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23 Nov 2019

1. Explain why it is important to understand the accounting and reporting requirements for an area that an auditor will be assigned to audit – use sales and collections as an example. Briefly explain FASB’s revenue recognition standard.

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Revenue is recognized based on a five-step process that is applied to a company's revenue arrangements.

Requirements: 1. Describe the revenue recognition principle. Briefly describe the five-step process.

2. Explain the importance of contracts when analyzing revenue arrangements.

3. How are fair value measurement concepts applied in implementation of the five-step process?

4. Briefly discuss how the revenue recognition principle relates to the definitions of assets and liabilities.

5. In the previous revenue recognition guidance, revenue is not be recognized unless the revenue was realized or realizable (also referred to as collectibility). Is collectibility a consideration in the recognition of revenue? Explain.

6. Revenue is usually recognized at the point of sale (a point in time). Revenue may be also recognized over time. Give an example of the circumstances in which revenue is recognized over time and accounting merits of its use instead of the point-of-sale basis.

You are an audit accountant and you boss asks you the followingquestions

answer For financial audits, generally accepted governmentauditing standards (GAGAS) incorporate AICPA standards. GAGASprescribe additional requirements for reporting on Laws,Regulations, Reporting on Contracts, and Grants InternalControl

Yes No

No No

No Yes

Yes Yes

When reporting on an entity’s internal control over financialreporting in compliance with generally accepted government auditingstandards, an auditor should issue a written report that includesa

Statement of positive assurance that the results of testsindicate that internal control either can, or cannot, be relied onto reduce control risk to an acceptable level.

Statement of negative assurance that nothing came to theauditor’s attention that caused the auditor to believe significantdeficiencies were present.

Description of the scope of the auditor’s testing of internalcontrol.

Description of the material weaknesses and the strengths thatthe auditor can rely on in reducing the extent of substantivetesting.

Reporting standards for financial audits under GovernmentAuditing Standards differ from reporting standards undergenerally accepted auditing standards in that GovernmentAuditing Standards require the auditor to

Present the results of the auditor’s tests of economy andefficiency regarding the use of the entity’s resources.

Describe the scope of the auditor’s tests of compliance withlaws and regulations.

Provide negative assurance that the auditor discoveredno transactions that were indicative of illegalacts.

Provide positive assurance that the entity’s audit committee isadequately informed about the effects of any illegal acts.

An auditor determines that a client who received a federal grantfraudulently reported information to the federal government. Theclient’s management refuses to acknowledge the fraud. Which of thefollowing parties should the auditor contact first?

The recipients of the client’s services.

The state attorney general’s office.

The agency that provided the grant.

The state accountancy board.

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 entity’s 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. “We have audited …”

b. “Nothing came to our attention…”

c. “The financial statements referred to above present fairly…”

d. “An audit includes examining, on a test basis …”

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 owners’ 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.

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