EDUC 622 CLIENT REPORT ANALYSIS
GUIDE WITH VERIFIED SOLUTIONS
●● In the auditor's report, the group auditor decides not to make
reference to another CPA who audited a client's subsidiary. The group
auditor could justify this decision if, among other requirements, the
group auditor
Learns that the other CPA issued an unmodified opinion on the
subsidiary's financial statements.
Is satisfied as to the independence and professional reputation of the
other CPA.
Issues an unmodified opinion on the consolidated financial statements.
Is unable to review the audit programs and working papers of the other
CPA.
Answer: Is satisfied as to the independence and professional reputation
of the other CPA.
●● In auditing the financial statements of Star Corp., Land discovered
information leading Land to believe that Star's prior year's financial
,statements, which were audited by Tell, require substantial revisions.
Under these circumstances, Land should
Notify Tell about the information and make inquiries about the integrity
of Star's management.
Request Star to arrange a meeting among the three parties to resolve the
matter.
Notify Star's audit committee and stockholders that the prior year's
financial statements cannot be relied on.
Request Star to reissue the prior year's financial statements with the
appropriate revisions.
Answer: Request Star to arrange a meeting among the three parties to
resolve the matter.
●● A limitation on the scope of an audit sufficient to preclude an
unmodified opinion will usually result when management
Is unable to obtain audited financial statements supporting the entity's
investment in a foreign subsidiary.
,Fails to correct a reportable condition communicated to the audit
committee after the prior year's audit.
Does not sign an engagement letter specifying the responsibilities of
both the entity and the auditor.
Refuses to disclose in the notes to the financial statements related party
transactions authorized by the Board of Directors.
Answer: Is unable to obtain audited financial statements supporting the
entity's investment in a foreign subsidiary.
●● Davis, CPA, believes there is substantial doubt about the ability of
Hill Co. to continue as a going concern for a reasonable period of time.
In evaluating Hill's plans for dealing with the adverse effects of future
conditions and events, Davis most likely would consider, as a mitigating
factor, Hill's plans to
Negotiate reductions in required dividends being paid on preferred
stock.
Accelerate research and development projects related to future products.
Purchase equipment and production facilities currently being leased.
, Accumulate treasury stock at prices favorable to Hill's historic price
range.
Answer: Negotiate reductions in required dividends being paid on
preferred stock.
CASH FLOW IS THE MAIN CONCERN
●● Which of the following is a component of the management's
responsibility paragraph of a standard unmodified opinion audit report?
A reference to amounts and disclosures in the financial statements.
A statement that it is management's responsibility to detect fraud.
A reference to the applicable accounting framework.
The name of the audited entity.
Answer: A reference to the applicable accounting framework.
Management's responsibilities that are indicated in the 2nd paragraph of
the audit report include the preparation and fair presentation of the
financial statements in accordance with the applicable financial
reporting framework and the design, implementation, and maintenance
of internal control relevant to financial reporting. Although management
GUIDE WITH VERIFIED SOLUTIONS
●● In the auditor's report, the group auditor decides not to make
reference to another CPA who audited a client's subsidiary. The group
auditor could justify this decision if, among other requirements, the
group auditor
Learns that the other CPA issued an unmodified opinion on the
subsidiary's financial statements.
Is satisfied as to the independence and professional reputation of the
other CPA.
Issues an unmodified opinion on the consolidated financial statements.
Is unable to review the audit programs and working papers of the other
CPA.
Answer: Is satisfied as to the independence and professional reputation
of the other CPA.
●● In auditing the financial statements of Star Corp., Land discovered
information leading Land to believe that Star's prior year's financial
,statements, which were audited by Tell, require substantial revisions.
Under these circumstances, Land should
Notify Tell about the information and make inquiries about the integrity
of Star's management.
Request Star to arrange a meeting among the three parties to resolve the
matter.
Notify Star's audit committee and stockholders that the prior year's
financial statements cannot be relied on.
Request Star to reissue the prior year's financial statements with the
appropriate revisions.
Answer: Request Star to arrange a meeting among the three parties to
resolve the matter.
●● A limitation on the scope of an audit sufficient to preclude an
unmodified opinion will usually result when management
Is unable to obtain audited financial statements supporting the entity's
investment in a foreign subsidiary.
,Fails to correct a reportable condition communicated to the audit
committee after the prior year's audit.
Does not sign an engagement letter specifying the responsibilities of
both the entity and the auditor.
Refuses to disclose in the notes to the financial statements related party
transactions authorized by the Board of Directors.
Answer: Is unable to obtain audited financial statements supporting the
entity's investment in a foreign subsidiary.
●● Davis, CPA, believes there is substantial doubt about the ability of
Hill Co. to continue as a going concern for a reasonable period of time.
In evaluating Hill's plans for dealing with the adverse effects of future
conditions and events, Davis most likely would consider, as a mitigating
factor, Hill's plans to
Negotiate reductions in required dividends being paid on preferred
stock.
Accelerate research and development projects related to future products.
Purchase equipment and production facilities currently being leased.
, Accumulate treasury stock at prices favorable to Hill's historic price
range.
Answer: Negotiate reductions in required dividends being paid on
preferred stock.
CASH FLOW IS THE MAIN CONCERN
●● Which of the following is a component of the management's
responsibility paragraph of a standard unmodified opinion audit report?
A reference to amounts and disclosures in the financial statements.
A statement that it is management's responsibility to detect fraud.
A reference to the applicable accounting framework.
The name of the audited entity.
Answer: A reference to the applicable accounting framework.
Management's responsibilities that are indicated in the 2nd paragraph of
the audit report include the preparation and fair presentation of the
financial statements in accordance with the applicable financial
reporting framework and the design, implementation, and maintenance
of internal control relevant to financial reporting. Although management
