cpa audit review ch17 review 3

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Joens1313
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cpa audit review ch17 review 3
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2014-06-10 23:58:11
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cpa audit review ch17 review 3
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  1. The auditor’s responsibility section of an auditor’s report contains the following: “We did not audit the financial statements of EZ, Inc., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 27% and 29%, respectively, of the related consolidated totals. Those statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ, Inc., is based solely on the report of the other auditors.” These sentences
    Assume no responsibility for the audit of the component auditor.

    The quoted language is adapted from the auditor’s responsibility section in an example of an auditor’s report (AU-C 600). It illustrates the reporting by a group auditor who is referring to the audit of a component auditor. The group auditor’s report should clearly indicate that the component was not audited by the group auditor. It also should state (1) that the component was audited by the component auditor and (2) the magnitude of the portion audited. However, the ISAs do not permit a reference to a component auditor unless required by law or regulation.
  2. If a group auditor decides to refer to the report of a component auditor,  would an auditor’s report ordinarily express an unmodified opinion without an additional paragraph?
    no -- -A reference to a component auditor indicates that the group auditor does not assume responsibility for the audit of the component auditor. It also indicates the source of the audit evidence with respect to the component. The reference is not a qualification of the opinion and does not require a basis for modification, emphasis-of-matter, or other-matter paragraph. However, under international standards (ISAs), the auditor must be satisfied that the evidence supports the opinion and cannot refer to other (component) auditors.
  3. Green, CPA, concludes that there is substantial doubt about JKL Co.’s ability to continue as a going concern. If JKL’s financial statements adequately disclose its financial difficulties, Green’s auditor’s report should
    Include a paragraph Following the opinion paragraph

    Specifically use the words "going concern"

    specifically use the words "substantial doubt"

    An evaluation should be made as to whether substantial doubt exists about the entity’s ability to continue as a going concern for a reasonable period of time, not to exceed 1 year beyond the date of the financial statements. If the auditor reaches this conclusion after identifying conditions and events that create such doubt and after evaluating management’s plans to reduce their effects, (s)he should consider the possible effects on the statements and the adequacy of disclosure. (S)he also includes an emphasis-of-matter paragraph (after the opinion paragraph) in the report. The auditor should use language in the emphasis-of-matter paragraph that includes the phrases “substantial doubt” and “going concern.” Also, the emphasis-of-matter paragraph should not use conditional language in expressing its conclusion about the existence of a substantial doubt. The substantial doubt is not a basis for a qualified or an adverse opinion, but a disclaimer is not precluded in the case of such a material uncertainty.
  4. Mead, CPA, had substantial doubt about Tech Co.’s ability to continue as a going concern when reporting on Tech’s audited financial statements for the year ended June 30, Year 1. That doubt has been removed in Year 2. What is Mead’s reporting responsibility if Tech is presenting its financial statements for the year ended June 30, Year 2, on a comparative basis with those of Year 1?
    The emphasis-of-matter paragraph included in the Year 1 auditor’s report should not be repeated.

    The emphasis-of-matter paragraph included in the previous report should not be repeated in subsequent reports if the doubt has been resolved.
  5. Kane, CPA, concludes that there is substantial doubt about Lima Co.’s ability to continue as a going concern for a reasonable period of time. If Lima’s financial statements adequately disclose its financial difficulties, Kane’s auditor’s report is required to include an emphasis-of-matter paragraph that specifically uses the phrase(s)
    This paragraph should include the terms “substantial doubt” and “going concern.”

    The auditor has a substantial doubt about the firm’s ability to continue as a going concern for a reasonable period of time. Accordingly, the auditor should include an emphasis-of-matter paragraph after the opinion paragraph in the report. This paragraph should include the terms “substantial doubt” and “going concern.” The specific phrases included in the question are not required.

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