Chapter 15

You are an auditor for Bigger Warehouses, who recently completed an acquisition of Smaller Group Inc. Smaller Group represents a material amount of the financial statements for Bigger. As the group engagement partner, you decide to reference the work done by the auditor for Smaller Group. Because you referenced the work of this component audit, which of the following statements is correct? A You are not assuming responsibility for the work of the component auditor and your opinion is based solely on the report of the component auditors. B You are not assuming responsibility for the work of the component auditor and your opinion is not based solely on the report of the component auditors. C You are assuming responsibility for the work of the component auditor and your opinion is not based solely on the report of the component auditors. D You are assuming responsibility for the work of the component auditor and your opinion is based solely on the report of the component auditors.

A You are not assuming responsibility for the work of the component auditor and your opinion is based solely on the report of the component auditors.

Pervasive

A description of the impact or possible impact of a material misstatement or material scope limitation on the financial statements as a whole.

Emphasis-of-matter paragraph

A paragraph included in the auditor's report that is required by generally accepted auditing standards, or is included at the auditor's discretion, and that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's professional judgment, is of such importance that it is fundamental to users' understanding of the financial statements.

Modified opinion

A qualified opinion, an adverse opinion, or a disclaimer of opinion.

Which of the following is an example of a modified opinion? A qualified opinion. A going concern emphasis-of-matter paragraph. A consistency emphasis-of-matter paragraph. A reference to the audit of component auditors.

A qualified opinion.

If the auditor encounters a material scope limitation and cannot obtain sufficient appropriate audit evidence regarding the fair presentation of the financial statements, what type of report would be issued? A qualified or adverse opinion. An unmodified opinion with an emphasis-of-matter paragraph. A qualified or disclaimer of opinion. No report can be issued.

A qualified or disclaimer of opinion.

Integrated audit

An audit that combines the financial statement audit with an audit of the effectiveness of ICFR.

Compilation engagement

An engagement in which a CPA applies accounting and financial expertise to assist management in the presentation of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework.

Review engagement

An engagement in which a CPA uses inquiry and analytical procedures to provide limited assurance that no material modifications should be made to the financial statements for them to be in accordance with the applicable financial reporting framework.

What is an auditor's responsibility with regard to subsequently discovered facts? A Auditors are responsible for subsequently discovered facts, both before and after the report release date. B Auditors are only responsible for subsequently discovered facts that become known before the end of fieldwork date. C Auditors have no responsibility for subsequently discovered facts after the report release date unless the client determines that routine auditing procedures should have uncovered the facts during the period of the financial statement. D Subsequently discovered facts become known only after the report release date so auditors have no responsibility to deal with them.

Auditors are responsible for subsequently discovered facts, both before and after the report release date.

Disclaimer of opinion

Auditors provide no opinion on the financial statements due to a pervasively material scope limitation or lack of independence from the client.

Qualified opinion

Auditors state the financial statements are fairly presented except for a material departure from the applicable financial reporting framework or a material scope limitation.

Adverse opinion

Auditors state the financial statements are not fairly presented due to a pervasively material departure from the applicable financial reporting framework.

What is the difference between a subsequent event and a subsequently discovered fact? A A subsequent event occurs between the end of fieldwork date and the report release date, whereas a subsequently discovered fact occurs before the end of fieldwork date. B A subsequent event is discovered after the report release date and a subsequently discovered fact is discovered before the report release date. C A subsequent event is discovered before the report release date and a subsequently discovered fact is discovered after the report release date. D A subsequent event does not require auditors to perform any audit procedures after the date of the financial statements, whereas a subsequently discovered fact does.

C A subsequent event is discovered before the report release date and a subsequently discovered fact is discovered after the report release date.

Which of the following statements is INCORRECT regarding using the work of another auditor for the audits of private companies? A If more than one component auditor was used to audit multiple subsidiaries, then the portion audited by all component auditors can be aggregated together and expressed as a single dollar amount or percentage. B The group engagement partner must decide whether to make reference to the audit of a component auditor in the auditor's report on the group financial statements. C If the subsidiary audited by the component auditor is an immaterial amount of the group financial statements, the group engagement partner typically decides to reference the work completed by the component auditor in the audit report. D When reference is made to a component auditor, the auditor's responsibility paragraph is modified to include a portion of the group financial statements that were audited by the component auditor.

C If the subsidiary audited by the component auditor is an immaterial amount of the group financial statements, the group engagement partner typically decides to reference the work completed by the component auditor in the audit report.

When issuing an unmodified opinion, the auditor who evaluates the audit findings should be satisfied that the Estimate of the total likely misstatement is less than a material amount. Amount of known misstatement is documented in the management representation letter. Amount of known misstatement is acknowledged and recorded by the client. Estimate of the total likely misstatement includes the adjusting entries already recorded by the client.

Estimate of the total likely misstatement is less than a material amount.

Subsequently discovered facts

Facts that become known to the auditor after the date of the auditor's report that, had they been known to the auditor at that date, might have caused the auditor to revise the auditor's report.

Dual dating

Showing two dates on an audit report; one date is the end of fieldwork and the other is the date of a revision to the financial statements that occurred after the end of fieldwork.

Which of the following statements is not correct about the auditor's report under PCAOB auditing standards? The date of the auditor's report has been changed to the date that the issuer filed the applicable financial statements with the Securities and Exchange Commission. Critical audit matters must be identified and discussed in the auditor's report. Each section of the audit report must have an appropriate label. The auditor's opinion is expressed at the beginning of the audit report.

The date of the auditor's report has been changed to the date that the issuer filed the applicable financial statements with the Securities and Exchange Commission.

Unmodified opinion

The opinion expressed by the auditor when the auditor concludes that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

All of the following are examples of a change in accounting principle except: a change from one acceptable accounting principle to another acceptable accounting principle. a change in an accounting estimate. a change from an acceptable accounting method to a newly adopted accounting principle. a change in the method of application of an acceptable accounting principle.

a change in an accounting estimate.

An emphasis-of-matter paragraph is used with an unmodified opinion when: a significant uncertainty exists that should be brought to the financial statements user's attention. an extreme limitation of the scope of the audit exists. there is a disagreement with those charged with governance regarding the selection of accounting policies. a client has an unjustified change in accounting principle.

a significant uncertainty exists that should be brought to the financial statements user's attention.

If auditors identify only one material weakness in a client's internal control system, the appropriate report to issue is a(n): qualified opinion. adverse opinion. disclaimer of opinion. unqualified opinion with an emphasis-of-matter paragraph.

adverse opinion.

When the audit opinion is based in part on the work of another auditor, all of the following changes are made to the standard unmodified audit report except: the auditor's responsibility paragraph has added wording stating that other auditors completed a portion of the audit. the opinion paragraph references the other auditors. the portion of the audit conducted by the component auditor is stated in the report. an emphasis-of-matter paragraph is added after the opinion paragraph.

an emphasis-of-matter paragraph is added after the opinion paragraph.

In an engagement to review financial statements of a private company, the auditor will do all of the following except: confirm key account receivable balances. inquire of management regarding key revenue recognition policies. calculate key ratios relevant to the client. issue a report at the conclusion of the engagement.

confirm key account receivable balances.

If an auditor becomes aware after the date of the auditor's report but before the financial statements are issued, of a fact that may materially affect the financial statements, the first step the auditor should take is to: alert the appropriate regulatory body. discuss the matter with management and, if appropriate, those charged with governance. determine if the financial statements need to be revised. make the appropriate adjustments to the financial statements.

discuss the matter with management and, if appropriate, those charged with governance.

All of the following phrases would be found in the standard unmodified audit report for a private company except: in our opinion, the financial statements referred to above are correct, in all material respects. management is responsible for the preparation and fair presentation of the financial statements. standards require that we plan and perform the audit to obtain reasonable assurance. we believe the audit evidence we have obtained is sufficient and appropriate.

in our opinion, the financial statements referred to above are correct, in all material respects.

If a client has a going concern issue that has been properly disclosed in the notes, the auditor should: issue an unmodified report and add an emphasis-of-matter paragraph before the opinion paragraph to highlight the going concern issue. issue a qualified report and add an emphasis-of-matter paragraph before the opinion paragraph to highlight the going concern issue. issue an unmodified report and add an emphasis-of-matter paragraph after the opinion paragraph to highlight the going concern issue. issue a qualified report and add an emphasis-of-matter paragraph after the opinion paragraph to highlight the going concern issue.

issue an unmodified report and add an emphasis-of-matter paragraph after the opinion paragraph to highlight the going concern issue.

The dual dating of an audit report means: the release date of the financial statements was after the completion of fieldwork. a subsequent event occurred. the auditors performed audit procedures regarding a specific event that was after the end of fieldwork. the auditors extended their responsibility period to include the release date of the financial statements.

the auditors performed audit procedures regarding a specific event that was after the end of fieldwork.

In a public company audit, the audit report is addressed to the: audit committee. the CEO and CFO. the SEC. the board of directors and shareholders.

the board of directors and shareholders.

All of the following are components of the standard unqualified report on the effectiveness of ICFR except: a title that includes the term "independent." a statement about the inherent limitations of ICFR. the definition of internal control over financial reporting. the definition of a material weakness.

the definition of a material weakness.