In: Accounting
1. An auditor's report on financial statements prepared in accordance with generally accepted accounting principles should include all of the following except:
2. Which of the following risks is related to effectiveness of testing performed by the auditor?
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.