ACC 521 Study Guide - Final Guide: Internal Control, Financial Statement, Accountant

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9 Feb 2016

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Understand and explain these essential terms and concepts. The independent auditor"s report on an company"s financial statements is a standardized public statement that an auditor must provide when s/he has completed the f/s audit engagement. When the f/s are prepared in accordance with gaap, they are expected to present fairly the financial position, financial performance and cash flows of a company. This means the f/s should give users a full and unbiased understanding of these aspects of economic realities of the company. The auditor"s report is the most public output of a f/s audit, and states the auditor"s opinion on whether the f/s are fairly presented. Forming this opinion is the ultimate goal of the whole process of planning and performing a f/s audit engagement. The audit profession traditionally has preferred that all audit reports use very similar wording; this is so people using an audit report are less likely to interpret it in ways the auditor didn"t intend.

Related Questions

Indicate whether you agree or disagree with the following statements and explain your reasoning:

a) Rejean feels that an internal auditor that reports to the chief financial officer of the company can be as independent as an auditor that reports to the audit committee.

b) Angela discovered a very material overstatement in the financial statements. She felt the misstatement would have an impact on the decisions of users of the financial statements, and indicated to her audit senior that she would be including it as an âemphasis of matterâ paragraph in the audit report.

c) An auditor is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

d) An assurance engagement involves evaluation or measurement of subject matter against criteria.

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.

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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The following auditorâs report was drafted by a staff accountantof Nathan and Mat-
thew, CPAs, at the completion of the audit of the comparativefinancial statements

of Monterey Partnership for the years ended December 31, 2015and 2014. Mon-
terey is a privately held company that prepares its financialstatements on the income

tax basis of accounting. The report was submitted to theengagement partner, who

reviewed matters thoroughly and properly concluded that anunmodified opinion

should be expressed. The draft of the report prepared by aninexperienced staff audi-
tor is as follows:

Auditorâs Report

We have audited the accompanying financial statements ofMonterey Partnership,

which comprise the statements of assets, liabilities, andcapitalâincome tax basis as

of December 31, 2015, and the related statements of revenue andexpensesâincome

tax basis and of changes in partnersâ capital accountsâincometax basis for the year

then ended, and the related notes to the financialstatements.

Final PDF to printer

Auditorâs Responsibility

We conducted our audit in accordance with standards establishedby the AICPA.

Those standards require that we plan and perform the audit toobtain reasonable assur-
ance about whether the financial statements are free from materialmisstatement.

An audit involves performing procedures to obtain audit evidenceabout the

amounts and disclosures in the financial statements. Theprocedures selected depend

on the auditorâs judgment, including the assessment of the risksof material mis-
statement of the financial statements, whether due to fraud orerror. An audit also

includes evaluating the appropriateness of accounting policiesused as well as evalu-
ating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained issufficient and appropriate

to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to abovepresent fairly, in all

material respects, the assets, liabilities, and capital ofMonterey Partnership as of

December 31, 2015, and its revenue and expenses and changes inpartnersâ capital

accounts for the year then ended in conformity with generallyaccepted accounting

principles applied on a consistent basis.

Basis of Accounting

We draw attention to Note 2 of the financial statements, whichdescribes the basis

of accounting. The financial statements are prepared on thebasis of accounting the

Partnership uses for income tax purposes. Accordingly, thesefinancial statements

are not designed for those who do not have access to thePartnershipâs tax returns.

Our opinion is not modified with respect to this matter.

Nathan and Matthew, CPAs

April 3, 2016

Required:

Identify the errors and omissions in the auditorâs report asdrafted by the staff audi-
tor. Group the errors and omissions by paragraph, where applicable.Do not redraft

the report.

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ACC 521 Study Guide - Final Guide: Internal Control, Financial Statement, Accountant

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