15.4 Flashcards
A limitation on the scope of an audit sufficient to preclude an unmodified opinion will usually result when management
Does not make the minutes of the board of directors’ meetings available to the auditor.
An inability to obtain sufficient appropriate evidence may result from limitations imposed by management. Failing to make the minutes of board meetings available is such a limitation. It also raises a question about management’s compliance with the preconditions for an audit, e.g., providing access to relevant information and persons within the entity.
When an auditor qualifies an opinion on the financial statements of a nonissuer because of a scope limitation, which part(s) of the auditor’s report should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself?
the opinion paragraph only.
When a qualified opinion results from an inability to obtain sufficient appropriate evidence in an audit of a nonissuer, the auditor describes the matter in the basis for qualified opinion paragraph, not in a note to the statement. The description of the audit scope is the responsibility of the auditor, not management. The opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements, not to the scope limitation itself. The wording “. . . except for the possible effects of the matter described in the basis for qualified opinion paragraph . . .“ is appropriate. The following are the other effects on the auditor’s report when the opinion is qualified due to an inability to obtain sufficient appropriate evidence with possible effects that are material but not pervasive: (1) The introductory paragraph is unchanged; (2) the management’s responsibility paragraph is unchanged; and (3) the auditor’s responsibility section ends with the sentence, “We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.”
The primary responsibility for the adequacy of disclosure in the financial statements of an issuer rests with the
Management of the issuer.
Management is responsible for the accounting policies and the internal control of an entity, including the accounting system. Accordingly, management has the primary responsibility for the fairness of presentation of the financial statements in accordance with U.S. GAAP.
An external auditor discovers that a payroll supervisor of the firm being audited has misappropriated $10,000. The firm’s total assets and before-tax net income are $14 million and $3 million, respectively. Assuming no other issues affect the report, the external auditor’s report will most likely contain a(n)
Unmodified opinion.
The auditor is likely to express an unmodified opinion for two reasons. First, the misappropriated amount is immaterial relative to assets and income. Second, as long as the misappropriation is accounted for properly, the financial statements will be fairly presented.
Which of the following statements best describes the distinction between the auditor’s responsibilities and management’s responsibilities?
The auditor’s responsibility is confined to expressing an opinion, but the financial statements remain the responsibility of management.
The auditor is responsible for the opinion on financial statements, but management is responsible for the representations made in the financial statements.
Under which of the following circumstances might an auditor disclaim an opinion?
There are significant uncertainties affecting the financial statements for which the auditor is unable to obtain sufficient evidence to support management’s assertions.
If the auditor is unable to obtain sufficient evidential matter to support management’s assertions about a matter, a qualified opinion or disclaimer of opinion should be expressed.
On January 2, Year 2, the Retail Auto Parts Co. received a notice from its primary suppliers that effective immediately all wholesale prices would be increased 10%. On the basis of the notice, Retail Auto Parts Co. revalued its December 31, Year 1, inventory to reflect the higher costs. The inventory constituted a material proportion of total assets. However, the effect of the revaluation was material to current assets but not to total assets or net income. In reporting on the company’s financial statements for the year ended December 31, Year 1, in which inventory is valued at the adjusted amounts, the auditor would most likely
Express a qualified opinion.
The auditor should express a qualified opinion when the financial statements are materially misstated, but the effects are not pervasive. Inventory is misstated because it should be recorded at lower of cost or market. Holding gains should not be recognized until realized, i.e., when inventory is sold. Furthermore, the effect on current assets is material. However, it (1) is confined to specific elements, accounts, or items and (2) is not a substantial proportion of the financial statements.
Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?
The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements.
The opinion of a suitably qualified, independent, outside party lends credibility to the financial statements and provides some protection to third parties who may rely upon them when making investment decisions. The opinion contained in the audit report, which accompanies audited financial statements, is the result of the auditor’s performance of the attest function, that is, the gathering of evidence during the audit and the issuance of an opinion on the fairness of the presentation of the statements.
When the financial statements of a nonissuer contain a misstatement, the effect of which is material but not pervasive, the auditor should
Qualify the opinion and include a basis for qualified opinion paragraph that describes the matter resulting in the qualification.
When the financial statements are materially misstated, but the effects are not pervasive, the auditor should express a qualified opinion. The report should contain a basis for qualified opinion paragraph preceding the opinion paragraph. 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. The opinion paragraph should refer to the basis paragraph.
When the auditor cannot obtain sufficient appropriate evidence to determine whether certain client acts are not in compliance with laws and regulations, (s)he would most likely express
Either a disclaimer of opinion or a qualified opinion.
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 auditor was unable to obtain audited financial statements or other evidence supporting an entity’s investment in a foreign subsidiary. Between which of the following reports should the entity’s auditor choose?
Qualified or disclaimer.
An auditor’s inability to obtain sufficient appropriate evidence may arise from, among other things, circumstances related to the nature or timing of the auditor’s work. An example is an inability, not resulting from a management-imposed limitation, to obtain audited financial statements of a long-term investee. If the possible effects are material, the auditor expresses a qualified opinion or disclaims an opinion, depending on pervasiveness (AU-C 705).
Without affecting the CPA’s willingness to express an unmodified opinion on the client’s U.S.-GAAP-based financial statements, corporate management may refuse a request to
Change its basis of accounting for inventories from FIFO to LIFO because, in the opinion of the CPA, the FIFO method fails to give adequate recognition to the extraordinary increases in prices of merchandise acquired and held by the company.
FIFO (first-in, first-out) and LIFO (last-in, first-out) are both methods of accounting for inventories that are generally accepted in the U.S. LIFO has the advantage during periods of inflation of matching current costs with current revenues. An independent auditor who has requested a change from FIFO to LIFO is likely to express an unmodified opinion even if management refuses to do so because the financial statements would still conform with U.S. GAAP.
Under which of the following circumstances may audited financial statements contain a note that is labeled “unaudited,” disclosing an event occurring after the balance sheet date?
When the event occurs after the date of the auditor’s original report.
To prevent the financial statements from being misleading, management may disclose an event that arose after the date of the auditor’s report. If the event is included in a separate note labeled as unaudited [e.g., a note captioned as “Event (Unaudited) Subsequent to the Date of the Independent Auditor’s Report”], the auditor need not perform any procedures on the note. Moreover, the auditor’s report should have the same date as the original report (AU-C 560).
The auditor’s report in an audit of an issuer may be addressed to
The board of directors and shareholders.
The PCAOB standards (AS 3101) require the audit report to be addressed to the board of directors and shareholders.
A note to the financial statements of the First Security Bank indicates that all of the records relating to the bank’s business operations are stored on magnetic disks and that no emergency backup systems or duplicate disks are stored because the bank and its auditors consider the occurrence of a catastrophe to be remote. Based upon this note, the auditor’s report on the financial statements should express
An unmodified opinion.
Failure to provide for backup records does not affect the fairness of the financial statements, regardless of the negative implications for the client’s internal control. The auditor should therefore express an unmodified opinion in the absence of other indications to the contrary.
