ACCT 401 - Chapter 17 Homework

Which of the following is a general purpose financial reporting framework? A. Auditing Standards of the Public Company Accounting Oversight Board. B. International Financial Reporting Standards. C. Generally accepted auditing standards. D. International Standards of Auditing.

B. International Financial Reporting Standards

An audit report on a public company is least likely to include a paragraph titled: A. Critical Audit Matters. B. Opinion on the Financial Statements. C. Basis for Opinion. D. Auditor responsibility

D. Auditor responsibility

Which of the following is least likely to result in an adverse opinion? A. Related party transaction. B. Uncertainty. C. Change in accounting principle. D. Limitation in the scope of the audit.

D. Limitation in the scope of the audit.

1. Auditors may add an emphasis-of-matter paragraph that refers to a matter that is _________ presented or disclosed. 2. A going concern is to be evaluated for a period not to exceed _________ beyond the date of the financial statements. 3. If substantial doubt about a going concern exists, an ______ paragraph is the most common resolution. 4. An emphasis-of-matter paragraph always _______ the opinion paragraph. 5.Changes in accounting estimates ______ result in an explanatory paragraph.

1. Appropriately 2. One year 3. Emphasis-of-Matter 4. Follows 5. Do not

Required: Your job as senior on the engagement is to review and revise the 20X5 audit report for the Keystone audit. For each of the sentences called out in the points on the document, determine if the current language is appropriate as is, should be removed altogether, or replaced with any of the provided alternatives. Ensure that the 20X5 list is appropriate given the information provided. Links to each of the exhibits are provided in the document, but are available in the list below for convenience. Certified Public Accountant's Report (Callout #1) To Sam Best, President: (Callout #2) We have audited the accompanying financial statements of Keystone Computers & Networks, Inc., which comprise the balance sheet as of December 31, 20X5, and the related statements of income, changes in stockholders' equity, and cash flows for the year then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Basis for Qualified Opinion The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. If these lease obligations were capitalized, property would be increased by $3,500,000, long-term debt by $3,500,000, and retained earnings by $500,000 as of December 31, 20X5. Additionally, net income would be increased by $500,000 and earnings per share would be increased by $1.12 for the year then ended. (Callout #3) Opinion In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph and subject to the accounting change described in the Emphasis of Matter paragraph, (Callout #4) the financial statements referred to above present fairly, in all material respects, the financial position of Keystone Computers & Networks, Inc., as of December 31, 20X5, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note 4 to the financial statements, in 20X5 the entity elected to change the estimated life of a number of its plant assets. We concur with this change. (Callout #5) Adams, Barnes & Co. (Callout #6) Phoenix, Arizona February 6, 20X6. (Callout #7) 1. "Certified Public Accountant's Report" 2. "Sam Best, President" 3. "Basis for Qualified Opinion: The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. If these lease obligations were capitalized, property would be increased by $3,500,000, long-term debt by $3,500,000, and retained earnings by $500,000 as of December 31, 20X5. Additionally, net income would be increased by $500,000 and earnings per share would be increased by $1.12 for the year then ended." 4. "and subject to the accounting change described in the Emphasis of Matter paragraph". 5. "As discussed in Note 4 to the financial statements, in 20X5 the entity elected to change the estimated life of a number of its plant assets. We concur with this change." 6. "Adams, Barnes & Co." 7. "February 6, 20X6."

1. Replace with "Independent Auditor's Report" 2. Replace with "Board of Directors of Keystone" 3. Retain the original text. 4. Delete the text. 5. Delete entire paragraph. 6. Retain the original text. 7. Replace with "January 31, 20X6, except for Note 7, as to which the date is February 2, 20X6."

Which of the following is not explicitly included in an audit report for a nonpublic company? A. A statement that the auditor believes that the audit provides a reasonable basis for expressing negative assurance. B. A statement that the auditor's responsibility is to express an opinion on the financial statements. C. A title with the word "independent." D. A statement that the financial statements are the responsibility of management.

A. A statement that the auditor believes that the audit provides a reasonable basis for expressing negative assurance.

An auditor's report on comparative financial statements should be dated as of the date of the: A. Accumulation of sufficient appropriate audit evidence. B. Latest financial statements being reported on. C. Issuance of the report. D. Last related-party transaction disclosed in the statements.

A. Accumulation of sufficient appropriate audit evidence.

In which of the following circumstances will it be most likely that an adverse opinion is considered appropriate? A. The statements are not in conformity with generally accepted accounting principles regarding pension plans. B. The statements are not in conformity with generally accepted accounting principles due to a departure from GAAP with an immaterial effect on the financial statements. C. The auditor is not independent with respect to the enterprise being audited. D. A client-imposed scope limitation prevents the auditor from obtaining sufficient appropriate audit evidence.

A. The statements are not in conformity with generally accepted accounting principles regarding pension plans.

Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? A. Performing cutoff tests of sales transactions with customers with long-standing receivable balances. B. Inquiring of the entity's legal counsel about litigation, claims, and assessments. C. Evaluating the entity's procedures for identifying and recording related party transactions. D. Inspecting title documents to verify whether any real property is pledged as collateral.

B. Inquiring of the entity's legal counsel about litigation, claims, and assessments.

When an auditor does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should: A. Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables. B. Issue an unmodified opinion with no reference to this omission. C. Issue an adverse opinion. D. Issue an unmodified opinion, but disclose elsewhere in the report this departure from a customary procedure.

B. Issue an unmodified opinion with no reference to this omission.

Which of the following is least likely to result in a qualification of the auditors' opinion due to a scope limitation? A. Scope limitations imposed by the client. B. Reliance placed upon the report of component auditors. C. Inability to obtain sufficient appropriate audit evidence. D. Inadequate accounting records.

B. Reliance placed upon the report of component auditors.

If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows: A. The auditors may still issue an unmodified opinion. B. The auditors should issue a qualified report for the departure from generally accepted accounting principles. C. The auditors should disclaim an opinion on the overall financial statements. D. The auditors should issue a qualified report indicating a scope limitation in that no statement of cash flows is presented.

B. The auditors should issue a qualified report for the departure from generally accepted accounting principles.

The Rotter Company, a nonpublic company, changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading due to pervasive misstatements. The change (including its dollar effect) has been described in the notes to the 20X4 statements. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should: A. Disclaim an opinion and explain all of the reasons therefore. B. Express an adverse opinion regarding the 20X4 financial statements, without a basis for modification paragraph since the reason will be included in the notes to the statements. C. Express an unmodified opinion with an emphasis-of-matter paragraph and disclose the accounting change from 20X3 and its effect on the financial statements. D. Express an adverse opinion with the basis for modification paragraph disclosing the reason (the accounting change) for the opinion.

D. Express an adverse opinion with the basis for modification paragraph disclosing the reason (the accounting change) for the opinion.

Critical audit matters are included in a public company audit report with a(n): Adverse Opinion / Disclaimer of Opinion A. Yes / Yes B. Yes / No C. No / Yes D. No / No

D. No / No

Which of the following would most likely be an appropriate addressee for an audit report? A. A third party who requested that a copy of the audit report be sent to her. B. The chief financial officer. C. The president of the corporation whose financial statements were examined. D. The shareholders of the corporation whose financial statements were examined.

D. The shareholders of the corporation whose financial statements were examined.

When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for: A. Expressing dual dated opinions. B. Updating the report on the previous financial statements only if there has not been a change in the opinion. C. Updating the report on the previous financial statements only if the previous report was qualified and the reasons for the qualification no longer exist. D. Updating the report on the previous financial statements regardless of the opinion previously issued.

D. Updating the report on the previous financial statements regardless of the opinion previously issued.

Which of the following is a "registration statement" that is filed with the SEC by a company planning to issue securities to the public? A. Form 10-K. B. Form 8-K. C. Form S-1. D. Form 10-Q.

Form S-1

\Match each situation with the appropriate type of opinion to be issued. Opinion: a. Disclaimer of Opinion b. Unmodified Opinion c. Adverse Opinion d. Unqualified Opinion with an Emphasis-of-Matter paragraph e. Adverse Opinion Situations: 1. Auditors have obtained sufficiently appropriate evidence to conclude that the financial statements are not materially misstated. 2. Auditors have doubt about a company's ability to continue as a going concern. 3. The client has elected to not follow GAAP. 4. Auditors determine that the possible effects on the financial statements of the inability to obtain sufficient evidence (i.e. a scope limitation) could be both material and pervasive. 5. A material misstatement is considered pervasive.

a. Disclaimer of Opinion - Auditors determine that the possible effects on the financial statements of the inability to obtain sufficient evidence (i.e. a scope limitation) could be both material and pervasive. b. Unmodified Opinion - Auditors have obtained sufficiently appropriate evidence to conclude that the financial statements are not materially misstated. c. Adverse Opinion - The client has elected not to follow GAAP. d. Unqualified Opinion with an Emphasis-of-Matter paragraph - Auditors have doubt about a company's ability to continue as a going concern. e. Adverse Opinion - A material misstatement is considered pervasive.

CONCEPT REVIEW: The emphasis-of-matter paragraph follows the opinion paragraph and states that the auditor's opinion is not modified, but that the matter is to be emphasized. Match each paragraph with its corresponding reason for the emphasis-of-matter paragraph based on the hint provided. Paragraphs: a. As discussed in Note XX to the financial statements, the Company adopted SFAS XXX as of December 31, 20XX. Our opinion is not modified with respect to this standard. b. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, but there is substantial doubt about its ability to continue as a going concern. c. As discussed in Note XX to the financial statements, the Company is a defendant in a lawsuit. Reason: 1. Going Concern Opinion 2. Auditor Discretionary Circumstances 3. Principles Not Consistently Applied

a. Principles not consistently applied b. Going Concern Opinion c. Auditor Discretionary Circumstances