Chapter 16 -- Reports (Other Modifications)

Question 1

Section 16.1: Group Audits and Component Auditors

When should a component auditor be mentioned in a group audit engagement?

Answer 1

• The component auditor is mentioned when the engagement partner does not take responsibility of the component auditor’s work.
• The component auditor’s conclusion is reported in the Opinion section of the report.

Question 2

Section 16.1: Group Audits and Component Auditors

What are the responsibilities of the group engagement team in regard to the component auditor?

Answer 2

• The group engagement team should have an understanding of the component auditor’s professional competance and compliance with ethical requirements.
• Confirm that the component auditor meets the same ethical requirements as the group engagement team.

Question 3

Section 16.1: Group Audits and Component Auditors

How is the component auditor’s work reported with the Group engagement partner assumes responsibility for the work?

Answer 3

• The component auditor is not referred to in the report of the group financial statements.
• The group engagement team should either audit the component directly or have the component auditor audit the information.

Question 4

Section 16.1: Group Audits and Component Auditors

What are the responsibilities of the group engagement partner?

Answer 4

• The engagement partner is assigned by the firm.
• The engagement partner is responsible for the group engagement, its performance and the report on the group statements.

Question 5

Section 16.1: Group Audits and Component Auditors

What are the objectives of a group engagement partner?

Answer 5

• Determine whether to refer to the component auditor’s report.
• Communicate with the component auditor or other auditors
• Obtain sufficient appropriate evidence about the financial information of the components and the consolidation process.

Question 6

Section 16.1: Group Audits and Component Auditors

What are the factors to act as a group auditor?

Answer 6

• The financial signficance of the individual components
• The significant risk of material misstatement of the group statements from assuming responsibility for the components
• The group engagement team’s knowledge of the overall financial statements

Question 7

Section 16.1: Group Audits and Component Auditors

What is the responsibility of a group auditor when a component financial statement audit is based on the equity method?

Answer 7

• The group auditor should obtain the component auditor’s audited financial statements.
• The group auditor should make inquiries regarding the component auditor’s professional reputation and independence.

Question 8

Section 16.1: Group Audits and Component Auditors

What if the component auditor does not meet the requirements of the group engagement team?

Answer 8

• The group engagement may decide not to assume responsibility for the component auditor’s work.
• Refer to the component auditor’s report. The group engagement report can be an unmodified opinion if the component auditor’s report is referenced in the group report.

Question 9

Section 16.1: Group Audits and Component Auditors

What is component materiality?

Answer 9

• Component materiality is lower than the materiality for the group statements.
• The purpose of component materiality is to reduce the risk that the sum of uncorrected and undetected misstatements in the component is greater than the materiality of the group as a whole.

Question 10

Section 16.2: Consistency of Financial Statements

How is a change in accounting principle reported in the auditor’s report of comparative financial statements?

Answer 10

• If the auditor concurs with the change, a separate paragraph is required
• If the effect of the change is not material to the financial statements, then the change is not referred to in the auditor’s report

Question 11

Section 16.2: Consistency of Financial Statements

What are the criteria to report a change in accounting principle reported in the auditor’s report of comparative financial statements?

Answer 11

• The new principal and the method of accounting are in accordance with the reported framework.
• Appropriate disclosures are made
• The entity has justified that the change is preferable.

Question 12

Section 16.2: Consistency of Financial Statements

How is a change in accounting principle reported if the change in principle is not material to the financial statements?

Answer 12

If a change in principle is not material to the financial statements, then the auditor does not refer to the change in the current-year report.

Question 13

Section 16.2: Consistency of Financial Statements

How is a change in accounting principle reported if the change in principle is material to the financial statements?

Answer 13

If a change in principle is material to the financial statements:
* The change is reported in the emphasis-of-matter paragraph.
* The paragraph includes describes the change in principle
* Refers to the entity disclosure
* Indicates that the opinion is not modified with regard to the matter emphasized.

Question 14

Section 16.2: Consistency of Financial Statements

What is the process when the segments use different accounting principles?

Answer 14

• If multiple segments use different accounting principles, the difference is not a consistency issue.
• If the use of different methods is appropriate, then the auditor will issue an unmodified opinion.

Question 15

Section 16.2: Consistency of Financial Statements

How is a material change in estimate reported if it is inseparable from a change in accounting principle?

Answer 15

• The change is reported prospectively as a change in principle.
• The change is recognized in the auditor’s report as to consistency.
• If the change results prior period adjustments that will cause material misstatement in prior financial statements, then the opinion will be either qualified or adverse.

Question 16

Section 16.3: Uncertainties and Going Concern

How is a going concern reported in the auditor’s report?

Answer 16

• A separate paragraph is included in the auditor’s report titled “Substantial Doubt about the Entity’s Ability to Continue as a Going Concern”
• The section does not use conditional language (i.e. “If the assets were reported…”)
• The substantial doubt is not a basis for a qualified or adverse opinion.
• If there is material uncertainty, then a disclaimer of opinion may be reported.

Question 17

Section 16.3: Uncertainties and Going Concern

What would cause a modification to a report regarding a going concern?

Answer 17

• The report may be modified if the going concern is material and not adequately disclosed in the financial statements.
• This may result in a qualified or adverse opinion.
• A disclaimer of opinion will occur when the auditor cannot obtain sufficient evidence, a scope limitation, as to the going concern.

Question 18

Section 16.4: Comparative Financial Statements

What are the responsibilities of a predecessor auditor in regard to comparative financial statements?

Answer 18

• Read the current period’s financial statements
• Compare the prior year financial statements with the current year
• Obtain a representation letter from the current auditor
• Obtain a representation letter from management

Question 19

Section 16.4: Comparative Financial Statements

In comparative financial statements, what is reported as it pertains to the precessor auditor’s report in the current year’s auditor report?

Answer 19

• The prior year’s financial statement were auditor by another auditor (do not provide the auditor’s name).
• The date of the report
• The type of opinion expressed
• The reason for any modifications
• The nature of any emphasis-of-matter or other-matter paragraph

Question 20

Section 16.4: Comparative Financial Statements

How does the continuing auditor report on previous financial statements when issuing comparative financial statements?

Answer 20

The auditor updates the report on the previous financial statements, regardless of the opinion previoulsly expressed.

Question 21

Section 16.4: Comparative Financial Statements

What date is used when issuing a report on comparative financial statements?

Answer 21

• The date of the report is based on the most recent audit.
• The auditor dates the report no earlier than the date the auditor obtained sufficient appropriate evidence for the opinion of the most recent audit.

Question 22

Section 16.5: Emphasis-of-Matter and Other-Matter Paragraphs

What is purpose of the Other-Matter paragraph?

Answer 22

• The Other-Matter paragraph is used to enhance the user’s understanding.
• It reports matters that are not required to be presented or disclosed on the financial statements.

Question 23

Section 16.5: Emphasis-of-Matter and Other-Matter Paragraphs

What is the purpose of the Emphasis-Of-Matter paragraph?

Answer 23

• The Emphasis-of-Matter paragraph is used to enhance the user’s understanding of matters that are already presented or disclosed on the financial statements.
• It is necessary to draw the attention to the matter.
• The matter is appropriately presented and disclosed in the financial statements.

Question 24

Section 16.5: Emphasis-of-Matter and Other-Matter Paragraphs

What is included in the Emphasis-Of-Matter paragraph?

Answer 24

• An event that has, or will have, a significant effect on the entity’s financial position (i.e. a departure from GAAP to prevent missleading reports).
• A material change in an accounting principle occurs
• An uncertainty related to a future outcome (i.e. litigation)
• Significant transactions with related parties
• Unusually important subsequent events
• A major catastrophe that has a significant impact on the financial position

Question 25

# Section 16.5: Emphasis-of-Matter and Other-Matter Paragraphs How are emphasis parapgraphs reported for an issuer (PCAOB)?

Answer 25

Under PCAOB, an emphasis paragraph is * Never required * Not a substitute for Critical Audit Matters (CAM) * Not ereferred to in the opinion section

Question 26

# Section 16.5: Emphasis-of-Matter and Other-Matter Paragraphs How are the prior year's unaudited financial statements presented in comparison with this year's audited financial statements?

Answer 26

An Other-Matter paragraph is used for unaudited prior-period statement.