Review ALL sections WRONG ANSWERED Flashcards
Under which of the following situations would the expression of a disclaimer of opinion be inappropriate?
A. Management refuses to allow the auditor to send a letter of inquiry to their attorneys. B. The entity's going concern disclosures are adequate. C. The auditor is not independent. D. Management fails to disclose a significant subsequent event.
Choice “D” is correct. Inadequate disclosure of a material item or event results in a qualified or adverse opinion.
Choice “A” is incorrect. Management’s refusal to permit inquiry of the attorneys generally will result in a disclaimer of opinion or withdrawal from the audit.
Choice “B” is incorrect. Although the general rule in adequately disclosed going concern cases is to add an emphasis-of-matter paragraph to an unmodified opinion, the auditor is not prohibited from choosing to disclaim an opinion due to a going concern uncertainty
Choice “C” is incorrect. When the auditor is not independent but is required by law or regulation to report on the financial statements, the auditor should disclaim an opinion and should specifically state that the auditor is not independent.
How does an auditor make the following representations when issuing the auditor’s report on comparative financial statements under U.S. auditing standards?
Obtaining evidence that
is sufficient and
appropriate
Consistent
application of
accounting principles
A. Explicitly
Implicitly
B. Implicitly
Explicitly
C. Implicitly
Implicitly
D. Explicitly
Explicitly
Choice “A” is correct. Explicitly - Implicitly.
Under U.S. auditing standards, the auditor explicitly states in the Basis for Opinion section of the auditor’s report: “We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.” Consistency is implied in the auditor’s report.
Choice “B” is incorrect. An explicit statement on obtaining evidence that is sufficient and appropriate is included in the Basis for Opinion section, while the concept of the consistent application of accounting principles is implicit to the auditor’s report.
Choice “C” is incorrect. Only the consistency of the application of accounting principles is implicit to the auditor’s report.
Choice “D” is incorrect. Only a statement regarding obtaining evidence that is sufficient and appropriate is explicitly included in the auditor’s report. Such statement is included in the Basis for Opinion section.
When a qualified opinion is issued due to an insufficiency of audit evidence, the _ _ _ _ _ _ _ _ _ _ _ paragraph refers to the scope limitation using the following phrase:
opinion
” … except for the possible effects of the matter described in the Basis for Qualified Opinion section of our report … .”
NOTE: The Auditor’s Responsibility paragraph and the notes to the financial statements do not refer to the scope limitation.
Which of the following is an appropriate phrase to include in the opinion paragraph when expressing a qualified opinion due to a scope limitation?
A. Except for the above-mentioned limitation on the scope of our audit. B. Subject to the possible effects of the matter described in the basis for qualified opinion section. C. With the foregoing explanation of the limitation on the scope of our audit. D. Except for the possible effects of the matter described in the basis for qualified opinion section.
Explanation
Choice “D” is correct. “Except for the possible effects of the matter described in the basis for qualified opinion section” is an appropriate phrase to include in the opinion paragraph when expressing a qualified opinion due to a scope limitation.
Choice “A” is incorrect. This wording is incorrect because it bases the exception on the restriction itself rather than on the possible effects on the financial statements.
Choice “B” is incorrect. The phrase “subject to” is inappropriate because the phrase is not sufficiently clear or forceful.
Choice “C” is incorrect. The phrase “with the foregoing explanation” is inappropriate because the phrase is not sufficiently clear or forceful. Also, the wording should focus on the possible effects on the financial statements, not on the scope limitation itself.
An _ _ _ _ _ _ _ _ _ _ effect does not require an emphasis-of-matter paragraph.
immaterial
In Year 1, Randall, CPA, issued a qualified opinion on the financial statements of Celadon Industries, a nonissuer, due to the improper recording of lease obligations. During Year 2, Celadon restated the Year 1 financial statements to correct the error, and now plans to issue comparative financial statements for Year 1 and Year 2. Which of the following is true about Randall’s report on the comparative financial statements?
A. Randall may not change the prior opinion, but may add an other-matter paragraph to the report indicating that the previous error has been corrected. B. Randall may revise the prior opinion, but must include an emphasis-of-matter or other-matter paragraph describing the situation. C. Randall may not change the prior opinion, and should not issue a report on the comparative financial statements. D. Randall may revise the prior opinion and need not make mention of the change, as long as the comparative financial statements include the revised statements (and not the original statements) for Year 1.
Choice “B” is correct.
Randall may revise the prior opinion, but must include an emphasis-of-matter or other-matter paragraph describing the situation and including the date and type of the previous opinion, the reason for the previous opinion, the changes that have occurred, and a statement that the new opinion differs from the old.
Choice “A” is incorrect. Randall may revise the prior opinion if the situation warrants such revision.
Choice “C” is incorrect. Randall may revise the prior opinion if the situation warrants such revision, and is not prohibited from issuing a report on the comparative financial statements.
Choice “D” is incorrect. Randall may revise the prior opinion, but must include an emphasis-of-matter or other-matter paragraph describing the situation and including the date and type of the previous opinion, the reason for the previous opinion, the changes that have occurred, and a statement that the new opinion differs from the old.
According to GAAS, which of the following procedures is not required when the group auditor decides to make reference to the component auditor in the auditor’s report on the group financial statements?
A. The group auditor should be satisfied with the independence of the component auditor. B. The component auditor’s report is not restricted. C. The group auditor should be satisfied with the competence of the component auditor. D. The group auditor should determine the type of work to be performed on the financial information of the components.
Choice “D” is correct.
Determining the type of work to be performed on the components is not required when the group auditor decides to make reference to the component auditor. The group auditor should determine the type of work to be performed on the financial information of the components when assuming responsibility for the work of the component auditor.
Choice “A” is incorrect. The group auditor should be satisfied with the independence of the component auditor even when the group auditor references the component auditor in the report.
Choice “B” is incorrect. One of the requirements to reference the component auditor in the group auditor’s report is that the component auditor’s report is not restricted.
Choice “C” is incorrect. The group auditor should be satisfied with the competence of the component auditor even when the group auditor references the component auditor in the report.
An auditor issues a report dated 2/12/Year 2 on financial statements for the year ended 12/31/Year 1. Which best describes the auditor’s responsibility for an event occurring on 2/1/Year 2 and an event occurring on 3/1/Year 2?
A. The auditor has an active responsibility to investigate the 2/1/Year 2 event, but no responsibility concerning the 3/1/Year 2 event. B. The auditor has an active responsibility to investigate both events. C. The auditor has an active responsibility to investigate the 2/1/Year 2 event, and must also consider the effect of the 3/1/Year 2 event if it comes to his/her attention. D. The auditor has no responsibility for either event, since both occur after the date of the financial statements.
Choice “C” is correct.
The auditor has an active responsibility to investigate subsequent events between the date of the financial statements and the date of the auditor’s report, and must also consider the effect of any events occurring after the date of the auditor’s report that come to his/her attention.
Choice “A” is incorrect. The auditor has an active responsibility to investigate the 2/1/Year 2 event, but also may have some level of responsibility with respect to the 3/1/Year 2 event. Despite the fact that it occurred after the date of the auditor’s report, if the event comes to the auditor’s attention, it cannot be ignored.
Choice “B” is incorrect. The auditor has no active responsibility to investigate events occurring after the date of the auditor’s report, unless such events come to his or her attention.
Choice “D” is incorrect. The auditor has an active responsibility to investigate subsequent events between the date of the financial statements and the date of the auditor’s report, and must also consider the effect of any events occurring after the date of the auditor’s report that come to his/her attention.
Which of the following events occurring after the issuance of the auditor’s report most likely would cause the auditor to make further inquiries about the previously issued financial statements?
A. Loss of a plant as the result of a fire. B. The company issues a bond for a material amount. C. Purchase of a business that has revenues equivalent to the entity. D. The discovery of information regarding a material unrecorded expense that occurred during the year under audit.
Choice “D” is correct.
The question addresses subsequent discovery of facts that may have existed at the balance sheet date that the auditor should have known about during the audit. Discovery of information related to a material unrecorded expense that occurred during the year under audit most likely would result in the auditor making further inquiries about the previously issued financial statements.
Choice “A” is incorrect. The loss of a plant is an example of a subsequent event occurring after the date of the auditor’s report that the auditor has no obligation to investigate. The loss of the plant does not provide additional information about the previously issued financial statements, nor did the loss of the plant exist at the date of the audit report.
Choice “B” is incorrect. The issuance of a bond for a material amount is an example of a subsequent event occurring after the date of the auditor’s report that the auditor has no obligation to investigate. The issuance of the bond does not provide additional information about the previously issued financial statements, nor did the issuance exist at the date of the audit report.
Choice “C” is incorrect. The purchase of a business is an example of a subsequent event occurring after the date of the auditor’s report that the auditor has no obligation to investigate. The purchase of the business does not provide additional information about the previously issued financial statements audit. In addition, the purchase of the business occurred after the date of the auditor’s report.
An auditor should obtain information related to subsequent events by obtaining/performing the following:
Information on Post Balance Sheet Transactions (bank statements), Representation Letter, Inquiry, Minutes (Board Meetings), and Examination of latest available financial statements.
In its annual report to shareholders, Walsh Co. (a nonissuer) included a letter to shareholders that contained financial summaries of the past two years. Walsh’s auditor is expressing an unmodified opinion on Walsh’s financial statements but has not been engaged to examine and report on this additional information. What is the auditor’s responsibility concerning the financial summaries?
A. The auditor should express a qualified or adverse opinion because all financial statement information should be audited. B. The auditor should inquire of management regarding the purpose of the supplementary information and the criteria used to prepare the information. C. The auditor should read the letter to the shareholders and verify the information is materially consistent with the information presented in the audited financial statements. D. The auditor should include an emphasis-of-matter paragraph that includes a disclaimer of opinion on this information.
Explanation
Choice “C” is correct.
The auditor should read the letter to the shareholders (considered other information) and verify the information is materially consistent with the information presented in the audited financial statements.
Choice “A” is incorrect. The audited financial statements may be contained in a document that contains additional financial information that is outside the audited financial statements. In addition, the auditor’s opinion is on the basic financial statements, not the entire document that the financial statements may accompany.
Choice “B” is incorrect. The auditor should inquire of management regarding the purpose of the supplementary information and the criteria used to prepare the information when engaged to report on the supplementary information. The auditor is not engaged to examine this information, so the auditor is not required to perform those inquiries.
Choice “D” is incorrect. The auditor is required to reference the other information in the auditor’s report, but such reference should be made in a separate section of the auditor’s report with the heading “Other Information” rather than in an emphasis-of-matter paragraph.
Which of the following reports requires restricted use language in the report?
A. A report on financial statements prepared on the tax basis of accounting. B. A report on the balance sheet only. C. A report on a client's compliance with a contractual agreement, assuming the report is prepared in connection with a financial statement audit of the complete financial statements. D. A report on an examination of a financial forecast.
Explanation
Choice “C” is correct.
A report on a client’s compliance with a contractual agreement, assuming the report is prepared in connection with a financial statement audit of the complete financial statements should include a restriction as to the use of the report.
Choice “A” is incorrect. A report on financial statements prepared on the tax basis of accounting does not require a restriction as to the use of the report.
Choice “B” is incorrect. Reports on a single financial statement do not require restriction as to the use of the report.
Choice “D” is incorrect. A report on the examination of a financial forecast does not require a restriction on the use of the report.
When reporting on financial statements prepared in accordance with a regulatory basis and intended for general use, the auditor should express an opinion about whether the financial statements are prepared in accordance with the special purpose framework and:
A. Fairly presented, in all material respects, in accordance with GAAS. B. Fairly presented in a manner that will meet the needs of all users. C. That the special purpose framework is appropriate for the needs of all users. D. Fairly presented, in all material respects, in accordance with GAAP.
Choice “D” is correct. If the special purpose financial statements are prepared in accordance with a regulatory basis and intended for general use, the auditor should express an opinion about whether the financial statements are fairly presented, in all material respects, in accordance with GAAP and prepared in accordance with the special purpose framework.
Choice “A” is incorrect. Financial statements are never prepared in accordance with GAAS (GAAP used for financial statement presentation). GAAS (generally accepted auditing standards) are the standards that are followed by the auditor in evaluating the financial statements and forming an opinion on whether they are fairly presented.
Choice “B” is incorrect. This is not a requirement for special purpose financial statements prepared in accordance with a regulatory basis and intended for general use.
Choice “C” is incorrect. This is not a requirement for special purpose financial statements prepared in accordance with a regulatory basis and intended for general use.
If an auditor performs an inspection of documentation supporting a client’s account balances, he or she would most likely be testing any of the following financial statement assertions, with the exception of:
A.
Rights and obligations.
B.
Completeness.
C.
Valuation, allocation, and accuracy.
D.
Understandability of presentation and classification.
.
Choice “B” is correct. When testing the completeness assertion, the auditor may observe processes and procedures, trace transactions forward from source documents to the accounting records, and perform analytical review procedures. The inspection of documentation would not be a primary audit procedure used to test the completeness assertion
Choice “A” is incorrect. This represents the primary audit procedure used to test the rights and obligations assertion.
Choice “C” is incorrect. This audit procedure is used to test the valuation, allocation, and accuracy assertion, along with performing independent recalculations, footing schedules, and reconciling supporting schedules to the general ledger.
Choice “D” is incorrect. This audit procedure is used to test the understandability of presentation and classification assertion along with reviewing related disclosures for compliance with GAAP and performing inquiries of management
The inability to complete which of the following activities most likely would prevent an accountant from accepting and completing an engagement for a review of financial statements performed in accordance with Statements on Standards for Accounting and Review Services?
A.
Having previous experience in the client’s industry.
B.
Performing tests of details of major account balances.
C.
Performing inquiries and analytical procedures.
D.
Obtaining an understanding of internal control to assess control risk.
Choice “C” is correct. The requirements of a review completed in accordance with SSARS include the requirement that inquiries be made to appropriate individuals and analytical procedures be performed.
Choice “A” is incorrect. While an accountant should obtain sufficient knowledge regarding the company’s industry and business during the review engagement, he or she is not required to have previous experience in the client’s industry.
Choice “B” is incorrect. The inability to perform detail testing on major account balances would not prevent a review to be performed in accordance with SSARS. Detail testing is an auditing procedure, not a procedure performed during a review engagement.
Choice “D” is incorrect. Obtaining an understanding of internal control is not required for a review performed in accordance with SSARS.
