Ch15 1 - Notes PDF

Preview

Summary

Notes...

Description

Chapter 15 Reporting on the Audit Question Type: True or False 1.

The auditor’s report can be in writing or it can be expressed orally. A. True B. False Answer: B, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Research, AACSB: Analytic, Learning objective: LO15.1, Solution: The auditor’s report must be in writing, in either hardcopy or electronic form.

2.

If the client has a going concern issue, then management must make a note disclosure about the circumstances, including any plans management may have to mitigate the situation. A. True B. False Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic, Learning objective: LO15.2, Solution: If the client has a going concern issue, then management must make a note disclosure about the circumstances, including any plans management may have to mitigate the situation.

3.

A component auditor, which is a different accounting firm, may audit a component or subsidiary of the parent company. A. True B. False Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.3, Solution: A component auditor, which is a different accounting firm, may audit a component or subsidiary of the parent company.

4.

Characteristics of a pervasive misstatement or scope limitation include that is it not confined to specific elements, accounts, or items of the financial statements. A. True B. False Answer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.4, Solution: Characteristics of a pervasive misstatement or scope limitation include that is it not confined to specific elements, accounts, or items of the financial statements.

5.

If the subsidiary ‘s financial statements audited by the component auditor is a material amount of the group financial statements, the group engagement partner typically decides to reference the work completed by the component auditor in the audit report. A. True

1

B. False Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic, Learning objective: LO15.3, Solution: If the subsidiary audited by the component auditor is a material amount of the group financial statements, the group engagement partner typically decides to reference the work completed by the component auditor in the audit report.

6.

An unmodified opinion is expressed by the auditor when the auditor concludes the financial statements are presented fairly, in all material respects. A. True B. False Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.4, Solution: An unmodified opinion is expressed by the auditor when the auditor concludes the financial statements are presented fairly, in all material respects.

7.

An emphasis of matter paragraph is mandatory for all audit reports. A. True B. False Answer: B, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.2, Solution: An emphasis of matter paragraph is optional, and can be used by the auditor to draw attention to important information that is already presented or disclosed in the financial statements.

8.

Companies typically present their financial statements in comparative form, which means showing two consecutive years of balance sheets and three consecutive years of the income statement, statement of cash flows, and statement of stockholders’ equity. A. True B. False Answer: A, Taxonomy: Knowledge Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.2 Solution: Companies typically present their financial statements in comparative form, which means showing two consecutive years of balance sheets and three consecutive years of the income statement, statement of cash flows, and statement of stockholders’ equity.

9.

An immaterial misstatement occurs when the client departs from the applicable financial reporting framework. A. True B. False Answer: B, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.4, Solution: A material misstatement occurs when the client departs from the applicable financial reporting framework.

10.

A scope limitation occurs when auditors are able to perform planned audit procedures to gather sufficient appropriate evidence. A. True 2

B. False Answer: B, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.4, Solution: A scope limitation occurs when auditors cannot perform planned audit procedures to gather sufficient appropriate evidence.

11.

Whether auditors choose to dual date or extend the end of fieldwork, they must request written representation from management as of the new date of the auditor's report. A. True B. False Answer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.4, Solution: Whether auditors choose to dual date or extend the end of fieldwork, they must request written representation from management as of the new date of the auditor's report.

12.

The concept of materiality is NOT an important factor in determining which type of modified report to issue. A. True B. False Answer: B, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic, Learning objective: LO15.4, Solution: The concept of materiality is a key factor in determining which type of modified report to issue.

13.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. A. True B. False Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.5, Solution: An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.

14.

The auditor should consider modifying the opinion if the management refuses to sign the updated representation letter. A. True B. False Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic, Learning objective: LO15.5, Solution: The auditor should consider modifying the opinion if the management refuses to sign the updated representation letter.

15.

Auditors of public companies can perform an integrated audit, which means performing the financial statement audit and the audit of the effectiveness of the internal control over financial reporting (ICFR) at the same time. A. True B. False

3

Answer: B, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.6, Solution: Auditors of public companies must perform an integrated audit, which means performing the financial statement audit and the audit of the effectiveness of internal control over financial reporting (ICFR) at the same time.

16.

Adverse opinions on the effectiveness of internal control over financial reporting (ICFR) are frequently issued for large, well-established companies. A. True B. False Answer: B, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic, Learning objective: LO15.6, Solution: Adverse opinions on the effectiveness of ICFR are rare for large, wellestablished companies.

17.

In a compilation engagement, the CPA will assist management in the presentation of financial statements and will provide assurance as to whether the financial statements are presented fairly in accordance with the applicable financial reporting framework. A. True B. False Answer: B, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.7, Solution: In a compilation engagement, the CPA will assist management in the presentation of financial statements but will not provide assurance as to whether the financial statements are presented fairly in accordance with the applicable financial reporting framework.

18.

To provide limited assurance, the CPA must perform procedures to gather evidence that no material modifications are needed for the financial statements to be in accordance with the financial reporting framework. A. True B. False Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic, Learning objective: LO15.7, Solution: To provide limited assurance, the CPA must perform procedures to gather evidence that no material modifications are needed for the financial statements to be in accordance with the financial reporting framework.

Question Type: Multiple choice 19.

An unmodified opinion is expressed by_______. A. the internal audit function upon concluding the financial statements are fairly represented B. the external auditor when the auditor concludes the financial statements are presented fairly, in all material respects C. the external auditor when the auditor concludes the financial statements are presented fairly, in all material and immaterial respects D. management when the auditor concludes the financial statements are presented fairly, in all material respects

4

Answer: B, Taxonomy: Application, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.1, Solution: An unmodified opinion is expressed by the auditor when the auditor concludes the financial statements are presented fairly, in all material respects.

20.

The responsibility for the financial statements rests_______. A. jointly with the auditor and management B. solely with management C. with the internal audit function D. solely with the external auditor Answer: B, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.1, Solution: The responsibility for the financial statements rests solely with management.

21.

The purpose of an audit is to _______. A. provide financial statement users with an opinion by an independent auditor on whether the financial statements are presented fairly in accordance with an applicable financial reporting framework B. provide internal auditors with an opinion by the external auditor on whether the financial statements are presented fairly in accordance with an applicable financial reporting framework C. provide absolute assurance that the financial statements conform to Generally Accepted Accounting Principles (GAAP) D. help management ensure yearly bonuses will be received Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.1, Solution: The purpose of an audit is to provide financial statement users with an opinion by an independent auditor on whether the financial statements are presented fairly in accordance with an applicable financial reporting framework.

22.

The audit process _______. A. can typically take up to a year B. is aimed primarily at creditors C. enhances the degree of confidence that intended users place in the financial statements D. decreases the degree of confidence that intended users place in the financial statements Answer: C, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.1, Solution: The audit process enhances the degree of confidence that intended users place in the financial statements.

5

23.

Once auditors have gathered sufficient appropriate audit evidence, evaluated uncorrected misstatements, and completed the required communications with those charged with governance _______. A. the final step is to prepare and issue the independent auditor’s report B. the final step is to confer with the client's legal counsel C. the audit report should be sent to the internal audit function for review D. the report should be sent to the SEC for modification and approval Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.1, Solution: Once auditors have gathered sufficient appropriate audit evidence, evaluated uncorrected misstatements, and completed the required communications with those charged with governance, the final step is to prepare and issue the independent auditor’s report.

24.

AU-C 700 Forming an Opinion and Reporting on Financial Statements defines an unmodified opinion as the opinion expressed by the_______. A. internal auditor when the auditor concludes the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework B. external auditor when the auditor concludes the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework C. external auditor when the auditor concludes the financial statements are presented fairly, in all material and immaterial respects, in accordance with the applicable financial reporting framework D. external auditor when the auditor concludes the financial statements are presented fairly, in all material respects, in accordance with the international financial reporting standards Answer: B, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.1, Solution: AU-C 700 Forming an Opinion and Reporting on Financial Statements defines an unmodified opinion as the opinion expressed by the external auditor when the auditor concludes the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

25.

The audit process _______. A. enhances the degree of confidence that intended users place in the financial statements B. has no effect on the degree of confidence that intended users place in the financial statements C. decreases the degree of confidence that intended users place in the financial statements D. is unrelated to the degree of confidence that intended users place in the financial statements

6

Answer: A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.1, Solution: The audit process enhances the degree of confidence that intended users place in the financial statements.

26.

The audit report represents the _______. A. beginning of the audit process B. “end product” of the financial statement audit C. “end product” of the internal audit review and audit D. opinion of management with respect to the fairness and accuracy of the financial statements Answer: B, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.1, Solution: The audit report is the “end product” of the financial statement audit.

27.

Audit reports tend to be _______. A. very different, depending on the company being audited B. fairly standard with respect to wording and paragraphs C. standard for companies within an industry, but varying between industries D. very different, with respect to wording and paragraphs Answer: B, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.1, Solution: Audit reports tend to be fairly standard with respect to wording and paragraphs.

28.

The auditor’s responsibility, as expressly stated in the audit report, is to _______. A. express an opinion on the financial statements B take responsibility for the financial statements C. make it clear that responsibility for the financial statements rests with the internal audit function D. make it clear that responsibility for the financial statements rests with the client's legal counsel Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.1, Solution: The auditor’s responsibility, as expressly stated in the audit report, is to express an opinion on the financial statements.

29.

In the audit report, the auditor states that another party is responsible for the preparation of the financial statements. This party is _______. A. the internal auditor B. the client's legal counsel C. management D. the SEC Answer: C, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.1, Solution: In the audit report, the auditor

7

states that another party is responsible for the preparation of the financial statements. This party is management.

30.

A/an _______ is presented by the auditor to indicate that the financial statements are in accordance with the applicable financial reporting framework. A. unmodified opinion B. modified opinion C. unqualified opinion D. audit opinion Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic, Learning objective: LO15.1, Solution: An unmodified opinion is presented by the auditor to indicate that the financial statements are in accordance with the applicable financial reporting framework.

31.

Which of the following is NOT a component of unmodified opinion for a private company audit? A. Auditor tenure B. Title C. Opinion paragraph D. Introductory paragraph Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic, Learning objective: LO15.1, Solution: Some components of unmodified opinion for a private company audit include title, opinion paragraph, and introductory paragraph. Audit tenure is only required for audits of public companies.

32.

An emphasis-of-matter paragraph refers to when an auditor_______. A. issues an unmodified opinion but may include an additional paragraph in the report to draw attention to important information B. issues a disclaimer of opinion due to a scope limitation C. makes inquiries of the prior auditor relating to prior audit opinions issues D. makes inquiries of the legal auditor relating to prior audit opinions issues Answer: A, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Measurement Analysis and Interpretation, AACSB: Analytic, Learning objective: LO15.2, Solution: An emphasis-of-matter paragraph refers to when an auditor issues an unmodified opinion but may include an additional paragraph in the report to draw attention to important information.

33.

If an auditor wishes to draw attention to important information that is already presented or disclosed in the financial statements, the auditor would include a _______. A. qualified opinion B. disclaimer of opinion C. emphasis-of-matter paragraph D. scope limitation paragraph

8

Answer: C, Taxonomy: Knowledge, Difficulty: Easy, AICPA FC: Risk Assessment, Analysis and Management, AACSB: Analytic, Learning objective: LO15.2, Solution: There are certain situations in which the auditor issues an unmodified opinion but may include an additional paragraph in the report to draw attention to important information that is already presented or disclosed in the financial statements. This additional paragraph is called an emphasis-of-matter paragraph.

34.

Th...