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106 Cards in this Set
- Front
- Back
Note
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The auditor's standard report should include reference to the United States as the country of origin of both the accounting principles used to prepare the FSs & the auditing standards the auditor followed in performing the audit.
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Note
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When information accompanies audited FSs in a client-prepared document, the auditor is required to read the information. If such information is materially inconsistent with the FSs & the FSs do not require revision, the auditor should request that the information (in this case the letter of transmittal) be revised.
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Note
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Negotiating reductions in required dividends would conserve cash, which would be a mitigating factor in Davis' concerns about Hill's ability to continue as a going concern.
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Note
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If the FSs of a prior period have been audited by a predecessor auditor whose report is not presented, the successor auditor should indicate in the introductory paragraph of the report 1) that the FSs of the prior period were audited by another auditor, 2) the date of the previous report, 3) the type of report issued by the predecessor auditor, & 4) if the report was other than a standard unqualified report, the substantive reasons therefore. The successor auditor may name the predecessor auditor only if the predecessor auditor's practice was acquired by or merged with that of the successor auditor.
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Note
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When an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the FSs & not to the scope limitation itself.
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Note
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If a company issues FSs that purport to present financial position & results of operations but omits the related statement of cash flows, the auditor will normally conclude that the omission requires qualification of the opinion.
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Note
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GAAP allows a company to use different methods for costing different inventories as long as the methods are disclosed. Thus, the audit report would be unqualified; there is no departure from GAAP.
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Note
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If an auditor has previously qualified his or her opinion on FSs of a prior period, & the prior period statements are restated to conform with GAAP, the auditor should express an unqualified opinion on the restated FSs. In addition, the auditor would state the substantive reasons for the change in opinion in an explanatory paragraph preceding the opinion paragraph.
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Note
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For an entity's FSs to be presented fairly in conformity with generally accepted accounting principles, the
principles selected should reflect transactions in a manner that presents the FSs within a range of acceptable limits. |
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Note
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If the client refuses to accept the CPA's suggestions, the CPA should add a paragraph modifying the disclaimer to describe, in a separate explanatory paragraph, the nature & effect of the departure from GAAP.
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Note
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When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to consider the adequacy of disclosure about the entity's possible inability to continue as a going concern & include an explanatory paragraph in the audit report.
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Note
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The auditor should perform limited procedures on supplementary information accompanying the FSs. In addition, the auditor's report on the FSs should include an explanatory paragraph regarding the required supplementary information.
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Note
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Note that division of responsibility is permitted under U.S. auditing standards, but is generally not permitted under international auditing standards.
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Note
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A change in accounting estimate is accounted for prospectively & does not affect the comparability of FSs between periods.
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Note
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generally accepted accounting principles can be said to encompass the conventions, rules, & procedures necessary to define accepted accounting practice at a particular time.
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Note
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The auditor is not required to audit supplementary information, but he should perform limited procedures on supplementary information accompanying the FSs. In addition, the auditor's report on the FSs should include an explanatory paragraph regarding the required supplementary information.
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Note
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The auditor should report whether the information in the condensed FSs is fairly stated, in all material respects, in relation to the FSs from which it has been derived.
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Note
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When a qualified opinion results from a limitation on the scope of the audit or an insufficiency of audit evidence, the situation should be described in an explanatory paragraph preceding the opinion paragraph & referred to in both the scope & opinion paragraphs of the auditor's report. It is not appropriate for the scope of the audit to be explained in a note to the FSs, since the description of the audit scope is the responsibility of the auditor & not that of the client.
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Note
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Before reissuing the prior year's auditor's report on the FSs of a former client, the auditor should 1) read the FSs of the current period, 2) compare the prior-period information that the auditor reported on with the FSs to be presented for comparative-..e purposes, 3) obtain a letter of representation from the successor auditor, & 4) obtain a letter of representation from the former client's management. The representation letter from the successor auditor will state whether the successor's audit revealed any issues of a material nature that might affect the previous FSs. The representation letter from the former client's management will indicate whether its previous representations are still accurate & whether there have been any subsequent events affecting the previous FSs.
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Note
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When an independent CPA assists in preparing the FS of a publicly held entity, but has not "audited" or "reviewed" them, the CPA should issue a disclaimer of opinion & has only the responsibility to read the FS for obvious material misstatements.
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Note
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Note that division of responsibility is permitted under U.S. auditing
standards, but is generally not permitted under international auditing standards. |
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Note
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The auditor should perform limited procedures on supplementary information accompanying the FSs. In addition, the auditor's report on the FSs should include an explanatory paragraph regarding the required supplementary information.
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Note
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Before reporting on the FSs of a U.S. entity that have been prepared in conformity with another country's accounting principles, the auditor practicing in the U.S. should understand the accounting principles generally accepted in the other country.
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Note
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Under U.S. GAAS, the principal auditor makes reference in the audit report to the work of the other auditor when the principal auditor is unable to rev1ew the other auditor's audit documentation. This is because the principal auditor will be unable to be satisfied concerning the work performed by the other auditor. Even though the other auditor has an excellent reputation, the principal auditor must see the work to be able to assume responsibility for it. Note that under ISAs, no reference is made to the other auditor unless required by law or regulation.
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Note
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The factor most likely to cause the auditor to promptly apply the omitted procedure would be if the omission impairs the auditor's present ability to support the previously expressed opinion.
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Note
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When FSs are prepared in conformity with the accounting principles generally accepted in the parent's country & are for use only in that country, the auditor may report using either a U.S.-style report modified to report on the accounting principles of the parent's country or the report form of the parent's country.
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Note
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Rule 203 of the code of professional conduct of the AICPA states that if the FSs or data contain a GAAP departure, the departure may be justified if the CPA can demonstrate that due to unusual circumstances, such as new legislation or the evolution of a new form of business transaction, the FS would otherwise be misleading.
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Note
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If management (of a governmental body) declines to present information required by the GASB, the auditor should issue an unqualified opinion with an additional explanatory paragraph.
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Note
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An auditor ordinarily would issue an unqualified opinion with an explanatory paragraph if he or she wishes to emphasize that the entity had significant related party transactions, or if the auditor has substantial doubt about the entity's ability to continue as a going concern (even if the circumstances are fully disclosed in the FSs).
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Note
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The auditor has no active responsibility to make continuing inquiries between the date of the auditor's report & the date on which the report is submitted. The auditor's active responsibility stops on the date of the auditor's report.
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Note
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When rendering an opinion on the application of accounting principles to a specific transaction, the reporting CPA should consult with the continuing CPA to obtain information relevant to the transaction.
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Note
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The auditor should make reference to another auditor in the auditor's report if the principle auditor inquiries indicate that the other auditor has an excellent reputation
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Note
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When information accompanies audited FSs in a client-prepared document, the auditor is required to read the information. If such information is materially inconsistent with the FSs & the FSs do not require revision, the auditor should request that the information (in this case the letter of transmittal) be revised.
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Note
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"Our responsibility is to express an opinion on these FSs based on our audit" this statement is found in the unqualified FS audit opinion under both U.S. auditing standards & International standards on Auditing
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Note
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A quality control system consists of policies & procedures designed, implemented, & maintained to ensure that the firm complies with professional standards & appropriate legal & regulatory requirements, & that any reports issued are appropriate in the circumstances.
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Note
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Leasing rather than purchasing operating facilities results in reduced (or at least delayed) expenditures, which is a mitigating factor in a going concern situation.
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Note
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In obtaining evidence about subsequent events, the auditor should examine the latest available interim financial information, & compare them with the FSs under audit.
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Note
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The auditor may report on one basic FS & not the others, as long as access is not limited to information underlying the basic FS. This is considered a limited reporting engagement.
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Note
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In a report qualified for inadequate disclosure, the auditor would add an explanatory paragraph & modify the opinion paragraph, but the introductory & scope paragraphs would not be modified.
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Note
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Lack of sufficient evidence to support management's assertions would most likely cause an auditor to issue a qualified or disclaimer of opinion.
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Note
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The auditor should issue an "unqualified opinion" when management adequately discloses future events,
the outcome of which are not susceptible of reasonable estimation. No reference to the uncertainty need be made in the auditor's opinion under U.S. auditing standards. International standards on Auditing recommend the addition of a paragraph describing the significant uncertainty. |
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Note
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With respect to supplementary information required by the GASB that is placed outside the basic FSs, the auditor should apply limited procedures to the information (to determine that it is consistent with the basic audited FSs) & add an explanatory paragraph to the FS audit report.
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Note
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In the event of omitted audit procedures, the auditor should first attempt to perform alternative procedures in order to ascertain whether the original opinion can be relied upon.
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Note
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When an entity changes its method of accounting for income taxes, which has a material effect on comparability, the auditor should refer to the change in an explanatory paragraph added to the auditor's report. This paragraph should identify the nature of the change & should refer to the note in the FSs that discusses the change in detail. Following is an example of an appropriate explanatory paragraph: "As discussed in Note X to the FSs, the company changed its method of accounting for income taxes in X2."
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Note
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Under U.S. GAAS, the principal auditor makes reference in the audit report to the work of the other auditor when the principal auditor is unable to review the other auditor's audit documentation. This is because the principal auditor will be unable to be satisfied concerning the work performed by the other auditor. Even though the other auditor has an excellent reputation, the principal auditor must see the work to be able to assume responsibility for it. Note that under ISAs, no reference is made to the other auditor unless required by law or regulation.
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Note
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The auditor would only notify the creditors if the board of directors was unable to facilitate the proper adjustment.
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Note
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When an auditor expresses an adverse opinion, the opinion paragraph should include in our opinion, because of the effects of the matters discussed in the preceding paragraphs, the FSs .... "
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Note
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When disclaiming an opinion because of scope limitations, the auditor should indicate in a separate paragraph(s) the reasons that the audit did not comply with GAAS. The auditor should also omit the scope paragraph. The opinion paragraph is not omitted; however it indicates that no opinion is expressed.
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Note
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International standards on Auditing recommend the addition of a paragraph describing the significant uncertainty.
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Note
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The accountant's report on the application of accounting principles should include a statement that should any facts or circumstances differ from those presented to the accountant, the accountant's conclusions may change.
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Note
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The auditor would inquire about changes in stockholders' equity occurring after year-end, but would not generally perform an investigation of such items.
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Note
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"In our opinion, with the foregoing explanation, the FS referred to above present fairly" is an example of inappropriate reporting. When an auditor's report refers to the use of an accounting principle at variance with GAAP, the words, "in our opinion, except for the effects of the matters discussed in the preceding paragraph, the FS referred to above present fairly, ... " should be used.
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Note
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A change in accounting estimate (such as a change in the useful life of a depreciable asset) is accounted for prospectively & does not affect the comparability of FSs between periods. Since the auditor's standard report implies that consistency exists, no modification to the report is necessary. A consistency modification is required even if the previous accounting principle was not GAAP.
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Note
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Under U.S. auditing standards, the auditor's standard audit report includes a statement that "An audit includes assessing ... significant estimates made by management. .. "
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Note
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Generally accepted auditing standards include three categories: general standards, standards of fieldwork, & standards of reporting.
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Note
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The auditor sends an engagement letter to the client, not vice versa.
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Note
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The auditor should consider that fraud might occur regardless of any past experience with the entity. An assessment of management's honesty & integrity performed during the previous year would not necessarily be relevant to the current year's audit.
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Note
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When a qualified opinion results from a limitation on the scope of the audit or an insufficiency of audit evidence, the situation should be described in an explanatory paragraph preceding the opinion paragraph & referred to in both the scope & opinion paragraphs of the auditor's report. It is not appropriate for the scope of the audit to be explained in a note to the FSs, since the description of the audit scope is the responsibility of the auditor & not that of the client.
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Note
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Conditions that did not exist at year end but arose after year end are Type 2 (nonrecognized) subsequent events that must be disclosed to keep the FSs from being misleading.
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Note
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If an entity changes its method of accounting for income taxes, which has a material effect on comparability, the auditor should refer to the change in an explanatory paragraph added to the auditor's report. This paragraph should identify the nature of the change & Refer to the FS note that discusses the change in detail.
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Note
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The auditor's report on condensed statements derived from audited statements should indicate (1) that the CPA audited & expressed an opinion on the complete FSs, (2) the date of the auditor's report on the complete FSs, (3) the type of opinion expressed, & (4) whether, in the auditor's opinion, the information set forth in the condensed FSs is fairly stated in all material respects in relation to the complete financial
statements from which it was derived. |
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Note
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When a change in accounting principle materially affects the comparability of the comparative FS, the auditor should refer to the
change in an explanatory paragraph following the unqualified opinion paragraph, without neither concurring explicitly with the change nor issuing an "except for" qualified opinion. |
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Note
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When an entity changes its method of accounting for income taxes, which has a material effect on comparability, the auditor should refer to the change in an explanatory paragraph added to the auditor's report. This paragraph should identify the nature of the change & Refer to the FS note that discusses the change in detail.
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Note
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When a successor auditor does not present the predecessor
auditor's report, the successor should indicate in an other-matter paragraph that the predecessor auditor expressed an unmodified opinion on the prior year's FSs. |
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Note
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The report options for FSs prepared for use in a
foreign country depend upon the intended distribution. The auditor should therefore obtain written representations from management regarding the purpose & uses of the FSs. |
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Note
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Details concerning the results of audit procedures (such as the
results of confirmation of receivables) generally do not appear in the footnote. |
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Note
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If the auditor concludes that there is substantial doubt, the auditor should include an emphasis-of-matter paragraph following the opinion paragraph that includes the terms "substantial doubt & "going concern. " The time period is not mentioned in the auditor's report.
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Note
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The reporting accountant's report on the application of the
requirements of an applicable financial reporting framework should include a statement that should any facts or circumstances differ from those presented to the reporting accountant, the accountant's report may change. |
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Note
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If an auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern & that the entity's disclosures are adequate, then the audit report may be either:
•Unmodified with emphasis-of-matter paragraph, or •Disclaimed. (Generally, an unmodified opinion is issued, but the auditor is not prohibited from choosing to issue a disclaimer. ) |
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Note
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If an accounting change does not have a material effect on the FS
of the current year, it will be disclosed in the note to the FS for the current year, but no modification of the auditor's report is necessary. |
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Note
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An unmodified opinion states that the FSs are
presented fairly, in all material respects. Since the collective effect of the proposed adjustments is immaterial, an unmodified opinion should be expressed. In addition, footnote disclosure of proposed immaterial adjustments is not required. |
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Note
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When FSs are prepared in accordance with a financial reporting framework generally accepted in the parent's country & are for use only in that country, the auditor may report using either a U.S. style report modified to report on the financial reporting framework of the parent's country or the report form of the parent's country.
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Note
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When assessing management's plans for dealing with the adverse
effects of future conditions & events, mitigating factors would include: 1 . The postponement of expenditures (including R&D), 2. Plans to dispose of assets, 3. Plans to borrow money or restructure debt, 4. Plans to increase ownership equity (sell stock) |
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The auditor's report may make reference to the use of a specialist
only if the specialist's findings result in a change to the auditor's report, such as a qualified opinion. |
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The phrase "U.S. GAAP" is an accounting term that: Encompasses the conventions, rules, & procedures necessary to define U.S. accepted accounting practice at a particular time.
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Note
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An auditor most likely would issue a disclaimer of opinion because of Management's refusal to furnish written representations.
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Note
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For a particular entity's FSs to be presented fairly
in accordance with the applicable financial reporting framework, it is not required that the principles selected be applied on a basis consistent with those followed in the prior year, merely that any changes in accounting principle be properly accounted for & disclosed. |
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When an auditor's report refers to the use of an accounting principle at variance with GAAP, the words, " in our opinion, except for the effects of the matters discussed in the preceding paragraph, the FS referred to above present fairly, . . . " should be used.
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Note
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Lack of sufficient evidence to support management's assertions
would most likely cause an auditor to issue a qualified or disclaimer of opinion. |
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The introductory paragraph indicates the nature of the engagement
(i.e. , audit), the FSs covered in the ( audit) engagement, the name of the entity whose FSs have been audited, & the dates covered by each FS. |
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If the auditor concurred with the change, a lack of consistency in
applying GAAP would result in an unmodified opinion with an emphasis-of-matter paragraph following the opinion paragraph. |
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Note
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Inability to determine amounts associated with an employee fraud
scheme is a scope limitation that may result in a disclaimer of opinion. |
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Note
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The auditor should disclose the substantive reasons for expressing
an adverse opinion in a separate basis for adverse opinion paragraph preceding the opinion paragraph. |
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If the auditor concurred with the change, a lack of consistency in
applying GAAP would result in a n unmodified opinion with an emphasis-of-matter paragraph following the opinion paragraph. |
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The auditor, in order to express an opinion, must obtain a
reasonable level of assurance about whether the FSs are free from material misstatement, whether due to error or fraud. In order to obtain reasonable assurance, the auditor must (a) plan the work & properly supervise any assistants; (b)determine & apply appropriate materiality levels; (c) identify & assess risks of material misstatement, whether due to error or fraud; & (d) obtain sufficient appropriate audit evidence. |
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When the group auditor decides not to make reference to the audit
of a component auditor, the group auditor assumes responsibility for the work of the component auditor & should determine the type of work to be performed on the financial information of the component. If the component is significant, the component should be audited by the group engagement team or the component auditor. |
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The preparation & fair presentation of the FSs
requires identification of the applicable financial reporting framework & inclusion of an adequate description of the framework, as well as preparation & fair presentation in accordance with the framework. |
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The auditor has a responsibility to evaluate whether there is
substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time. If the auditor concludes that there is substantial doubt, the auditor should include an emphasis-of-matter paragraph following the opinion paragraph that includes the terms "substantial doubt' & "going concern. " The time period is not mentioned in the auditor's report. |
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When circumstances indicate that a financial presentation in
accordance with U.S. G4AP would be misleading, a departure from U.S. G4AP is permissible. In such cases, the auditor should issue an unmodified opinion because the FSs are not materially misstated. |
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Note
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Before reissuing the prior year's auditor's report on the financial
statements of a former client, the auditor should 1 ) read the FSs of the current period, 2) compare the prior-period information that the auditor reported on with the FSs to be presented for comparative purposes, 3) obtain a letter of representation from the successor auditor, & 4) obtain a letter of representation from the former client's management. The representation letter from the successor auditor will state whether the successor's audit revealed any issues of a material nature that might affect the previous FSs. The representation letter from the former client's management will indicate whether its previous representations are still accurate & whether there have been any subsequent events affecting the previous financial statements. |
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For a particular entity's FSs to be presented fairly
in accordance with the applicable financial reporting framework, it is not required that the principles selected be applied on a basis consistent with those followed in the prior year |
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There is no explicit reference to "test basis"
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Note
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Generally accepted auditing standards ("GAAS") are measures of
the quality of the auditor's performance, & guide the auditor in the performance of a properly planned & executed audit. |
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When reporting on the application of the requirements of an applicable financial reporting framework to a specific transaction, the CPA should include in his or her report a statement that the preparers of the FSs, who should consult with their continuing accountants, bear the ultimate responsibility for proper accounting treatment.
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Note
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The CPA's report on audited FSs does not include
matters related to the auditor's assessment of specific risk factors. |
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Note
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Division of responsibility is generally not permitted under ISAs.
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Note
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Regardless of the group auditor's decision whether to assume responsibility or divide responsibility, he must always become satisfied regarding the component auditor's reputation & independence
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Note
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There is no requirement that the auditor's report on supplementary information required by GAAP be restricted.
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Note
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When a successor auditor does not present the predecessor auditor's report, the successor should indicate in an other-matter paragraph that the predecessor auditor expressed an unmodified opinion on the prior year's FSs.
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Since the FSs were adjusted without disclosure of the event in the footnotes, then the date of the report should be the original date
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Note
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The opinion paragraph in an adverse opinion should state that, in the auditor's opinion, because of the significance of the matter(s) described in the basis for adverse opinion paragraph, the FSs are . . . .
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Note
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While GAAS do not override laws or regulations that govern an audit of FSs, an audit may be conducted in accordance with two sets of auditing standards in their entirety. In this case, the auditor should add additional language to the Auditor's Responsibility paragraph to state that the audit was conducted in accordance with both sets of auditing standards.
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Note
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In a report qualified for inadequate disclosure, the auditor would add a paragraph titled Basis for Qualified Opinion preceding the Opinion paragraph & modify the Opinion paragraph by adding an "except for . . . " statement.
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Note
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When a qualified opinion results from an inability to obtain sufficient appropriate audit evidence, the situation should be described in a Basis for Qualified Opinion paragraph preceding the Opinion paragraph & should be referred to in the Opinion paragraph. The scope limitation is not mentioned in the Management's Responsibility paragraph.
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Note
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When disclaiming an opinion because of scope limitations, the auditor should indicate in a separate paragraph(s) the reasons that the audit did not comply with GAAS. The Auditor's Responsibility paragraph is revised to mention the disclaimer, but is not omitted. The Opinion paragraph is not omitted; however it indicates that no opinion is expressed.
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Note
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If management (of a governmental body) declines to present information required by the GASB, the auditor should issue an unmodified opinion with an other-matter paragraph.
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