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Auditing a risk based approach to conducting a quality audit 9th edition Karla Johnstone, Audrey Gramling, Larry Rittenberg - Solutions

TRUE-FALSE QUESTIONS1. The auditor should provide an opinion on the financial statements only if the opinion indicates that the financial statements are fairly stated in all material respects.2. The auditor's opinion should be provided in a written report.3. The audit opinion for a U.S. public
TRUE-FALSE QUESTIONS1. The primary reason for issuing an adverse audit opinion is that the client's financial statements contain a pervasive and material unjustified departure from GAAP.2. An adverse opinion would contain language indicating that the financial statements are not presented fairly
MULTIPLE-CHOICE QUESTIONS1. Which of the following statements is false regarding audit reporting?a. The auditor's opinion should be expressed in a written report.b. The auditor should provide an opinion in accordance with the auditor's findings or state that an opinion cannot be expressed.c. The
MULTIPLE-CHOICE QUESTIONS1. In which of the following circumstances would an auditor be most likely to express an adverse opinion on a company's financial statements?a. Information comes to the auditor's attention that raises substantial doubt about the company's ability to continue as a going
Why is the audit report important to the audit opinion formulation process?
What are the requirements of the AICPA's Principles 1 and 7 regarding audit reporting?
List the components of a standard unqualified audit report for a U.S. public company.
Identify the primary difference in auditor reporting terminology between AU-C 700 and ISA 700.
What words and phrases in an unqualified audit report imply that there is a risk that the audited financial statements may contain a material misstatement?
Under what circumstances might the auditor choose not to refer to other auditors who worked on a part of the audit? How do the requirements differ under international auditing standards?
The accounting and auditing literature discusses several different types of accounting changes. For each of the changes listed below (a. through e.), indicate whether the auditor should add a paragraph to the audit report, assuming that the change had a material effect on the financial statements
Various types of accounting changes can affect the auditor's report.a. Briefly describe the rationale for having accounting changes affect the auditor's report and the auditor's responsibility in such cases.b. For each of the changes listed below (1. through 8.), indicate the type of change and its
Under what circumstances must the audit report refer to the consistency, or the lack of consistency, in the application of GAAP? What is the purpose of such reporting?
On February 28, 2014, Stu & Dent, LLP completed the audit of Shylo Ranch, Inc. (a public company) for the year ended December 31, 2013. A recent fire destroyed the accounting records concerning the cost of Shylo's livestock. These were the only records destroyed.The auditors are unable to obtain
What is the nature of the qualification of the audit report for Honda Motor Company? How was the audit report modified?
Identify the basic types of audit reports other than a standard unqualified audit report and explain the circumstances under which each type of report is appropriate.
The following table outlines various scenarios in which an auditor will determine the appropriate audit opinion to issue. Note that the auditor's professional judgment about the nature of the matter giving rise to the modification and the pervasiveness of its effects or possible effects on the
Audit situations 1, through 8, presented below describe various independent factual situations an auditor might encounter in conducting an audit. List A represents the types of opinions the auditor ordinarily would issue, and List B represents the report modifications (if any) that would be
Each of the following phrases (1. through 5.) is from a paragraph in an auditor's report. Assume that except for the information indicated in the phrase, the report would have been a standard unqualified report. Select from the following list (a. through d.) the most likely report for the indicated
Assume that you are in a situation where you had doubts about your client's ability to continue as a going concern. Further, assume you have decided that, after performing all the required audit procedures, you can issue an unqualified opinion but need to modify the audit opinion to indicate
Identify the conditions under which an auditor would modify the opinion on ICFR (for situations other than the presence of a material weakness).
The SEC issued Accounting and Auditing Enforcement Release (AAER) No. 2393 on March 8, 2006. The Enforcement Release related to the matter of Michael B.Johnson and Michael Johnson & Co. and concerns the audits of Winners. The following facts about Johnson and Co.'s audit of Winners are included in
Review the audit report of Coca-Cola in Panel A of Exhibit 15.1. Obtain a copy of the audit report in the 2011 Annual Report of 3D Diagnostic Imaging plc, which is available at www.3ddiagnosticimaging.com/ assets/Documents/AnnualReport30June2011.pdfa. Describe key differences between the audit
Locate and read the article listed below and answer the following questions.Blay, A. D., M. A. Geiger, and D. S. North. 2011. The auditor's going-concern opinion as a communication of risk. Auditing: A Journal of Practice and Theory 30 (2): 77-102.a. What is the issue being addressed in the
Locate and read the article listed below and answer the following questions.Krishnan, J., Raghunandan, K., & Yang, J. S. 2007. Were former Andersen clients treated more leniently than other clients? Evidence from going-concern modified audit opinions. Accounting Horizons 21 (4): 423-435.a. What is
Ford 10-K or Annual Report 1. What type of audit report did PricewaterhouseCoopers LLP issue for Ford?2. What type of audit report did PricewaterhouseCoopers LLP issue for Toyota?Toyota 20-F or Annual Report 3a. What are the advantages to Ford and Toyota of using the same audit firm?3b. Why might
What conditions must be present for an auditor to be able to issue a standard unqualified audit report similar to the ones presented in Exhibit?
Review Exhibit and identify the timing requirements for U.S. public companies to file audited financial statements with the SEC.In Exhibit SEC Reporting RequirementsSize of Filer Form 10-K (Annual Report)Large accelerated filer—Market capitalization greater than $700 million
How would the auditor’s opinion differ if the financial statements of a company that was a foreign private issuer were prepared in conformity with IFRS and filed with the SEC rather than prepared in conformity with U.S. GAAP?
When a client has a justified departure from GAAP, how should the auditor modify the audit report?
Provide examples of matters that auditors may choose to emphasize when issuing an unqualified opinion.
Identify the situations in which an auditor issues a qualified opinion.
You are a senior auditor working for Fuhremann & Fuhremann, CPAs. Your staff assistant has drafted the following audit report of a publicly traded U.S. company. You believe the scope limitation is significant enough to qualify the opinion, but not to disclaim an opinion. Identify the
In what situations would an auditor issue an adverse opinion?
What is the purpose of a disclaimer of opinion? In what situations would an auditor issue a disclaimer of opinion?
The following are independent audit situations for which you are to recommend an appropriate audit report. For each situation listed as 1. through 6. below identify the appropriate type of audit report from the list below (a. through f.) and briefly explain the rationale for selecting the
In September 2008, XL Leisure Group, Britain's third-largest tour operator, filed for bankruptcy. A few months prior to filing for bankruptcy, the company had issued its audited financial statements. Neither the financial statements nor the auditor's opinion contained any explicit warning that
Obtain the 2012 10-K Annual Report for Overland Storage, Inc. (OVRL). Refer to Note 1 on page F-7. Based on management’s discussion in the note, what type of audit report did Overland’s audit firm likely issue? In this situation, what options did the audit firm have?
The current audit report format has been criticized for its lack of useful and complete information. Over the past several years, investors, regulators, and auditors have debated the need for changes to the standard audit report.a. Describe the basic information that is included in an audit
TRUE-FALSE QUESTIONS1. Complex auditing judgments and decisions often involve accounts that require subjective estimates by management.2. The inventory account does not require any subjective estimates by management.3. Auditors make materiality assessments to help in planning the audit evidence to
TRUE-FALSE QUESTIONS1. Because of conservatism considerations, auditors should allow a client to overestimate its reserve for restructuring.2. U.S. accounting standards require organizations to use a two-step process to determine the impairment of goodwill.3. An audit of Level 1 assets is likely to
MULTIPLE-CHOICE QUESTIONS1. Complex judgments are found in what types of accounts?a. Asset accounts.b. Liability accounts.c. Income statement accounts.d. All of the above.2. Which of the following statements is true about accounts requiring management estimates?a. Because these accounts are
MULTIPLE-CHOICE QUESTIONS1. Which of the following might require an auditor to rely on a specialist to obtain sufficient appropriate evidence related to acquisitions?a. The acquired organization has assets that may have been impaired.b. The acquired organization has environmental liabilities
Is it reasonable for the auditor to make judgments about the acceptability of subjective estimates made by the client? If yes, explain the process by which an auditor should make such judgments.
Are inventory, accounts receivable, and property, plant, and equipment subject to fair value estimates? Explain and state how the fair value concept is applicable to these accounts.
Review Exhibit and identify balance sheet accounts requiring subjective judgments and describe the nature of those judgments.
What factors make materiality decisions complex and judgmental?
Should the materiality of misstatements be considered individually or combined to be considered in aggregate with other misstatements when considering whether the financial statements are misstated? When is a misstatement considered clearly trivial?
When might a quantitatively small misstatement be considered material?
Staff Accounting Bulletin (SAB) No. 108 articulates guidance on applying the dual approach to evaluating uncorrected misstatements.Under the dual approach, a misstatement must be corrected if it is material (using guidelines established in SAB No. 99) under either the rollover method or the iron
Assume that a client has a recurring late cutoff error. Prior-year sales included $10 million of current-year sales, and current-year sales include $12 million of next year sales.a. What is the misstatement under the (a) rollover method and (b) the iron curtain method?b. Now assume that the client
Assume that an auditor finds a material misstatement regarding the financial statements while performing substantive tests of the account balance. More important, the auditor concludes that the misstatement involved the misapplication of an accounting principle to achieve a desired financial
During the course of auditing year-end financial statements, the auditor becomes aware of misstatements in a company's financial statements. When combined, the misstatements result in a 4% overstatement of net income and a $0.02 (4%) overstatement of earnings per share. Because no item in the
An often contentious area of discussion between the auditor and the client is the preciseness with which an estimate is to be made, for example, an estimate of the warranty liability of an automotive manufacturer.a. Scenario: Your client argues that because an estimate is subjective, the range for
Describe the significant estimates that must be made with the following liability accounts.a. Warranty reservesb. Pension obligationsc. Postemployment benefit liabilities other than pensions
Explain how WorldCom used restructuring reserves (liabilities) to fraudulently manipulate reported earnings.
Does the auditor always need to engage another independent specialist to test the work of the specialist hired by the company to determine the value of the tangible and intangible assets other than goodwill? Explain, incorporating the idea of the importance of auditor professional skepticism.
What is fair value? When are fair value concepts applied?
Fair value guidance suggests that there may be three levels of evidence available to assess fair value. Explain the nature of Level 1, Level 2, and Level 3 fair value estimates and the type of information the auditor needs to evaluate each type.
Assume the company's stock price goes down in a bear market that occurs at the end of the year. However, the stock price more than doubles in the next year. The company recognized goodwill impairment at the end of the year when the stock price was low. Because the market decline was temporary,
Assume that in 2013, Nelson Communications purchased a controlling interest in Telnetco that resulted in goodwill in the 2013 consolidated financial statements of $4,500,000. There are no other intangible assets. Telnetco continues to be listed on NASDAQ. Near the end of 2014, Nelson estimated that
Assume that Sun, Inc. had identified a potential write-down of at least $1.8 billion related to a reporting unit.a. What is a reporting unit? How does Sun determine what constitutes a reporting unit for the purpose of determining a goodwill impairment?b. Explain how the market value of the firm as
In what ways do some of the newer types of financial instruments differ from traditional financial instruments? What additional risks are associated with such securities?
What are the major factors the auditor should consider when evaluating an internal control deficiency to determine if it is a material weakness, or a significant deficiency?
An important judgment made on an integrated audit is determining whether deficiencies in internal control are material weaknesses, significant deficiencies, or are just control deficiencies.Explain the way in which the following factors influence how a control deficiency is classified:a. Weakness
For what types of assertions and accounts can the external auditor rely on work performed by a client's internal audit function? Are there accounts and assertions where the external auditor would likely not rely on the work performed by a client's internal audit function? Explain.
What factors does an external auditor consider when assessing the competence of the internal audit function and quality of work performance of a client's internal audit function?
SEC Accounting and Auditing Enforcement Release No. 904 describes KPMG's 1993 audit of Structural Dynamics Research Corporation (SDRC). The AAER describes SDRC as a client that inflated revenues and earnings by recognizing both premature and fictitious revenue. The following excerpt from the AAER
In June 2008, the PCAOB issued its report on the 2007 inspection report on Pricewaterhouse-Coopers LLP (see PCAOB Release No. 104-2008-125). For one of PricewaterhouseCoopers' clients (referred to as "Issuer A" in the PCAOB's inspection report), the PCAOB noted the following:In determining the fair
Using information at the Web site of the IIA, describe the requirements for becoming a CIA. Also identify other certifications offered by the IIA and discuss the importance of these additional certifications.
Locate and read the article listed below and answer the following questions.Moehrle, S. R. 2002. Do Firms Use Restructuring Charge Reversals to Meet Earnings Targets? The Accounting Review 77 (2): 397–413.a. What is the issue being addressed in the paper?b. What are the findings of the paper?c.
Locate and read the article listed below and answer the following questions.Seong-Yeon, C, R. C. Hagerman, N. Sandeep, and E. R. Patterson. 2003. Measuring Stockholder Materiality. Accounting Horizons 17: 63–76.a. What is the issue being addressed in the paper?b. What are the findings of the
Locate and read the article listed below and answer the following questions.Brandon, D. M. November 2010. External Auditor Evaluations of Outsourced Internal Auditors. Auditing: A Journal of Practice & Theory 29 (2): 159–173.a. What is the issue being addressed in the paper?b. What are the
Ford 10-K or Annual Report1. One of Ford's most significant liabilities concerns pensions and other postretirement benefits. What is the nature of estimates required to value these liabilities? What risks do these estimates pose for the audit firm?2. Read Ford's MD&A disclosures concerning
1a. Some common numerical thresholds and benchmarks for overall materiality judgments are 5% of net income and 1% of assets. The materiality level at which items are considered clearly trivial-a materiality level where the auditor believes errors below that level would not, even when aggregated
Dr. Frank Benford, a physicist at General Electric in the 1920s, found that the first and second digits of many populations of numbers occur with a fairly consistent frequency. This has been found true, for example, of census numbers and certain accounting populations, such as accounts payable.
Auditors need to determine appropriate benchmarks in setting overall materiality. What would be an appropriate benchmark for a profit-oriented entity or an entity whose debt or equity securities are publicly traded? A not-for-profit entity? An asset-based entity such as a mutual fund?
Panzero Bread is a major retailer of specialty sandwich items and baked goods. The following information representsThe auditor of Panzero Bread identifies the company as a client With high audit risk and has set the posting thresholds for individual accounts at 10% of overall financial statement
Refer to the previous problem. Use the framework for professional decision making from Chapter 4 to make a recommendation about how the auditor should resolve the dispute with management regarding whether or not to correct the misstatement. Recall that the framework is asfollows:
What are the differences between the rollover method and the iron curtain method in terms of evaluating uncorrected misstatements?
Why is it important to assess whether potential misclassifications in the statement of cash flows are material?
Assess each deficiency described below and determine whether it should be classified as a control deficiency, significant deficiency, or material weakness. Consider each deficiency separately.Be able to support your answer. For scenario (c), specifically discuss the importance of professional
What is objectivity as it relates to the internal audit function? What factors does an external auditor consider when assessing the objectivity of a client's internal audit function?
AS 5 encourages the external auditor to consider the work of the internal audit in accumulating audit evidence when performing an integrated audit of internal control and financial statements.a. What information does the external auditor use to assess the internal auditor's objectivity?b. Can the
TLD CPAs is performing the audit of REDTOP Sports. You are on the external audit team for that engagement. Following is some information about the client and its internal audit function. After reviewing this information, you will be asked to assess the quality of the internal audit function and
Read the PCAOB enforcement case against Christopher E. Anderson (PCAOB Release No. 105-2008-003, available at www.pcaob.org). Among the PCAOB's findings is that the audit partner, Anderson, changed materiality during the engagement.In part, the enforcement case notes that Anderson was a Deloitte
Do an Internet search on the terms restructuring and goodwill impairment. For each search term, locate one public company that is experiencing this issue. Next, locate each company's most recent 10-K or annual report. Be prepared to discuss the following: (a) the company name and its industry, (b)
The advent of sophisticated financial instruments has dramatically changed the nature of investing during the past decade. Many financial instruments offer potentially greater returns for the investor but at higher levels of risk.a. Review the FASB's discussion on financial instruments, or a
TRUE-FALSE QUESTIONS1. The terms attestation engagement and assurance engagement refer to the same concept; the difference in terminology occurs because the first term is used by the IAASB and the second term is used by the AICPA.2. Assurance engagement risk is the risk that the practitioner
TRUE-FALSE QUESTIONS1. When planning and performing an engagement of the audit of special-purpose financial statements, the auditor is not required to obtain an understanding of the entity's selection and application of accounting policies.2. An appropriate description of findings in an agreed-upon
MULTIPLE-CHOICE QUESTIONS1. Which of the following are examples of the subject matter of an attestation engagement?a. Prospective financial information.b. Physical characteristics, such as the square footage of facilities, or processes within facilities.c. Historical events, such as the price of a
MULTIPLE-CHOICE QUESTIONS1. Refer to Exhibit, which provides an overview of reporting requirements for special-purpose financial statements. In which of the following situations would the practitioner include an emphasis-of-matter paragraph alerting readers about the preparation in accordance with
Provide examples of the subject matter of an assurance engagement.
Refer to Exhibit and describe the relevant roles and the interaction between the parties involved in attestationengagements.
Define the term assurance engagement risk and distinguish between reasonable assurance engagements and limited assurance engagements.
Refer to Exhibit and describe the U.S. and international attestation (assurance) standards.
Refer to Exhibit and describe the AICPA's 10 general, fieldwork, and reporting standards for attestation engagements.Compare and contrast similarities and differences of these standards with the PCAOB's 10 general, fieldwork, and reporting standards for audit engagements as described in Chapter.
Define the objective of a review engagement, and explain how a review differs from a financial statement audit.
Describe the standard procedures for conducting a review.
Review Exhibit, which provides an example of a standard review report. Discuss the content and purpose of each of the main paragraphs in the report.

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