Delta Life Insurance Co. prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission. If Wall, CPA, Delta's auditor, discovers that the statements are not suitably titled, Wall should:
Answer(s): A
Choice "a" is correct. Financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP that are not suitably titled require a qualified opinion with an explanatory paragraph.Choice "b" is incorrect. The financial statements are not suitably titleD. The auditor does not need any advice from the insurance commission as to how the statements should be titled or as to how to handle the situation.Choice "c" is incorrect. The auditor would not disclaim an opinion unless there is a scope limitation or independence problem.Choice "d" is incorrect. The notes to the financial statements are communications from management, not from the auditor.
Helpful Co., a nonprofit entity, prepared its financial statements on an accounting basis prescribed by a regulatory agency solely for filing with that agency. Green audited the financial statements in accordance with generally accepted auditing standards and concluded that the financial statements were fairly presented on the prescribed basis. Green should issue a:
Answer(s): D
Choice "d" is correct. A "special report" (unqualified) would be issued in an audit of financial statements prepared on an accounting basis prescribed by a regulatory agency solely for filing with that agency.Special reports are also issued for:1. Financial statements that are prepared in accordance with a comprehensive basis of accounting other than GAAP.2. Specified elements, accounts or items of a financial statement.3. Compliance with contractual or regulatory requirements related to audited financial statements.4. Financial information presented in prescribed forms, or schedules that require a prescribed form of auditor's report.Choices "a" and "c" are incorrect. The special report would be unqualified since Green concluded that the financial statements were fairly presented on the prescribed basis. Choice "b" is incorrect. The wording of the special report varies slightly from the auditor's standard three paragraph report, and includes an additional explanatory paragraph.
An auditor's report would be designated a special report when it is issued in connection with:
Answer(s): B
Choice "b" is correct. An auditor's report would be designated a special report when it is issued in connection with compliance with aspects of regulatory requirements related to audited financial statements.Choice "a" is incorrect. A "review report" (not a "special report") should be issued in connection with a limited review of interim financial information of a publicly held company. Choice "c" is incorrect. Special reports are not issued in connection with the application of accounting principles to specified transactions.Choice "d" is incorrect. An auditor may compile, examine, or apply agreed-upon procedures to limited use prospective financial statements (PFS) such as a financial projection, but this would not constitute a special report.
When a CPA reports on audited financial statements prepared on the cash receipts and disbursements basis of accounting, the report should:
Answer(s): C
Choice "c" is correct. A report on other comprehensive basis of accounting ("OCBOA") financial statements should include an explanatory paragraph stating the basis, referring to the footnote that describes it, and indicating that it is a non-GAAP basis. Choice "a" is incorrect. A report on other comprehensive basis of accounting ("OCBOA") financial statements does not include an evaluation of the usefulness of the basis of accounting. Choice "b" is incorrect. A report on other comprehensive basis of accounting ("OCBOA") financial statements makes reference to the note in the financial statements that describes the accounting basis, not to a note describing management's responsibility. Choice "d" is incorrect. The separate explanatory paragraph states the basis, refers to the footnote describing it, and indicates that it is a non-GAAP basis. It does not discuss the justification for the non-GAAP basis, nor does the CPA indicate concurrence.
Which option best describes the level of assurance provided in the following special reports?
Choice "a" is correct. Positive assurance is provided in all of the listed reports except "compliance with contractual or regulatory requirements related to audited financial statements." Negative assurance is provided in this report.Choices "b", "c", and "d" are incorrect, based on the above Explanation.
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