Adverse Opinion Flashcards
An auditor’s report includes the following statement: “The financial statements do not present fairly the financial position, results of operations, or cash flows in conformity with generally accepted accounting principles.” This auditor’s report was most likely issued in connection with financial statements that are
Inconsistent.
Based on prospective financial information.
Misleading.
Affected by a material uncertainty.
Misleading.
This answer is correct because language such as that quoted in this question is used in an adverse opinion. Such an opinion is appropriate when financial statements are considered to be misleading.
An auditor would issue an adverse opinion if
The audit was begun by other independent auditors who withdrew from the engagement.
A qualified opinion cannot be given because the auditor lacks independence.
The restriction on the scope of the audit was significant.
The statements taken as a whole do not fairly present the financial condition and results of operations of the company.
The statements taken as a whole do not fairly present the financial condition and results of operations of the company.
This answer is correct because the professional standards state that such an opinion is expressed when the financial statements taken as a whole are not presented fairly in conformity with generally accepted accounting principles.
When an auditor expresses an adverse opinion, the opinion paragraph should include
The principal effects of the departure from generally accepted accounting principles.
A direct reference to a separate paragraph disclosing the basis for the opinion.
The substantive reasons for the financial statements being misleading.
A description of the uncertainty or scope limitation that prevents an unmodified opinion.
A direct reference to a separate paragraph disclosing the basis for the opinion.
The opinion paragraph should include a direct reference to a separate paragraph disclosing the basis for the opinion.
When an adverse opinion is expressed, the opinion paragraph should include a direct reference to
A footnote to the financial statements which discusses the basis for the opinion.
The scope paragraph which discusses the basis for the opinion rendered.
A separate paragraph which discusses the basis for the opinion rendered.
The consistency or lack of consistency in the application of generally accepted accounting principles.
A separate paragraph which discusses the basis for the opinion rendered.
This answer is correct because the opinion paragraph of an adverse opinion should refer to a separate basis for modification paragraph which discusses the basis for the opinion rendered.
An auditor should disclose the substantive reasons for expressing an adverse opinion in a basis for adverse opinion paragraph
Preceding the scope paragraph.
Preceding the opinion paragraph.
Following the opinion paragraph.
Within the notes to the financial statements.
Preceding the opinion paragraph.
This answer is correct because the professional standards require that a basis for adverse opinion disclosing the substantive reasons for expressing an adverse opinion precede the opinion paragraph of the auditor’s report.
A client has capitalizable leases but refuses to capitalize them in the financial statements. Which of the following reporting options does an auditor have if the amounts pervasively distort the financial statements? Qualified opinion. Unmodified (unqualified) opinion. Disclaimer opinion. Adverse opinion.
Adverse opinion.
This is correct because such a departure from GAAP with a material and pervasive effect on the financial statements leads to an adverse opinion.
Tread Corp. accounts for the effect of a material accounting change prospectively when the inclusion of the cumulative effect of the change is required in the current year.
The auditor would choose between expressing a(n)
Qualified opinion or a disclaimer of opinion.
Disclaimer of opinion or an unmodified opinion with an emphasis-of-paragraph.
Unmodified opinion with an emphasis-of-matter paragraph and an adverse opinion.
Adverse opinion and a qualified opinion.
Adverse opinion and a qualified opinion.
Accounting for the effect of a material accounting change prospectively, when GAAP require inclusion of the cumulative effect of the change in the current year, is a GAAP departure. A material GAAP departure results in either an adverse or a qualified opinion.
In which of the following circumstances would an auditor be most likely to express an adverse opinion?
The chief executive officer refuses the auditor access to minutes of board of directors’ meetings.
Tests of controls show that the entity’s internal control structure is so ineffective that it cannot be relied upon.
The financial statements are not in conformity with the FASB Statements regarding the capitalization of leases.
Information comes to the auditor’s attention that raises substantial doubt about the entity’s ability to continue as a going concern.
The financial statements are not in conformity with the FASB Statements regarding the capitalization of leases.
An adverse opinion is issued when a material and pervasive GAAP departure is present in the financial statements. If the financial statements do not conform with FASB requirements for the capitalization of leases, a GAAP departure is present. If considered to be of sufficient magnitude to cause the financial statements to be misleading, the auditor would issue an adverse opinion.
A client has capitalizable leases but refuses to capitalize them in the financial statements. Which of the following reporting options does an auditor have if the amounts pervasively distort the financial statements? Qualified opinion. Unmodified opinion. Disclaimer opinion. Adverse opinion.
Adverse opinion.
When a misstatement is material and the effect on the financial statements is pervasive, the auditor should express an adverse opinion indicating that the financial statements are not fairly stated.
An auditor would express an unmodified opinion with an emphasis-of-matter paragraph added to the auditor’s report for
An unjustified accounting change
A material weakness in the internal control structure
Yes Yes
Yes No
No Yes
No No
No No
An unjustified change in accounting principles is a GAAP departure that would result in a qualified or adverse opinion. A material weakness in internal control should be reported to those charged with governance, but would not be reported in an unmodified audit report.
