15.5

Question 1

An auditor’s report included an additional paragraph disclosing that there is a difference of opinion between the auditor and the client for which the auditor believed an adjustment to the financial statements should be made. The opinion paragraph of the auditor’s report most likely expressed

Answer 1

A qualified opinion.

The most likely reason for including a separate paragraph disclosing a difference of opinion with the client is that the selection or application of an accounting principle is not in accordance with the applicable reporting framework.

Question 2

An adverse opinion most likely should be expressed when

Answer 2

Management uses an accounting policy not in accordance with the applicable reporting framework.

When management uses an accounting policy not in accordance with the applicable reporting framework, an adverse opinion is expressed if (1) the misstatement of the financial statements is material and (2) the effects are pervasive.

Question 3

In a financial statement audit, an auditor disclaims an opinion because of an inability to obtain sufficient appropriate audit evidence. The most likely reason for this result is

Answer 3

Management’s prevention of the confirmation of receivables.

The auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit evidence after concluding that the possible effects on the financial statements of undetected misstatements, if any, could be material and pervasive. This scope limitation may result from (1) circumstances not controlled by the entity, such as destruction or government seizure of accounting records; (2) circumstances related to the nature or timing of the work, such as not being able to observe inventory or determining that controls are ineffective; or (3) limitations imposed by management, such as preventing the auditor from (a) observing inventory or (b) confirming receivables.

Question 4

A closely held manufacturing company must disclose all of the following information in audited financial statements except

Answer 4

Replacement cost of inventory.

A U.S. manufacturer should report inventory at full absorption cost unless the fair value is less than cost. Neither closely nor publicly held companies must report replacement cost of inventory.

Question 5

The date of the audit report is important because

Answer 5

The auditor cannot date the report earlier than the date on which sufficient appropriate evidence to support the opinion has been obtained.

The auditor cannot date the report until sufficient appropriate evidence has been obtained. This date informs users that the auditor has considered the effects of events and transactions occurring up to that date of which the auditor became aware.

Question 6

On February 13, Year 2, Fox, CPA, met with the audit committee of the Gem Corporation to review the draft of Fox’s report on the company’s financial statements as of and for the year ended December 31, Year 1. On February 16, Year 2, Fox completed all remaining field work and obtained sufficient appropriate evidence to support the opinion on the financial statements. On February 28, Year 2, the final report was mailed to Gem’s audit committee. What date most likely would be used on Fox’s report?

Answer 6

February 16, Yr 2.

The report should be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence. February 16, Year 2, is the date that Fox obtained sufficient appropriate evidence to support the opinion on the financial statements. The auditor is not responsible for making any inquiries or carrying out any audit procedures for the period after the date of the report (but see AU-C 925).

Question 7

The existence of audit risk is recognized by the statement in the auditor’s report that the auditor

Answer 7

Obtains reasonable assurance about whether the financial statements are free of material misstatement.

The existence of audit risk is recognized by the statement in the auditor’s report that the auditor obtained reasonable assurance about whether the financial statements are free of material misstatement. Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk exists because the assurance is not absolute. Reasonable assurance is obtained when the auditor has obtained sufficient appropriate evidence to reduce audit risk to an acceptably low level (AU-C 200).

Question 8

Under which of the following circumstances would a disclaimer of opinion not be appropriate?

Answer 8

Management does not provide reasonable justification for a change in accounting principles.

If (1) the new principle and the method of accounting for the effect of the change are in accordance with the applicable reporting framework, (2) disclosures are adequate, and (3) the entity has justified that the principle is preferable, the auditor expresses an unmodified (unqualified) opinion. Otherwise, if the change is material, the misstatement results in expression of a qualified or an adverse opinion in the report for the year of change.

Question 9

Which of the following occurs when an adverse opinion is expressed on the financial statements?

Answer 9

The auditor’s responsibility section changes.

The auditor’s responsibility section is changed to state, “We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our adverse audit opinion.”

Question 10

Just before the client’s annual physical inventory count at year-end, circumstances made the auditor’s attendance impracticable. The auditor determined that alternative audit procedures did not provide sufficient appropriate audit evidence of the existence and condition of the inventory at year-end. The possible effects on the financial statements are material. But they are confined to specific accounts and are not a substantial proportion of the financial statements. Assuming the financial statements are otherwise fairly presented, the auditor should express a(n)

Answer 10

Qualified opinion.

The auditor expresses a qualified opinion because of an inability to obtain sufficient appropriate evidence if the possible effects on the financial statements are material but not pervasive. The possible effects of not observing the inventory count are material but not pervasive. They are confined to specific elements, accounts, or items of the financial statements and are not a substantial proportion of the financial statements.

Question 11

An auditor expresses a qualified opinion because of a material misstatement related to specific amounts in the financial statements. Which of the following phrases should be included in the report?

“When read in conjunction with Note X”:
“With the foregoing explanation”:

Answer 11

No
No

The auditor should use the phrase “except for” to qualify an opinion, and include a reference to a paragraph that describes the deficiency. Given a qualification because of a material misstatement related to specific amounts in the financial statements, the reference should describe the matter resulting in the qualification. It also should include (1) a description and quantification of the financial effects, if practicable; (2) an explanation of how narrative disclosures are misstated; or (3) omitted information, if practicable, and a description of its nature. However, if financial-effects disclosures are made in a note to the statements, the report may refer to it. Furthermore, the notes are part of the financial statements, and a phrase such as “when read in conjunction with Note X” in the report is likely to be misunderstood. Also, wording such as “with the foregoing explanation” is neither clear nor forceful enough.

Question 12

An auditor of a nonissuer was engaged by the client to use PCAOB auditing standards to conduct the audit. The auditor should refer in the report to

PCAOB Auditing Standards:
GAAS:

Answer 12

Yes
Yes

The audit of financial statements of a nonissuer in accordance with the standards of the PCAOB is not within the jurisdiction of the PCAOB. The auditor must conduct the audit in accordance with GAAS. In such circumstances, the auditor should use the form of report required by the standards of the PCAOB, amended to state that the audit also was in accordance with GAAS.

Question 13

Limitation on the scope of the audit may require the auditor to express a qualified opinion or to disclaim an opinion. Which of the following is a limitation on the scope of the audit?

Answer 13

The unavailability of sufficient appropriate evidence.

A limitation on the scope of the audit is defined as an auditor’s inability to obtain sufficient appropriate audit evidence. It may result from (1) circumstances not controlled by the entity, (2) circumstances related to the nature or timing of audit work, or (3) limitations imposed by management. An auditor’s inability to obtain sufficient appropriate audit evidence results in a qualified opinion (disclaimer of opinion) when the possible effects of undetected misstatements are material but not pervasive (material and pervasive) (AU-C 705).

Question 14

A limitation on the scope of the audit sufficient to preclude an unmodified opinion is most likely to result when management

Answer 14

Refuses to permit its lawyer to respond to the letter of audit inquiry.

Direct communication with the entity’s external legal counsel should be made if actual or potential litigation, claims, or assessments may result in a risk of material misstatement. If management refuses to permit this communication, the auditor should modify the opinion.

Question 15

Under which of the following circumstances would an auditor’s expression of an unmodified opinion for a nonissuer be inappropriate?

Answer 15

The auditor is unable to obtain the audited financial statements of a significant subsidiary.

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).

Question 16

An auditor’s decision concerning whether to dual date the audit report is based upon the auditor’s willingness to

Answer 16

Extend auditing procedures.

When a subsequent event disclosed in the financial statements occurs after the date of the auditor’s report but before the release of the auditor’s report, the auditor may use dual dating. (S)he may date the report as of the original report date except for the matters affected by the subsequent event, which would be assigned the appropriate later date. In that case, the auditor’s responsibility for events after the original report date would be limited to the specific event. If the auditor is willing to accept responsibility to the later date and accordingly extends subsequent events procedures to that date, the auditor may choose the later date as the date for the entire report.

Question 17

When a scope limitation has precluded the auditor from obtaining sufficient appropriate evidence to determine whether certain client acts are illegal, (s)he would most likely express

Answer 17

Either a disclaimer of opinion or a qualified opinion.

The auditor may be unable to determine the legality of certain acts or the amounts associated with them because of an inability to gather sufficient appropriate evidence; e.g., the internal control may have been circumvented, resulting in failure to record or properly document the acts, or client’s legal counsel may have refused to give advice. In these circumstances, the scope limitation requires a qualified opinion or a disclaimer, although a client-imposed scope limitation ordinarily results in a disclaimer.

Question 18

An auditor who is unable to form an opinion on a new client’s opening inventory balances may express an unmodified opinion on the current year’s

Answer 18

Balance Sheet only.

An inability to obtain sufficient appropriate audit evidence related to beginning inventory may prevent the auditor from expressing an unmodified opinion on some of the financial statements. Opening inventories enter into the determination of net income and cash flows. Thus, the auditor may disclaim an opinion on results of operations and cash flows. However, the balance sheet reports only the ending inventory balances. Thus, the auditor may express an unmodified opinion on the balance sheet.

Question 19

The auditor’s report refers to the U.S. GAAP-based financial statements, which are customarily considered to include the balance sheet and the statements of

Answer 19

income, changes in equity, and cash flows.

The balance sheet, statement of income, statement of changes in equity, and statement of cash flows are the financial statements upon which the auditor customarily reports. Furthermore, provided that the entity has items of other comprehensive income, U.S. GAAP require that comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements that constitute a full set of financial statements. The format may be (1) one continuous statement consisting of net income and other comprehensive income (OCI) or (2) two separate but consecutive statements. The introductory paragraph identifies the titles of the entity’s financial statements. However, the statement of changes in equity and a separate statement of comprehensive income are not separately reported on the opinion paragraph. The reason is that changes in equity and comprehensive income are included in financial position, results of operations, and cash flows.

Question 20

An auditor concludes that a client’s noncompliance with laws and regulations, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on how pervasive the effect is on the financial statements, the auditor should express either a(n)

Answer 20

Qualified opinion or an adverse opinion.

When noncompliance with laws and regulations having a material effect on the financial statements has been detected but not properly reported, the auditor should insist upon revision of the financial statements. Failure to revise the statements precludes an unmodified opinion. Depending on the pervasiveness of the misstatement, the auditor should express either a qualified opinion or an adverse opinion.