ACC 451 Lecture Notes - Lecture 18: Financial Statement, Retained Earnings, Internal Control

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tanhyena210

3 Aug 2020

School

Ball State University

Department

Accounting

Course

ACC 451

Professor

Reichle

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Document Summary

Audit report on icfr (ics audit: see figure 7-4 for overview, see exhibit 7-1 for management"s report on icfr. Chapter 18 reports on audited financial statements: unqualified (unmodified) opinion, signifies that the entity"s ics is designed and operating effectively as of year-end (no material weaknesses, see exhibit 7-4. 4. optional explanatory language paragraph: discusses items the auditor wants to draw the readers" attention to, see below for detailed discussion. Chapter 18 reports on audited financial statements. Chapter 18 reports on audited financial statements: disclaimer of opinion in sufficient appropriate evidence to form an opinion on the overall financial statements, see exhibit 18-6. Gaap departure that materially affects the financial statements overall: see exhibit 18-9. Accordingly, we do not express an opinion on the accompanying balance sheet as of december 31, 20xx, and the related statements of income, retained earnings, and cash flows for the year then ended. : overview figure 18-1.

Related Questions

Chapter 15

1. Consider the following statements:

I. For the last several years, both the FinancialAccounting Standards Board (FASB) and the

International Auditing and Assurance Standards Board (IAASB)have been considering possible

changes to the standard unqualified audit report.

II. The audit report is modified to five paragraphs as a resultof another audit firm performing part of

the financial statement audit (Refer to Shared Reporttopic).

a. I is true; II is true

b. I is true; II is false

c. I is false; II is true

d. I is false; II is false

2. Consider the following statements:

I. Inconsistent application of accounting principles is a GAAPviolation and would result in a

qualified or adverse audit opinion.

II. For a change in accounting principles thatmanagement does justify to the auditor, the

auditor will likely choose between a qualified or an adverseopinion.

a. I is true; II is true

b. I is true; II is false

c. I is false; II is true

d. I is false; II is false

3. Consider the following statements:

I. The failure of a client to include a Statement of Cash Flowswill result in the issuance of a

disclaimer of opinion by the auditor.

II. The auditor will issue an unqualified opinionon Internal Controls over Financial Reporting (ICFR)

if the auditor has identified only one material weakness inICFR.

a. I is true; II is true

b. I is true; II is false

c. I is false; II is true

d. I is false; II is false

4. In which of the following instances would an auditor mostlikely issue a standard unqualified opinion

WITH an explanatory paragraph?

a. Management disclosures are missing or inadequate.

b. There is substantial doubt about the entityâs ability tocontinue as a going-concern.

c. There is a significant limitation on the scope of theengagement.

d. There is an immaterial deviation from GAAP related tocapitalizing repairs.

5. Which one of the following is an example of the contents ofan opinion paragraph found in an audit

report?

a. âWe have audited â¦â

b. âNothing came to our attentionâ¦â

c. âThe financial statements referred to above present fairlyâ¦â

d. âAn audit includes examining, on a test basis â¦â

6. A client company has a history of negative cash flow trendsand continuing losses. What would this

seem to involve?

a. GAAP problem

b. Going concern.

c. Lack of consistency.

d. Lack of independence.

7. An audit of the Flagler Company, a diamond mining company,brings to light the fact that its

equipment has been marked up to the ownersâ expectation ofmarket values. Such a situation will

most likely result in which type of report?

a. Disclaimer.

b. Review.

c. Adverse.

d. Unqualified, with explanatory paragraph.

8. In which of the following instances would an auditor issue adisclaimer of opinion?

a. Lack of consistency.

b. GAAP problem.

c. There is a significant limitation on the scope of theengagement.

d. The principle auditor decides to make reference to anotherauditor who has issued an unqualified

audit report.

9. When might an auditor modify the introductory paragraph andreplace the scope paragraph with an

explanatory paragraph? The ANSWER is A.

a. When a pervasive scope limitation exists.

b. When there is substantial doubt about going-concern.

c. When the auditor lacks independence.

d. When there is an emphasis of a matter.

aquamarineeagle546

For each of the following independent situations relating to theaudit of ICFR, indicate the reason for and the type of audit reportyou would issue.
a. During the audit of Wood Pharmaceuticals, you are surprised tofind several control deficiencies in the entity's internal control.You determine that there is a reasonable possibility that any oneof them could result in a misstatement that is significant.Although the odds are extremely low that the deficiencies, singlyor taken together, will result in a material misstatement of theentity's financial statements, the large number of problems causesyou concern. Management's written assessment concludes that theentity's ICFR was effective as of the report date.
b. You agreed to perform an audit for Rodriguez & Co., afterthe entity's year- end. Due to time constraints, your audit firmcould not complete a full audit of ICFR. However, the evidence youdid collect suggests that the entity has exceptionally strong ICFR.You seriously doubt that a material weakness would have been foundif time had permitted a more thorough audit. Management's writtenassessment concludes that the entity's ICFR was effective as of thereport date.
c. George & Diana Company's internal audit function identifieda material weakness in the entity's ICFR. The entity corrected thisweakness about four months prior to the end of the annual reportingperiod. Management reassessed controls in the area and found themeffective. After reevaluating and retesting the relevant controls,you believe the controls to have been effective for a sufficientperiod of time to provide adequate evidence that they were designedand operating effectively as of the end of the entity's reportingperiod. Management's written assessment concludes that the entity'sinternal control was effective as of the report date.
d. Reynolds Distilleries identified what you agree is a materialweakness and made an adverse assessment in its report on ICFR. Theentity had not corrected the material weakness as of the end of thereporting period.
e. Cindy & David Company's management identified a materialweakness in the entity's ICFR during its assessment process. Theentity corrected this weakness about a month prior to the end ofthe annual reporting period. Management reassessed controls in thearea and believes they were effective as of the end of thereporting period. After reevaluating and retesting the relevantcontrols, you agree that the new controls are well designed, butsince the controls over this particular area are applied only onceat the end of each month (i. e., the controls have only operatedtwo times since being corrected), you do not believe you havesufficient audit evidence to assess their operating effectiveness.Management's written assessment concludes that the entity'sinternal control was effective as of the report date.
f. During the audit of ICFR for Big Al & Larry Industries, youdiscover several control deficiencies. You determine that there ismore than a reasonable possibility that any one of them couldresult in a financial statement misstatement. Although you do notbelieve that any of the deficiencies taken individually will resultin a material misstatement, you believe there is a moderately lowlikelihood that, taken together, the deficiencies could produce amaterial misstatement. Management's written assessment concludesthat the entity's internal control was effective as of the reportdate

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.

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ACC 451 Lecture Notes - Lecture 18: Financial Statement, Retained Earnings, Internal Control

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