AUD Becker A1 - Audit Reports Part 1 Flashcards
The opinion paragraph in an auditor’s report for a nonissuer should include a statement that:
A. Describes the auditor’s responsibility for expressing an opinion on the financial statements.
B. Identifies the applicable financial reporting framework and its origin.
C. Indicates that management is responsible for the fair presentation of the financial statements.
D. Includes the word independent to clearly indicate that the report is from an independent auditor.
Choice “2” is correct. The opinion paragraph in an auditor’s report should include a statement regarding the auditor’s opinion and an indication of the applicable financial reporting framework and its origin.
Choice “1” is incorrect. A description of the auditor’s responsibility would be included in a separate paragraph stating the auditor’s responsibility rather than in the opinion paragraph.
Choice “3” is incorrect. An indication of management’s responsibility for the fair presentation of the financial statements should be included in a separate paragraph explaining management’s responsibility rather than in the opinion paragraph.
Choice “4” is incorrect. The word independent should be included in the report title, and not the opinion paragraph in an auditor’s report.
An auditor’s responsibility to express an opinion on the financial statements of a nonissuer under U.S. auditing standards is:
A. Implicitly represented in the auditor’s report.
B. Explicitly represented in the Auditor’s Responsibility paragraph.
C. Explicitly represented in the Introductory paragraph of the auditor’s report
D. Explicitly represented in an emphasis-of-matter paragraph of the auditor’s report.
Choice “2” is correct. The auditor’s responsibility to express an opinion on the financial statements under U.S. auditing standards is explicitly represented in the first sentence of the Auditor’s Responsibility section of the nonissuer audit report. It says “Our responsibility is to express an opinion on these financial statements based on our audit.”
Choice “1” is incorrect. The responsibility to express an opinion is explicitly represented (i.e., clearly stated), not implicitly represented (i.e., assumed).
Choice “3” is incorrect. There are no words in the Introductory paragraph of a nonissuer report that represent an auditor’s responsibility to express an opinion. The Introductory paragraph (titled Report on the Financial Statements) states the name of the entity under audit, as well as the financial statements being audited (e.g., balance sheet, income statements, etc.).
Choice “4” is incorrect. An emphasis-of-matter paragraph does not explicitly represent the auditor’s opinion to express an opinion. Emphasis-of-matter and other-matter paragraphs are used in certain circumstances to add additional communications to the auditor’s report without modifying the auditor’s opinion.
To obtain reasonable assurance, an auditor should:
A. Examine all available corroborating evidence supporting management’s assertions.
B. Ensure that management does not conceal any fraudulent activities on the part of employees
C. Plan the work and properly supervise any assistants
D. Design the audit to detect all instances of illegal acts.
Choice “3” is correct. To obtain reasonable assurance, an auditor must plan the work and properly supervise assistants, as well as determine and apply appropriate materiality levels, identify and assess risks of material misstatement whether due to fraud or error, and obtain sufficient appropriate audit evidence.
Choice “1” is incorrect. An auditor examines some (but not all) available corroborating evidence supporting management’s assertions. Examination of all evidence would not be feasible.
Choice “2” is incorrect. It would not be possible for the auditor to ensure that management does not conceal any fraudulent activities of employees.
Choice “4” is incorrect. An auditor has a reasonable responsibility to design the audit to detect material instances of illegal acts, errors, and irregularities. It would not be feasible to design an audit to detect all instances of illegal acts.
When an auditor of a nonissuer qualifies an opinion because of the inability to confirm accounts receivable by direct communication with debtors, the wording of the qualified opinion paragraph of the auditor’s report should indicate that the qualification pertains to the:
A. Limitation on the auditor’s scope
B. Possible effects on the financial statements
C. Lack of sufficient appropriate audit evidence
D. Departure from generally accepted auditing standards.
Choice “2” is correct. When an auditor of a nonissuer qualifies his or her opinion because of a scope limitation, such as the inability to confirm accounts receivable, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself.
Choices “1”, “3”, and “4” are incorrect, based on the above explanation.
An auditor was unable sufficient appropriate audit evidence concerning certain transactions due to an inadequacy in the entity’s accounting records. The auditor would choose between issuing a(an):
A. Adverse opinion and a disclaimer of opinion.
B. Disclaimer of opinion and a qualified opinion.
C. Unmodified opinion with an emphasis-of-matter paragraph and an adverse opinion.
D. Qualified opinion and an unmodified opinion with an emphasis-of-matter paragraph.
Choice “2” is correct. Client-imposed restrictions of scope such as those caused by inadequate records would cause the auditor to choose between issuing a disclaimer of opinion and a qualified opinion.
Choices “3” and “1” are incorrect. An adverse opinion pertains to GAAP and would not be used for reporting restrictions of scope.
Choice “4” is incorrect. An unmodified opinion would only be justified if the transactions in question were not material, but in such situations, no emphasis-of-matter paragraph would be required.
A group engagement partner decides not to refer to the audit of a component auditor. After making inquiries about the component auditor’s professional reputation and independence, the group engagement partner most likely would:
A. Document in the engagement letter that the group engagement partner assumes no responsibility for the other CPA’s work.
B. Contact the component auditor and review the audit programs and working papers pertaining to the component.
C. Add an emphasis-of-matter paragraph to the auditor’s report indicating that the component’s financial statements are not material to the consolidated financial statements.
Choice “2” is correct. When the group engagement auditor accepts responsibility for the work performed by a component auditor, the group engagement partner must contact the component auditor and review the audit program and working papers pertaining to the component.
Choice “1” is incorrect. When a group engagement partner decides not to reference a component auditor, the group engagement partner has assumed responsibility for the work performed by the component auditor.
Choice “3” is incorrect. When the group engagement partner assumes responsibility for the work of a component auditor, no reference to the component auditor or to the component’s financial statements is made in the auditor’s report.
Choice “4” is incorrect. Permission does not need to be obtained to assume responsibility for the work of the other CPA.
Which of the following is not a special purpose framework?
A. Basis of accounting used by an entity to file its income tax return.
B. Cash receipts and disbursements basis of accounting.
C. Basis of accounting promulgated by the International Accounting Standards Board.
D. Basis of accounting used by an entity to comply with the financial reporting requirements of a government regulatory agency,
Choice “3” is correct. IFRS (the standards promulgated by the International Accounting Standards Board) and GAAP (the standards promulgated by the Financial Accounting Standards Board) are general purpose frameworks. Special purpose frameworks include:
Cash basis and modified cash basis
Tax basis
Regulatory basis
Contractual basis
Other basis
Choices “2”, “1”, and “4” are incorrect, as explained above.
An auditor of a nonissuer concludes that a client’s illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the pervasiveness of the effect on the financial statements, the auditor should express either a (an):
A. Disclaimer of opinion or an unmodified opinion with an emphasis-of-matter paragraph.
B. Adverse opinion or a disclaimer of opinion.
C. Qualified opinion or an adverse opinion.
D. Unmodified opinion with an other-matter paragraph or a qualified opinion.
Choice “3” is correct. If the financial statements, including accompanying notes, fail to disclose information that is required by generally accepted accounting principles, the auditor should express a qualified or adverse opinion, depending on pervasiveness.
Choice “1” is incorrect. Neither a disclaimer of opinion nor an unmodified opinion with an emphasis-of-matter paragraph is appropriate for a client with a material undisclosed item or GAAP departure.
Choice “2” is incorrect. A disclaimer of opinion is not an appropriate report for inadequate disclosure or a GAAP departure.
Choice “4” is incorrect. An unmodified opinion with an other-matter paragraph is not appropriate for a client with a material undisclosed item or GAAP departure.
When reporting on comparative financial statements, an auditor ordinarily should change the previously issued opinion on the prior year’s financial statements if the:
A. Prior year’s financial statements are restated following a change in reporting entity in the current year.
B. Prior year’s financial statements are restated to conform with generally accepted accounting principles.
C. Prior year’s opinion was unmodified and the opinion on the current year’s financial statements is modified due to a lack of consistent.
D. Auditor is a predecessor auditor who has been requested by a former client to reissue the previously issued report.
Choice “2” is correct. If, during the current audit, auditors become aware of circumstances or events that affect the financial statements of a prior period, they should consider such matters when updating the report on the financial statements of the prior period. For example, if auditors have previously qualified their opinion or expressed an adverse opinion on financial statements of a prior period because of a departure from generally accepted accounting principles, and the prior period financial statements are restated in the current period to conform with generally accepted accounting principles, the auditor’s updated report on the financial statements of the prior period should indicate that the statements have been restated and should express an unmodified opinion with respect to the restated financial statements.
Choice “1” is incorrect. Restatement of financial statements following a change in reporting entity affects comparability of the financial statements, but would not result in a change in opinion from the audit report previously issued.
Choice “3” is incorrect. A difference of opinions between periods would not result in the auditor changing the opinion on a previously issued audit report.
Choice “4” is incorrect. The predecessor auditor generally would not change a previously issued opinion when reissuing the audit report.
An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. The auditor believes that the financial statements do not require revision, but the client is unwilling to revise or eliminate the material inconsistency in the other information. Under these circumstances, what action would the auditor most likely take next?
A. Disclaim an opinion on the financial statements after explaining inconsistency in a other-matter paragraph.
B. Communicate this matter with those charged with governance.
C. Issue an “except for” qualified opinion after discussing the matter with the client’s audit committee.
D. Consider the situation closed because the other information is not in the audited financial statements.
Choice “2” is correct. If the auditor discovers a material inconsistency in other information accompanying the audited financial statements, the financial statements do not require revision, and the client refuses to eliminate or revise the inconsistency, the auditor should communicate the matter with those charged with governance and then consider 1) revising the report to include an other-matter paragraph describing the material inconsistency, 2) withholding the use of the report, or 3) withdrawing from the engagement and consulting with legal counsel.
Choice “1” is incorrect. A disclaimer of opinion is generally not warranted because there is no limitation on scope.
Choice “3” is incorrect. A qualified opinion is generally not warranted because the financial statements are fairly stated.
Choice “4” is incorrect. Even though the auditor has no responsibility to audit or otherwise corroborate other information accompanying the financial statements, the auditor has a responsibility to read the other information accompanying the financial statements for consistency and to identify any material misstatements of fact included therein.
An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph:
A. Is considered an “except for” qualification of the opinion.
B. Is appropriate and would not negate the unmodified opinion.
C. Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.
D. Necessitates a revision of the opinion paragraph to include the phrase “with the foregoing explanation.”
Choice “2” is correct. This is an emphasis-of-matter paragraph and should be added to an otherwise unmodified opinion in this case.
Choice “1” is incorrect. An “except for” qualification is used for a scope limitation or a departure from GAAP, but not for emphasis of a matter.
Choice “3” is incorrect. The auditor may emphasize a matter even if it is included in the footnotes.
Choice “4” is incorrect. A phrase such as “with the foregoing explanation” should not be used in an unmodified opinion.
A client decides not to make an auditor’s proposed adjustments that collectively are not material, and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation?
A. The financial statements are free from material misstatement, and no disclosure is require in the notes to the financial statements.
B. The financial statements are free from material misstatement, but disclosure of the proposed adjustments is required in the notes to the financial statements.
C. The financial statements do not conform with generally accepted accounting principles (GAAP)/
D. The financial statements contain unadjusted misstatements that should result in a qualified opinion.
Choice “2” is correct. This is an emphasis-of-matter paragraph and should be added to an otherwise unmodified opinion in this case.
Choice “1” is incorrect. An “except for” qualification is used for a scope limitation or a departure from GAAP, but not for emphasis of a matter.
Choice “3” is incorrect. The auditor may emphasize a matter even if it is included in the footnotes.
Choice “4” is incorrect. A phrase such as “with the foregoing explanation” should not be used in an unmodified opinion.
Before reporting on the financial statements of a U.S. entity that have been prepared in
accordance with a financial reporting framework generally accepted in another country, an
auditor practicing in the U.S. should:
A. Notify management that the auditor is required to disclaim an opinion on the financial
statements.
B. Be certified by the appropriate auditing or accountancy board of the other country.
C. Receive a waiver from the auditor’s state board of accountancy to perform the
engagement.
D. Understand the applicable legal responsibilities involved if the auditor plans to use the
form and content of the auditor’s report of another country.
Choice “4” is correct. In an audit of financial statements prepared in accordance with a financial reporting framework generally accepted in another country, the auditor should obtain an understanding of the applicable legal responsibilities involved if the auditor plans to use the form and content of the auditor’s report of another country. The auditor should also obtain an understanding of the purpose for which the financial statements are prepared; whether the financial reporting framework is a fair presentation framework; the intended users of the financial statements; and the steps taken by management to determine whether the applicable financial reporting framework is acceptable in the circumstances.
Choice “1” is incorrect. The auditor need not disclaim an opinion on the financial statements prepared in accordance with a financial reporting framework generally accepted in another country.
Choice “2” is incorrect. The auditor practicing in the U.S. would be able to report on the financial statements of the U.S. entity without obtaining certification in the other country.
Choice “3” is incorrect. A waiver to perform the engagement is not necessary.
In which of the following situations would an auditor ordinarily choose between expressing
an “except for” qualified opinion or an adverse opinion?
A. Events disclosed in the financial statements cause the auditor to have substantial
doubt about the entity’s ability to continue as a going concern.
B. The auditor did not observe the entity’s physical inventory and is unable to become
satisfied as to its balance by other auditing procedures.
C. The financial statements fail to disclose information that is required by generally
accepted accounting principles.
D. The auditor is asked to report only on the entity’s balance sheet and not on the other
basic financial statements.
Choice “3” is correct. Failure to disclose information that is required by GAAP is a departure from GAAP. Departures from GAAP result in a qualified or an adverse opinion.
Choice “1” is incorrect. If, after considering identified conditions and events and management’s plans, the auditor concludes that substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time remains, the audit report should include an emphasis-of-matter (explanatory) paragraph (after the opinion paragraph in the unmodified (unqualified) report) to reflect that conclusion.
Choice “2” is incorrect. If the auditor is unable to observe physical inventory and is unable to become satisfied through alternative means, that is a scope limitation. Scope limitations result in either a qualified opinion or a disclaimer of opinion.
Choice “4” is incorrect. The auditor can report on one financial statement and not the others. This does not preclude issuance of an unmodified opinion.
Which of the following statements is not true regarding the auditor’s responsibility for
subsequent events?
A. The auditor has an active responsibility to make continuing inquiries between the date
of the financial statements and the date on which sufficient appropriate audit evidence
has been obtained.
B. The auditor has an active responsibility to make continuing inquiries between the date
of the auditor’s report and the date on which the report is submitted.
C. The auditor has no active responsibility to make continuing inquiries after the date of
the auditor’s report.
D. The auditor has an active responsibility to make continuing inquiries between the date
of the financial statements and the date of the auditor’s report.
Choice “2” is correct. The auditor has no active responsibility to make continuing inquiries between the date of the auditor’s report and the date on which the report is submitted. The auditor’s active responsibility stops on the date of the auditor’s report.
Choice “1” is incorrect. The auditor does have an active responsibility to make continuing inquiries between the date of the financial statements and the date on which sufficient appropriate audit evidence has been obtained.
Choice “3” is incorrect. The auditor has no active responsibility to make continuing inquiries after the date of the auditor’s report.
Choice “4” is incorrect. The auditor does have an active responsibility to make continuing inquiries between the date of the financial statements and the date of the auditor’s report.
