15.3 Flashcards
When an auditor expresses an adverse opinion on the financial statements of a nonissuer, the matter resulting in the modification should be described in a paragraph
Preceding the opinion paragraph.
When an adverse opinion is expressed, the opinion paragraph should refer to a basis for adverse opinion paragraph that precedes the opinion paragraph. This paragraph describes the matter resulting in the modification (AU-C 705).
Zag Co. presents financial position and results of operations but not the related statement of cash flows. Zag would like to engage Brown, CPA, to audit its financial statements without the statement of cash flows, although Brown’s access to all of the information underlying the basic financial statements will not be limited. Under these circumstances, Brown most likely would
Explain to Zag that the omission requires a qualification of the auditor’s opinion.
An entity that reports financial position and results of operations should provide a statement of cash flows. Thus, the omission of the cash flow statement is normally a basis for modifying the opinion. If the statements fail to disclose required information, the auditor should provide the information in the report, if practicable. However, the auditor is not required to prepare a basic financial statement. Accordingly, (s)he should qualify the opinion and explain the reason for doing so in the report.
March, CPA, is engaged by Monday Corp., a client, to audit the financial statements of Wall Corp., a nonissuer company that is not March’s client. Monday expects to present Wall’s audited financial statements with March’s auditor’s report to 1st Federal Bank to obtain financing in Monday’s attempt to purchase Wall. In these circumstances, March’s auditor’s report would usually be addressed to
Monday Corp., the client that engaged March.
If an auditor is retained to audit the financial statements of a nonissuer entity that is not his or her client, the report customarily is addressed to the client and not to the board of directors or shareholders of the entity whose financial statements are being audited.
Billie J. King, CPA, was engaged to audit the financial statements of Newton Co. after its fiscal year had ended. King neither observed the inventory count nor confirmed the receivables by direct communication with debtors, but was satisfied concerning both after applying alternative procedures. King’s auditor’s report most likely contained a(n)
Unmodified opinion.
Because the auditor is satisfied as to inventory quantities and the amounts of receivables, she obtained sufficient appropriate evidence. Accordingly, the opinion is not modified.
In which of the following circumstances would an auditor not express an unmodified opinion?
The auditor is unable to obtain audited financial statements of a long-term investee.
A qualified opinion may be based on a lack of sufficient appropriate evidence. Some common scope limitations relate to the inability to observe inventory, confirm accounts receivable, or obtain audited statements of a long-term investee.
Kapok Corporation is a substantial user of computer equipment and has used an outside service bureau to process data in years past. During the current year, Kapok adopted the policy of leasing all hardware and expects to continue this arrangement in the future. This change in policy is adequately disclosed in notes to Kapok’s financial statements, but uncertainty prohibits either Kapok or its auditor from assessing the impact of this change upon future operations. The audit report should include
An unmodified opinion.
In the absence of a material misstatement, for example, because of inadequate disclosure or a scope limitation, an uncertainty does not require modification of the opinion.
In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion and an adverse opinion?
Conditions that cause the auditor to have substantial doubt about the entity’s ability to continue as a going concern are inadequately disclosed.
When the auditor concludes that substantial doubt exists about an entity’s ability to continue as a going concern for a reasonable period of time, (s)he should include an emphasis-of-matter paragraph (following the opinion paragraph) in the auditor’s report to describe the uncertainty. By itself, this doubt does not require a modification of the opinion. However, if the entity’s disclosures about the issue are inadequate, the misstatement may result in a qualified or an adverse opinion.
Under which of the following circumstances might an auditor disclaim an opinion?
The auditor is unable to obtain sufficient appropriate evidence to support management’s assertions concerning an uncertainty.
Based on the audit evidence that is, or should be, available, the auditor assesses whether the audit evidence is sufficient to support managements’ assertions about an uncertainty. When the auditor cannot obtain sufficient appropriate evidence, (s)he expresses a qualified opinion if the possible effects are material but not pervasive. If the possible effects are material and pervasive, (s)he disclaims an opinion.
In which of the following circumstances would an auditor be most likely to express an adverse opinion?
The financial statements are not in conformity with the FASB Codification’s guidance regarding the capitalization of leases.
An adverse opinion is expressed when, in the auditor’s judgment, the financial statements as a whole are not presented fairly in conformity with GAAP. The FASB Accounting Standards Codification is authoritative with regard to U.S. GAAP.
When an auditor qualifies an opinion in an audit of a nonissuer because of the omission of information required to be disclosed, the auditor should describe the nature of the omission in the basis for qualified opinion paragraph and modify the
Introductory paragraph:
Auditor’s responsibility section:
Opinion paragraph:
No
Yes
Yes
If the material misstatement relates to specific amounts, the basis paragraph should describe and quantify the financial effects, if practicable. If the misstatement relates to narrative disclosures, the auditor should include an explanation. If the misstatement relates to an omission of required information, the auditor should describe the nature of the information and, if practicable, include the information. If the opinion is qualified, (1) the introductory paragraph and management’s responsibility for the financial statements paragraph are unchanged, (2) the auditor’s responsibility section mentions that the audit opinion is qualified, and (3) the opinion paragraph includes the language “. . ., except for the effects of the matter(s) described in the basis for qualified opinion paragraph, . . .”
Which of the following factors most likely would influence an auditor’s determination of the auditability of an entity’s financial statements?
The destruction of the accounting records.
When the auditor cannot obtain sufficient appropriate evidence, (s)he expresses a qualified opinion if the possible effects are material but not pervasive. If the possible effects are material and pervasive, (s)he disclaims an opinion. An inability to obtain sufficient appropriate evidence may result from (1) circumstances beyond the control of the entity, (2) circumstances related to the nature or the timing of the work, or (3) a management-imposed limitation. They result in either a qualified opinion or a disclaimer. Circumstances beyond the control of the entity include (1) destruction of accounting records or (2) indefinite governmental seizure of accounting records (AU-C 705).
Because an expression of opinion as to certain identified items in financial statements tends to overshadow or contradict a disclaimer of opinion or adverse opinion, it is inappropriate for an auditor to express
A piecemeal opinion.
A piecemeal opinion is an opinion on a specific element of the statements when an auditor has disclaimed an opinion or expressed an adverse opinion on the statements as a whole. A piecemeal opinion is not acceptable because it contradicts the disclaimer or adverse opinion.
A former client requests a predecessor auditor to reissue an audit report on a prior period’s financial statements. The financial statements are not restated and the report is not revised. What date(s) should the predecessor auditor use in the reissued report?
The date of the prior-period report.
Use of the original date in a predecessor auditor’s reissued report removes any implication that records, transactions, or events after such date have been audited or reviewed. However, the predecessor auditor should perform the following procedures to determine whether the report is still appropriate: (1) read the statements of the subsequent period, (2) compare the prior statements with the current statements, and (3) obtain written representations from management and the successor auditor about information obtained or events that occurred subsequent to the original date of the report (also see AU-C 925 regarding filings under the Securities Act of 1933).
Adequate disclosure means that sufficient information is presented so that financial statements are not misleading. The decisions about adequate disclosure should reflect the needs of
Users with a reasonable knowledge of business.
The auditor considers the needs of users of the financial statements. However, it is reasonable for the auditor to assume that users (1) have reasonable knowledge of business and accounting, (2) are willing to study financial information with reasonable diligence, (3) understand the materiality limits of audited statements, (4) recognize that many amounts in the statements are based on estimates and judgments, and (5) make reasonable decisions based on the statements.
If an accountant concludes that unaudited financial statements of an issuer on which the accountant is disclaiming an opinion also lack adequate disclosure, the accountant should suggest appropriate revision. If the client does not accept the accountant’s suggestion, the accountant should
Describe the appropriate revision to the financial statements in the accountant’s disclaimer of opinion.
PCAOB auditing standards apply to engagements involving issuers. Under these standards, inadequate disclosure is a departure from U.S. GAAP. When an accountant who is associated with the unaudited statements of an issuer suggests revision because of such a departure and the client declines to provide the necessary disclosures, the disclaimer should be modified to describe the departure. The description should refer specifically to the nature of the departure and, if practicable, state the effects on the financial statements or include the necessary information for adequate disclosure (PCAOB AS 3320).
