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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2014-10-24 00:09:52
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cpa audit review ch17 review 3
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  1. For which of the following events would an auditor issue a report that omits any reference to a change in accounting principle or correction of a material misstatement?

    A.A change in the useful life used to calculate the provision for depreciation expense.

    B.Management’s lack of reasonable justification for a material change in accounting principle.

    C.A change in the method of accounting for inventories.

    D.A change from an accounting principle that is not in accordance with the applicable reporting framework to one that is.
    A.A change in the useful life used to calculate the provision for depreciation expense.

    A change in estimate is neither a change in accounting principle nor the correction of a material misstatement in previously issued financial statements. Thus, it requires no modification of the opinion or other recognition in the report. However, an exception is a change in estimate that is inseparable from a change in principle. The auditor evaluates and reports on this change as a change in principle.
  2. A company has made a material change in its method of inventory measurement from an unacceptable one to one in accordance with the applicable financial reporting framework. The auditor’s report on the financial statements of the year of the change should include

    A.A note explaining the change.

    B.No reference to consistency.

    C.Justification for the change and the effect of the change on reported net income.

    D.A reference to the entity’s disclosure of the correction.
    D.A reference to the entity’s disclosure of the correction.

    The auditor’s report should include an emphasis-of-matter paragraph to describe the correction of a material misstatement in previous statements. The paragraph should (1) state that the previous statements have been restated and (2) refer to the entity’s disclosure of the correction.
  3. Management believes, and the auditor is satisfied, that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss but fully discloses the situation in the notes to the financial statements. If management does not make an accrual in the financial statements, the auditor should express a(n)

    A.Qualified opinion due to a material misstatement.

    B.Qualified opinion due to a scope limitation.

    C.Unmodified opinion with no additional paragraph in the auditor’s report.

    D.Unmodified opinion with an emphasis-of-matter paragraph.
    C.Unmodified opinion with no additional paragraph in the auditor’s report.

    If the auditor concludes that sufficient appropriate evidence supports management’s assertions about the nature of a matter involving an uncertainty, an unmodified report is ordinarily appropriate.
  4. A change in accounting principle made by a nonissuer has no material effect on the financial statements in the current year but is expected to have a material effect in later years. Accordingly, the change should be

    A.Disclosed in the notes to the financial statements and referred to in the auditor’s report for the current year.

    B.Treated as a consistency modification of the opinion in the auditor’s report for the current year.

    C.Disclosed in the notes to the financial statements of the current year.

    D.Treated as a subsequent event.
    C.Disclosed in the notes to the financial statements of the current year.

    The accounting change has no material effect on the financial statements in the current year but is expected to have a material effect in later years. The applicable financial reporting framework may require that the change be disclosed in the notes to the financial statements. But the independent auditor need not recognize the change in the current period’s report.
  5. Before reissuing the prior year’s auditor’s report on the financial statements of a former client, the predecessor auditor should obtain a letter of representations from the

    A.Former client’s attorney.

    B.Former client’s board of directors.

    C.Successor auditor.

    D.Securities and Exchange Commission.
    C.Successor auditor.

    Before reissuing the report, the predecessor auditor should consider whether the report is still appropriate. The predecessor auditor should (1) read the current period financial statements, (2) compare the prior period statements reported on with those to be presented comparatively, and (3) obtain written representations from the successor auditor and management (AU-C 560).
  6. 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 describe the change and

    A.State the auditor’s explicit concurrence with or opposition to the change.

    B.Describe the cumulative effect of the change on all periods prior to those presented.

    C.Refer to the financial statement note that discusses the change in detail.

    D.Explain why the change is justified under the applicable reporting framework.
    C.Refer to the financial statement note that discusses the change in detail.

    When a change in accounting principle has a material effect on comparability, the auditor should add an emphasis-of-matter paragraph after the opinion paragraph that (1) uses the heading “Emphasis of Matter,” (2) describes the change in principle, (3) refers to the entity’s disclosure, and (4) indicates that the opinion is not modified with regard to the matter emphasized.
  7. When a predecessor auditor reissues the report on the prior period’s financial statements at the request of the former client, the predecessor should

    A.Indicate in the introductory paragraph of the reissued report that the financial statements of the subsequent period were audited by another CPA.

    B.Compare the prior period’s financial statements that the predecessor reported on with the financial statements to be presented for comparative purposes.

    C.Add an additional paragraph to the reissued report stating that the predecessor has not performed additional auditing procedures on the prior period’s financial statements.

    D.Obtain a representation letter from the auditor but not from management.
    B.Compare the prior period’s financial statements that the predecessor reported on with the financial statements to be presented for comparative purposes.

    The predecessor auditor should perform certain procedures before reissuing a report on prior-period financial statements. (S)he should (1) read the current period’s financial statements, (2) compare the prior and current financial statements, (3) obtain a representation letter from the auditor stating whether (s)he has discovered matters having a material effect on (or requiring disclosure in) the statements reported on by the predecessor auditor, and (4) obtain a representation letter from management confirming past representations and stating whether post-balance-sheet events require adjustment of or disclosure in the financial statements.

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