Opening Balances—Initial Audits Flashcards
Stone was asked to perform the first audit of a wholesale business that does not maintain perpetual inventory records. Stone has observed the current inventory but has not observed the physical inventory at the previous year-end date and concludes that the opening inventory balance, which is not auditable, is a material factor in the determination of cost of goods sold for the current year. Stone will probably
Decline the engagement.
Express an unmodified opinion on the balance sheet and income statement except for inventory.
Express an unmodified opinion on the balance sheet and disclaim an opinion on the income statement.
Disclaim an opinion on the balance sheet and income statement.
Express an unmodified opinion on the balance sheet and disclaim an opinion on the income statement.
This answer is correct because for the case described in this question, the auditor will be able to gather evidence on all year-end balances. However, evidence with respect to the beginning inventory is lacking making the verification of cost of goods sold, an income statement element, impossible. If no other problems arise, the auditor will be able to issue an unmodified opinion on the balance sheet and a disclaimer on the income statement.
An auditor who is unable to form an opinion on a new client's opening inventory balances may issue an unmodified (unqualified) opinion on the current year's Income statement only. Statement of cash flows only. Balance sheet only. Statement of shareholders' equity only.
Balance sheet only.
This is correct because beginning inventory does not affect the year-end balances on the balance sheet; while both prior year and current year income are affected by a misstated prior year ending (current year beginning) inventory, the misstatements counterbalance one another and will cause no misstatement of the current year-end balance sheet.
Park, CPA, was engaged to audit the financial statements of Tech Co., a new client, for the year ended December 31, 2009. Park obtained sufficient audit evidence for all of Tech's financial statement items except Tech's opening inventory. Due to inadequate financial records, Park could not verify Tech's January 1, 2009 inventory balances. Park's opinion on Tech's 2009 financial statements most likely will be Balance sheet Income statement Disclaimer Disclaimer Unmodified Disclaimer Disclaimer Adverse Unmodified Adverse
Unmodified Disclaimer
The scope limitation will not affect the year-end balance sheet account balances. However, because evidence with respect to the beginning inventory is lacking, verification of cost of goods sold, an income statement element, is impossible. Although year-end retained earnings will not be affected, both the current and prior years’ retained earnings statements will be affected (by an offsetting amount) by the cost of goods sold misstatement. If no other problems arise, the auditor will be able to issue an unmodified opinion on the balance sheet and a disclaimer on the income statement (and on the retained earnings statement).
While conducting an audit of a new nonissuer client, an auditor discovers that accounting policies applied in relation to the financial statement opening balances are inconsistent with accounting policies applied during the period under audit. In this scenario, what should the auditor do?
Obtain sufficient appropriate evidence about whether changes in the accounting policies have been appropriately accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework.
Refrain from placing any reliance on information obtained from the review of the predecessor auditor’s audit documentation of the prior period.
Request that management inform the predecessor auditor that the prior-period audited financial statements require revision.
Express a qualified or adverse opinion.
Obtain sufficient appropriate evidence about whether changes in the accounting policies have been appropriately accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework.
Correct! When there is such an inconsistency the auditor should evaluate whether (1) the adopted principle is in accordance with the applicable financial reporting framework; (2) whether the effect of the change is accounted for in accordance with the applicable reporting framework; (3) whether disclosures about the change are adequate; and (4) whether the entity has justified that the alternative selected is preferable.
Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement?
Disagreements between the predecessor auditor and management as to significant accounting policies and principles.
The predecessor auditor’s understanding of the reasons for the change of auditors.
Facts known to the predecessor auditor that might bear on the integrity of management.
Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.
Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.
The auditor may inquire of the predecessor auditor about issues related to the consistency of financial reporting over time, but that is not something that the auditor is required to inquire about prior to accepting the audit engagement. The other answer options should be conducted prior to acceptance.
AICPA Professional Standards require an auditor (the successor) to make several inquiries of the predecessor auditor before accepting the audit engagement. These matters include:(1) information bearing on the integrity of management; (2) disagreements with management about accounting or auditing issues; (3) communications to those charged with governance about fraud and noncompliance with laws and regulations; (4) communications to management and those charged with governance about internal control issues; and (5) the predecessor’s understanding for the reasons the entity changed auditors.
Park, CPA, was engaged to audit the financial statements of Tech Co., a new client, for the year ended December 31, 20x1. Park obtained sufficient audit evidence for all of Tech’s financial statement items except Tech’s opening inventory. Due to inadequate financial records, Park could not verify Tech’s January 1, 20x1, inventory balances.
Park’s opinion on Tech’s 20x1 financial statements most likely will be on the
Balance sheet Income statement Disclaimer Disclaimer Unmodified Disclaimer Disclaimer Adverse Unmodified Adverse
Unmodified Disclaimer
The inability to verify the beginning inventory makes the auditor unable to express an opinion on any financial statement in which inventory is a material component. Beginning inventory is material to cost of goods sold and net income. As a result, the auditor is unable to express an opinion and must disclaim on the income and retained earnings statements and the statement of cash flows. The auditor will, however, be able to render an unmodified opinion on the balance sheet.
