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1
Q

What is an auditor’s responsibility for supplementary information, such as the disclosure of pension information, that is outside the basic financial statements but required by the GASB?

A

The auditor should apply certain limited procedures to the supplementary information and report deficiencies in, or omissions of, such information.

The auditor should add an other-matter paragraph (following the opinion paragraph and any emphasis-of-matter paragraph) to the auditor’s report to refer to RSI. If RSI is not omitted, prescribed guidelines are followed, and required audit procedures are completed, the paragraph should: (1) identify the RSI and the applicable reporting framework; (2) state that the RSI, although not part of the basic statements, is required to place them in context; (3) describe the auditor’s limited procedures performed on the RSI in accordance with U.S. GAAS; and (4) state that no opinion is expressed and no other assurance is provided on the RSI and that limited procedures provide insufficient evidence (AU-C 730).

2
Q

A CPA is permitted to accept a separate engagement (not in conjunction with an audit of financial statements) to audit an entity’s

Schedule of AR:
Schedule of Royalties:

A

yes
yes

An auditor may be requested to express an opinion on one or more specified elements, accounts, or items of a financial statement. In the audit of a specific element, account, or item, the auditor should perform procedures on interrelated items as necessary to meet the objective of the audit. For example, sales, receivables, inventory, and payables are interrelated. Furthermore, the specific element, account, or item may be, or may be based upon, the entity’s equity or net income. The auditor should perform procedures necessary to obtain sufficient appropriate evidence to permit expression of an opinion on, respectively, (1) financial position and (2) financial position and results of operations. Thus, the auditor may audit accounts receivable or royalties without auditing the statements if (s)he audits the interrelated items (AU-C 805).

3
Q

Delta Life Insurance Co. prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission. If Wall, CPA, Delta’s auditor, discovers that the statements are not suitably titled, Wall should

A

Disclose any reservations in a basis for qualified opinion paragraph and qualify the opinion.

Terms such as “balance sheet,” “statement of income,” or other unmodified titles are ordinarily understood to apply to statements presented in accordance with GAAP. Consequently, the auditor of statements prepared under a special purpose framework should consider whether the statements are suitably titled. If (s)he believes they are not, the auditor should disclose his or her reservations in a basis for qualified opinion paragraph (AU-C 800).

4
Q

Form 8-K must be filed within

A

4 business days after significant events.

Current reports must be promptly filed on Form 8-K. It describes certain material events that must be disclosed within 4 business days. They include (1) changes in control of the registrant, (2) the acquisition or disposition of a significant amount of assets other than in the ordinary course of business, (3) bankruptcy or receivership, (4) resignation of a director, and (5) a change in the registrant’s certifying accountant. Reporting of material other events involving changes in financial condition or operations is optional. Thus, no mandatory time for filing is established. Nevertheless, registrants are encouraged to file promptly and with due regard for the accuracy, completeness, and currency of the information.

5
Q

In connection with a proposal to obtain a new client, an accountant in public practice is asked to prepare a written report on the requirements of an applicable financial reporting framework to a specific transaction. The accountant’s report should include a statement that

A

Any difference in the facts, circumstances, or assumptions presented may change the report.

The accountant’s report is addressed to the requesting party. The report should contain (1) a description of the engagement and a statement that it was performed in accordance with AU-C 915; (2) a description of the transaction and identification of the entity; (3) a description of the financial reporting framework applied (including its country of origin), the type of report that may be issued, and the reasons for the conclusion; (4) a statement that the responsibility for proper accounting is with the preparers of the financial statements; (5) statements of the facts, circumstances, and assumptions and their sources; (6) a statement that any difference in the facts, etc., may change the report; (7) an alert restricting the use of the report to specified parties; and (8), if the accountant is not independent, a statement of the lack of independence.

6
Q

Comfort letters ordinarily are

Addressed to the client’s:
Signed by the client’s:

A

Requesting party
independent auditor

The letter should not be addressed or given to anyone other than the entity and the requesting party, such as an underwriter. A common condition of an underwriting agreement in connection with the offering for sale of securities registered with the SEC under the Securities Act of 1933 is that the independent auditor furnish a comfort letter to the underwriters. Hence, the independent auditor signs the comfort letter.

7
Q

Which of the following best describes other information in documents containing audited financial statements?

A

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).

8
Q

An auditor’s report on financial statements prepared in accordance with the income tax basis of accounting should include all of the following except

A

An opinion as to whether the basis of accounting used is appropriate under the circumstances.

The auditor’s report should include paragraphs or sections that (1) describe the financial statements; (2) state management’s responsibility for the financial statements; (3) describe the auditor’s responsibilities; (4) express an opinion on fair presentation in accordance with the income tax basis; and (5) identify in an emphasis-of-matter paragraph the basis of accounting, state that the basis is other than GAAP, and refer to the note that describes that basis. The auditor’s responsibilities include evaluating the appropriateness of the accounting policies used. They do not include expression of an opinion on whether the basis of accounting used is appropriate under the circumstances.

9
Q

Whenever negative assurance is provided by a CPA, it is based upon

A

An absence of nullifying evidence.

Negative assurance consists of a statement by the auditor that, as a result of the procedures performed, nothing came to the auditor’s attention that caused the auditor to believe that specified matters do not meet specified criteria (AU-C 920). Procedures performed for reviews provide a basis for this limited assurance.

10
Q

A CPA should not normally refer to which one of the following subjects in a comfort letter?

A

Management’s determination of operating segments.

AU-C 920 lists the permissible content of a comfort letter. In addition to the other answer choices, the letter may address (1) the form of audit statements and schedules in the registration statement, (2) other items in the filing (e.g., pro forma information, MD&A, and capsule information), and (3) the provision of negative assurance. However, management’s determination of operating segments is a matter addressed in an audit, an engagement with a broader scope than that for the issuance of a comfort letter.

11
Q

Which of the following titles is suitable for financial statements that are prepared on a cash basis?

A

Statement of revenue collected and expenses paid.

Terms such as “balance sheet,” “statement of financial position,” “statement of operations,” “income statement,” “statement of cash flows,” and similar unmodified titles suggest that the statements were prepared in accordance with GAAP. Appropriate titles for comparable cash basis statements are “statement of assets and liabilities arising from cash transactions” and “statement of revenue collected and expenses paid.”

12
Q

When an auditor is requested to express an opinion on the inventory of an entity, the auditor may

A

Accept the engagement and express an opinion.

A report may be issued in connection with an engagement to express an opinion on specified elements, accounts, or items of a financial statement. Examples of specified elements, accounts, or items on which an auditor may report based on an audit in accordance with GAAS include (1) accounts receivable, (2) royalties, (3) a profit participation, or (4) inventory.

13
Q

If management declines to present required supplementary information, the auditor should express a(n)

A

Unmodified paragraph 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).

14
Q

MEEN, LLP, is finalizing its audit report of financial statements intended for use only outside the U.S. The report must include

A

A U.S. form of the report or the report form of the other country.

When the financial statements and auditor’s report are intended for use only outside the U.S., the auditor is permitted to report using either (1) a U.S. form of report reflecting that the statements reported on have been prepared in accordance with a reporting framework generally accepted in another country or (2) the report form and content of the other country (or, if applicable, as set forth in the International Standards on Auditing).

15
Q

The report on summary financial statements should indicate that the

A

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
Q

An auditor determines that the entity is presenting certain supplementary financial disclosures of pension information that are required by the GASB. Under these circumstances, the auditor should

A

Compare the required supplementary information for consistency with the audited financial statements.

RSI is information that the designated accounting standards setter has determined must accompany the basic financial statements. The auditor should (1) inquire about (a) whether the RSI is within the prescribed guidelines, (b) whether methods of measurement or presentation have changed and the reasons for any change, and (c) any significant assumptions or interpretations; (2) compare the RSI for consistency with the basic statements, management’s responses to inquiries, and other audit evidence; and (3) obtain management’s written representations relevant to its responsibilities for RSI and compliance with guidelines (AU-C 730).

17
Q

An auditor is engaged to report on statistical data presented with audited financial statements. Under these circumstances, the report on the statistical data should

A

Be limited to data derived from the entity’s audited financial statements.

Supplementary information is presented outside the basic statements and is not necessary for the statements to be fairly presented in accordance with the applicable financial reporting framework. Examples include summaries extracted from the financial statements and statistical data. An auditor ordinarily does not report on supplementary information but may be engaged to do so. An auditor who is engaged to report on whether supplementary information is fairly stated, in all material respects, in relation to the statements as a whole should determine that certain conditions are satisfied: (1) the supplementary information is derived directly from the underlying records used to prepare the statements and relates to the same period, (2) the financial statements were audited, (3) the auditor issued a report that did not express an adverse opinion or disclaim an opinion, and (4) the supplementary information will accompany the audited statements or be made readily available without further action by the entity (e.g., on the entity’s website).

18
Q

The auditor has determined that the audited financial statements and supplementary information (SI) are presented together. The auditor may report on the SI in

A

An other-matter paragraph.

When the SI and the audited statements are presented together, the auditor reports on the SI in (1) a separate report or (2) an other-matter paragraph following the opinion paragraph and any emphasis-of-matter paragraph.

19
Q

AU-C 915, Reports on Application of Requirements of an Applicable Financial Reporting Framework, provides guidance to a reporting accountant who

A

Is preparing a written report on the application of an applicable financial reporting framework to a specific transaction.

AU-C 915 guides the reporting accountant when (s)he prepares a written report or gives oral advice on (1) the application of the requirements of a financial reporting framework to a specific transaction (completed or proposed) involving facts and circumstances of a particular entity or (2) the type of report that may be issued on a specific entity’s financial statements. The accountant should not issue a written report on a hypothetical transaction.

20
Q

An independent auditor’s report is based on a review of interim financial information. If this report is presented in a registration statement, a prospectus should include a statement clarifying that the

A

Auditor’s review report is not a part of the registration statement within the meaning of the Securities Act of 1933.

The auditor has reviewed interim information, and his or her report is presented or incorporated by reference in a registration statement. In these circumstances, the SEC requires that a prospectus containing a statement about the auditor’s involvement clarify that the report is not a report on, or a part of, the registration statement within the meaning of sections 7 and 11 of the Securities Act of 1933. The prospectus should state that reliance on the report should be restricted given the limited procedures applied and that the auditor is not subject to the liability provisions of section 11.