cpa audit review ch 18 review 3

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cpa audit review ch 18 review 3
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cpa audit review ch 18 review 3
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  1. Blue, CPA, has been asked to report on the application of a financial reporting framework to a specific transaction by an entity that is audited by another CPA. Blue may accept this engagement but should

    A.Consult with the continuing accountant to obtain information relevant to the transaction.

    B.Report the engagement’s findings to the entity’s audit committee, the continuing accountant, and management.

    C.Be independent of the client.

    D.Disclaim any opinion on the application of the financial reporting framework to the hypothetical transaction.
    A.Consult with the continuing accountant to obtain information relevant to the transaction. 

    The reporting accountant should consult with the continuing accountant to determine the available facts relevant to a professional judgment. The continuing accountant may provide information not otherwise available to the reporting accountant. (S)he should (1) explain to the entity’s management the need to consult with the continuing accountant, (2) request permission to do so, and (3) request authorization for the continuing accountant to respond fully.
  2. If management declines to present required supplementary information, the auditor should express a(n)


    A.Unmodified opinion with an other-matter paragraph.

    B.Unmodified opinion without an additional paragraph.

    C.Adverse opinion.

    D.Qualified opinion with an additional paragraph.
    A.Unmodified opinion with an other-matter paragraph.

    Omission of RSI does not affect the auditor’s opinion because such information is not part of the basic financial statements. Instead, the auditor should express an unmodified opinion on the basic financial statements (assuming it is otherwise justified). In the other-matter paragraph, the auditor should (1) state that management omitted the RSI; (2) describe the missing RSI; (3) describe the applicable financial reporting framework that requires the RSI to be presented to supplement the basic statements; (4) identify the designated accounting standards setter; (5) state that the RSI is considered to be essential by the designated accounting standards setter, although it is not a part of the basic financial statements; and (6) state that the audit opinion is unaffected by the omission. The information itself need not be presented by the auditor (AU-C 730).
  3. As a condition of obtaining a loan from First National Bank, Maxim Co. is required to submit an audited balance sheet but not the related statements of income, retained earnings, or cash flows. Maxim would like to engage a CPA to audit only its balance sheet. Under these circumstances, the CPA

    A.May not audit only Maxim’s balance sheet if the amount of the loan is material to the financial statements as a whole.

    B.May audit only Maxim’s balance sheet if the CPA disclaims an opinion on the other financial statements.

    C.May audit only Maxim’s balance sheet if the CPA can audit interrelated items.

    D.May not audit only Maxim’s balance sheet if Maxim is a nonissuer.
    C.May audit only Maxim’s balance sheet if the CPA can audit interrelated items.

    The auditor may report on one basic financial statement and not on the others if (1) the auditor complies with all AU-C sections relevant to the audit, (2) the audit is feasible, and (3) the auditor can perform procedures on interrelated items. For example, (1) sales and receivables, (2) inventory and payables, and (3) equipment and depreciation are interrelated.
  4. Which of the following matters is covered in a typical comfort letter?

    A.Negative assurance concerning whether the entity’s internal control activities operated as designed during the period being audited.

    B.An opinion as to whether the audited financial statements comply in form with the accounting requirements of the SEC.

    C.Positive assurance concerning whether unaudited condensed financial information complied with generally accepted accounting principles.

    D.An opinion regarding whether the entity complied with laws and regulations under Government Auditing Standards and the Single Audit Act.
    B.An opinion as to whether the audited financial statements comply in form with the accounting requirements of the SEC.

    A typical comfort letter expresses an opinion on whether audited financial statements and schedules included in the securities offering comply as to form, in all material respects, with the applicable accounting requirements of the Securities Act of 1933 and the related published rules and regulations. However, the comfort letter does not state or repeat an opinion about the fairness of presentation of the statements.
  5. The Securities and Exchange Commission has authority to

    A.Require a change of auditors of governmental entities after a given period of years as a means of ensuring independence.

    B.Deny lack of privity as a defense in third-party actions for gross negligence against the auditors of issuers.

    C.Determine accounting principles for the purpose of financial reporting by companies offering securities to the public.

    D.Prescribe specific auditing procedures to detect fraud concerning inventories and accounts receivable of companies engaged in interstate commerce.
    C.Determine accounting principles for the purpose of financial reporting by companies offering securities to the public.

    The SEC has the authority to regulate the form and content of all financial statements, notes, and schedules filed with the SEC and also the financial reports to shareholders if the company is subject to the Securities Exchange Act of 1934. The SEC has stated that financial statements conforming to FASB standards will be presumed to be in accordance with U.S. GAAP. However, the SEC reserves the right to substitute its principles for those of the accounting profession and to require any additional disclosures it deems necessary. The Sarbanes-Oxley Act of 2002 authorized the SEC to recognize as generally accepted any accounting principles established by a standards-setting body that meets the act’s criteria.
  6. 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

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

    B.Only the net income element.

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

    D.Financial position and results of operations.
    D.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.
  7. Which of the following procedures ordinarily should be applied when an independent auditor conducts a review of interim financial information of an issuer?

    A.Read the minutes of the board of directors’ meetings.

    B.Perform cutoff tests for cash receipts and disbursements.

    C.Inspect the open purchase order file.

    D.Verify changes in key account balances.
    A.Read the minutes of the board of directors’ meetings.

    A review involves (1) establishing an understanding with the client; (2) obtaining knowledge of the entity’s business and controls; (3) performing analytical procedures, making inquiries, and applying other limited procedures; (4) obtaining written representations from management; and (5) evaluating the results of procedures. The specific procedures performed include reading the minutes of meetings of shareholders, the board of directors, and committees of the board of directors and inquiring about the results of meetings for which minutes are unavailable.
  8. An auditor may express an opinion on an entity’s accounts receivable balance even if the auditor has disclaimed an opinion on the financial statements as a whole, provided that the

    A.Auditor also reports on the current asset portion of the entity’s balance sheet.

    B.Report on the accounts receivable is presented separately from the disclaimer of opinion on the financial statements.

    C.Distribution of the report on the accounts receivable is restricted to internal use only.

    D.Report on the accounts receivable discloses the reason for the disclaimer of opinion on the financial statements.
    B.Report on the accounts receivable is presented separately from the disclaimer of opinion on the financial statements.

    An auditor may be requested to express an opinion on one or more specified elements, accounts, or items of a financial statement. However, the auditor may not express such an opinion after disclaiming an opinion on the financial statements if such reporting is tantamount to a piecemeal opinion on the financial statements. Nevertheless, an auditor may be able to express an opinion in these circumstances if a major portion of the financial statements is not involved. For example, an auditor who has disclaimed an opinion on the financial statements may be able to express an opinion on the accounts receivable balance. Moreover, the report should be presented separately.
  9. The auditor’s inquiries of management regarding required supplementary information (RSI) should be directed to the judgments made concerning

    A.Accuracy and objectivity.

    B.Rights and obligations.

    C.Measurement and presentation.

    D.Relevance and validity.
    C.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).
  10. The auditor is engaged to report on whether supplementary information is fairly stated in relation to the audited financial statements as a whole. Which of the following best describes the auditor’s responsibility for this information if it is outside the basic financial statements and not deemed necessary to their fair presentation?

    A.The auditor has no reporting responsibility concerning information accompanying the basic financial statements.

    B.The auditor must disclaim an opinion on the information if it is supplementary information required by the applicable financial reporting framework.

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

    D.The auditor should not express an opinion on the supplementary information if (s)he disclaimed an opinion on the financial statements.
    D.The auditor should not express an opinion on the supplementary information if (s)he disclaimed an opinion on the financial statements.

    Supplementary information is presented outside the basic statements and is not deemed necessary for their fair presentation in accordance with the applicable financial reporting framework. For example, it includes (1) additional details or explanations of items in or related to the statements, (2) consolidating information, (3) statistical data, and (4) historical summaries. The auditor should not express an opinion on the supplementary information if (s)he expressed an adverse opinion or disclaimed an opinion on the audited financial statements. Moreover, the auditor should have served as the group auditor of those statements.
  11. An auditor may report on summary financial statements that are derived from audited financial statements only if the auditor

    A.Determines that the summary financial statements include all the disclosures necessary for the audited financial statements.

    B.Presents the summary financial statements in comparative form with the prior year’s summary financial statements.

    C.States whether the information is consistent with the audited financial statements.

    D.Expresses an unmodified opinion on the audited financial statements from which the summary financial statements are derived.
    C.States whether the information is consistent with the audited financial statements.

    Summary financial statements consist of historical information derived from financial statements audited in accordance with GAAS by the same auditor. The auditor should not accept an engagement to report on summary statements unless (s)he has been engaged to audit the statements from which they are derived. The report expresses an opinion on whether the summary statements are consistent, in all material respects, with the audited statements, in accordance with the applied criteria.
  12. Which of the following best describes other information in documents containing audited financial statements?

    A.Required supplementary information.

    B.Summary financial statements.

    C.Information presented in addition to the audited financial statements, such as a report by management on operations.

    D.Notes to the financial statements.
    C.Information presented in addition to the audited financial statements, such as a report by management on operations.

    Other information is financial or nonfinancial information (other than the financial statements and the auditor’s report) that is included in a document containing audited statements and the auditor’s report (excluding RSI). An example of such a document is an annual report to owners. Examples of other information are (1) a management report on operations, (2) selected quarterly data, and (3) financial summaries (AU-C 720).
  13. The information supplementary to the basic financial statements on which the auditor has been engaged to report may not include

    A.Modifications of the auditor’s report.

    B.Explanatory comments.

    C.Statistical data.

    D.Details of items in the basic financial statements.
    A.Modifications of the auditor’s report.

    The auditor’s report covers the basic financial statements and notes, which are an integral part of the statements. Supplementary information is presented outside the basic statements and not deemed necessary for their fair presentation in accordance with the applicable financial reporting framework. It includes additional details or explanations of items in or related to the statements, consolidating information, statistical data, historical summaries, etc. Modifications of the auditor’s report, however, must appear in the report itself, not in the supplementary information.
  14. When making a review of interim financial information (IFI), the auditor’s work consists primarily of

    A.Studying and evaluating limited amounts of documentation supporting the interim financial information.

    B.Confirming and verifying significant account balances at the interim date.

    C.Scanning and reviewing client-prepared, internal financial statements.

    D.Making inquiries and performing analytical procedures concerning significant accounting matters.
    D.Making inquiries and performing analytical procedures concerning significant accounting matters.

    Timeliness is an important element of interim reporting. The development of documentation and information underlying the report is necessarily less extensive at interim dates than at year end. Consequently, procedures for reviewing IFI generally are limited to inquiries, analytical procedures, and obtaining written representations from management (AU-C 930).
  15. The report on summary financial statements should indicate that the

    A.The auditor expresses limited assurance that the financial statements conform with GAAP.

    B.Procedures performed included evaluating whether they are prepared in accordance with the applied criteria.

    C.Summary financial statements are fairly presented in all material respects.

    D.Summary financial statements are prepared in conformity with a special purpose framework.
    B.Procedures performed included evaluating whether they are prepared in accordance with the applied criteria.

    The report on the summary statements describes, among other things, the procedures performed. They primarily include (1) comparing the summary statements with the related information in the audited statements and (2) evaluating whether the summary statements are prepared in accordance with the criteria applied by management.
  16. Reports are considered reports on financial statements prepared in accordance with a special purpose framework when issued in conjunction with

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

    B.Interim financial information reviewed to determine whether material modifications should be made to conform with GAAP.

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

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

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