Simulation 1

Question 1

What is a communication requirement with respect to audit firms?

Answer 1

Registered firms must report to the audit committee the critical accounting policies and practices used.

Question 2

Under which circumstances requires modification of the accountant’s report on a review of interim financial information of a publicly held entity prepared on the basis of generally accepted accounting principles?

Answer 2

Departures from GAAP (including inadequate disclosure) require modification of the review report.

Question 3

Which procedures would the auditor use to audit retained earnings?

Answer 3

Analyze the retained earnings account since the last audit.

Question 4

List outside parties an auditor may disclose irregularities to.

Answer 4

1. The SEC when the client reports an auditor change.
2. A successor auditor when the successor makes appropriate inquiries.
3. A government funding agency from which the client receives financial assistance.

Question 5

When an auditor qualifies an opinion for a nonissuer due to a scope limitation, the auditor should modify the section(s) of the report related to

Answer 5

A scope limitation resulting in a qualified opinion requires modification of both the Basis for Qualified Opinion and Opinion sections of the auditor’s report.

Question 6

A report includes the following language, “This report is intended solely for the information and use of the board of directors and management of X Company, and is not intended to be and should not be used by anyone other than the specified parties.” This report would most likely relate to which of the following engagements?

Answer 6

A report on a client’s compliance with a regulatory requirement, assuming the report is prepared based on a financial statement audit of the complete financial statements.