Question 1

Presented below is an independent auditor's report for a private company prepared by the firm of Harrington and Perry, LLP.
Auditor's Report
To the president and management of EPM, Inc.
We have examined the accompanying balance sheets and statements of income, retained earnings, and cash flows of EPM, Inc., as of December 31, 2012 and 2011. We performed our examination in accordance with auditing standards generally accepted in the United States of America and examined, on a test basis, evidence supporting the accounting principles used and estimates made by management.
In our opinion, the financial statements referred to above accurately present the financial position of EPM, Inc., in conformity with generally accepted accounting principles.
Harrington and Perry, LLP
December 31, 2012
Other information:
EPM, Inc., is a for-profit corporation and publishes comparative financial statements for distribution to shareholders, potential investors, and the general public. The client has a calendar year-end. For the most recent audit, the auditor completed all significant fieldwork on March 5, 2013 and issued the audit report on March 16, 2013. During 2012, EPM changed its method of depreciating long-term assets and properly reflected the effect of the change in the current year's financial statements, restated the prior year's financial statements, and properly discussed the change in a footnote (Note 4) to those statements. The auditors are satisfied that the change was preferable.
Required:
Consider all the facts given and rewrite the complete auditor's report, including report title, address, body of report, name of firm, and audit report date.

Accepted Answer

Independent Auditor's Report
To the shareholders of EPM, Inc.
We have audited the accompanying balance sheets of EPM, Inc., as of December 31, 2012 and 2011, and the related statements of income, retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of EPM, Inc., as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
As discussed in Note 4 to the financial statements, EPM, Inc., changed its method of computing depreciation.
Harrington and Perry, LLP
March 5, 2013

Question 2

Describe the standard unqualified report to be issued for an audit of a private company. Begin by specifying the seven parts of the report, and then discuss the contents of each part.

Accepted Answer

The parts of the standard unqualified report are as follows:
• Report title. The title must include the word "independent." Examples of appropriate titles are "independent auditor's report," or "report of independent accountant."
• Report address. The report is usually addressed to the company's stockholders or board of directors. It should not be addressed to company management.
• Introductory paragraph. There are three important components of the introductory paragraph. First, it states that an audit was performed. Second, it lists the financial statements that were audited and their dates. Third, it states that management is responsible for the financial statements, and that the auditor is responsible for expressing an opinion on those statements based on an audit.
• Scope paragraph. The scope paragraph is a factual statement about what was done during the audit. It first states that auditing standards generally accepted in the United States of America were followed by the auditor. It then states that an audit is designed to obtain reasonable assurance about whether the statements are free of material misstatement. It concludes by stating that the auditor evaluated the appropriateness of the accounting principles used, and estimates made, by management, and of the financial statement disclosures and presentations given.
• Opinion paragraph. This paragraph states the auditor's opinion concerning whether the financial statements present fairly the client's financial position and results of its operations and cash flows in conformity with generally accepted accounting principles.
• Name of CPA firm. Typically, the name of the CPA firm, and not the name of an individual auditor, is used.
• Audit report date. The audit report is normally dated as of the last day of fieldwork.

Question 3

The scope paragraph of the standard unqualified audit report states that the audit is designed to:

Accepted Answer

The scope paragraph of the standard unqualified audit report states that the audit is designed to obtain reasonable assurance whether the financial statements are free of material misstatement. Therefore, option D is the best choice. Option A is incorrect as it is impossible to discover all errors and/or irregularities in an audit. Option B is close but not accurate enough as the audit only focuses on material errors and/or irregularities. Option C is also incorrect as the audit may not conform to generally accepted accounting principles, but instead assesses whether the financial statements are fairly presented in all material respects.

Question 4

The introductory paragraph of the standard audit report states that the auditor is:

Accepted Answer

The introductory paragraph of the standard audit report states that the auditor is responsible for the opinion on the financial statements, indicating that the auditor's role is to provide an independent assessment of the financial statements rather than taking joint responsibility with management.

Question 5

Which of the following statements are true?
I. The introductory paragraph states that management is responsible for the preparation and content of the financial statements.
II. The scope paragraph states that the auditor evaluates the appropriateness of those accounting principles, estimates, and financial statement disclosures.

Accepted Answer

Statement I is true as the introductory paragraph of an auditor's report states that the management of the company is responsible for the preparation and content of the financial statements. 
Statement II is also true as the scope paragraph of an auditor's report details that the auditor evaluates the appropriateness of accounting principles, estimates, and financial statement disclosures.

Question 6

Most auditors believe that financial statements are "presented fairly" when the statements are in accordance with GAAP, and that it is also necessary to:

Accepted Answer

While GAAP compliance is necessary to present financial statements fairly, auditors also need to examine the substance of transactions and balances for possible misinformation. This means that auditors need to go beyond simply checking if the statements comply with GAAP and look for any potential misrepresentations or misstatements, whether intentional or not. Choices A, C, and D are not accurate as FASB statements are already incorporated in GAAP, the SEC does not promulgate accounting principles, and auditors cannot assure future net income.

Question 7

An audit report prepared by Garrett and Brown, CPAs, is provided below. The audit for the year ended December 31, 2012 was completed on March 1, 2013, and the report was issued to Javlin Corporation, a private company, on March 13, 2013. List any deficiencies in this report. Do not rewrite the report.
We have examined the accompanying financial statements of Dalton Corporation as of December 31, 2012. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these statements based on our audit.
We conducted our audit in accordance with generally accepted accounting principles. Those principles require that we plan and perform the audit to provide reasonable assurance about whether the financial statements are free of misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, except for the effects of not capitalizing certain lease obligations that should be capitalized in order to conform with generally accepted accounting principles, the financial statements referred to above present accurately the financial position of Jacob Corporation as of December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
Garrett and Brown, CPAs
March, 2013

Accepted Answer

The answer of An audit report prepared by Garrett and...

Question 8

The introductory paragraph of the standard audit report for a non-profit company performs which functions?
I. States the CPA has performed an audit.
II. Lists the financials being audited.
III. States the financials are the responsibility of the auditor.

Accepted Answer

The introductory paragraph of the audit report states that the CPA has performed an audit and lists the financial statements being audited. The responsibility for the financial statements lies with the management, not the auditor.

Question 9

The audit report date on a standard unqualified report indicates:

Accepted Answer

The audit report date on a standard unqualified report indicates the last day of the auditor's responsibility for the review of significant events that occurred subsequent to the date of the financial statements. The other options listed are not the correct date indicated by the audit report.

Question 10

The standard audit report refers to GAAS and GAAP in which paragraphs?

Accepted Answer

The answer of The standard audit report refers to GAAS...

Question 11

If the balance sheet of a company is dated December 31, 2011, the audit report is dated February 8, 2012, and both are released on February 15, 2012, this indicates that the auditor has searched for subsequent events that occurred up to:

Accepted Answer

The auditor is responsible for searching for subsequent events up to the date of the audit report, which in this case is February 8, 2012.

Question 12

Auditing standards require that the audit report must be titled and that the title must:

Accepted Answer

Auditing standards require that the audit report must be titled and that the title must include the word "independent." Other options such as indicating if the auditor is a CPA or the type of entity the auditor belongs to are not mandatory requirements for the title of an audit report. However, the type of audit opinion issued should be clearly stated in the report.

Question 13

AICPA professional standards provide uniform wording for the auditor's report to enable users of the financial statements understand the audit report.

Accepted Answer

The AICPA professional standards do indeed provide uniform wording for the auditor's report, as this is necessary to ensure that the report can be easily understood by users of the financial statements. Standardized language and formatting help to promote consistency and clarity, which are essential qualities in any professional communication.

Question 14

The financial statements most commonly audited by external auditors are the balance sheet, the income statement, and the statement of changes in retained earnings.

Accepted Answer

The financial statements most commonly audited by external auditors are the balance sheet, the income statement, the statement of cash flows, and the statement of changes in equity.

Question 15

Which of the following is not explicitly stated in the standard unqualified audit report?

Accepted Answer

The standard unqualified audit report states that the audit was conducted in accordance with generally accepted auditing standards (GAAS), not generally accepted accounting principles (GAAP).

Question 16

The appropriate audit report date for a standard nonqualitifed audit report for a non-public entity should be the:

Accepted Answer

The audit report date should be the date the auditor completed the auditing procedures in the field, as this is when the auditor has obtained sufficient appropriate evidence to support their opinion.

Question 17

To emphasize the fact that the auditor is independent, a typical addressee of the audit report could be:

Accepted Answer

The answer of To emphasize the fact that the auditor...

Question 18

If an auditor performs an audit of a public company, the scope paragraph should make reference to which standards?

Accepted Answer

When performing an audit of a public company in the United States, the scope paragraph should reference Standards issued by the Public Company Accounting Oversight Board (PCAOB), as these are the standards specifically designed for audits of public companies in the U.S. GAAP is the set of accounting principles used to prepare financial statements, and GAAS are the standards used to guide audit work in general, but neither is specific to audits of public companies. International Audit Standards may be applicable for audits in other countries, but would not be the appropriate reference for a U.S. public company audit.

Question 19

The introductory paragraph of the standard audit report states that the financial statements are:

Accepted Answer

The introductory paragraph of the standard audit report states that the financial statements are the responsibility of management. This means that management is responsible for preparing the financial statements fairly and accurately, and the auditor's responsibility is to express an opinion on whether the financial statements are presented fairly and in accordance with the applicable financial reporting framework. The auditor's role is not to prepare the financial statements but to provide an independent assessment of their fairness and accuracy.

Question 20

An audit of historical financial statements most commonly includes the:

Accepted Answer

The most common components of a financial statement audit are the three primary financial statements: the balance sheet, income statement, and statement of cash flows. The statement of retained earnings may also be included as it is closely related to the income statement. The statement of net working capital is not a primary financial statement and is not typically audited.

Quiz 3: Audit Reports