This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below. Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure.Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft.Accountant's Review ReportWe have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co.A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole.Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose. The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date.Jordan and Stone, CPAsMarch 1, 20X3Supervisor's Review NotesThere should be an indication that no auditing procedures were performed after the date of the report on the prior year's financial statements in the fourth (separate) paragraph.
Answer(s): A
Correct. In the fourth paragraph, there should be an indication that the auditors performed no auditing procedures after the date of the report on the prior year's financial statements.
This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below. Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure.Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft.Accountant's Review ReportWe have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co.A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole.Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose. The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date.Jordan and Stone, CPAsMarch 1, 20X3Supervisor's Review NotesThere should be no reference to "updating the prior year's auditor's report for events and circumstances occurring after that date" in the fourth (separate) paragraph.
Correct. The report should not state that the auditors have no responsibility for updating the prior year's audit report for events and circumstances that occurred after that date. This type of comment is included in a report on prospective financial statements, not in a report on the financial statements of a nonissuer.Planning and Supervision
Which of the following is true about the term "likely misstatement?"
Choice "a" is correct. A "likely misstatement" is one that has not been specifically identified, but which is likely to exist based on the auditor's judgment. Choice "b" is incorrect. "Likely misstatement" does not refer to the cumulative effect of prior year errors.It is a measure of misstatements the auditor considers likely to exist, that have not been specifically identified.Choice "c" is incorrect. "Likely misstatement" is a measure of misstatements the auditor considers likely to exist, that have not been specifically identified. Choice "d" is incorrect. The term "likely misstatement" includes only an estimate of potential errors. It does not include specific misstatements identified during the audit.
A successor auditor ordinarily should request to review the predecessor's audit documentation relating to:
Choice "a" is correct. A review of the predecessor's audit documentation related to matters of continuing accounting and auditing significance would be permitted. This would include documentation concerning contingencies and internal controls. Choice "b" is incorrect. It is appropriate for the successor auditor to review the predecessor's audit documentation relating to internal controls.Choice "c" is incorrect. It is appropriate for the successor auditor to review the predecessor's audit documentation relating to contingencies as they may have an impact on the current year financial statements.Choice "d" is incorrect. It is appropriate for the successor auditor to review the predecessor's audit documentation relating to internal controls and contingencies.
An auditor's engagement letter most likely would include:
Choice "a" is correct. An understanding with the client should be established regarding management's responsibilities, which include establishing and maintaining effective internal control over financial reporting. This is generally documented in an engagement letter. Choice "b" is incorrect. During the planning process, the auditor must document evidence of the assessment of the risk of material misstatement due to fraud. This information would be included in the audit documentation, not in the engagement letter.Choice "c" is incorrect. Management is not responsible for illegal acts committed by employees, and therefore the engagement letter would not include such a statement.Choice "d" is incorrect. The auditor generally does not contact the client's lawyer directly; rather, a letter is sent from management to the lawyer requesting corroboration of information related to litigation, claims, and assessments. The engagement letter therefore would not include a request for permission to contact the attorney.
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