Study Unit 18: questions

Question 1

A modification of interim financial statements is required for:

Answer 1

Inadequate note disclosure.

Question 2

If there is uncertainty or if there is an accounting consistency matter, should the interim review report be modified?

Answer 2

No, the report need not be modified as long as the F/S include adequate disclosure.

Question 3

The objective of a review of interim financial information (IFI) of a nonissuer is to provide an auditor with a basis for reporting whether

Answer 3

Material modifications should be made to conform with the applicable financial reporting framework.

The objective of a review of IFI is to provide the auditor with a basis for reporting on whether material modifications should be made for such information to conform with the applicable financial reporting framework, that is, to provide negative assurance.

Question 4

In a review of an interim financil statement of a public company do you have to test the internal controls?

Answer 4

No. The understanding of I/C does not involve detailed testing or assessment, but does involve inquiries about the control environment, accounting systems, and control procedures & policies.

Question 5

Comfort letters ordinarily are addressed to

Answer 5

The party who negotiated the agreement with the client.

The letter should be addressed only to the requesting party (or that party and the entity) and should not be given to anyone else. A requesting party is a specified party that has negotiated an agreement with the entity. Requesting parties may include (1) underwriters (purchasers of securities for public distribution) and (2) others who are conducting a review process consistent with the due diligence process performed when a securities offering is registered. Thus, a comfort letter signed by an independent auditor assists the requesting party in developing a record of a reasonable investigation.

Question 6

The auditor performs a reasonable investigation to provide what kind of assurance?

Answer 6

The auditor performs a reasonable investigation to provide negative assurance in a comfort letter.

Terms of uncertain meaning, such as “general review,” “limited review,” “check,” or “test,” should not be used in describing the work unless the procedures to be performed are described in the comfort letter (AU-C 920).

Question 7

When an auditor issues to an underwriter a comfort letter containing comments on data that have not been audited, the underwriter most likely will receive what kind of assurance on what kind of information?

Answer 7

Negative assurance on capsule information.

Capsule information is (1) unaudited summarized interim information for periods subsequent to the periods covered by the audited financial statements or (2) unaudited interim financial information in the securities offering. The auditor may provide negative assurance on whether the capsule information is in accordance with the applicable financial reporting framework. The auditor must review the underlying statements in accordance with GAAS, and the capsule information must meet the framework’s disclosure requirements.

Question 8

A typical comfort letter expresses an opinion on whether audited financial statements and schedules included in the securities offering comply:

Answer 8

A typical comfort letter expresses an opinion on whether audited financial statements and schedules included in the securities offering comply as to form, in all material respects, with the applicable accounting requirements of the Securities Act of 1933 and the related published rules and regulations. However, the comfort letter does not state or repeat an opinion about the fairness of presentation of the statements.

Question 9

Comfort letters typically give negative assurance on:

Answer 9

unaudited interim financial information.

Question 10

Comfort letters ordinarily are signed by the client’s

Answer 10

Independent auditors.

A common condition of an underwriting agreement in connection with the offering for sale of securities registered with the SEC under the Securities Act of 1933 is that the auditors furnish a comfort letter to the underwriters. Hence, the independent auditors sign the comfort letter.

Question 11

Comfort letters ordinarily are address to _____________and signed by ____________

Answer 11

Addressed to Requesting party and signed by an independent auditor.

Question 12

Whenever negative assurance is provided by a CPA, it is based upon

Answer 12

An absence of nullifying evidence.

Negative assurance consists of a statement by the auditor that, as a result of the procedures performed, nothing came to the auditor’s attention that caused the auditor to believe that specified matters do not meet specified criteria (AU-C 920). Procedures performed for reviews provide a basis for this limited assurance.

Question 13

AU-C 920 lists the permissible content of a comfort letter. In addition to the other answer choices, the letter may address:

Answer 13

(1) the form of audit statements and schedules in the registration statement,
(2) other items in the filing (e.g., pro forma information, MD&A, and capsule information), and
(3) the provision of negative assurance. However, management’s determination of operating segments is a matter addressed in an audit, an engagement with a broader scope than that for the issuance of a comfort letter.

Question 14

The Securities and Exchange Commission has authority to

Answer 14

Determine accounting principles for the purpose of financial reporting by companies offering securities to the public.

The SEC has the authority to regulate the form and content of all financial statements, notes, and schedules filed with the SEC and also the financial reports to shareholders if the company is subject to the Securities Exchange Act of 1934. The SEC has stated that financial statements conforming to FASB standards will be presumed to be in accordance with U.S. GAAP. However, the SEC reserves the right to substitute its principles for those of the accounting profession and to require any additional disclosures it deems necessary. The Sarbanes-Oxley Act of 2002 authorized the SEC to recognize as generally accepted any accounting principles established by a standards-setting body that meets the act’s criteria.

Question 15

When an auditor’s report is incorporated by reference in an SEC registration statement, a prospectus that includes a statement about the auditor’s involvement should refer to the auditor as

Answer 15

Expert in auditing and accounting.

In filings under the Securities Act of 1933, the prospectus often states that certain information is included in the registration statement in reliance on the report of a named expert. Accordingly, the prospectus may state that the report of the auditor is relied on because of his or her authority as an expert in auditing and accounting (AU-C 925).

Question 16

When an independent auditor’s report based on a review of interim financial information is presented in a registration statement, a prospectus should include a statement about the auditor’s involvement. This statement should clarify that the

Answer 16

Auditor’s review report is not a part of the registration statement within the meaning of the Securities Act of 1933.

The SEC requires that the prospectus contain a statement that the report is not a report on, or a part of, the registration statement within the meaning of sections 7 and 11 of the Securities Act of 1933. The prospectus should state that reliance on the report should be restricted given the limited procedures applied and that the auditor is not an expert with respect to the review report and is not subject to the liability provisions of section 11 (AU-C 925).

Question 17

What is other information in audited financial statements?

Answer 17

Other information is financial or nonfinancial information (other than the financial statements and the auditor’s report) that is included in a document containing audited statements and the auditor’s report (excluding RSI). An example of such a document is an annual report to owners. Examples of other information are (1) a management report on operations, (2) selected quarterly data, and (3) financial summaries (AU-C 720).

Question 18

What is an auditor’s responsibility for required supplementary information (RSI)?

Answer 18

Apply limited procedures to the information and report its omission or the need for material modifications.

RSI differs from other information outside the basic statements because the designated accounting standard setter considers it to be an essential part of financial reporting for placing the basic financial statements in context. The auditor at minimum should apply limited procedures and report on the RSI in an other-matter paragraph that follows the opinion paragraph.

Question 19

The auditor’s inquiries of management regarding required supplementary information (RSI) should be directed to the judgments made concerning

Answer 19

Measurement and presentation.

RSI is information that the designated accounting standards setter has determined must accompany the basic financial statements. Thus, authoritative guidelines for its measurement and presentation have been prescribed. The auditor should inquire about whether the RSI is within the guidelines, (2) whether methods of measurement or presentation have changed and the reasons for any change, and (3) any significant assumptions or interpretations (AU-C 730).

Question 20

If information supplementary to the basic financial statements has been subjected to auditing procedures, the auditor may express an opinion that the accompanying information is fairly stated in

Answer 20

All material respects in relation to the basic financial statements as a whole.

The report on the supplementary information should include an opinion on its fairness in relation to the basic financial statements as a whole if it has been audited using the procedures performed in the audit of the financial statements and certain other procedures. The auditor should report either in an other-matter paragraph or in a separate report (AU-C 725 and AS No. 17).

Question 21

Which of the following best describes the auditor’s reporting responsibility when engaged to report on supplementary information in relation to the financial statements as a whole?

A.The auditor should report on the supplementary information only if the auditor participated in its preparation.

B.The auditor has no reporting responsibility concerning supplementary information.

C.The auditor should report on the supplementary information only if the auditor did not participate in its preparation.

D.The auditor should report on all the information.

Answer 21

The auditor should report on all the information.

When an auditor is engaged to report on supplementary information in relation to the financial statements, (s)he should report on all the information (AU-C 725 and AS No. 17).

Question 22

An auditor is engaged to report on statistical data presented with audited financial statements. Under these circumstances, the report on the statistical data should

Answer 22

Be limited to data derived from the entity’s audited financial statements.

Supplementary information is presented outside the basic statements and is not necessary for the statements to be fairly presented in accordance with the applicable financial reporting framework.

Question 23

The auditor should not express an opinion on the supplementary information if (s)he expressed an:

Answer 23

an adverse opinion or disclaimed an opinion on the audited financial statements. Moreover, the auditor should have served as the group auditor of those statements.

Question 24

Investment and property schedules are presented for purposes of additional analysis in a document outside the basic financial statements. The schedules are not required supplementary information. When the auditor is engaged to report on whether the supplementary information is fairly stated in relation to the audited financial statements as a whole, the measurement of materiality is the

Answer 24

Same as that used in forming an opinion on the basic financial statements as a whole.

When reporting on whether supplementary information is fairly stated in relation to the statements as a whole, the measurement of materiality is the same as that used in forming an opinion on the basic financial statements taken as a whole. Accordingly, the auditor need not apply procedures as extensive as would be necessary to express an opinion on the information by itself.

Question 25

The report on summary financial statements should indicate that the

Answer 25

Procedures performed included evaluating whether they are prepared in accordance with the applied criteria.

The report on the summary statements describes, among other things, the procedures performed. They primarily include (1) comparing the summary statements with the related information in the audited statements and (2) evaluating whether the summary statements are prepared in accordance with the criteria applied by management.

Question 26

An auditor may report on summary financial statements that are derived from audited financial statements only if the auditor

Answer 26

States whether the information is consistent with the audited financial statements.

Summary financial statements consist of historical information derived from financial statements audited in accordance with GAAS by the same auditor. The auditor should not accept an engagement to report on summary statements unless (s)he has been engaged to audit the statements from which they are derived. The report expresses an opinion on whether the summary statements are consistent, in all material respects, with the audited statements, in accordance with the applied criteria.

Question 27

The auditor should not accept an engagement to report on summary statements unless

Answer 27

The auditor has been engaged to audit the financial statements from which the summary statements are derived.

Summary financial statements consist of historical information derived from financial statements audited in accordance with GAAS by the same auditor. The auditor should not accept an engagement to report on summary statements unless (s)he has been engaged to audit the statements from which they are derived. The report expresses an opinion on whether the summary statements are consistent, in all material respects, with the audited statements, in accordance with the applied criteria.

Question 28

An auditor may report on financial statements prepared in accordance with a special purpose framework. Except when regulatory-basis statements are intended for general use, an emphasis-of-matter paragraph (titled “Basis of Accounting”) should follow the opinion paragraph. It:

Answer 28

(1) identifies the special purpose framework,
(2) refers to the note describing the framework, and
(3) states that the framework is not GAAP.

Question 29

AU-C 800 identifies special purpose frameworks for financial statements as frameworks other than GAAP. They are

Answer 29

(1) the cash basis,
(2) the tax basis,
(3) a regulatory basis,
(4) a contractual basis, and
(5) a definite set of logical and reasonable criteria applied to all items in the statements. Compiled statements are not audited, and appraised value is not a special purpose framework.

Question 30

If the auditor believes that financial statements prepared on the entity’s income tax basis are not suitably titled, the auditor should

Answer 30

B.Qualify the opinion.

Answer (B) is correct.
Terms such as “balance sheet,” “statement of income,” or other unmodified titles are ordinarily understood to apply to statements presented in conformity with GAAP. Consequently, the auditor of statements prepared using a special purpose framework should consider whether the statements are suitably titled. If (s)he believes they are not, (s)he should disclose his or her reservations in a basis for qualified opinion paragraph and qualify the opinion (AU-C 800).

Question 31

Financial statements may be prepared in accordance with a financial reporting framework generally accepted in another country. In these circumstances, if the statements are prepared for use only outside the U.S., the auditor may use either a:

Answer 31

U.S. form of report modified to report on the financial reporting framework of the other country or, if appropriate, the report form of the other country.

An unmodified U.S. form of report is inappropriate because of the departures from GAAP contained in statements prepared in accordance with a financial reporting framework generally accepted in the other country.

Question 32

An auditor practicing in the U.S. has been engaged to report on the financial statements of a U.S. entity that have been prepared in accordance with a financial reporting framework generally accepted in another country. The auditor should

Answer 32

Understand the framework.

Question 33

An auditor practicing in the U.S. may report on the financial statements of a U.S. entity prepared in accordance with a financial reporting framework generally accepted in another country for use outside the U.S. The auditor should understand

Answer 33

(1) the purpose of the statements,
(2) the intended users, and
(3) the steps by management to determine that the financial reporting framework is acceptable. If the statements are for general use and the report form and content of the foreign country will be used, the auditor should consider any additional legal responsibilities.

Question 34

In connection with a proposal to obtain a new client, an accountant in public practice is asked to prepare a written report on the requirements of an applicable financial reporting framework to a specific transaction. The accountant’s report should include a statement that

Answer 34

Any difference in the facts, circumstances, or assumptions presented may change the report.

The accountant’s report is addressed to the requesting party. The report should contain (1) a description of the engagement and a statement that it was performed in accordance with AU-C 915; (2) a description of the transaction and identification of the entity; (3) a description of the financial reporting framework applied (including its country of origin), the type of report that may be issued, and the reasons for the conclusion; (4) a statement that the responsibility for proper accounting is with the preparers of the financial statements; (5) statements of the facts, circumstances, and assumptions and their sources; (6) a statement that any difference in the facts, etc., may change the report; (7) an alert restricting the use of the report to specified parties; and (8), if the accountant is not independent, a statement of the lack of independence.

Question 35

A client has requested an auditor to audit and report on the single element of net income. The auditor should obtain audit evidence relating to the fairness of

Answer 35

Financial position and results of operations.

If the specific element reported on is the entity’s net income, the auditor should perform procedures necessary to obtain sufficient appropriate audit evidence to permit the expression of an opinion on the financial position and results of operations. The reason is that net income affects the balance sheet and the income statement.

Question 36

An auditor is reporting on a single financial statement. How should materiality be determined?

Answer 36

Based on the single financial statement being reported on.

The auditor should determine materiality for the single financial statement being reported on, not for the complete set of financial statements. The auditor will express an opinion on the fairness of the single financial statement.

Question 37

A report may be issued in connection with an engagement to express an opinion on specified elements, accounts, or items of a financial statement. Examples of specified elements, accounts, or items on which an auditor may report based on an audit in accordance with GAAS include:

Answer 37

(1) accounts receivable,
(2) royalties,
(3) a profit participation, or
(4) inventory.

Question 38

Can an auditor be engaged to issue a report that expresses an opinion on a single financial statement or one or more specific elements, accounts or items of a financial statement?

Answer 38

Yes, as long as the auditor has access to all data necessary to form an opinion on the specified element, account or item, such as engagement may also be undertaken separately.

Question 39

What is piecemeal opinion?

Answer 39

Ordinarily an auditor would not issue an opinion on an individual account or specific element if the auditor has audited the overall FSs and has issued an adverse or disclaimer of opinion. This type of “piecemeal opinion” could confuse the reader and overshadow the adverse or disclaimer opinion on the FSs.