SU 17: Other Modifications

Question 1

1.) Going Concern: Paragraph should be placed after the opinion paragraph of the auditor’s report

Answer 1

a. True, an additional paragraph identifying going concern issues follow the opinion paragraph

Question 2

2.) Going Concern: It is appropriate to include a note in the audit report

Answer 2

a. False, notes are used for disclosure in f/s, not audit reports

Question 3

3.) Going Concern: The phrase “if these losses continue” is appropriate

Answer 3

a. False, it is not acceptable to include a contingent statement in the going concern paragraph

Question 4

4.) Going Concern: The phrase “some doubt” should be replaced with “substantial doubt”

Answer 4

a. True, the phrase “substantial doubt” should be used in the going concern paragraph

Question 5

5.) Going Concern: Management’s plans to deal with the issues should have a reference to a note that discusses them

Answer 5

a. True, more detail should be provided about management’s plans and that is provided in a note to the f/s

Question 6

6.) Going Concern: The phrase “continue as a going concern” should be replaced with the phrase “remain profitable”

Answer 6

a. False, the phrase “going concern” is appropriate to use in the paragraph

Question 7

7.) Going Concern: The phrase “any adjustments that might result” is inappropriate.

Answer 7

a. False, the phrase “any adjustments that might result” is appropriate to be used in the paragraph

Question 8

8.) Going Concern: If the auditor were satisfied with the plans that management has to deal with the uncertainty, no paragraph need be added to the audit report

Answer 8

a. True, if the auditor believes that management has appropriate plans to deal with the contingency, then going concern should not be an issue.

Question 9

9.) Going Concern: The auditor’s going concern reference in the audit report is an opinion qualification

Answer 9

a. False, the opinion that the f/s present fairly is not affected by the additional paragraph about going concern

Question 10

10.) Going Concern: The auditor should follow up in months following the issuance of the report to keep updated for new information regarding going concern issues

Answer 10

a. False, the auditor has no obligation to follow up or to update the report for new information about going concern

Question 11

1.) Acct Changes: A change from the completed contract method to the percentage-of-completion method of accounting for long-term construction contracts

Answer 11

a. B, change from GAAP to GAAP
b. M, modification of the auditor’s report is required
c. R, retrospective application or restatement is required

Question 12

2.) Acct Changes: A change in the estimated useful life of previously recorded fixed assets based on newly acquired information

Answer 12

a. A, change in accounting estimate
b. N, modification of the auditor’s report is not required
c. S, no retrospective application or restatement is required

Question 13

3.) Acct Changes: Correction of a mathematical error in inventory pricing made in the prior period

Answer 13

a. G, correction of an error not involving a principle
b. N, modification of the auditor’s report is not required
a. R, retrospective application or restatement is required

Question 14

4.) Acct Changes: A change from prime costing to full absorption costing for inventory measurement.

Answer 14

a. C, Correction of an error in principle
b. M, modification of the auditor’s report is required
c. R, prior statements need to be restated.

Question 15

5.) Acct Changes: A change from presentation of statements of individual companies to presentation of consolidated statements

Answer 15

a. D, change in reporting entity
b. M, modification of the auditor’s report is required
c. R, retrospective application or restatement is required

Question 16

6.) Acct Changes: A change in method of depreciation

Answer 16

a. E, change in accounting estimate inseperable from change in principle
b. M, modification of the auditor’s report is required
c. S, no retrospective application or restatement is required

Question 17

7.) Acct Changes: A change to including the employer share of FICA taxes as Retirement Benefits on the income statement from including it with other taxes

Answer 17

a. F, change in classification
b. M, modification of the auditor’s report is required
c. S, no retrospective application or restatement is required

Question 18

8.) Acct Changes: A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing when it is impracticable to determine the cumulative effect on the period prior to the period of change

Answer 18

a. B, change from GAAP to GAAP
b. M, modification of the auditor’s report is required
c. S, no retrospective application or restatement is required

Question 19

1.) The paragraph is a qualification of the audit opinion

Answer 19

a. False, the paragraph is a division of reporting responsibility

Question 20

2.) It is appropriate to divide responsibility with the other auditors report

Answer 20

a. True, it is acceptable for principal auditor to divide responsibility with other auditors

Question 21

3.) The proposed paragraph will be presented in the scope paragraph of the audit report

Answer 21

a. False, this state would be included in the introductory paragraph. However, the other auditors are also mentioned in the scope and opinion paragraph

Question 22

4.) The paragraph should give the amounts audited by the other auditor

Answer 22

a. True, the statement should include percentages or dollar amounts audited by other auditors

Question 23

5.) The paragraph should state that the financial statements were audited by other auditors

Answer 23

a. True, the paragraph should state that the f/s were audited, not prepared, by other auditors.

Question 24

6.) It is acceptable to base the audit opinion solely on the report of other auditors

Answer 24

a. False, It is appropriate to base the opinion on the portion of f/s audited by other auditor’s solely on their work, but not the whole opinion.

Question 25

7.) The paragraph should indicate the date of the other auditor’s report

Answer 25

a. False, The statement need not indicate the date of the other auditor’s report

Question 26

8.) The other auditor’s name must appear in the paragraph

Answer 26

a. False, The other auditor’s name should not appear unless that is report is also presented

Question 27

8.) The other auditor’s name must appear in the paragraph

Answer 27

a. False, The other auditor’s name should not appear unless that is report is also presented

Question 28

9.) The principal auditor’s report should refer to the other auditor in the opinion paragraph of the report as well as the draft paragraph

Answer 28

a. True, The other auditor is mentioned in the introduction, scope, and opinion paragraphs

Question 29

10.) The paragraph should state whether the principal auditor concurs with the opinion of the other auditor

Answer 29

a. False, the principal auditor would not include concurrence with the other auditor’s opinion

Question 30

With regard to other auditor’s report the auditor may issues a standard report if?

Answer 30

If the principal auditor can become satisfied regarding independence and professional reputation of, and work work performed by other auditor, they may be able to express an opinion on the f/s taken as a whole without referring to the other auditor if they assume responsibility for the work of the other auditor a standard report is appropriate (AU 543)

Question 31

Which statements could an auditor express an opinion upon if the auditor could not gather sufficient appropriate evidence about consistent application of accounting principles between current and prior year balances and assets and liabilities at BOY? Due to client record retention policy

Answer 31

The 2nd standard of reporting states “the auditor must identify in the auditor’s report circumstances in which such principles have not been consistently observed in current period in relation to they preceding period.” An auditor must be able to identify accounting changes that affect consistency. If the auditor is unable to become satisfied based on client record retention policies the auditor will be unable to express an opinion on operations and cash flows. However, the auditor may be able to become satisfied as to ending balances on the Balance Sheet.

Question 32

What representations are implicitly and explicitly stated in the auditors report on comparative f/s

Answer 32

Examination of evidence is explicitly stated
Consistent Application of Accounting Principles implicitly stated. The scope paragraph of the standard auditor’s report on comparative statements explicitly states “an audit includes examining on a test basis, evidence supporting the amounts and disclosures in the f/s” When GAAP have been consistently observed, the standard report makes no mention of consistency. (AU 508)

Question 33

What should a predecessor auditor do if asked to re-issue report for comparative statements

Answer 33

1.) Read current-period statements. 2.) Compare the statements they reported on to the statements to be presented comparatively. 3.) Obtain written representation form the auditor. 4.) Obtain written representation from management.

Question 34

Emphasis of Matter Paragraph

Answer 34

used in the auditor’s report to draw users’ attention to a matter appropriately presented or disclosed in the financial statements that is of such importance that it is fundamental to users’ understanding of the financial statements.

Question 35

Emphasis of Matter Paragraph - Required Included when

Answer 35

1. AU-C 560, Subsequent Events and Subsequently Discovered Facts – If the auditor’s opinion on revised financial statements changes after the original report date, the new report should include either an emphasis-of-matter or other-matter paragraph.
2. AU-C 570, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern – If the auditor has substantial doubt about an entity’s ability to continue as a going concern, an emphasis-of-matter paragraph should be included in the report.
3. AU-C 708, Consistency of Financial Statements – A material change in principle or the correction of a material misstatement in previously issued statements requires the auditor to include an emphasis-of-matter paragraph in the report.
4. AU-C 800, Special Considerations—Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks – Reports on special purpose financial statements require the auditor to add an emphasis-of-matter paragraph to the report.

Question 36

Emphasis of Matter Paragraph - Auditor Included when

Answer 36

1. An uncertainty relating to the future outcome of unusually important litigation or regulatory action
2. A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position
3. Significant transactions with related parties
4. Unusually important subsequent events

Question 37

Other Matter Paragraph

Answer 37

used in the auditor’s report to draw users’ attention to any matter relevant to users’ understanding of the auditor’s (a) audit, (b) responsibilities, or (c) report