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AC 412 Lecture Notes - Lecture 5: Accounting, Financial Statement

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mauvellama356
19 Sep 2017
School
Quinnipiac University
Department
Accounting
Course
AC 412
Professor
Sheikh

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Document Summary

Learning objective 3: what should be in the pcaob audit standards, financial statement opinion. Icfr opinion: two separate reports for the above items can be made or one larger one can be made, format for financial statement opinions. Intro paragraph: scope paragraph, opinion paragraph, cross reference paragraph if icfr is included, format for icfr opinions. Intro: scope, definition, opinion, there is no cross reference paragraph. Learning objective 4: describe the fie circumstances when an emphasis-of-matter explanatory paragraph or non-standard wording is appropriate to include in an unmodified opinion audit report.

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Related Questions

2-30 2–30. Multiple Choice Questions
Select the best answer for each of the following items and give reasons for your choice.
A a. Which of the following organizations can revoke the right of an individual to practice as a
CPA?
(1) The Public Company Accounting Oversight Board.
(2) The American Institute of Certifi ed Public Accountants.
(3) The Securities and Exchange Commission.
(4) The applicable state board of accountancy.
B b. The AICPA over time has played an important role in standards setting. Which of the following
standards are currently established by the AICPA?
(1) Accounting standards applicable to nonpublic companies.
(2) Auditing standards applicable to audits of nonpublic companies.
(3) Quality control standards applicable to audits of public companies.
(4) Standards for reviews of the interim fi nancial information issued by public companies.
C c. Which of the following does the FASB consider a source of nonauthoritative guidance for
use when there is no authoritative guidance available?
(1) The FASB Codifi cation.
(2) FASB Concepts Statements.
(3) SEC Rules.
(4) SEC Interpretive Releases
D d. Financial statement audits performed under PCAOB requirements are designed to provide
which type(s) of assurance with respect to the detection of material misstatements due to
errors or fraud?
Reasonable Absolute
1 Yes Yes
2 Yes No
3 No Yes
4 No No
E e. A basic objective of a CPA fi rm is to provide professional services that conform with professional
standards. Reasonable assurance of achieving this basic objective is provided through:
(1) Compliance with generally accepted reporting standards.
(2) A system of quality control.
(3) A system of peer review.
(4) Continuing professional education.
F f. Which of the following is not explicitly included in a standard report for a nonpublic
company?
(1) The CPA’s opinion that the fi nancial statements comply with generally accepted
accounting principles.
(2) That generally accepted auditing standards were followed during the audit.
(3) That internal control of the client was satisfactory.
(4) An identifi cation of the fi nancial statements audited.
G g. The general group of the 10 PCAOB Auditing Standards requires that:
(1) The auditors maintain an independent mental attitude.
(2) The audit be conducted in conformity with generally accepted accounting
principles.
(3) Assistants, if any, be properly supervised.
(4) The auditors obtain an understanding of internal control.
H h. Which AICPA quality control standard would most likely be satisfi ed when a CPA fi rm
maintains records indicating which partners or employees of the fi rm were previously
employed by the CPA fi rm’s clients?
(1) Professional relationship.
(2) Engagement performance.
(3) Relevant ethical requirements.
(4) Monitoring.
I i. An audit provides reasonable assurance of detecting material:
Fraudulent Financial Misappropriation
Reporting of Assets
1 Yes Yes
2 Yes No
3 No Yes
4 No No
J j. Which of the following is not included in an integrated audit report on the fi nancial statements
of a public company?
(1) The report states that the audit was performed in accordance with AICPA standards.
(2) The report indicates that the fi nancial statements are the responsibility of management.
(3) The report indicates that the auditors have also audited the effectiveness of the company’s
internal control.
(4) The report is signed in the name of the CPA fi rm.
K k. Audit fi rms that are subject to inspections by the PCAOB staff include:
(1) All audit fi rms.
(2) Audit fi rms that are registered with the SEC.
(3) Audit fi rms that are registered with the PCAOB.
(4) Audit fi rms that are registered with a state board of accountancy.
L l. Which of the following is not a difference noted when comparing the AICPA audit report
to the international audit report?
(1) The international audit report may use the phrase “true and fair view.”
(2) The international audit report may be signed using the personal name of the audit
partner, the audit fi rm, or both.
(3) The international audit report requires inclusion of the city of the CPA fi rm offi ce that
performed the audit.
(4) The international audit report includes an opinion on internal control.

2–30. Multiple Choice Questions
Select the best answer for each of the following items and give reasons for your choice.
a. Which of the following organizations can revoke the right of an individual to practice as a
CPA?
(1) The Public Company Accounting Oversight Board.
(2) The American Institute of Certifi ed Public Accountants.
(3) The Securities and Exchange Commission.
(4) The applicable state board of accountancy.
b. The AICPA over time has played an important role in standards setting. Which of the following
standards are currently established by the AICPA?
(1) Accounting standards applicable to nonpublic companies.
(2) Auditing standards applicable to audits of nonpublic companies.
(3) Quality control standards applicable to audits of public companies.
(4) Standards for reviews of the interim fi nancial information issued by public companies.
c. Which of the following does the FASB consider a source of nonauthoritative guidance for
use when there is no authoritative guidance available?
(1) The FASB Codifi cation.
(2) FASB Concepts Statements.
(3) SEC Rules.
(4) SEC Interpretive Releases
d. Financial statement audits performed under PCAOB requirements are designed to provide
which type(s) of assurance with respect to the detection of material misstatements due to
errors or fraud?
LO 2-1
LO 2-2
LO 2-2
LO 2-1
Objective
Questions
Reasonable Absolute
(1) Yes Yes
(2) Yes No
(3) No Yes
(4) No No

She proposed to give the controller, if appointed, an internal auditing staff to carry on such
continuing investigations of accounting data as appeared necessary. Evaluate this proposal.
2–28. Reed, CPA, accepted an engagement to audit the fi nancial statements of Smith Company.
Reed’s discussions with Smith’s new management and the predecessor auditor indicated the
possibility that Smith’s fi nancial statements may be misstated due to the possible occurrence
of errors, fraud, and illegal acts.
a. Identify and describe Reed’s responsibilities to detect Smith’s errors and fraud. Do not
identify specifi c audit procedures.
b. Describe Reed’s responsibilities to detect Smith’s material noncompliance with laws. Do
not identify specifi c audit procedures.
c. Identify and describe Reed’s responsibilities to report Smith’s noncompliance with laws.
(AICPA, adapted)
2–29. While the AICPA administers a peer review program for CPA fi rms, the PCAOB staff performs
practice inspections.
a. Identify the two basic types of peer review.
b. On what part of a fi rm’s practice does the PCAOB staff focus its inspections?
c. Describe a PCAOB inspection.
d. Describe how the PCAOB staff selects an audit engagement for inspection.
LO 2-3
Required:
LO 2-7
Required:
e. A basic objective of a CPA fi rm is to provide professional services that conform with professional
standards. Reasonable assurance of achieving this basic objective is provided through:
(1) Compliance with generally accepted reporting standards.
(2) A system of quality control.
(3) A system of peer review.
(4) Continuing professional education.

f. Which of the following is not explicitly included in a standard report for a nonpublic
company?
(1) The CPA’s opinion that the fi nancial statements comply with generally accepted
accounting principles.
(2) That generally accepted auditing standards were followed during the audit.
(3) That internal control of the client was satisfactory.
(4) An identifi cation of the fi nancial statements audited.
g. The general group of the 10 PCAOB Auditing Standards requires that:
(1) The auditors maintain an independent mental attitude.
(2) The audit be conducted in conformity with generally accepted accounting
principles.
(3) Assistants, if any, be properly supervised.
(4) The auditors obtain an understanding of internal control.
h. Which AICPA quality control standard would most likely be satisfi ed when a CPA fi rm
maintains records indicating which partners or employees of the fi rm were previously
employed by the CPA fi rm’s clients?
(1) Professional relationship.
(2) Engagement performance.
(3) Relevant ethical requirements.
(4) Monitoring.
i. An audit provides reasonable assurance of detecting material:

Fraudulent Financial Misappropriation
Reporting of Assets
(1) Yes Yes
(2) Yes No
(3) No Yes
(4) No No
j. Which of the following is not included in an integrated audit report on the fi nancial statements
of a public company?
(1) The report states that the audit was performed in accordance with AICPA standards.
(2) The report indicates that the fi nancial statements are the responsibility of management.
(3) The report indicates that the auditors have also audited the effectiveness of the company’s
internal control.
(4) The report is signed in the name of the CPA fi rm.
k. Audit fi rms that are subject to inspections by the PCAOB staff include:
(1) All audit fi rms.
(2) Audit fi rms that are registered with the SEC.
(3) Audit fi rms that are registered with the PCAOB.
(4) Audit fi rms that are registered with a state board of accountancy.
l. Which of the following is not a difference noted when comparing the AICPA audit report
to the international audit report?
(1) The international audit report may use the phrase “true and fair view.”
(2) The international audit report may be signed using the personal name of the audit
partner, the audit fi rm, or both.
(3) The international audit report requires inclusion of the city of the CPA fi rm offi ce that
performed the audit.
(4) The international audit report includes an opinion on internal control.
(AICPA, adapted)
2–31. Simulation
Casa Royale, Inc., a nonpublic company, retained Ying and Company CPA to perform an
audit of the fi nancial statements for the current year. Howard Smythe, the partner in charge of
the audit, drafted the following unmodifi ed report:

To the Management of Casa Royale, Inc.:
We have examined the accompanying consolidated balance sheet of Casa Royale, Inc., and
its subsidiaries, as of December 31, 20X1, and the related consolidated statements of income,
retained earnings, and cash fl ows for the years then ended.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated
fi nancial statements in accordance with accounting principles generally accepted in the United
States of America; this includes the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of consolidated fi nancial statements that are
free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these fi nancial statements based on our audit. We
conducted our audit in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated fi nancial statements are free of material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the consolidated fi nancial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the consolidated
fi nancial statements, whether due to fraud or illegal acts. In making those risk assessments, the
auditor considers internal control relevant to the entity’s preparation and fair presentation of
the consolidated fi nancial statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the entity’s internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of signifi cant accounting estimates made by management,
as well as evaluating the overall presentation of the consolidated fi nancial statements.
We believe that the audit evidence we have obtained is adequate to provide a basis for our audit
opinion.
Opinion
In our opinion, the consolidated fi nancial statements referred to above present fairly, in all material
respects, the fi nancial position of Casa Royale, Inc., and its subsidiaries as of December 31,
20X1, and the results of their operations and their cash fl ows for the years then ended in accordance
with auditing standards generally accepted in the United States of America.
Howard Smythe , Partner
Phoenix, Arizona
February 12, 20X2
Reviewer’s Comments
Comment Is
Correct (yes or no)
a. The report should not be addressed to management.
b. The report should indicate that we have “audited,” rather than “examined,”
the fi nancial statements (fi rst paragraph after introduction).
c. The report should not indicate anything concerning management’s
responsibility for internal control.
d. The report should state that the auditors’ responsibility is to express
“reasonable assurance,” not an opinion (fi rst paragraph under “auditor’s”
responsibility).
e. The audit is designed to assess risks of material misstatements due to
errors or fraud; the term “illegal acts” is incorrect (second paragraph
under auditor’s responsibility).
f. The report should not refer to the auditors “evaluating the appropriateness
of accounting policies,” since those are the responsibility of management.
g. The evidence should be suffi cient and appropriate rather than “adequate”
(third paragraph under auditor’s responsibility).

Reviewer’s Comments
Comment Is
Correct (yes or no)
h. The opinion should not include “in all material respects” since the auditors
are providing an opinion on the accuracy of the fi nancial statements
(opinion paragraph).
i. The opinion should be on “accounting principles generally accepted in the
United States of America,” not on auditing standards (opinion paragraph).
j. The signature on the report should be that of the CPA fi rm, not that of
the partner.

The independent auditor is allowed to use a specialist for evaluating a complicated financial transaction provided the specialist is

knowledgeable and independent of the audit client.
approved by the client's board of directors.
all of the above.
acceptable to the PCAOB.

Inappropriately dating transfers of funds between bank accounts to cover shortages of cash is properly referred to as

lapping.
reconciling.
kiting.
embezzling.

Cash equivalents

represent current assets that can be converted to cash within a year or an operating cycle, whichever is shorter.
include only cash and highly liquid investments that are virtually free of risk.
should be reported as investments and not be included as cash on the balance sheet.
typically exclude money market funds and treasury bills.

A cut-off bank statement primarily is used to

determine whether reconciling items on the year-end bank reconciliation have cleared the bank.
prepare a year-end bank reconciliation.
test for kiting.
confirm the year-end balance of cash.

An imprest cash account

typically is used for many large miscellaneous disbursements.
typically earns large amounts of interest.
is another name for the general cash account of an organization.
is an account containing a stipulated amount of money to be used for a specific purpose.

An auditor may estimate the appropriate amount of interest expense to be recorded by an audit client by multiplying the average debt by the average interest rate. If the auditor's estimate is considerably larger than the client's recorded interest expense this would be evidence of a potential

failure of the client to accrue interest expense at year end.
the violation of significant loan covenants.
overstatement of recorded interest expense.
understatement of long-term debt.

Internal controls over fixed assets in a smaller entity

usually include authorization by the board of directors.
typically will be very similar to internal controls over other assets within the entity.
must be the same as in larger entities.
are of little importance since fixed assets are not subject to theft or misuse.

A change in depreciation methods employed by an audit client resulting in a material change in depreciation expense

is not necessarily a violation of generally accepted accounting principles.
requires disclosure by the audit client in the footnotes to the financial statements.
must be noted in the audit opinion due to lack of consistency.
is properly described by all of the listed statements.

Auditors typically assess inherent risk for material accounts requiring significant estimates as

low.
high.
zero.
moderate.

Which of the following loans from an audit client, which is a financial institution, made in accordance with the normal lending practices of the financial institution would impair the CPA's independence?

A loan fully secured by certificates of deposit from the same financial institution.
A credit card loan in which the balance carried forward each month does not exceed $9,000.
An automobile loan secured by the automobile.
A home loan equal to less than 50% of the home's value and collateralized by the home.

A CPA has obtained some original records from a client during the course of an audit engagement. At the completion of her audit according to the proper professional standards the client fired the CPA and demanded that the CPA return all of his original records immediately. Under these circumstances which of the following statements is most correct according to the AICPA Code of Professional Conduct?

The CPA may hold the original records she obtained until the client pays for the services she has completed.
The CPA must return only the original records of the client upon demand regardless of the circumstances.
The CPA must return all original records and all copies of original records of the client upon demand regardless of the circumstances.
This is a matter of state law and not a matter covered by the AICPA Code of Professional Conduct.