ACC 521 Study Guide - Final Guide: Financial Audit, Cash Flow Statement, Audit Evidence

55 views3 pages

tealsea-lion549

10 Feb 2016

School

Department

Course

Professor

For unlimited access to Study Guides, a Grade+ subscription is required.

Document Summary

Chapter 15 the essentials of completing the audit work. So far in our coverage of the financial statement audit process, we have looked at the evidence gathering programs auditors perform related to the auditee"s main accounting processes. As the engagement gets nearer to its end, auditors must address some final matters to complete their work. First, they must analyze the income statement to ensure it fairly presents the categories of revenue and expenses and is consistent with evidence they obtained from auditing all the major balance sheet accounts and transactions. There may be additional substantive procedures required on specific income statement items that were not yet examined sufficiently. The auditors also would review the rest of the financial statements: the cash flow statement; statement of changes in equity; and notes. They will want to make sure the whole set of financial statements are presented appropriately, and are consistent with the evidence obtained and documented in the audit files.

Related Questions

Which of the following statements is most correct regarding the independent auditor's reliance on the tests of controls performed by the internal auditors to reduce their substantive testing?

1-The independent auditor must obtain assurance of the independence of the internal auditors but need not test their work.

2-It is not acceptable for the independent auditor to rely upon the work of the internal auditors.

3-There are no restrictions in relying upon the work of internal auditors.

4-The independent auditor must evaluate the competency and objectivity of the internal auditors and must test a sample of the work of the internal auditors in order to rely upon their work.

The term "materiality" as used in auditing is best described as the

1-substance of the auditing procedures.

2-amount of misstatement on the financial statements that would influence a decision maker.

3-underlying evidence upon which the audit opinion is based.

4-amount of material the auditor gathers as evidence to support the audit opinion.

Prior to accepting an audit client an auditor has a professional obligation to

1-contact the predecessor auditor.

2-perform preliminary analytical review procedures.

3-do all of the listed actions.

4-obtain approval for the audit engagement from the SEC.

Which of the following best represents financial statement fraud?

1-The transfer agent issues 40,000 shares of the company's stock to a friend without authorization by the board of directors.

2-The controller of the company decreases a contingent liability by $3 million so the company will meet analysts' expectations this quarter.

3-The in-house attorney receives payments from the French government for negotiating the development of a new plant in Paris.

4-The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization.

Sampling risk is the risk that

1-errors are inherent and may be present in the population without regard to the internal controls.

2-the population will not contain characteristics representative of the sample such that inferences made about that sample will be incorrect.

3-internal controls are not adequate to prevent or detect material errors.

4-the sample will not contain characteristics representative of the population such that inferences made about that population will be incorrect.

Control risk that is assessed excessively high (i.e. the auditor believes control risk is high when in reality it is moderate or low) leads to:

1-audit inefficiency.

2-a less expensive audit.

3-reduced substantive testing.

4-errors that are more likely to occur than anticipated.

The purchasing process consists of each of the following phases except

1-receipts of goods and services.

2-approval of items for payment.

3-authorized request for goods and services.

4-cash receipts.

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.

sapphirewallaby498

2â31. 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.
Managementâs 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.
Auditorâs 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 auditorâs
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 entityâs 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 entityâs 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
Reviewerâs Comments
Comment Is
Correct (yes or no)
a. The report should not be addressed to management.
b. The report should indicate that we have âaudited,â rather than âexamined,â
the fi nancial statements (fi rst paragraph after introduction).
c. The report should not indicate anything concerning managementâs
responsibility for internal control.
d. The report should state that the auditorsâ responsibility is to express
âreasonable assurance,â not an opinion (fi rst paragraph under âauditorâsâ
responsibility).
e. The audit is designed to assess risks of material misstatements due to
errors or fraud; the term âillegal actsâ is incorrect (second paragraph
under auditorâs responsibility).
f. The report should not refer to the auditors âevaluating the appropriateness
of accounting policies,â since those are the responsibility of management.
g. The evidence should be suffi cient and appropriate rather than âadequateâ
(third paragraph under auditorâs responsibility).

Reviewerâs Comments
Comment Is
Correct (yes or no)
h. The opinion should not include âin all material respectsâ since the auditors
are providing an opinion on the accuracy of the fi nancial statements
(opinion paragraph).
i. The opinion should be on âaccounting principles generally accepted in the
United States of America,â 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.

blushcrocodile696

ACC 521 Study Guide - Final Guide: Financial Audit, Cash Flow Statement, Audit Evidence

Document Summary

Get access

Related Documents

ACC 521 Study Guide - Final Guide: Audit Evidence, Deferral, Risk Assessment

ACC 521 Study Guide - Final Guide: Financial Audit, Audit Evidence, Financial Statement

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

Related Questions