Study Unit 17: questions Flashcards
When a CPA decides to rely on the audit work performed by another audit firm, what should the CPA do?
Review the other firm’s audit workpapers and reperform a subset of audit testing to validate the firm’s conclusions. Also, when taking responsibility for the other firm’s work, the auditor does not refer to the component auditor.
When the group engagement partner assumes responsibility for the work of a component auditor, the auditor’s report on the group statements does not refer to the component auditor. However, the group engagement partner still must be satisfied that those performing the engagement, including component auditors, collectively possess the necessary competence. Moreover, the assumption of responsibility requires involvement in the work of the component auditor. Involvement may include (1) performing risk assessment procedures, (2) performing further procedures, and (3) reviewing the component auditor’s documentation (AU 600).
Which of the following is not a responsibility of a group engagement team?
A.Develop a group audit plan.
B.Determine materiality for the group as a whole.
C.Establish an overall audit strategy.
D.Choose one member to be the group engagement partner.
Choose one member to be the group engagement partner.
Answer (D) is correct.
The audit firm chooses the group engagement partner. This individual is responsible for
(1) the group engagement,
(2) its performance, and
(3) the report on the group statements.
When a group auditor decides to refer to a component auditor’s audit, the group auditor’s report should indicate clearly, in the auditor’s responsibility section, the
Magnitude of the portion of the financial statements audited by the component auditor.
Answer (D) is correct.
When the group engagement partner decides to refer to the report of a component auditor, the report on the group statements should clearly indicate that the component was not audited by the group auditor. It also should state (1) that the component was audited by the component auditor and (2) the magnitude of the portion of the statements audited. This language is included in the auditor’s responsibility section of the report.
The group engagement partner may not refer to the audit of the component auditor unless the component auditor performed an audit in accordance with:
(1) GAAS or
(2) , if required by law or regulation, PCAOB auditing standards.
The auditor’s responsibility section of an auditor’s report contains the following: “We did not audit the financial statements of EZ, Inc., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 27% and 29%, respectively, of the related consolidated totals. Those statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ, Inc., is based solely on the report of the other auditors.” These sentences
Assume no responsibility for the audit of the component auditor.
The quoted language is adapted from the auditor’s responsibility section in an example of an auditor’s report (AU-C 600). It illustrates the reporting by a group auditor who is referring to the audit of a component auditor. The group auditor’s report should clearly indicate that the component was not audited by the group auditor. It also should state (1) that the component was audited by the component auditor and (2) the magnitude of the portion audited. However, the ISAs do not permit a reference to a component auditor unless required by law or regulation.
A group auditor has decided to assume responsibility and not make reference to a component auditor. The report of the component auditor expressed a qualified opinion, but the group auditor believes the qualification to be immaterial in regard to the consolidated financial statements. Accordingly, the group auditor
Need not refer to the audit of the component auditor.
Answer (D) is correct.
The group auditor need not refer to the audit of the component auditor if (s)he is willing to assume responsibility for the component auditor’s work. Because the qualification stated by the component auditor is immaterial to the group financial statements, it need not cause a qualification of the opinion. For example, the component may not (1) be financially significant to the group or (2) be likely to include significant risks of material misstatement of the group statements.
What are the 3 choices that the group auditor has in regards to the component auditors work:
- Make no reference to the component auditor
- Make reference to the component auditor, but not by name
- Make reference to the component auditor by name.
Green Company uses the first-in, first-out method of costing for its international subsidiary’s inventory and the last-in, first-out method of costing for its domestic inventory. The different costing methods will cause Green’s auditor to issue a report with a(n)
Unmodified opinion.
The objective of the evaluation of consistency for the periods presented is to communicate in the report when the comparability of financial statements between periods has been materially affected by a change in accounting principles or by adjustments to correct a material misstatement in previous statements. Thus, the use of two different cost flow assumptions does not, by itself, affect the comparability of the entity’s financial statements between periods if no accounting changes have occurred.
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 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.
If a change in accounting principle has no material effect on the current financial statements but is expected to have a material effect in future years, the change should:
be disclosed by the client if required by the applicable financial reporting framework. But it need not be recognized in the report. So express an unmodified opinion.
When a material change in accounting principle with which the auditor concurs occurs, what kind of opinion should be expressed?
Unmodified opinion with an emphasis of matter paragraph.
An auditor includes an emphasis-of-matter paragraph in the audit report when a material change in accounting principle has occurred. If (1) the new principle and the method of accounting for the effect of the change are in accordance with the applicable reporting framework, (2) disclosures are adequate, and (3) the entity has justified that the principle is preferable, the opinion is unmodified.
What items do NOTrequire an emphasis of matter paragraph in lack of consistency situations? (Just disclosed in the notes to the financial statemetns, but no change in the current period’s report)
Change in accoutning estimate (useful life used to calculate the provision for depreciation expense)
Changes in classification and reclassifications
Changes which have no material impact on the financial statements
Change in principle that is immaterial this year but expected to become material in future years should be disclosed in the footnotes, but does not require an explanatory paragraph in the opinion.
Adoption of accounting principles for the first time.
When should an auditor’s report stating an unmodified opinion refer to the lack of consistency when a material change in accounting principle has occurred?
An emphasis-of-matter paragraph following the opinion paragraph.
The auditor should evaluate a change in principle to determine whether (1) the new principle and the method of accounting for the effect of the change are in accordance with the applicable framework, (2) the disclosures related to the change are adequate, and (3) the entity has justified that the alternative principle is preferable. If the criteria stated above are met, and the change in principle is material, the auditor should include an emphasis-of-matter paragraph in the report. This paragraph (1) describes the change, (2) refers to the entity’s disclosures, and (3) follows the opinion paragraph.
when should an auditor issue a qualified or adverse opinion in lack of consistency?
When the new principle is not GAAP
When the method of applying the new principle is not GAAP
When the disclosure of the change is not adequate
When the client does not justify, and the auditor does not concur, that the new method is preferable to the previous principle.
When the new principle is GAAP
When the method of applying the new principle is GAAP
When the disclosure of the change is adequate
When the client does justify, and the auditor does concur, that the new method is preferable to the previous principle
what opinion should the auditor express?
Unmodified opinion with an emphasis of matter paragraph added after the opinion paragraph “As discussed in note 3 to the financial statements, in 2015 the Company changed from the completed contract method to the percentage of completion method of accounting. Our opinion is not modified with respect to this matter.”
