cpa audit review ch 18 review 1

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cpa audit review ch 18 review 1
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2014-11-03 23:30:19
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cpa audit review ch 18 review 1
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  1. Which of the following best describes the auditor’s reporting responsibility when engaged to report on supplementary information in relation to the financial statements as a whole?

    The auditor has no reporting responsibility concerning supplementary information.  

    The auditor should report on all the information.  

    The auditor should report on the supplementary information only if the auditor did not participate in its preparation.

    The auditor should report on the supplementary information only if the auditor participated in its preparation.
    The auditor should report on all the information.  

    .When an auditor is engaged to report on supplementary information in relation to the financial statements, (s)he should report on all the information (AU-C 725).
  2. A client has requested an auditor to audit and report on the single element of net income. The auditor should obtain audit evidence relating to the fairness of  

    The net income element and its related notes but not financial position.  

    The net income element, the associated notes, and internal control over net income.  

    Financial position and results of operations.

    Only the net income element.
    Financial position and results of operations.   

    .If the specific element reported on is the entity’s net income, the auditor should perform procedures necessary to obtain sufficient appropriate audit evidence to permit the expression of an opinion on the financial position and results of operations. The reason is that net income affects the balance sheet and the income statement.
  3. When planning a review of an audit client’s interim financial statements, which of the following procedures should the auditor perform to obtain an understanding of the entity and its environment, including its internal control?  

    Select a sample of material revenue transactions occurring during the interim period and examine supporting documentation.  

    Inquire of the entity’s outside legal counsel about the status of any previous pending litigation and any new litigation involving the entity.  

    Consider the results of audit procedures performed with respect to the current year’s financial statements.

    Perform analytical procedures on selected accounts by comparing the interim amounts to the amounts for the previous audited fiscal year end.
    Consider the results of audit procedures performed with respect to the current year’s financial statements.  

    Procedures to obtain an understanding include (1) reading documentation of the prior audit and of prior reviews; (2) reading the recent annual information and prior interim financial information; (3) considering current audit results; (4) inquiring of management about changes in the business or in internal control; (5) in an initial review, inquiring of the predecessor auditor and reading his/her documentation (if permitted); and (6) obtaining knowledge of the relevant aspects of the components of internal control relating to annual information and interim financial information.
  4. Reports are considered reports on financial statements prepared in accordance with a special purpose framework when issued in conjunction with  

    Compliance with aspects of regulatory requirements related to audited financial statements.  

    Pro forma financial presentations designed to demonstrate the effects of hypothetical transactions.  

    Feasibility studies presented to illustrate an entity’s results of operations.

    Interim financial information reviewed to determine whether material modifications should be made to conform with GAAP.
    Compliance with aspects of regulatory requirements related to audited financial statements.  

    Special purpose frameworks include (1) the cash basis used to record cash receipts and cash payments, (2) the tax basis used to file income tax returns, (3) the regulatory basis used to comply with the requirements of a regulatory agency, (4) the contractual basis used to comply with an agreement between the entity and a third party, and (5) an other basis consisting of definite criteria that are (a) logical and reasonable and (b) applied to all material items.
  5. The auditor’s inquiries of management regarding required supplementary information (RSI) should be directed to the judgments made concerning

    Relevance and validity.  

    Measurement and presentation.  

    Accuracy and objectivity.

    Rights and obligations.
    Measurement and presentation.  

    RSI is information that the designated accounting standards setter has determined must accompany the basic financial statements. Thus, authoritative guidelines for its measurement and presentation have been prescribed. The auditor should inquire about whether the RSI is within the guidelines, (2) whether methods of measurement or presentation have changed and the reasons for any change, and (3) any significant assumptions or interpretations (AU-C 730).
  6. Harris, CPA, has been asked to audit and report on the balance sheet of Fox Co. but not on the statements of income, changes in shareholders’ equity, or cash flows. Harris will have access to all information underlying the basic financial statements. Under these circumstances, Harris may

    Not accept the engagement because it would be tantamount to expressing a prohibited piecemeal opinion.  

    Accept the engagement but should disclaim an opinion because of an inability to apply the procedures considered necessary.  

    Not accept the engagement because it would constitute a violation of the profession’s ethical standards.

    Accept the engagement if an audit in accordance with GAAS is practicable.
    Accept the engagement if an audit in accordance with GAAS is practicable.  

    An auditor may report on one basic financial statement and not on the others. An auditor should comply with all AU-C sections relevant to the audit. For an audit of a single financial statement, this requirement applies regardless of whether the auditor also audits the complete set of statements. If the auditor audits only a single financial statement, (s)he should determine whether it is feasible to (1) audit the statement and (2) perform procedures on interrelated items. Procedures should be performed on interrelated items when the auditor cannot consider the financial statement in isolation.
  7. An auditor who conducts an audit in accordance with generally accepted auditing standards and concludes that the financial statements are fairly presented in accordance with a special purpose framework, such as the cash basis of accounting, should issue a  

    Report expressing an opinion.  

    Report expressing a qualified opinion.  

    Report disclaiming an opinion.

    Review report.
    Report expressing an opinion.  

    An auditor’s judgment (opinion) about the fair presentation of financial statements is applied within an identifiable framework, which is usually provided by GAAP. However, a special purpose framework (e.g., cash basis) may sometimes be used. An auditor’s report is appropriate for reporting on statements prepared using a special purpose framework.
  8. In a comfort letter, the auditor should most likely avoid using which of the following terms to describe the work performed?  

    Made inquiries.  

    Made a general review.  

    Read.

    Audited.
    Made a general review. 

    The auditor performs a reasonable investigation to provide negative assurance in a comfort letter. Terms of uncertain meaning, such as “general review,” “limited review,” “check,” or “test,” should not be used in describing the work unless the procedures to be performed are described in the comfort letter (AU-C 920).
  9. Comfort letters ordinarily are addressed to  

    The client’s audit committee.

    Creditor financial institutions.  

    The Securities and Exchange Commission.

    The party who negotiated the agreement with the client.
    The party who negotiated the agreement with the client.  

    The letter should be addressed only to the requesting party (or that party and the entity) and should not be given to anyone else. A requesting party is a specified party that has negotiated an agreement with the entity. Requesting parties may include (1) underwriters (purchasers of securities for public distribution) and (2) others who are conducting a review process consistent with the due diligence process performed when a securities offering is registered. Thus, a comfort letter signed by an independent auditor assists the requesting party in developing a record of a reasonable investigation.

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