Audit Reports MCQ Part I | Bisk CPA Review AUD #4

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Welcome back to our CPA Review discussion on reporting issues. Now you know that I've assigned six CPA Exam auditing questions that I wanted you to complete before starting this class. If you haven't done that, then shut the class down. Now get your answers before we begin. That's such an important part of this process.

Always get your answers first. Then we discuss the questions. So let's look at number one. Number one says, which of the following representation. Does an auditor make explicitly and which implicitly when issuing an unmodified opinion, how about conformity with gaap? Well, that's explicit, right? In the opinion paragraph, don't we say, in our opinion, the financial statements referred to above, present fairly in accordance with accounting principles, generally accepted in the United States of America.

Can't be more explicit than that. How about. Adequacy of disclosures. That's never said explosively. That's implied. The answer is D. that's implicit because when we say that the financial statements are presented fairly in accordance with us gaap, well, US gaap requires that all disclosures be adequate and complete.

We don't mention disclosures, but gaap requires it. So if the statements are in conformity with the US gaap. Then it is implied that all disclosures are adequate and complete. Number two, when subsequently discovered facts lead to a change in the auditor's opinion, which of the following must be added to the auditor's unmodified opinion?

Well, I hope you went right down to D the basis for an unmodified opinion paragraph. There's no such thing. No such thing as a basis for unmodified opinion paragraph doesn't exist, so hopefully, right away you look at D and said, can't be, and you were right. Now we're left with a, B, and C either an emphasis of matter, paragraph a, B, an other matter paragraph or C, either an emphasis of matter paragraph or an other matter paragraph, and you may remember it is C, this is that case.

Yes, you are required. To have a paragraph about this. Anytime that subsequently discovered facts have led to a change in opinion, you are required to have an added paragraph to the unmodified opinion. It's true, but they leave it to the auditor's judgment. Depending on the level of importance that the auditor places on this item, they can either add an emphasis of matter paragraph or.

An other matter paragraph. It's up to the auditor's judgment. Answer C number three, how does an auditor make the following representations when issuing the standard auditor's report the standard on modified opinion on comparative financial statements? How about the consistent application of accounting principles?

Is that explicit or implicit? Now it's implicit. When we say that the financial statements are presented fairly in accordance with us generally accepted accounting principles. Us generally accepted accounting principles. You is generally accepted. Accounting principles require that us gaap be consistently implied.

We don't, we don't say that gaap was consistently applied. We say that the financial statements were presented. Yeah. Fairly in accordance with us gaap, which requires consistency. So that's implicit. How about the other? The second call auditor considers internal control. Well, that's explicit, isn't it? In the auditor's responsibility paragraph.

Don't we say in the auditor's responsibility paragraph that the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures? That's explicit in the auditor's responsibility. Paragraph number four. If a client makes a change in accounting principle that is inseparable from a change in estimate.

This material event should be handled in the accounting records as a change in, well, you may remember that when there's a change in estimate effected by a change in principle or inseparable from a change in principle in the accounting records, it's handled as a change in estimate. We don't touch prior periods.

Just going forward, we make the change prospective only. That's handled in the accounting records as a change in estimate, as I'm sure you know, but is it a or B, is it in the account? Is it in the accounting records as a change in estimate and the auditor would add an other matter paragraph, or is it be a change in estimate, and the auditor would add an emphasis of matter paragraph?

It's B. It's a required emphasis of matter paragraph.

Number five, the following emphasis of matter paragraph was included in an auditor's report to indicate a justified, a justified lack of consistency as discussed in note T to the financial statements, the company changed their method of accounting for long-term contracts. It's a change in principle. How does, how should the auditor report on this matter if the auditor concurred with the change?

Well, what type of opinion, if the, if the auditor concurs with the chains, if it's a justified change and the auditor concurs with a change, it's an unmodified opinion. And where would the explanatory paragraph be? Well, of course, if it's an unmodified opinion. The explanatory paragraph. The emphasis of matter paragraph would be after the opinion paragraph.

And the answer is big because we're not modifying the opinion. So these explanatory paragraphs, emphasis of matter, paragraph. Other matter paragraphs come after the audit opinion paragraph. We're not modifying the opinion. So answer B, number six which of the following events. Would an auditor issue a report that omits any reference to consistency?

When would we omit any reference to consistency? Well, answer a change in the method of accounting for inventory. Well, that's a change in principle. We would change the audit report and add an emphasis of matter paragraph. It would be required. So that's not it. They want to know when we would admit any reference.

Two consistency. How about be a change from an accounting principle that is not generally accepted to one that is generally accepted? Well, that's correcting an error and it's correcting an error that involves a principle. It's a required emphasis of matter paragraph so that that can't be, the answer would not be admitted.

D says management's lack of reasonable justification for a change in principle. Well, if there's a lack of justification, that's a consistency problem. If it's not justified, then it's a gaap problem. It's a gaap problem, so of course, it's going to have to be referred to and we'll get to that later in the class, but answer, see a change in the useful life to calculate the provision for depreciation.

That's just a simple change in estimate, a simple change in estimate. It is not mentioned in the audit report. So if you estimate, you use to estimate that a machine would have a useful life of four years and now you've gained more information, you think it's going to have a useful life of six years. That's a simple change in estimate is not referred to in the audit report at all.

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