The following statements relate to general principles or terms used in the audit of financial statements. Identify at least two errors from each of the following statements (a)-(e) and explain why these are errors and suggest corrections.
(a) Audit objective (4 marks)
The objective of an audit of financial statements is for auditors to make sure the financial statements give a true and correct view in all respects in accordance with an identified financial reporting framework and to ensure that they detect all fraud that may have taken place.
(b) HKSA (4 marks)
The Hong Kong Standards on Auditing specify exactly the necessary audit procedures that auditors should perform. For all private and listed companies, the Financial Reporting Council is responsible for investigating all deviations from the Hong Kong Standards on Auditing.
(c) Terms of engagement (4 marks)
Auditors and their clients should agree on the terms of the engagement, which can be recorded either in the management representation letter or other suitable form of verbal contract. This letter is required to be reissued before the start of every audit, regardless of whether there are any changes to the terms.
(d) Audit opinion (4 marks)
The auditor was unable to attend and observe the inventory count of the companyâs subsidiary in Bangkok due to the recent riots over the current government. The inventory in Bangkok accounts for 80% of the groupâs total inventory. lnventory is a significant amount within current assets but is not considered significant in respect of total assets. The auditor decided the most appropriate audit opinion is an adverse opinion.
(e) Audit documentation (4 marks)
Since the client paid for the audit, the audit working papers are the property of the audit client and they can be used as substitutes for the company's accounting records in case the companyâs accounting records are destroyed in a fire.
The following statements relate to general principles or terms used in the audit of financial statements. Identify at least two errors from each of the following statements (a)-(e) and explain why these are errors and suggest corrections.
(a) Audit objective (4 marks)
The objective of an audit of financial statements is for auditors to make sure the financial statements give a true and correct view in all respects in accordance with an identified financial reporting framework and to ensure that they detect all fraud that may have taken place.
(b) HKSA (4 marks)
The Hong Kong Standards on Auditing specify exactly the necessary audit procedures that auditors should perform. For all private and listed companies, the Financial Reporting Council is responsible for investigating all deviations from the Hong Kong Standards on Auditing.
(c) Terms of engagement (4 marks)
Auditors and their clients should agree on the terms of the engagement, which can be recorded either in the management representation letter or other suitable form of verbal contract. This letter is required to be reissued before the start of every audit, regardless of whether there are any changes to the terms.
(d) Audit opinion (4 marks)
The auditor was unable to attend and observe the inventory count of the companyâs subsidiary in Bangkok due to the recent riots over the current government. The inventory in Bangkok accounts for 80% of the groupâs total inventory. lnventory is a significant amount within current assets but is not considered significant in respect of total assets. The auditor decided the most appropriate audit opinion is an adverse opinion.
(e) Audit documentation (4 marks)
Since the client paid for the audit, the audit working papers are the property of the audit client and they can be used as substitutes for the company's accounting records in case the companyâs accounting records are destroyed in a fire.
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Related questions
2-30 | 2â30. 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 CPAâs 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 rmâs 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 companyâs | ||||||||
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 âtrue and fair view.â | ||||||||
(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. |