Faye Jaworski, CPA, is auditing the financial statements of Fulbright Company. As she is nearing the audit completion date, Jaworski realizes that she needs to evaluate whether all material contingencies are properly accounted for and disclosed in Fulbright’s financial statements. Because of its size, Fulbright has retained external counsel (Vinson, LLP) to handle its various legal matters. Required: a. List some common procedures that Jaworski will perform with respect to Fulbright’s litigation, claims, and assessments. b. What are the responsibilities of Jaworski, Fulbright, and Vinson with respect to litigation, claims, and assessments? c. Attorney letters are used to provide corroboration of litigation, claims, and assessments against the client. Briefly describe the process through which attorney letters are prepared, sent, and used in the audit examination. d. What information is normally included in an attorney letter?
> If the auditors decide to present separate reports on the entity’s financial statements and internal control over financial reporting, which of the following should be modified to refer to the other report? Report on Internal Contr
> Which of the following is not included in the standard (unmodified) report on the financial statements? a. An identification of the financial statements that were audited. b. A general description of an audit. c. An opinion that the financial statements
> Company A hired Samson & Delilah, CPAs, to audit the financial statements of Company B and deliver the report to Megabank. Who is the client? a. Megabank. b. Samson & Delilah. c. Company A. d. Company B.
> How is the auditors’ responsibility for expressing the opinion on financial statements disclosed in the standard (unmodified) report for a nonpublic company? a. Stated explicitly in the Auditor’s Responsibility section. b. Unstated but understood in the
> Which of the following is not required by generally accepted auditing standards? a. Written representations. b. Attorney letter. c. Management letter. d. Engagement letter.
> What actions should auditors take if evidence suggests that substantial doubt exists about the client’s ability to continue as a going concern?
> Under which of the following conditions can a disclaimer of opinion never be issued? a. The entity’s going-concern problems are highly material and pervasive. b. The entity does not allow the auditors access to evidence about important accounts. c. The a
> When auditors wish to issue an unmodified opinion but highlight that the entity changed its method of accounting for software development costs, they would most appropriately identify the change in accounting method in which of the following? a. The intr
> What factors may indicate that substantial doubt exists about the client’s ability to continue as a going concern?
> The auditing standards regarding subsequently discovered facts refers to knowledge obtained after a. The date the fieldwork began. b. The date of the auditor’s report. c. The date of the financial statements. d. The date interim audit work was complete.
> For each of the following departures from GAAP, indicate the type of opinion that the auditors would issue as well as any modifications that would be made to the standard (unmodified) report. a. A departure that had an immaterial effect on the financial
> The concepts of materiality and pervasiveness are important to auditors in examinations of financial statements and expressions of opinion on these statements. Required: How will materiality influence auditors’ reporting decisions in the following circu
> In December of the current year, Williams Company changed its method of accounting for inventory and cost of goods sold from LIFO to FIFO. The account balances shown in the trial balance have already been recalculated and adjusted retroactively as requir
> On January 1, Graham Company purchased land (the site of a new building) for $100,000. Soon thereafter, the state highway department announced that a new feeder road would run next to the site. The effect was a dramatic increase in local property values.
> Gustav Humphreys (chair of the board) and Ingrid VanEns (vice president, finance) prepared the draft of the financial review section of the annual report. You are reviewing it for consistency with the audited financial statements. The draft contains the
> AOW is the group auditor for the December 31, 2017, consolidated financial statements of Ferguson Company and subsidiaries. However, component auditors perform the work on certain subsidiaries for the year under audit amounting to 29 percent of total ass
> AOW has completed the audit of the financial statements of Musgrave Company for the year ended December 31, 2017, and is now preparing the report. AOW has audited Musgrave’s financial statements for several years, but this year Musgrave delayed the start
> Pitts Company has experienced significant financial difficulty. Current liabilities exceed current assets by $1 million, cash has decreased to $10,000, the interest on the long-term debt has not been paid, and a customer has brought a lawsuit against Pit
> One of the great resources for auditors is the SEC’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) system database at www.sec.gov. Public companies file SEC-required documents electronically. The SEC makes this information a
> What are the major differences in the auditors’ report for nonpublic and public entities?
> The following auditors’ report was drafted by Quinn Moore, a staff auditor with Tyler & Tyler, CPAs, at the completion of the audit of the financial statements of Park Publishing Company for the year ended September 30, 2017. The en
> Auditors have a responsibility related to management’s disclosure of new information related to subsequent events until a. The date of the financial statements. b. The date of the auditor’s report. c. The audit report release date. d. The following year’
> Your partner drafted the following auditors’ report yesterday. You need to describe the reporting deficiencies, explain the reasons for them, and discuss with the partner how the report should be corrected. You have decided to prepare a
> Following is Rex Wolf’s report on Bonair Corporation’s financial statements. Bonair publishes general-purpose financial statements for distribution to owners, creditors, potential investors, and the general public. R
> An assistant drafted the following auditors’ report at the completion of the audit of Cramdon Inc. on March 5, 2018. The partner in charge of the engagement has decided the opinion on the 2017 financial statements should be modified onl
> The board of directors of Cook Industries Inc. engaged Brown & Brown, CPAs, to audit the financial statements for the year ended December 31, 2017. Required: Identify the deficiencies in the following draft of the report. Do not rewrite the report.
> On September 23, 2018, Betsy Ross drafted the following report on Continental Corporation’s financial statements. Required: List and explain the deficiencies and omissions in the report prepared by Ross on Continental Companyâ&#
> For each of the following situations, indicate the type of opinion(s) that auditors could issue (more than one opinion may be appropriate in each circumstance). Unless otherwise noted, assume that no departures from GAAP were identified in the audit enga
> Assume that Stanford CPAs encountered the following issues during its various audit engagements in 2017: 1. It conducted the audit of Luck, a new client this past year. Last year, Luck was audited by another CPA, who issued an unmodified opinion on its f
> Central City was involved in litigation brought by Mexican American Legal Defense and Educational Fund (MALDEF) over the creation of single-member voting districts (which require candidates to receive only the highest number of votes, even if not a major
> Distinguish between client-imposed scope limitations and circumstance-imposed scope limitations. Which of these scope limitations is generally of more concern to auditors?
> Omega Corporation is involved in a lawsuit brought by a competitor for patent infringement. The competitor is asking $14 million actual damages for lost profits and unspecified punitive damages. The lawsuit has been in progress for 15 months, and Omega h
> For each of the following independent situations, describe the most appropriate course of action that the auditors should take. a. Drew Allison is conducting the audit of Anderson Inc. as of December 31, 2017. At the beginning of the evidence gathering,
> A. Griffin audited the financial statements of Dodger Magnificat Corporation for the year ended December 31, 2017. She completed gathering sufficient appropriate evidence on January 30 and later learned of a stock split voted by the board of directors on
> Jay Ralph completed the December 31, 2017, audit of Raider Company on February 3, 2018; Raider’s financial statements and Ralph’s reports on Raider’s financial statements and internal control over financial reporting were released on February 12, 2018. D
> The following are independent situations that have occurred in your public accounting firm, Arthur Hurdman: Case 1 During the internal inspection by a regional office of Arthur Hurdman, one of its clients, Wildcat Oil Suppliers, was selected for review.
> On June 1, Sidney Faultless of A. J. Faultless & Co., CPAs, noticed some disturbing information about the firm’s client, Hopkirk Company. A story in the local paper mentioned the indictment of Tony Baker, whom Faultless knew as the assistant controller a
> In connection with your examination of the financial statements of Olars Manufacturing Corporation for the year ended December 31, your post balance-sheet substantive procedures disclosed the following items: 1. January 3. The state government approved a
> You are in the process of completing the gathering of sufficient appropriate evidence for Top Stove Corporation, a company engaged in the manufacture and sale of kerosene space heaters. To date, there has been every indication that the financial statemen
> Crankwell Inc. is preparing its annual financial statements and annual report to stockholders. Management wants to be sure that all of the necessary and proper disclosures have been incorporated into the financial statements and the annual report. Two cl
> Michael Ewing is auditing the financial statements of Dallas Company for the year ended December 31, 2017. In concluding the process of gathering sufficient appropriate evidence, Ewing has asked to meet with his supervisor on the audit (John Ross) to dis
> How is the auditors’ standard (unmodified) report modified for qualified or adverse opinions issued as a result of departures from GAAP?
> From the “Inspections” section of the PCAOB’s website, access the most recent inspection reports for each of the Big Four firms (Deloitte, EY, KPMG, and PwC). Each inspection report contains the following information: An introductory preface. Inspection
> Officers of Richnow Company do not wish to disclose information about a product liability lawsuit filed by a customer seeking $500,000 in damages. They believe the suit is frivolous and without merit. Outside counsel is more cautious. The auditors insist
> The following subsequent event was disclosed in Dole Food Company’s 2009 annual report: Note 24: Subsequent Event On February 27, 2010, a significant earthquake struck the country of Chile. Although Dole’s Chilean operations resumed business after the e
> Subsequent knowledge of which of the following would cause the entity to adjust its December 31 financial statements? a. Sale of an issue of new stock for $500,000 on January 30. b. Settlement of a damage lawsuit for a customer’s injury sustained Februar
> Pat Colt is auditing the financial statements of Manning Company. The following is a summary of the uncorrected misstatements that Colt has identified during the past three years. These misstatements are immaterial and have related to isolated matters. I
> During the conduct of an audit, auditors may identify misstatements as a result of the completion of their substantive procedures. An important activity performed in the completion stages of the audit is considering the materiality of misstatements ident
> Aaron Rivers, CPA, is auditing the financial statements of Charger Company, a client for the past five years. During past audits of Charger, Rivers identified some immaterial misstatements (most of which relate to isolated matters and do not have common
> The firm of Cole & Cole, CPAs, is auditing the financial statements of Consolidated Industries Co. for the year ended December 31, 2017. On March 6, 2018, C. R. Brown, Consolidated’s chief financial officer, gave the auditors a draft of an attorney lette
> Classify each of the following issues according to whether they will be (1) included in written representations in all audits, (2) included in written representations in audits of public entities (under PCAOB standards), or (3) not included in written re
> If the entity is subject to PCAOB requirements regarding communication about control deficiencies (AS 1305), what written representations should auditors obtain from the client with respect to internal control over financial reporting?
> Each of the following statements is a communication from management. Indicate whether the inclusion of each statement in written representations is appropriate. Provide your rationale for any statements whose inclusion in written representations is not a
> During the audit of the annual financial statements of Amis Manufacturing Inc., the company’s president, Vance Molar, and Wanda Dweebins, the engagement partner, reviewed matters that were supposed to be included in written representations. Amis Manufact
> Hart, an assistant accountant with the firm of Better & Best, CPAs, is auditing the financial statements of Tech Consolidated Industries Inc. The firm’s audit plan calls for the preparation of written representations. Required: a. In an audit of financi
> The scope of an audit is not restricted when an attorney letter limits the response to a. Matters to which the attorney has given substantive attention in the form of legal representation. b. An evaluation of the likelihood of an unfavorable outcome of t
> Which of these substantive procedures is not used to obtain evidence about contingencies? a. Scanning expense accounts for credit entries. b. Obtaining a letter from the client’s attorney. c. Reading the minutes of the board of directors’ meetings. d. Ex
> The primary reason auditors request responses to attorney letters is to provide auditors a. The probable outcome of asserted claims and pending or threatened litigation. b. Corroboration of the information furnished by management about litigation, claims
> Which of the following substantive procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events? a. Recompute a sample of large-dollar transactions occurring after the date of the financial statements for ari
> Which of the following substantive procedures should auditors ordinarily perform regarding subsequent events? a. Compare the latest available interim financial statements with the financial statements being audited. b. Send second requests to the client’
> What is an auditor’s primary method to corroborate information on litigation, claims, and assessments? a. Examining legal invoices sent by the client’s attorney. b. Verifying attorney–client privilege through interviews. c. Reviewing the response from th
> Hall accepted an engagement to audit the year 1 financial statements of XYZ Company. XYZ completed the preparation of the year 1 financial statements on February 13, year 2, and its auditors began the fieldwork on February 17, year 2. Hall completed gath
> What are the major categories of information contained in written representations?
> Which of the following statements is not true with respect to written representations? a. The failure of management to furnish them is a significant scope limitation, resulting in either an adverse opinion or a disclaimer of opinion. b. They should addre
> After the audit report release date, auditors determine that an important auditing procedure was omitted. Which of the following initial courses of action is most appropriate? a. Perform the omitted procedure or an alternative procedure. b. Notify the bo
> Which of the following best describes the role of analytical procedures near the end of the audit engagement? a. To identify possible deficiencies in the client’s internal control over financial reporting. b. To identify accounts that appear to be missta
> When reporting under GAAS, certain statements are required in all auditors’ reports (“explicit”) and others are required only under certain conditions (“implicit”).
> Identify information that auditors are required to communicate to individuals charged with governance of the client.
> What steps should auditors take if, after the audit report release date, they discover that an important audit procedure was omitted?
> Which of the following statements is most likely to be included in an attorney letter? a. “Certain representations in this letter are described as being limited to matters that are material.” b. “If any unasserted claims or assessments are omitted from t
> What is the purpose of dual dating the auditor’s report?
> What are auditors’ responsibilities for subsequently discovered facts if these are identified (a) prior to the audit report release date and (b) following the audit report release date?
> What is an updated report? What is a reissued report?
> In addition to obtaining responses to attorney letters, what other procedures can be used to gather audit evidence regarding litigation, claims, and assessments?
> Identify the two types of subsequent events. How should information about these events be reflected in the financial statements?
> What procedures do auditors perform to identify subsequent events?
> What alternatives are available to auditors for reporting on the financial statements and internal control over financial reporting in the audit of public entities?
> What are some of the benefits of audit documentation review to a public accounting firm?
> What is an engagement quality review?
> Describe the audit documentation review process in a public accounting firm.
> Identify the two methods of evaluating the performance materiality of uncorrected misstatements. What are the requirements of Staff Accounting Bulletin No. 108 for evaluating the performance materiality of these misstatements?
> What is the typical content of attorney letters?
> What are the responsibilities of (a) client management, (b) auditors, and (c) the client’s attorneys with respect to obtaining evidence regarding litigation, claims, and assessments?
> Identify the reports that accompany the financial statements of public entities and nonpublic entities.
> Ambrose is auditing the financial statements of Mays (dated December 31, 2017). The date of the auditor’s report is February 17, 2018, and the audit report release date is February 20, 2018. For which of the following matters would Ambrose have the least
> Identify the four major sections of the auditors’ standard (unmodified) report for a nonpublic entity and the major contents of each section.
> How are analytical procedures used near the end of the audit?
> What are the audit requirements for nonpublic and public entities?
> Identify four primary periods in an audit examination and the tasks and activities that occur in each.
> To whom is the auditors’ report addressed?
> Briefly describe the options and information provided by auditors when engaged to report on (a) summary financial statements and (b) supplementary information?
> What reporting options are available if predecessor auditors examined prior years’ financial statements presented in comparative form?
> Which of the following is ordinarily performed last in the audit examination? a. Securing a signed engagement letter from the client. b. Performing tests of controls. c. Performing a review for subsequent events. d. Obtaining signed written representatio
> If auditors wish to express a different opinion on prior years’ financial statements in the current report than in a previously issued report, how should their current report be modified?
> What is the auditors’ reporting responsibility for (a) other information accompanying the audited financial statements and (b) required supplementary information?
> What is an uncorrected misstatement? What is the auditors’ responsibility for communicating misstatements detected during the audit?
> What are going-concern uncertainties? What is the auditors’ responsibility for evaluating going concern uncertainties?
> What types of matters would result in the auditors’ report being modified for consistency?
> Define emphasis-of-matter and other-matter paragraphs. What type of information do auditors provide in these paragraphs?
> What options are available to group auditors when component auditors are involved in the examination of group financial statements?
