Question

In: Accounting

1. An auditor's report on financial statements prepared in accordance with generally accepted accounting principles should...

1. An auditor's report on financial statements prepared in accordance with generally accepted accounting principles should include all of the following except:

  1. an opinion as to whether the basis of accounting used is appropriate under the circumstances.
  2. a statement that the basis of presentation is a basis of accounting other than generally accepted accounting principles if management wants to do it
  3. reference to the note to the financial statements that describes the basis of presentation as GAAP.
  4. an opinion as to whether the financial statements could be presented fairly in conformity with the other basis of accounting.

2. Which of the following risks is related to effectiveness of testing performed by the auditor?

  1. The risk of incorrect calculations.
  2. Inherent risk.
  3. The risk of incorrect acceptance.
  4. None of these.

Solutions

Expert Solution

1. The correct answer is a) An opinion as to whether the basis of accounting used is appropriate under the circumstances.
The auditor's report on financial statements prepared in conformity with a comprehensive basis of accounting other than GAAP would include a statement that the basis is a comprehensive basis of accounting other than GAAP. It would not state that the cash receipts and disbursements basis is not a comprehensive basis of accounting.
The auditor's report should include a paragraph that states the basis and refers to the note to the financial statements that describes the basis.
The auditor's report should include a paragraph that expresses the auditor's opinion on whether the financial statements are presented fairly, in all material respects, in conformity with the basis described.
The auditor's report should also state that the audit was conducted in accordance with U.S. GAAP.

2. The correct answer is c) The risk of incorrect acceptance.
It is a Type II decision error which related to effectiveness of an audit. Risk of Incorrect Acceptance is commonly referred to as risk of overreliance or the risk of assessing control risk too low.

Risk of incorrect rejection is a Type I decision error which is related to the efficiency of an audit. Risk of Incorrect rejection is commonly referred to as risk of underreliance or the risk of assessing control risk too high.

Inherent risk is the probability that, in the absence of internal controls, material errors or frauds could enter the accounting system used to develop financial statements. It is assessed by auditors to determine the level of tests of controls that need to be performed for each account.


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