Other Modifications

Question 1

Who should the Predecessor Auditor obtain a Representation Letter from before reissuing the prior year’s auditor’s report on the financial statements of a former client?

Answer 1

The Predecessor Auditor should obtain a Rep Letter from;

• The Successor Auditor

Question 2

What are some examples of when an “Other-Matter” paragraph is appropriate?

Answer 2

WHEN;

• A predecessor auditor’s report is not reissued
• The opinion on the prior-period statements has changed
• Required supplementary information is presented

Question 3

What is an example of when an “Other-Matter” paragraph is inappropriate?

Answer 3

WHEN;

• The client has materially restated the prior year’s comparative financial statements

Why? - Because restatement of comparative financial statements requires an emphasis-of-matter paragraph NOT other-matter paragraph

Question 4

What is the purpose of an “Other-Matter” Paragraph?

Answer 4

To draw attention to a matter not required to be presented or disclosed in the financial statements that is relevant to users’ understanding of the auditor’s audit, responsibilities, or report

Question 5

What is an example in which the group auditor would refer to the work of the Component Auditor?

Answer 5

When the Group Auditor is unable to review the Component Auditor’s audit documentation but;

• reads the financial statements and gains an understanding that the Component Auditor’s has an excellent reputation for professional competence and integrity

Question 6

What is an appropriate action when;

• the group auditor intends to assume responsibility for the work of the component auditor?

Answer 6

The group engagement team should either audit the component directly or;

• have the component auditor audit the information on its behalf

Question 7

What should the auditor do when;

• a change in accounting principle made by a nonissuer has no material effect on the current year financial statements but is expected to have a material effect in later years?

Answer 7

The auditor should disclose this in the notes to the financial statements of the current year

Note: The change should be reflectant in the Financial Notes NOT in the current period’s Report

Question 8

What is the purpose of the emphasis-of-matter paragraph?

Answer 8

The emphasis-of-matter paragraph is used to;

• draw users’ attention to a matter appropriately presented or disclosed in the financial statements

Note: The matter is fundamental to users’ understanding of the financial statements

Question 9

When a group auditor plans to refer to the component auditor’s work in their report;

(1) Where in the report should this reference be made?
and

(2) What should this reference clearly indicate?

Answer 9

(1) The reference should be made in the auditor’s responsibility section

and

(2) The reference should clearly indicate the magnitude of the portion of the financial statements audited by the component auditor

Note: The statements should clearly indicate that the component was not audited by the group auditor

Question 10

In what situation will an auditor most likely NOT add additional language to his report if the auditor will express an unmodified opinion?

Answer 10

WHEN, the auditor believes there is a remote likelihood of a material loss resulting from an uncertainty

NOTE: Uncertainties normally do not require the auditor to add a paragraph to the report

Question 11

What is an important factor to consider regarding the continuing auditor’s report on comparative financial statement?

Answer 11

The auditor’s report is silent as to consistency unless;

(1) the comparability of the financial statements has been materially affected by a change in accounting principle; or
(2) the comparability of the financial statements has been materially affected by correction of a material misstatement in previous statements

Question 12

Why would an auditor express an qualified opinion rather than an unmodified opinion due to a
disclosed uncertainty arising from pending litigation?

Answer 12

This may occur due to a lack of sufficient appropriate evidence

Question 13

What should the auditor’s report NOT include regarding the substantial doubt of an entity’s ability to continue as a going concern?

Answer 13

The report should NOT contain conditional language

E.g. “If the Company is not able to renew the contract . . .”

Question 14

What should be included in the auditor’s report when;

• a change in the reporting entity results in statements that are effectively those of a different entity?

Answer 14

This should result in a emphasis-of-matter paragraph

Question 15

What EXCEPTION would prevent the auditor from including a emphasis-of-matter paragraph for a change in the reporting entity?

Answer 15

WHEN the change results from a transaction or event

E.g. (1) presenting consolidated or combined statements in place of the statements of individual entities

(2) changing the subsidiaries included in consolidated statements
(3) changing the entities included in combined statements

Question 16

What type of opinion would the auditor make when they conclude that sufficient appropriate evidence supports management’s assertions about the nature of a matter involving an uncertainty?

Answer 16

The auditor would make an;

• Unmodified Opinion with no additional paragraph in the auditor’s report

Question 17

What should the auditor do when Comparative financial statements are include and the predecessor auditor’s opinion was unmodified?

Answer 17

He should indicate in the auditor’s report that the predecessor auditor expressed an unmodified opinion

E.g. He should give the date and the type of opinion and, if the report was modified, the reasons for modification

Question 18

What should the auditor do when there has been a change in accounting principles;

• but the effect of the change on the comparability of the financial statements is not material?

Answer 18

The auditor should NOT refer to consistency in the auditor’s report

Question 19

What type of opinion may the auditor express when he;

• concludes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time; and
• the entity’s disclosures concerning this matter is adequate?

Answer 19

An auditor may provide a “Disclaimer of Opinion”

E.g. By itself, a substantial doubt about an entity’s ability to continue as a going concern does not require a modification of the opinion paragraph

Note: An auditor however, may disclaim an opinion in these circumstances

Question 20

What should an auditor do when a material change in estimate is inseparable from a change in accounting principle?

Answer 20

This event should be evaluated by the auditor as a change in Principle, and the auditor should report on consistency

E.g. this type of change requires recognition in the auditor’s report as to consistency and is the reason for reporting such a change