financial statements fail to contain adequate disclosure concerning related party transactions.
The client refuses to permit its attorney to furnish information requested in a letter of audit inquiry.
The financial statements fail to contain adequate disclosure concerning related party transactions.
A disclaimer is issued when the scope limitations pertaining to the audit are so pervasive that the auditor in unable to express an opinion. Lack of adequate disclosures in the financial statements is a GAAP departure, not a scope limitation. Thus, a disclaimer of opinion would not be appropriate.
An auditor should ordinarily add an explanatory paragraph to the auditor’s report to identify a material matter related to
A change in reporting entity resulting from a specific transaction or event.
A change in accounting principle caused by the issuance of a new authoritative accounting standard that rendered the principle previously used no longer generally accepted.
A change in classification in previously issued financial statements.
All of the above.
A change in accounting principle caused by the issuance of a new authoritative accounting standard that rendered the principle previously used no longer generally accepted.
PCAOB auditing standards (specifically, AS Section 2820) identify two specific matters that affect the auditor’s evaluation of consistency of financial statements: (1) a change in accounting principle; and (2) an adjustment to correct a misstatement in previously issued financial statements (i.e., a “restatement”). A change in accounting principle may be at management’s discretion or it may be mandated by a change in accounting standards that eliminates an accounting alternative that was previously accepted but no longer is.
If management declines to present supplementary information required by the Governmental Accounting Standards Board (GASB), the auditor should issue a(n)
Adverse opinion.
Qualified opinion with an other‐matter paragraph.
Unmodified opinion.
Unmodified opinion with an additional explanatory paragraph.
Unmodified opinion with an additional explanatory paragraph.
Failure to include supplementary information required by the Governmental Accounting Standards Board would result in an unmodified opinion with an other‐matter paragraph.
The objective of a review of interim financial information of a public entity (issuer) is to provide an accountant with a basis for reporting whether
Material modifications should be made to conform with generally accepted accounting principles.
A reasonable basis exists for expressing an updated opinion regarding the financial statements that were previously audited.
Summary financial statements or pro forma financial information should be included in a registration statement.
The financial statements are presented fairly in accordance with generally accepted accounting principles.
Material modifications should be made to conform with generally accepted accounting principles.
The objective of a review of interim financial information is to provide a basis for reporting on whether material modification should be made for such information to conform with generally accepted accounting principles.
A modification of the CPA’s report on a review of the interim financial statements of a publicly held company would be necessitated by which of the following?
An uncertainty.
Lack of consistency.
Reference to another accountant.
Inadequate disclosure.
Inadequate disclosure.
Departures from generally accepted accounting principles, which include adequate disclosure, require modification of the accountant’s report.
Which of the following statements would not normally be included in a representation letter for a review of interim financial information?
To the best of our knowledge and belief, no events have occurred subsequent to the balance sheet and through the date of this letter that would require adjustment to or disclosure in the interim financial information.
We acknowledge our responsibility for the design and implementation of programs and controls to prevent and detect fraud.
We understand that a review consists principally of performing analytical procedures and making inquiries about the interim financial information.
We have made available to you all financial records and related data.
We understand that a review consists principally of performing analytical procedures and making inquiries about the interim financial information.
The AICPA’s sample management representation letter for interim financial information does not include a representation about understanding the meaning of a “review” of interim financial information. The nature of such an engagement would be clearly communicated in the required engagement letter, but it would not be a statement of fact by management in response to the auditor’s inquiries.
When planning a review of an audit client’s interim financial statements, which of the following procedures should the accountant perform to update the accountant’s knowledge about the entity’s business and its internal control?
Perform analytical procedures on selected accounts by comparing the interim amounts to the amounts for the previous audited fiscal year end.
Inquire of the entity’s outside legal counsel about the status of any previous pending litigation and any new litigation involving the entity.
Select a sample of material revenue transactions occurring during the interim period and examine supporting documentation.
Consider the results of audit procedures performed with respect to the current year’s financial statements.
Consider the results of audit procedures performed with respect to the current year’s financial statements.
AICPA Professional Standards specifically identify that the accountant should consider the results of any audit procedures performed with respect to the current year’s financial statements as a procedure that would be applicable to planning a review of interim financial information with respect to updating the auditor’s knowledge of the entity’s business and its internal control.
When unaudited financial statements of a nonpublic entity 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.
I only.
II only.
Both I and II.
Either I or II.
Either I or II.
The presentation of unaudited financial statements in comparative form with audited financial statements requires that the unaudited financial statements be clearly differentiated. In addition, the accompanying report should either include a reissued report on the prior year financial statements or a separate paragraph in the report indicating the responsibility assumed for the prior period financial statements.
Which of the following procedures would the group auditor most likely perform after deciding to make reference to a component auditor who audited a subsidiary of the entity?
Review the audit documentation and the audit programs of the component auditor.
Visit the component auditor and discuss the results of the other CPA’s audit procedures.
Make inquiries about the professional reputation and independence of the component auditor.
Determine that the component auditor has a sufficient understanding of the subsidiary’s internal control.
Make inquiries about the professional reputation and independence of the component auditor.
When part of the audit is performed by a component auditor, the group auditor is required to make inquiries concerning the professional reputation, independence, and competence of the component auditor.
An auditor’s report would be designated a special report when it is issued in connection with
Interim financial information of a publicly held company that is subject to a limited review.
Compliance with aspects of regulatory requirements related to audited financial statements.
Application of accounting principles to specified transactions.
Limited use prospective financial statements such as a financial projection.
Compliance with aspects of regulatory requirements related to audited financial statements.
Auditors’ reports issued in connection with requirements to comply with contractual agreements or regulatory requirements other than GAAP are designated as special reports.
The AICPA has outlined auditor reports based on three services that may be provided on service organization controls (SOC). The type most likely to result in a restricted use report on controls at a service organization related to security, availability, processing integrity, confidentiality, and/or privacy is
SOC 2
SOC SYS
SOC 6
SOC OC
A SOC 2 report is restricted and on such content. The AICPA has issued 3 service organizations control reports:
SOC 1: Restricted use reports on controls at a service organization relevant to a user entity's internal control over financial reporting. SOC 2: Restricted use reports on controls at a service organization related to security, availability, processing integrity, confidentiality, and/or privacy. SOC 3: General use SysTrust reports related to security, availability, processing integrity, confidentiality, and/or privacy.
A typical objective of an operational audit is to determine whether an entity’s
Internal control is adequately operating as designed.
Operational information is in accordance with generally accepted governmental auditing standards.
Financial statements present fairly the results of operations.
Specific operating units are functioning efficiently and effectively.
Specific operating units are functioning efficiently and effectively.
Operational audits typically address efficiency and effectiveness.
When an independent auditor reports on internal control based on criteria established by governmental agencies, the report should
Not include the agency’s name in the report.
Indicate matters covered by the study and whether the auditor’s study included tests of controls with the procedures covered by the study.
Not express a conclusion based on the agency’s criteria.
Assume responsibility for the comprehensiveness of the criteria established by the agency and include recommendations for corrective action.
Indicate matters covered by the study and whether the auditor’s study included tests of controls with the procedures covered by the study.
The report should indicate matters covered by the consideration and whether the auditor’s consideration included tests of controls with the procedures covered by his/her consideration. Additionally, the report should describe the objectives and limitations of internal control and the accountant’s evaluation thereof; state the accountant’s conclusion, based on the agency’s criteria; and describe the purpose of the report and state that it should not be used for any other purpose.
A CPA has performed an examination of the general‐purpose financial statements of Big City. The examination scope included the additional requirements of the Single Audit Act. When reporting on Big City’s internal accounting and administrative controls used in administering a federal financial assistance program, the CPA should
Communicate those weaknesses that are material in relation to the general‐purpose financial statements.
Express an opinion on the systems used to administer major federal financial assistance programs and express negative assurance on the systems used to administer nonmajor federal financial assistance programs.
Communicate those weaknesses that are material in relation to the federal financial assistance program.
Express negative assurance on the systems used to administer major federal financial assistance programs and express no opinion on the systems used to administer nonmajor federal financial assistance programs.
Communicate those weaknesses that are material in relation to the federal financial assistance program.
The AICPA Accounting and Audit Guide, Audits of State and Local Governmental Units, requires the communication of weaknesses that are material in relation to the federal financial assistance program.
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 statement of the audit objectives and a description of the audit scope.
Indications or instances of illegal acts that could result in criminal prosecution discovered during the audit.
The pertinent views of the entity’s responsible officials concerning the auditor’s findings.
A concurrent opinion on the financial statements taken as a whole.
A concurrent opinion on the financial statements taken as a whole.
Government Auditing Standards do not require a concurrent opinion on the financial statements taken as a whole when a performance audit is being conducted.
