Auditing Exam 3
Investigate changes in shareholders' equity occurring after the date of the financial statements.
Which of the following substantive procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events?
Client's outside attorneys.
Which of these persons generally does not participate in writing the management letter?
Scanning expense accounts for credit entries.
Which of these substantive procedures is not used to obtain evidence about contingencies?
Which of the following is not true with respect to a preparation engagement?
While not required to be independent, the accountants' communication to third parties should disclose their lack of independence.
Which of the following normally occurs earliest in the audit examination?
**Review of audit documentation. Preparation of the management letter. Discovery of an omitted audit procedure. Dual dating the auditor's report on the entity's financial statements for subsequent events that exist at the date of the financial statements.
Which of these substantive procedures is not used to obtain evidence about contingencies?
**Scanning expense accounts for credit entries. Reading the minutes of the board of directors' meetings. Examining terms of sale in sales contracts. Obtaining a letter from the client's attorney.
Which of the following statements is not true with respect to written representations?
**The failure of management to furnish them is a significant scope limitation, resulting in either an adverse opinion or a disclaimer of opinion. Auditors use them to corroborate information received during the audit from the client and its employees. They are dated the same date as the auditor's reports. They should address management's responsibility for designing internal control to prevent and detect fraud.
For each of the following statements, indicate whether it is appropriately related to financial forecasts (FF), financial projections (FP), both (B), or neither (N). 1. Financial information is prepared based on expected conditions or courses of action. 2. Accountant may perform an examination engagement. 3. Accountant is required to be independent to conduct engagement. 4. Engagement is conducted under attestation standards. 5. Financial information is prepared based on the occurrence of one or more hypothetical events. 6. Accountants' report indicates that differences between prospective financial information and actual results may occur. 7. Accountant may perform a review engagement. 8. Use of the accountants' report is limited to specific users.
1. FF 2. B 3. B 4. B 5. FP 6. B 7. N 8. FP
Indicate (either yes or no) whether each of the following would be included in an auditors' report on financial statements prepared using a special purpose framework. 1. A statement that the engagement was performed under auditing standards related to the special purpose framework. 2. Statements providing a general description of an audit examination. 3. The auditors' opinion on the fairness of the financial statements. 4. A statement indicating that the financial statements were prepared using a special purpose framework as well as identifying footnote or other disclosures providing further information about the special purpose framework.Yesselected answer correct 5. The auditors' opinion on the appropriateness of the special purpose framework for general use. 6. Statements describing management's responsibility for the financial statements. 7. A statement indicating that management is responsible for the selection of the special purpose framework used to prepare the financial statements. 8. The auditors' opinion on the materiality of differences between the financial information prepared using the special purpose framework and that under generally accepted accounting principles.
1. No 2. Yes 3. Yes 4. Yes 5. No 6. Yes 7. Yes 8. No
The following numbered items 1-10 state procedures accountants should consider performing in review engagements and compilation engagements on the annual financial statements of non-issuers. Required: For each item (taken separately), tell whether the item is required in all review engagements and/or required in all compilation engagements. For each item, give two responses, one regarding review engagements and the other regarding compilation engagements.
1. The accountants should establish an understanding in writing with the entity's management regarding the nature and limitations of the services to be performed. - Required for a review? (Y); Required for a compilation? (Y) 2. The accountants should make inquiries concerning actions taken at the board of directors' meetings. - Required for a review? (Y); Required for a compilation? (N) 3. The accountants, as the entity's successor accountants, should communicate with the predecessor accountants to obtain access to the predecessors' documentation. - Required for a review? (N); Required for a compilation? (N) 4. The accountants should obtain a level of knowledge of the accounting principles and practices of the entity's industry. - Required for a review? (Y); Required for a compilation? (Y) 5. The accountants should obtain an understanding of the entity's internal control over financial reporting. - Required for a review? (N); Required for a compilation? (N) 6. The accountants should perform analytical procedures designed to identify unusual relationships. - Required for a review? (Y); Required for a compilation? (N) 7. The accountants should assess the risk of material misstatement. - Required for a review? (N); Required for a compilation? (N) 8. The accountants should obtain a letter from the entity's attorney to corroborate the information furnished by management concerning litigation. - Required for a review? (N); Required for a compilation? (N) 9. The accountants should obtain written representations from the entity's management. - Required for a review? (Y); Required for a compilation? (N) 10. The accountants should study the relationship of the financial statement elements that would be expected to conform to a predictable pattern. - Required for a review? (Y); Required for a compilation? (N)
TrailBlazer, Inc. is considering the acquisition of Sonic Company and has prepared prospective financial statements under the assumption that financing would be received and the transaction would be approved by their respective boards of directors and would be consummated by March 15, 2021. In order to obtain financing, TrailBlazer has approached Oregon National Bank for a $10 million loan. After reviewing the prospective financial statements, Oregon National Bank has requested having an independent accountant evaluate the prospective financial statements. Required: d. Indicate whether the following statements or issues would be referenced in an accountants' report on that engagement. (Your responses may be "Yes", "No", or "Possibly".)
1. The financial statements/information evaluated by the accountant. - Examination (Y); Agreed-Upon Procedures(Y) 2. The accountants' opinion on the presentation of the prospective financial information. - Examination (Y); Agreed-Upon Procedures(N) 3. A description of the nature of the engagement. - Examination (Y); Agreed-Upon Procedures(Y) 4. A limitation on the use of the accountants' report. - Examination (P); Agreed-Upon Procedures(Y) 5. The procedures performed by the accountant on TrailBlazer's internal control over financial reporting. - Examination (N); Agreed-Upon Procedures(P) 6. A notation that differences between prospective financial information and actual results may occur. - Examination (Y); Agreed-Upon Procedures(Y) 7. An opinion on the achievability of the results reflected in the prospective financial information. - Examination (N); Agreed-Upon Procedures(N) 8. A detailed listing of procedures performed by the accountant. - Examination (N); Agreed-Upon Procedures(Y) 9. The accountants' opinion on the reasonableness of the assumptions used in preparing the prospective financial information. - Examination (Y); Agreed-Upon Procedures(N)
Which of the following situations would not ordinarily require auditors to modify the Opinion Section of the report on the financial statements of a non-issuer?
A change from one generally accepted accounting principle to another.
Impress on management its ultimate responsibility for the financial statements and disclosures.
A major objective of written representations is to
Which of the following statements should be included in a practitioners' report on the application of agreed-upon procedures?
A statement referring to standards established by the AICPA.
Which of the following would not ordinarily be included in an accountants' review report on a non-issuer's financial statements?
A statement that a review engagement is greater in scope than a compilation.
Which of the following would not be included in an accountants' report on compliance with laws, regulations, or other matters conducted separately from an audit?
A statement that the accountants' engagement provides a legal determination with respect to compliance.
January 30, 2015, except as to Note X, which is dated February 5, 2015.
A. Griffin audited the financial statements of Dodger Magnificat Corporation for the year ended December 31, 2014. She completed gathering sufficient appropriate evidence on January 30 and later learned of a stock split voted by the board of directors on February 5. The financial statements were changed to reflect the split, and she now needs to dual date the report on the entity's financial statements. Which of the following is the proper form?
Determine whether the omitted procedure is important in supporting the auditors' opinion on the entity's financial statements.
After the audit report release date, auditors determine that an important auditing procedure was omitted. Which of the following initial courses of action is most appropriate?
A major loss due to a catastrophe that occurred and was known by Ambrose on March 1, 2015.
Ambrose is auditing the financial statements of Mays (dated December 31, 2014). The date of the auditor's report is February 17, 2015, and the audit report release date is February 20, 2015. For which of the following matters would Ambrose have the least responsibility?
Which of the following is not included in the standard (unmodified) report on the financial statements?
An emphasis-of-matter paragraph commenting on the effect of economic conditions on the entity.
When auditors wish to issue an unmodified opinion but highlight that the entity changed its method of accounting for software development costs, they would most appropriately identify the change in accounting method in which of the following?
An emphasis-of-matter paragraph.
Which of the following would not be included in an auditors' report on financial statements prepared using a special purpose framework?
An opinion on the appropriateness of the special purpose framework.
Which of the following statements would not be included in an accountants' report on an examination of a financial forecast?
An opinion on the likelihood of achieving the forecasted results.
If the opinion issued on prior years' financial statements is no longer appropriate and financial statements are presented in comparative form, the auditors' current report should?
Reference the type of opinion issued on the prior years' financial statements and indicate that the current opinion on these financial statements differs from that expressed in the prior years.
Accountants are permitted to express limited assurance in which of the following reports?
Review report on unaudited financial statements.
What is an auditor's primary method to corroborate information on litigation, claims, and assessments?
Reviewing the response from the client's lawyer to a letter of audit inquiry.
Subsequent knowledge of which of the following would cause the entity to adjust its December 31 financial statements?
Settlement of litigation in February for $100,000 that had been estimated at $12,000 in the December 31 financial statements.
How is the auditors' responsibility for expressing the opinion on financial statements disclosed in the standard (unmodified) report for a nonissuer?
Stated explicitly in the Auditor's Responsibility for the Audit of the Financial Statements Section.
Which of the following information would be included in the Basis for Opinion section of the auditors' report on ICFR if the report is presented separately from the auditors' report on the entity's financial statements of an issuer?
Statements identifying the responsibility of the auditors and management for ICFR.
Settlement of litigation in February for $100,000 that had been estimated at $12,000 in the December 31 financial statements.
Subsequent knowledge of which of the following would cause the entity to adjust its December 31 financial statements?
Which of the following would be included in an accountants' report on an agreed-upon procedures engagement?
Summary of findings - Yes Summary of procedures performed - Yes
Auditors have a responsibility related to management's disclosure of new information related to subsequent events until
The audit report release date.
Under which of the following conditions can a disclaimer of opinion never be issued?
The audit team has determined that the entity uses the NIFO (next-in, first-out) inventory costing method.
The date of the auditor's report.
The auditing standards regarding subsequently discovered facts refers to knowledge obtained after
Which of the following statements is not true regarding an auditors' report on compliance with contractual provisions conducted in conjunction with a GAAS audit?
The auditors' report expresses an opinion on the financial statements and compliance with contractual provisions.
Assume that the audit team encountered the following separate situations when deciding on the report to issue for the current-year financial statements for a nonissuer. 1. The audit team decided that sufficient appropriate evidence could not be obtained to complete the audit of significant investments the entity held in a foreign entity. 2. The entity failed to capitalize lease assets and obligations but explained them fully in the notes to the financial statements. These lease obligations meet the criteria for capitalization under ASC 840. 3. The entity is defending a lawsuit on product liability claims. (Customers allege that power saw safety guards were improperly installed.) All facts about the lawsuit are disclosed in the notes to the financial statements, but the audit team believes the entity should record a loss based on a probable settlement mentioned by the entity's attorneys. 4. The entity hired the audit team after taking inventory on December 31. The accounting records and other evidence are not reliable enough to enable the audit team to have sufficient evidence about the proper inventory amount. 5. The FASB requires the energy company to present supplementary oil and gas reserve information outside the basic financial statements. The audit team finds that this information, which is not required as a part of the basic financial statements, has been omitted. 6. The auditors are group auditors of the parent company, but they reviewed the component auditors' work and reputation, and decided not to take responsibility for the work of the component auditors on three subsidiary companies included in the consolidated financial statements. The component auditors' work amounts to 32 percent of the consolidated assets and 39 percent of the consolidated revenues. 7. The entity changed its depreciation method from units of production to straight line, and its audit team believes the straight-line method is the more appropriate method in the circumstances. The change, fully explained in the notes to the financial statements, has a material effect on the year-to-year comparability of the comparative financial statements. 8. Because the entity has experienced significant operating losses and has had to obtain waivers of debt payment requirements from its lenders, the audit team decides that there is substantial doubt that the entity can continue as a going concern. The entity has fully described all problems in a note in the financial statements and the audit team believes that, while material, the uncertainty is not serious enough to warrant a disclaimer of opinion. Required: a. What kind of opinion should the auditors express in each separate case? b. What other modification(s) or addition(s) to the standard (unmodified) report is (are) required for each separate case?
(a) 1. Qualified or disclaimer of opinion 2. Qualified or adverse opinion 3.Qualified or adverse opinion 4.Qualified or disclaimer of opinion 5.Unmodified opinion 6.Unmodified opinion 7.Unmodified opinion 8.Unmodified opinion b) 1. Opinion Section (Modified); Basis for Opinion Section (Modified); Management's Responsibility for the Financial Statements Section (Not modified); Responsibilities for Audits of the Financial Statements Section (Modified (disclaimer only)); Additional Section or Paragraph (Additional paragraph in basis for opinion section). 2. Opinion Section (Modified); Basis for Opinion Section (Modified); Management's Responsibility for the Financial Statements Section (Not modified); Responsibilities for Audits of the Financial Statements Section (Not Modified); Additional Section or Paragraph (Additional paragraph in basis for opinion section). 3. Opinion Section (Modified); Basis for Opinion Section (Modified); Management's Responsibility for the Financial Statements Section (Not modified); Responsibilities for Audits of the Financial Statements Section (Not Modified); Additional Section or Paragraph (Additional paragraph in basis for opinion section). 4. Opinion Section (Modified); Basis for Opinion Section (Modified); Management's Responsibility for the Financial Statements Section (Not modified); Responsibilities for Audits of the Financial Statements Section (Modified (disclaimer only)); Additional Section or Paragraph (Additional paragraph in basis for opinion section). 5. Opinion Section (Not Modified); Basis for Opinion Section (Not Modified); Management's Responsibility for the Financial Statements Section (Not modified); Responsibilities for Audits of the Financial Statements Section (Not Modified); Additional Section or Paragraph (Other-matter paragraph). 6. Opinion Section (Modified); Basis for Opinion Section (Not Modified); Management's Responsibility for the Financial Statements Section (Not modified); Responsibilities for Audits of the Financial Statements Section (Not Modified); Additional Section or Paragraph (Not included). 7. Opinion Section (Not Modified); Basis for Opinion Section (Not Modified); Management's Responsibility for the Financial Statements Section (Not modified); Responsibilities for Audits of the Financial Statements Section (Not Modified); Additional Section or Paragraph (Emphasis-of-matter paragraph). 8. Opinion Section (Not Modified); Basis for Opinion Section (Not Modified); Management's Responsibility for the Financial Statements Section (Not modified); Responsibilities for Audits of the Financial Statements Section (Not Modified); Additional Section or Paragraph (Going concern section).
Which of the following statements is most likely to be included in an attorney letter?
**"Please furnish to our auditors such explanation, if any, that you consider necessary to supplement the foregoing information." "Certain representations in this letter are described as being limited to matters that are material." "Our work enabled us to notice some actions that could enhance the profitability of the Company." "If any unasserted claims or assessments are omitted from this disclosure, please provide this information directly to our auditors."
Ambrose is auditing the financial statements of Mays (dated December 31, 2020). The date of the auditor's report is February 17, 2021, and the audit report release date is February 20, 2021. For which of the following matters would Ambrose have the least responsibility?
**A major loss due to a catastrophe that occurred and was known by Ambrose on March 1, 2021. A customer's deteriorating financial condition that was identified on February 19, 2021. A merger that was announced by Mays and known by Ambrose on February 12, 2021. The obsolescence of inventory held on December 31, 2020, that was identified on January 20, 2021.
What does the auditor need to document when there is substantial doubt that a client will continue as a going concern?
**All of the choices are correct The conditions or events that suggest there is a going concern uncertainty. Management's plan (or lack thereof) to mitigate the conditions and to continue as a going concern. The auditor's conclusion on whether, after evaluating management's plan, substantial doubt exists regarding the company's ability to continue as a going concern and whether any report modifications are needed.
Which of these persons generally does not participate in writing the management letter?
**Client's outside attorneys. Public accounting firm's consulting and tax experts. Public accounting firm's audit team on the engagement. Client's accounting and production managers.
After the audit report release date, auditors determine that an important auditing procedure was omitted. Which of the following initial courses of action is most appropriate?
**Determine whether the omitted procedure is important in supporting the auditors' opinion on the entity's financial statements. Engage another public accounting firm to conduct a quality assurance review. Notify the board of directors and regulatory agencies that are currently relying on auditors' reports. Perform the omitted procedure or an alternative procedure.
Which of the following is not required by generally accepted auditing standards?
**Management letter. Engagement letter. Written representations. Attorney letter.
Which of the following is ordinarily performed last in the audit examination?
**Obtaining signed written representations. Performing tests of controls. Performing a review for subsequent events. Securing a signed engagement letter from the client.
If audit teams are unable to apply an auditing procedure to an account balance or class of transactions, the audit team should first:
Attempt to determine whether alternative auditing procedures are available and can be applied.
Which of the following best describes the scope of audit and compilation engagements compared to a review engagement?
Audit - Greater then review Compilation - Lesser than review
Which of the following statements is not true with respect to the audit examinations and reports for issuers and nonissuer?
Auditors are required to express an opinion on internal control in the audit of nonissuers but not in the audit of issuers.
The audit report release date.
Auditors have a responsibility related to management's disclosure of new information related to subsequent events until
If auditors examine all years presented in comparative form, which of the following best describes their responsibility for prior years' financial statements in their current report?
Auditors should consider whether information has come to their attention that might affect their previous opinion on the prior years' financial statements.
Which of the following substantive procedures should auditors ordinarily perform regarding subsequent events?
Compare the latest available interim financial statements with the financial statements being audited.
In which of the following engagements would an accountant be required to be independent of the client?
Compilation engagement - No Preparation engagement - No
An SOC 1 Type 2 report supporting the auditors' report on internal control over financial reporting for an issuer provides assurance with respect to:
Controls placed in operation - Yes Operating effectiveness of controls - Yes
The primary reason auditors request responses to attorney letters is to provide auditors
Corroboration of the information furnished by management about litigation, claims, and assessments.
Dale, CPA, was engaged to conduct an audit of the financial statements of AM Company (a non-issuer). After considering the scope and cost of an audit engagement, AM Company has asked Dale to modify the scope of the engagement to a review. Which of the following best describes the professional guidance for this situation?
Dale would be permitted to modify the scope of the engagement if AM Company's request is based on their lender's willingness to accept a review engagement rather than an audit.
Which report would not be appropriate for a public accounting firm to provide on the ICFR for issuers?
Disclaimer of opinion—significant deficiencies exist.
Which of these situations would require auditors to include an emphasis-of-matter paragraph about consistency to an otherwise unmodified opinion?
Entity changed its inventory costing method from FIFO to LIFO.
In which of the following engagements would general use of the accountants' report be appropriate?
Examination of financial forecast.
March 24, year 2.
Hall accepted an engagement to audit the year 1 financial statements of XYZ Company. XYZ completed the preparation of the year 1 financial statements on February 13, year 2, and its auditors began the fieldwork on February 17, year 2. Hall completed gathering sufficient appropriate evidence on March 24, year 2; Hall's report and XYZ's financial statements were released on March 28, year 2. The written representations normally would be dated
A major objective of written representations is to
Impress on management its ultimate responsibility for the financial statements and disclosures.
Management acknowledgement of its responsibility for the fairness of the financial statements in accordance with U.S. GAAP. Availability of all financial records and related data. Information concerning fraud involving management and employees who have significant roles in internal control.
Included in written representations in all audits correct
Disclosure of all significant deficiencies and material weaknesses in internal control. Management's conclusion about the effectiveness of its internal control over financial reporting.
Included in written representations in audits of public entities correct
During a review of a non-issuer's financial statements, accountants are required to make certain inquiries of management. Which of the following inquiries is not required by SSARS?
Internal control deficiencies.
Which of the following substantive procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events?
Investigate changes in shareholders' equity occurring after the date of the financial statements.
A material weakness in ICFR is a situation in which
It is reasonably possible that a material misstatement would not be detected on a timely basis.
J. Griffith audited the financial statements of Mets Magnificat Corporation for the year ended December 31, 2020. She completed gathering sufficient appropriate evidence on January 30 and later learned of a stock split voted by the board of directors on February 5. The financial statements were changed to reflect the split, and she now needs to dual date the report on the entity's financial statements. Which of the following is the proper form?
January 30, 2021, except as to Note X, which is dated February 5, 2021.
Which of the following is not a condition that must be met for an engagement to evaluate compliance with laws, regulations, or other matters?
Management provides a report attesting to satisfactory compliance.
Hall accepted an engagement to audit the year 1 financial statements of XYZ Company. XYZ completed the preparation of the year 1 financial statements on February 13, year 2, and its auditors began the fieldwork on February 17, year 2. Hall completed gathering sufficient appropriate evidence on March 24, year 2; Hall's report and XYZ's financial statements were released on March 28, year 2. The written representations normally would be dated
March 24, year 2.
The scope of an audit is not restricted when an attorney letter limits the response to
Matters to which the attorney has given substantive attention in the form of legal representation.
A list of pending or threatened litigation, claims, or assessments currently outstanding against the client. A description of recommendations that allow the client to improve the efficiency and effectiveness of its operations. Auditors' judgment about the quality of the client's accounting principles. A statement that the financial statements are prepared according to U.S. generally accepted accounting principles.
Not included in written representations correct
In providing assurance services to clients, CPAs are building on their reputations for:
Objectivity and integrity.
Which of the following sections or paragraphs of the auditors' report would be modified if the report expresses an opinion on financial statements prepared using the cash basis of accounting rather than generally accepted accounting principles?
Opinion Section - Yes Auditor's Responsibility Section - No
In which of the following instances would a qualified opinion be an appropriate option?
Option *Scope Limitation - Yes *GAAP Departure - Yes
In the standard audit report under GAAS, some responsibilities are required to be stated in the report ("explicit"), while other responsibilities are implied ("implicit"). Which combination below correctly identifies the auditors' responsibilities as explicit or implicit?
Option A 1.GAAP - Explicit 2.Consistency - Implicit 3.Going concern - Implicit 4.Opinion - Explicit
If the auditors decide to present separate reports on the entity's financial statements and ICFR in the audit of an issuer, which of the following should be modified to refer to the other report?
Option A (Report on F/S: Yes; Report on ICFR: Yes)
Which of the following sections of the standard report on the financial statements of a nonissuer would be modified in response to a material departure from GAAP?
Option B *Basis for Opinion - Yes *Auditor's Responsibilities - No
The concepts of materiality and pervasiveness are important to audit teams in examinations of financial statements and expressions of opinion on these statements. Required: Consider how the materiality and pervasiveness of each issue below affect the opinion expressed. For each issue you should identify the nature of the issue, the appropriate opinion if the issue is material but not pervasive, and the appropriate opinion if the issue is material and pervasive. (A)The entity prohibits confirmation of accounts receivable, and sufficient and appropriate evidence cannot be obtained using alternative procedures. (B)The entity is a gas and electric utility company that follows the practice of recognizing revenue when it is billed to customers. At the end of the year, amounts earned but not yet billed are not recorded in the accounts or reported in the financial statements. (C)The entity leases buildings for its chain of transmission repair shops under terms that qualify as capital leases under ASC 840. These leases are not capitalized as leased property assets and lease obligations. (D) The entity has lost a lawsuit in federal district court. The case is on appeal in an attempt to reduce the amount of damages awarded to the plaintiffs. No loss amount is recorded.
Part a. - Nature of issue (scope limitation); Material but not pervasive (qualified opinion); Material and Pervasive (disclaimer of opinion). Part b. - Nature of issue (departure from GAAP); Material but not pervasive (qualified opinion); Material and Pervasive (adverse opinion). Part c. - Nature of issue (departure from GAAP); Material but not pervasive (qualified opinion); Material and Pervasive (adverse opinion). Part d. - Nature of issue (departure from GAAP); Material but not pervasive (qualified opinion); Material and Pervasive (adverse opinion).
The audit team found that the entity has not capitalized a material amount of leases in the financial statements. When considering the materiality of this departure from GAAP, the auditors would choose between which reporting options?
Qualified opinion or adverse opinion.
When financial statements are presented in comparative form and another firm audited the prior years' financial statements (but the other firm's report is not presented with the financial statements), the auditors' report on the current-year financial statements should:
Refer to the report and type of opinion issued by the other firm on the prior years' financial statements.
The audit team determined that the entity is suffering financial difficulty and its going-concern status is seriously in doubt. Assuming that the entity adequately disclosed this matter in the financial statements, the auditors must choose between which of the following report alternatives?
Unmodified opinion with a reference to going-concern or disclaimer of opinion.
Reviewing the response from the client's lawyer to a letter of audit inquiry.
What is an auditor's primary method to corroborate information on litigation, claims, and assessments?
To provide an overall review of the financial information and assessment of the adequacy of evidence gathered during the audit engagement.
Which of the following best describes the role of analytical procedures near the end of the audit engagement?
Management letter.
Which of the following is not required by generally accepted auditing standards?
Obtaining signed written representations.
Which of the following is ordinarily performed last in the audit examination?
Review of audit documentation.
Which of the following normally occurs earliest in the audit examination?
"Please furnish to our auditors such explanation, if any, that you consider necessary to supplement the foregoing information."
Which of the following statements is most likely to be included in an attorney letter?
The failure of management to furnish them is a significant scope limitation, resulting in either an adverse opinion or a disclaimer of opinion.
Which of the following statements is not true with respect to written representations?
Compare the latest available interim financial statements with the financial statements being audited.
Which of the following substantive procedures should auditors ordinarily perform regarding subsequent events?
The auditing standards regarding subsequently discovered facts refers to knowledge obtained after
The date of the auditor's report.
Which of the following would not be addressed in an emphasis-of-matter or other-matter paragraph?
The financial statement effects of a material departure from generally accepted accounting principles.
Corroboration of the information furnished by management about litigation, claims, and assessments.
The primary reason auditors request responses to attorney letters is to provide auditors
Which of the following statements is not true with respect to the auditors' report on ICFR?
The report will be dated as of the date of the financial statements.
Matters to which the attorney has given substantive attention in the form of legal representation.
The scope of an audit is not restricted when an attorney letter limits the response to
Which of the following is not an element or statement included in the Basis for Opinion Section of a standard (unmodified) report on the financial statements of an issuer?
The tenure of the auditor.
R. Wolfe became the new auditor for Royal Corporation, succeeding C. Mason, who audited the financial statements last year. Wolfe needs to report on Royal's comparative financial statements and should disclose in the report an explanation about other auditors having audited the prior year:
To describe the prior audit and the opinion but not name Mason as the predecessor auditor.
Which of the following best describes the role of analytical procedures near the end of the audit engagement?
To provide an overall review of the financial information and assessment of the adequacy of evidence gathered during the audit engagement.
Which of the following is not correct with respect to a user auditors' request for an SOC 1 report?
Type 1 reports would be most appropriate for auditors' reporting requirements for issuers.
To perform an attestation engagement on prospective financial information, accountants must do all of the following except
Understand the internal controls used in the processes that generated the prospective financial information.
M. Jordan & E. Stone, CPAs, audited the financial statements of Tech Company, a non-issuer, for the year ended December 31, 2019, and expressed an unmodified opinion. For the year ended December 31, 2020, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 2020 financial statements and B. Kent, an assistant on the engagement, drafted the accountants' review report that follows. Stone, the engagement supervisor, decided not to reissue the prior-year audit report but instructed Kent to include a separate paragraph in the current-year review report describing the responsibility assumed for the prior-year audited financial statements. Stone reviewed Kent's draft and indicated in the following supervisor's review notes that the draft contained several deficiencies . Accountants' Review Report—Kent's Draft We have reviewed and audited the accompanying financial statements of Tech Co, which comprise the balance sheets as of December 31, 2020 and 2019, and the related statements of income, changes in stockholders' equity, and cash flows for the years then ended, and the related notes to the financial statements. These engagements were conducted in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA and generally accepted auditing standards. A review includes primarily applying analytical procedures to management's financial data and making inquiries of company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements; 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. Accountant's Responsibility We are required to perform procedures to obtain limited assurance as a basis for reporting whether we are aware of any material modifications that should be made to the financial statements for them to be in accordance with accounting principles generally accepted in the United States of America. We believe that the results of our procedures provide a reasonable basis for our conclusion. Accountant's Conclusion Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose. Other Matter We audited the financial statements for the year ended December 31, 2019, and our report was dated March 2, 2020. We have no responsibility for updating that report for events and circumstances occurring after that date. Jordan and Stone, CPAs Chicago, IL March 1, 2021 Required: These supervisor's review notes may or may not be correct. For each item a-m, indicate whether Stone is correct or incorrect in the criticism of Kent's draft.
a. The report should contain no reference to the prior-year audited financial statements in the first paragraph.(Correct) b.All current-year financial statements are not properly identified in the first paragraph. (Incorrect) c. The report should contain no reference to the American Institute of Certified Public Accountants in the first paragraph. (Correct) d. The basic procedures performed in a review (analytical procedures and inquiries) should be provided in the Accountant's Responsibility section of the report and not the first paragraph. (Incorrect) e. The report should contain no comparison of the scope of a review to an audit in the first paragraph. (Incorrect) f. Limited assurance should be expressed on the current-year reviewed financial statements in the first paragraph. (Incorrect) g. The report should contain a statement that no opinion is expressed on the current-year financial statements in the first paragraph. (Correct) h. The report should contain a reference to "accounting principles generally accepted in the United States of America" in the Management's Responsibility for the Financial Statements section. (Correct) i. The report should not express a restriction on the use of the accountants' review report in the Accountant's Conclusion section. (Correct) j. The Accountant's Responsibility section should indicate that the accountant is required to be independent of the client. (Correct) k. The report should indicate the type of opinion expressed on the prior-year audited financial statements in the other-matter paragraph. (Correct) l. The report should indicate that no auditing procedures were performed after the date of the report on the prior-year financial statements in the other-matter paragraph. (Correct) m. The report should not contain a reference to "updating the prior-year auditors' report for events and circumstances occurring after that date" in the other-matter paragraph.(Correct)
If an accountant is not independent with respect to a non-issuer and has been requested to conduct a compilation engagement, the accountant should:
accept the engagement and disclose the lack of independence in the compilation report.
When accountants are not independent, which of the following reports can they issue:
compilation report on historical financial statements.
Auditors may accept an engagement and express an unmodified opinion on an element, account, or item of the financial statements if they:
conduct the engagement in accordance with generally accepted auditing standards.
Prospective financial information that reflects the results assuming the occurrence of one or more hypothetical events is referred to as a:
financial projection.
An assurance service is defined as a service that:
improves the quality of information for decision makers.
When a predecessor auditor has examined comparative financial statements and that report is not presented with the successor auditor's report, the successor auditor should:
indicate that comparative year(s) were examined by the predecessor auditor and disclose the type of opinion issued.
Lee and Kerzman is the auditor for Nance Corporation. During the course of the audit, the audit team noticed that Nance Corporation showed signs of financial distress. In particular, Nance Corporation was at risk for defaulting on several key loans and had therefore begun the process of restructuring their debt. This, among other indicators, led the audit team to have substantial doubt regarding Nance Corporation's ability to continue as a going concern. The next step the team should take is to:
obtain and discuss with management their plan to continue as a going concern and assess the likelihood the plan will be successful.
When component auditors are involved in the audit of group financial statements, the group auditors may issue a report that:
refers to the component auditors, describes the extent of the component auditors' work, and expresses an unmodified opinion.
If a non-issuer prepares financial statements that omit substantially all footnote disclosures required by GAAP, the accountants' compilation report:
should indicate that the disclosures are omitted and that this omission might affect users' conclusions.
The conclusions provided in an accountants' report on an agreed-upon procedures engagement are in the form of a(n):
summary of findings.
B. Harper is shopping online and finds a great pair of running shoes at a really low price. However, he is not familiar with the company and is concerned with the accuracy of the website in presenting the quality of the shoes. Harper may be more willing to place an order with this company if:
the website displays the WebTrust seal.
Statements on Standards for Accounting and Review Services are applicable to engagements involving:
unaudited financial statements of non-issuers.
