Question
What criticisms has the PCAOB levied against auditors in performing engagement quality reviews? LO 3Describe the documentation requirements relating to the PCAOB's AS 1220, Engagement
What criticisms has the PCAOB levied against auditors in performing engagement quality reviews?
LO 3Describe the documentation requirements relating to the PCAOB's AS 1220,Engagement Quality Review.
Assessing the quality of accounting policies is a matter of professional judgment. What considerations are relevant in making this judgment?
The accounting and auditing literature discusses several different types of accounting changes. For each of the changes listed below as a-d indicate whether the auditor should add a paragraph to the audit report, assuming that the change had a material effect on the financial statements and was properly justified, accounted for, and disclosed. Assume that the organization is a U.S. nonpublic company.
- Change from one GAAP to another GAAP
- Change in accounting estimate not affected by a change in accounting principle
- Change in accounting estimate affected by a change in accounting principle
- Change from non-GAAP to GAAP
Various types of accounting changes can affect the auditor's report.
- Briefly describe the rationale for having accounting changes affect the auditor's report and the auditor's responsibility in such cases.
- For each of the changes listed below, as 1 through 7, indicate the type of change and its effect on the audit report for U.S. companies.
- A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction contracts.
- A change in the estimated useful life of previously recorded fixed assets. (The change is based on newly acquired information.)
- Correction of an inventory error in previously issued financial statements.
- A change from full absorption costing to direct costing for inventory valuation (which is non-GAAP).
- A change from presentation of statements of individual companies to presentation of consolidated companies.
- A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred, because future benefits of the costs have become doubtful. (The new accounting method was adopted in recognition of the change in estimated future benefits.)
- A change from including the employer's share of FICA taxes with other taxes to including the employer's share of FICA taxes as retirement benefits on the income statement.
On February 28, 2019, Stu & Dent, LLP completed the audit of ShyLO Ranch, Inc. (a public company) for the year ended December 31, 2018. A recent fire destroyed the accounting records concerning the cost of ShyLO's livestock. These were the only records destroyed. The auditors are unable to obtain sufficient appropriate evidence concerning the cost of the livestock, which represents about 8% of total assets. These are GAAP-based financial statements, and the auditors found noother problems during the audit. The audit report is to cover the 2018 financial statements only. The audit partner has indicated that a qualified opinion is more appropriate than an adverse opinion. Draft the opinion and basis of opinion paragraphs for the audit report.
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