Module 5
The requirement is to determine the information to be included in an audit report on comparative FS's when a predecessor auditor's report is not being reissued-an other-matter paragraph should be added to the successor's report and it should indicate:
(1) that the FS's of the prior period were audited by another auditor (whose name is not presented) (2) The date of the predecessor's report (3) The type of report issued by the predecessor (4) If the report was other than a standard report, the substantive reasons therefor.
When the FS's a predecessor has audited are being included in an SEC registration statement filing, AU-C 920 required that the predecessor
1. Read pertinent portions of the document 2. Obtain a letter of representation from the successor auditor
AT 301 states that an accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided that:
1. The specified parties involved have participated in establishing the nature and scope of the engagement and take responsibility for the adequacy of the procedures to be performed 2. Use of the report is to be restricted to specified parties involved 3. The prospective FS's include a summary of significant assumptions
An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited FS's. If the auditor concludes that the FS's do not require revision, but the client refuses to revise or eliminate the material inconsistency, ........
AU-C 720 states the auditor should include an emphasis-of-matter paragraph that explains the inconsistency. The auditor may also withhold the use of the audit report or the auditor may withdraw from the engagement.
When compiled FS's are presented in comparative form with audited FS's, the report on the prior period may be reissued to accompany the current report.
Alternatively, the report on the current period may include a separate paragraph describing the responsibility assumed for the prior period FS's.
Park, CPA, was engaged to audit the FS's of Tech Co., a new client, for the year ended December 31, 2009. Park obtained sufficient audit evidence for all of Tech's FS items except Tech's opening inventory. Due to inadequate financial records, Park could not verify Tech's Jan. 1, 2009 inventory balances. Park's opinion on Tech's 2009 FS's most likely will be
Balanced Sheet-Unmodified Income Statement-Disclaimer The scope limitation will not affect the year-end BS account balances. However because evidence with respect to the beginning inventory is lacking, verification of COGS, an IS element, is impossible although year-end RE will not be affected, both the current and prior year's RE statements will be affected (by an offsetting amount) by the COGS misstatement
After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditors considerations relating to MGMT's plans for dealing with the adverse effects of these conditions most likely would include MGMT's plans to: a. Increase current dividend distributions b. Reduce existing lines of credit c. Increase ownership equity d. Purchase assets formerly leased
C. Increase ownership equity Increasing ownership equity will bring in funds to possibly overcome the negative trends and financial difficulties
A FS audit report issued for the audit of an issuer (public) company concludes that the FS's follow _____.
GAAP
Omission of required disclosures which is a departure from _____, will lead to a
GAAP; qualified or adverse opinion
Wilson, CPA, completed gathering sufficient appropriate audit evidence for the audit of Abco's December 31, 20X8 FS's on March 6, 20X9. A subsequent event requiring adjustment to the 20X8 FS's occurred on April 10, 20X9 and came to Wilson's attention on April 24, 20X9. If the adustment is made without disclosure of the event, Wilson's report ordinarily should be dated ____
March 6, 20X9
When disclaiming an opinion due to a client-imposed scope limitation on a nonpublic company's FS's, an auditor should indicate in a separate paragraph why the audit did not comply with GAAS.
Neither the auditor responsibility section nor the opinion paragraph is deleted, although they are both modified.
Do compilation reports provide a summary of findings?
No
Do compilation reports provide assurance?
No
Does an agreed-upon procedures report provide limited assurance?
No
If substantial doubt has been removed in the current period, should the emphasis-of-matter paragraph included in the auditor's report on the FS's of the prior period be repeated?
No
Is "reasonable period of time, not to exceed one year" included in an emphasis-of-matter paragraph relating to going concern status?
No
Is an auditor responsible for controlling the distribution of a restricted use report?
No
Should the auditor who qualifies an opinion because of an insufficiency in audit evidence refer to the limitation in the notes to the FS's?
No
Should the phrase "When read in conjunction with note X" be included in the opinion paragraph when an auditor expresses a qualified opinion?
No
Should the phrase "With the foregoing explanation" be included in the opinion paragraph when an auditor expresses a qualified opinion?
No
When the auditor has obtained assurance as to the consistency of application of accounting principles between the current and preceding year, should mention of consistency be included in the audit report?
No
Will a material weakness in internal control ordinarily result in a report modification?
No
When reporting on comparative FS's, should an auditor ordinarily change the previously issued opinion on the prior year's FS's if the prior year's opinion was unmodified and the opinion on the current year's FS's is modified due to the lack of consistency?
No, Prior year's opinion will remain unmodified
In a compilation report on prospective FS's is this statement included: Distribution of the report is restricted to specified parties
No, financial forecasts are not restricted
When reporting on comparative FS's, should an auditor ordinarily change the previously issued opinion on the prior year's FS's if the auditor is a predecessor auditor who has been required by a former client to reissue the previously issued report?
No, ordinarily the reissued report by a predecessor auditor will be the same as that originally issued.
When reporting on comparative FS's, should an auditor ordinarily change the previously issued opinion on the prior year's FS's if the prior year's FS's are restated following a pooling of interests in the current year?
No, this will not lead to a change in the previously issued opinion.
An auditor issued an audit report that was dual dated for a subsequent event occurring after the completion of fieldwork but before the issuance of the auditor's report. The auditor's responsibility for events occurring subsequent to the completion of fieldwork was limited to the specific event referenced.
Note, however that if the auditor chooses to date the report as of the date of the subsequent event, his/her responsibility for other subsequent events extends to the date of the audit report.
What type of opinion will scope limitations result in?
Qualified opinions or disclaimers of opinion
Departures from GAAP result what type of opinion
Qualified or adverse
What type of opinion will a departure from GAAP result in?
Qualified or adverse
What type of opinion will an unjustified accounting change result in?
Qualified or adverse
When management does not provide reasonable justification of a change in accounting principles what type of opinion will result?
Qualified or adverse
Scope limitations result in what type of opinion?
Qualified or disclaimer
These are examples of ______ _____: -The auditor is unable to determine amounts associated with an employee fraud scheme -The client refuses to permit the auditor to confirm certain AR or apply alternative procedures to verify their balances -The CEO is unwilling to sign the MGMT representation letter
Scope limitations
For a nonpublic company, which sections states a belief that the audit evidence obtained is sufficient and appropriate to provide a basis for the audit opinion?
The auditor's responsibility section
A client follows US GAAP for its domestic operations and foreign GAAP for a foreign subsidiary. The foreign subsidiary is audited by a component auditor, while the group auditor audits the remainder of the corporation and issues an audit report on consolidated operations. Who is responsible for evaluating the appropriateness of the adjustment of the foreign GAAP statements to the US GAAP?
The group auditor is responsible.
An auditor decides to issue a qualified opinion on an entity's FS's because a major inadequacy in its computerized accounting records prevents the auditor from applying necessary procedures.
The opinion paragraph of the auditor's report should state that the qualification pertains to the possible effects on the FS's.
If a publicly held company issues FS's that puport to present its financial position and results of operations but omits the statement of cash flows, which of the following types of opinion is most likely to be appropriate
This is considered a departure from GAAP, therefore a qualified or adverse opinion
Does a change in accounting principle require a consistency modification?
Yes
In a compilation report on prospective FS's is this statement included: A caveat that the prospective results may not be achieved
Yes
In a compilation report on prospective FS's is this statement included: A statement that a compilation is limited in scope and does not enable the practitioner to express an opinion or any other form of assurance on the information
Yes
In a compilation report on prospective FS's is this statement included: A statement that the practitioner assumes no responsibility to update the report for events and circumstances occurring after the date of the report
Yes
Is a CPA permitted to accept a separate engagement (not in conjunction with an audit of FS's) to audit an entity's schedule of AR and schedule of royalties.
Yes
Is emphasizing that an entity had significant related-party transactions normally accomplished through the addition of an emphasis-of-matter paragraph?
Yes
May auditors audit specified elements, accounts or items of a financial statement?
Yes
Should the auditor who qualifies an opinion because of an insufficiency in audit evidence describe the limitations in a basis for modification paragraph?
Yes
Should the auditor who qualifies an opinion because of an insufficiency in audit evidence refer to the limitation in an opinion paragraph?
Yes
Should the auditor who qualifies an opinion because of an insufficiency in audit evidence refer to the limitation in the auditor's responsibility section?
Yes
When reporting on comparative FS's, should an auditor ordinarily change the previously issued opinion on the prior year's FS's if the prior year's FS's are restated to conform with GAAP?
Yes, when an auditor has previously expressed a qualified or an adverse opinion on FS's of a prior period and those FS's have been restated, the auditor's updated report is changed with an emphasis-of-matter paragraph describing the circumstance.
If an auditor has doubt as to the integrity of MGMT and the representations obtained from MGMT and the auditor decides to retain the client, the professional standards consider this................
a scope limitation and accordingly its significant nature makes a disclaimer most likely
When performing an attestation engagement, which of the following is least likely to be present a. Practitioner's written assertion b. Responsible party c. Subject matter d. Suitable criteria
a. Practitioner's written assertion assertion is from the responsible party, not the practitioner
Per AT 301, when an accountant examines a financial forecast that fails to disclose several significant assumptions used to prepare the forecast, the accountant should describe the assumptions in the accountant's report and issue an _____ _____
adverse opinion
Significant misstatements can lead to an _____ _____.
adverse opinion
A review consists principally of performing _____ _____and making _____, not procedures such as _____, _____ and _____.
analytical procedures; inquiries; observation, inspection and confirmation
An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this paragraph is ____ and would not ____ the unmodified opinion.
appropriate; negate
An unmodified attestation report ordinarily may refer to either the _____ or the _____ _____ to which the assertion relates.
assertion; subject matter
an accountant's compilation report on a financial forecast should include a statement that the compilation does not include evaluation of the support of the _____ underlying the forecast.
assumptions
When an independent CPA has reviewed the interim FS's of a public client, which procedure is least likely to have been performed? a. Obtaining written representations from MGMT for all interim financial information presented b. Observing the interim count of inventory c. Reading the FS's for obvious material misstatements d. Performing analytical procedures related to sales
b. Observing interim count of inventory The primary procedures included in such a review are analytical procedures and inquiries
An auditor should disclose the substantive reasons for expressing an adverse opinion in a _____ for _____ paragraph preceding the _____ paragraph.
basis for modification; opinion
Accepting an engagement to examine an entity's financial projection most likely would be appropriate if the projection were to be distributed to a. All employees who work for the entity b. Potential stockholders who request a prospectus or a registration statement c. A bank with which the entity is negotiating for a loan d. All stockholders of record as of the report date
c. A bank with which the entity is negotiating for a loan
An independent accountant's report is based on a review of interim financial information. If this report is presented in a registration statement, a prospectus should include a statement.....
clarifying that an accountant's review report is not part of the registration statement within the meaning of the securities act of 1933
In a _____ _____ auditors provide an opinion as to whether the audited financial statements comply in form with the accounting requirements of the SEC.
comfort letter
Letters for underwriters (commonly referred to as _____ _____) are signed by the client's independent _____ to the _____.
comfort letters; underwriter
In most areas ______ are not included in attestation standard coverage, but in the area of prospective financial statements (forecasts as well as projections) coverage is included
compilations
If a specified element is, or is based upon an entity's net income or stockholder's equity, the CPA should have audited the _____ _____ _____ in order to express an opinion on that element.
complete financial statement
"Taken as a whole" in the PCAOB's 4th GAAS applies equally to a _____ set of FS's and to an _____ FS
complete; individual
A modification of the CPA's report on a review of the interim FS's of a publicly held company would be necessitated by which of the following: a. An uncertainty b. Lack of consistency c. Reference to another accountant d. Inadequate disclosure
d. Inadequate disclosure
Which of the following types of reports is most likely to include an alert as to its use being restricted to certain specified parties? a. Audit report b. Review Report c. Compilation Report d. Agreed-upon procedures report
d. agreed upon procedures report All agreed upon procedures reports are so restricted, the others may be
In an accountant's review of interim financial information, the accountant typically performs each of the following except: a. Reading the available minutes of the latest stockholder's meeting b. Applying financial ratios to the interim financial information c. Inquiring of the accounting department's management d. Confirming major receivable accounts
d. confirming major receivable accounts
In which of the following circumstances would an auditor not express an unmodified opinion? a. There has been a material change between periods in accounting principles b. Quarterly financial data required by the SEC has been omitted c. The auditor wishes to emphasize an unusually important subsequent event d. The auditor is unable to obtain audited FS's of a consolidated investee
d. represents a scope limitation and a significant scope limitation results in either a qualified opinion or a disclaimer of opinion a, b, and c result in a report with an unmodified opinion with an emphasis-of-matter paragraph
"Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going concern are inadequately disclosed" This is a _____ from GAAP.
departure
When an auditor expresses an adverse opinion, the opinion paragraph should include a ____ reference to a ____ paragraph disclosing the basis for the opinion
direct; separate
The auditor who lacks independence must ____ an opinion.
disclaim
If controls are so weak that an audit cannot effectively be completed, a _____ of opinion or _____ may be appropriate
disclaimer; withdrawal
A change in the useful life of assets is a change in _____.
estimate;
The auditor's standard report states that an audit includes assessing significant ____ made by MGMT.
estimates
When issuing the standard public company auditor's report on comparative financial statements, the report _____ states that the examination of evidence is made on a test basis and _____ assumes consistent application of accounting principles.
explicitly; implicitly
Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its knowledge and belief, an entity's expected financial position, results of operations and changes in financial position. Such prospective financial statements are known as ____ ___.
financial projections
When there is substantial doubt about a client's ability to continue as a going concern, the auditor's responsibility is to include in the audit report an emphasis-of-matter paragraph _____ the opinion paragraph, and must use the terms " _____ _____" and "_____ ____"
following; "going concern" "substantial doubt"
A financial forecast is a prospective FS for _____ use upon which an accountant may appropriately report.
general
When an accountant performs more than one level of service concerning the FS's of a nonissuer (nonpublic) entity, the accountant generally issues the report that is appropriate for the ____ level of service rendered.
highest
An account's report on a review of pro forma financial information must include a reference to the FS's from which the _____ _____ is derived and a statement as to whether such FS's were _____ or _____.
historical information; audited or reviewed
AU-C 915 indicates that an accountant should not undertake such an engagement when the report would be based on a _____ transaction
hypothetical
Reviews consist largely of ____ of MGMT and ____ ____; not ____ external evidence such as confirmations
inquiries; analytical procedures; corroborating
If an auditor is asked to provide an opinion relating to information accompanying the FS's in a document, the opinion will ordinarily be upon whether the information.......
is fairly stated in all material respects in relation to the basic FS's taken as a whole
Compilation is always the _____ level.
lowest
Before resissuing the prior year's auditor's report on the FS's of a former client, the predecessor auditor should obtain a letter of representation from the former client's ____ and the _____ _____
management; successor auditor
IN the first audit of a client, an auditor was not able to gather sufficient evidence about the consistent application of accounting principles between the current and the prior year, as well as the amounts of assets or liabilities at the beginning of the current year. This was due to the client's record retention policies. If amounts in question could _____ affect current operating results, the auditor would be unable to express an opinion on the current year's ____ of ____ and ____ ____.
materially; results of operations; cash flows
The objective of a review of interim financial information is to provide a basis for reporting on whether material _____ should be made for such information to conform with GAAP.
modification
When an entity changes its method of accounting for income taxes, which has a material effect on comparability, the auditor should refer to the change in an emphasis-of-matter paragraph added to the auditor's report. This paragraph should identify the ____ of the change and refer to the financial statement ____ that discusses the change in detail.
nature; note
Letters for underwriters typically provide _____ assurance on unaudited interim financial information.
negative
Does a change in estimate result in a consistency modification?
no
An auditor's report on FS's prepared in conformity with the cash basis of accounting should include a separate emphasis-of-matter paragraph that refers to the ___ to the FS's that describes the basis of accounting.
note
A client is presenting comparative (two-year) FS's. Concerning reporting responsibilities of a continuing auditor, the auditor should issue ____ audit report(s) that is on (both presented years) or (separate years)
one; both presented years.
A group engagement partner decides not to refer to the audit of another CPA who audited a component of the overall group FS's. After making inquiries about the other CPA's professional reputation and independence, the principal auditor most likely would,
perform additional audit procedures based on the significance of the subsidiary.
In connection with a proposal to obtain a new audit client, a CPA in public practice is asked to prepare a report on the application of accounting principles to a specific transaction. The CPA's report should include a statement that for the proper accounting treatment rests with the _____ of the financial statements.
preparers It should also include a statement that any difference in the facts, circumstances or assumptions presented may change the report.
An accountant's review report on interim financial information of a public entity is required by the professional standards to include a description of the _____ performed.
procedures
When an accountant is preparing a standard compilation report on prospective FS's, AT 301 requires that the accountant include a statement that the _____ _____ may not be achieved.
prospective results
When an independent audit report is incorporated by reference in an SEC registration statement, a _____ that includes a statement about the independent accountant's involvement should refer to the independent accountant as _____ in auditing and accounting.
prospectus; expert
When management does not provide reasonable justification that a change in accounting principle is preferable and its presents comparative FS's,the auditor should express a qualified opinion each year that the FS's initially _____ the change are presented.
reflecting
Suitable criteria in an attestation engagement may be available, publicly, in the CPA's ____, included with the _____ _____ or in the _____, well understood by users, or available only to _____ _____.
report; subject matter; assertion; specified parties
When an accountant examines projected financial statements, the accountant's report should include a _____ _____ that describes the limitations on the _____ of the presentation.
separate paragraph; usefullness
Conditions exist that result in a material deviation from the criteria against which the subject matter was evaluated during an examination. The CPA's conclusion may be on the _____ _____ only, not the _____ ____.
subject matter; written assertion
An agreed-upon procedures report provides a _____ of procedures performed and _____.
summary; findings
Financial information is presented in a printed form that prescribes the wording of the independent auditor's report. The form is not acceptable to the auditor because the form calls for statements that are inconsistent with the auditor's responsibility. Under these circumstances, ...
the auditor most likely would reword the form or attach a separate report
When the auditor decides to make reference to the report of an auditor who audited a component of group FS's, what type of audit opinion is ordinarily issued?
unmodified audit opinion without an emphasis-of-matter paragraph
Attestation standards explicitly exclude expert _____ work, but include the _____ of a financial projection;
witness; compilation
Is "going concern" included in an emphasis-of-matter paragraph relating to going concern status?
yes