Audit Reports

Question 1

An auditor most likely would modify the audit report if the entity’s financial statements include a footnote on related party transactions

Answer 1

Stating that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm’s-length transaction.
Material related party transactions must be disclosed.
In general, it is not possible to determine whether or not such transactions were conducted on terms equivalent to those in an arm’s-length transaction. If the entity’s financial statements include a footnote on related party transactions that states that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm’s-length transaction, should obtain sufficient appropriate evidence to verify arm’s-length equivalence (which is unlikely in view of the rather hypothetical nature of that statement).
If such evidence were not available, the auditor would ask management to remove the unsupportable statement. If the entity refused to remove the footnote in question, the auditor would consider issuing a qualified or adverse opinion, due to GAAP departure.

Question 2

An auditor may reasonably issue a qualified opinion for a(n)

Answer 2

A qualified opinion may be issued for a scope limitation and for an unjustified accounting change (GAAP departure).

Question 3

When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the situation in the

Answer 3

A qualified opinion resulting from a scope limitation (an insufficiency of audit evidence) results in the addition of a separate paragraph (Basis for Qualified Opinion, which describes the circumstances involved) and a modified opinion paragraph. No mention would be made in the notes to the financial statements. The Auditor’s Responsibility section would not include discussion of the reason(s) for the qualification.

Question 4

An auditor 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 materiality of the effect on the financial statements, the auditor should express either a(n)

Answer 4

Qualified opinion or an adverse opinion.
Failure to properly account for or disclose an illegal act that has a material effect on the financial statements is a generally accepted accounting principle (GAAP) departure. Material GAAP departures result in either a qualified or an adverse opinion.

Question 5

When disclaiming an opinion due to a client-imposed scope limitation, an auditor should indicate in a separate paragraph why the audit did not comply with generally accepted auditing standards. The auditor should also

Answer 5

A disclaimer report omits the scope paragraph (the second paragraph in the auditor’s responsibility section that describes an audit) and adds a separate paragraph explaining why the audit did not comply with generally accepted auditing standards (Basis for Disclaimer of Opinion). The scope paragraph is omitted because any descriptions of procedures performed could be misunderstood. If a disclaimer is issued, the auditor does not feel that the audit work performed was sufficient to render an opinion. The opinion paragraph remains but it indicates that the scope of work was insufficient to support an opinion.

Question 6

Park, CPA, was engaged to audit the financial statements of Tech Co., a new client, for the year ended December 31, 20x1. Park obtained sufficient audit evidence for all of Tech’s financial statement items except Tech’s opening inventory. Due to inadequate financial records, Park could not verify Tech’s January 1, 20x1, inventory balances.

Answer 6

Park’s opinion on Tech’s 20x1 financial statements most likely will be on the
The inability to verify the beginning inventory makes the auditor unable to express an opinion on any financial statement in which inventory is a material component. Beginning inventory is material to cost of goods sold and net income. As a result, the auditor is unable to express an opinion and must disclaim on the income and retained earnings statements and the statement of cash flows. The auditor will, however, be able to render an unmodified opinion on the balance sheet.

Question 7

If management declines to present supplementary information required by the Governmental Accounting Standards Board (GASB), the auditor should issue a(n)

Answer 7

Unmodified opinion with an additional explanatory paragraph.
Failure to include supplementary information required by the Governmental Accounting Standards Board would result in an unmodified opinion with an other-matter paragraph.

Question 8

What is an auditor’s responsibility for supplementary information, such as disclosure of pension information, which is outside the basic financial statements, but required by the GASB?

Answer 8

The auditor should apply certain limited procedures to the supplementary information and report deficiencies in, or omissions of, such information.
AICPA Professional Standards describe the limited procedures that the auditor is to perform to address required supplementary information. The auditor is further required to report deficiencies in or the omission of such information.

Question 9

An alert to restrict the auditor’s report is required when

Answer 9

The report is considered to be a by-product to the primary objective of the engagement.
An alert to restrict the use of the auditor’s report is required when (1) the subject matter is based on criteria that are only suitable or available to a limited number of users; or (2) when the matters are presented in a by-product report that is not the primary objective of the engagement.

Question 10

When adding an alert to restrict the auditor’s report, the auditor should place the alert

Answer 10

In a paragraph at the end of the auditor’s report.

The alert to restrict the distribution of the auditor’s report is presented at the end of the auditor’s report.

Question 11

An auditor may report on condensed financial statements that are derived from complete audited financial statements if the

Answer 11

Auditor indicates whether the information in the condensed financial statements is consistent in all material respects.
An auditor’s report on condensed financial statements should indicate:
1) the auditor has audited and expressed an opinion on the complete financial statements;
2) the date of the auditor’s report on such statements;
3) the type of opinion expressed; and
4) whether the information in the condensed financial statements is consistent, in all material respects, with the audited financial statements.

Question 12

When planning a review of an audit client’s interim financial statements, which of the following procedures should the accountant perform to update the accountant’s knowledge about the entity’s business and its internal control?

Answer 12

Consider the results of audit procedures performed with respect to the current year’s financial statements.
AICPA Professional Standards specifically identify that the accountant should consider the results of any audit procedures performed with respect to the current year’s financial statements as a procedure that would be applicable to planning a review of interim financial information with respect to updating the auditor’s knowledge of the entity’s business and its internal control.

Question 13

The objective of a review of interim financial information of a public entity is to provide the accountant with a basis for

Answer 13

Reporting whether material modifications should be made for such information to conform with the applicable financial reporting framework.

Question 14

For an entity’s financial statements to be presented fairly in conformity with generally accepted accounting principles, the principles selected should

Answer 14

Reflect transactions in a manner that presents the financial statements within a range of acceptable limits.
The accounting principles utilized in the preparation of the financial statements should:
1) be prepared in accordance with the identified financial reporting framework;
2) be appropriate in the circumstances;
3) provide information about matters that may affect the use, understanding, and interpretation of the financial statements;
4) classify and summarize information in a reasonable manner; and
5) reflect transactions in a manner that presents the financial position, results of operations, and cash flows stated within a range of reasonable and practicable limits.

Question 15

A group audit engagement partner decides not to refer to the audit of a component auditor who audited a subsidiary of the group auditor’s client. After making inquiries about component auditor’s professional reputation and independence, the group engagement partner most likely would

Answer 15

Contact the component auditor and review the audit programs and audit documentation pertaining to the subsidiary.
In deciding not to reference the component auditor, the group engagement partner should consider materiality and the type of work to be performed. The group auditor may also take appropriate steps to evaluate the work of the component auditor, such as reviewing relevant audit programs and the audit documentation.

Question 16

The group engagement partner decides not to refer to the audit of a component auditor who audited a subsidiary of the group auditor’s client. After making inquiries about the component auditor’s professional reputation and independence, the group engagement partner most likely would

Answer 16

Contact the component auditor and review the audit programs and documentation pertaining to the subsidiary.
The group engagement partner may decide not to make reference to the audit of a component auditor after obtaining satisfaction as to the professional reputation, independence, and competence of the component auditor and the work performed. Satisfaction with the work performed might be obtained by visiting the component auditor and discussing the procedures performed and the related results, reviewing the audit programs, and/or reviewing the documentation of the component auditor, including the internal control work performed.

Question 17

An auditor most likely would express an unmodified opinion and would not add an emphasis-of-matter or other-matter paragraph to the report if the auditor

Answer 17

Believes that there is a remote likelihood of a material loss resulting from an uncertainty.
An unmodified audit report would be appropriate, since there is no need for disclosure if the likelihood of a material loss is indeed remote.

Question 18

Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement?

Answer 18

Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.
The auditor may inquire of the predecessor auditor about issues related to the consistency of financial reporting over time, but that is not something that the auditor is required to inquire about prior to accepting the audit engagement.

Question 19

An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements.
If the auditor concludes that the financial statements do not require revision, but the client refuses to revise or eliminate the material inconsistency, the auditor may

Answer 19

Revise the auditor’s report to include a separate other-matter paragraph describing the material inconsistency.
If the auditor concludes that the financial statements do not require revision, but the client refuses to revise or eliminate the material inconsistency, the auditor may revise the auditor’s report to include a separate other-matter paragraph describing the material inconsistency. Because the financial statements are fairly stated, the auditor can only highlight the matter by adding an additional paragraph. Other alternatives include withholding the report or withdrawing from the engagement.

Question 20

When an independent accountant’s report based on a review of interim financial information is presented in a registration statement, a prospectus should include a statement about the accountant’s involvement. This statement should clarify that the

Answer 20

Accountant’s review report is not a “part” of the registration statement within the meaning of the Securities Act of 1933.
A statement about the accountant’s involvement with interim financial information presented in a registration statement should clarify that the accountant’s review report is not a “report” or “part” of the registration statement within the meaning of Sections 7 and 11 of the Securities Act of 1933.

Question 21

In an accountant’s review of interim financial information, the accountant typically performs each of the following, except

Answer 21

Obtaining corroborating external evidence.
A review consists primarily of performing analytical procedures and making inquiries of client personnel. It does not include other procedures performed in an audit, such as tests of control, confirmation, or obtaining corroborating evidence of inquiries, etc.