Ch 12 HW

Question 1

1. When reporting under GAAS, certain statements are required in all auditors’ reports (“explicit”) and others are required only under certain conditions (“implicit”). Which combination that follows correctly describes the auditors’ responsibilities for reporting?

GAAP Consistency Going concern Opinion

A. Explicit Implicit Implicit Explicit

B. Implicit Implicit Explicit Implicit

C. Explicit Explicit Implicit Explicit

D. Implicit Explicit Explicit Implicit

Answer 1

GAAP Consistency Going concern Opinion

Explicit	 Implicit	    Implicit	 Explicit

Question 2

2. If the auditors decide to present separate reports on the entity’s financial statements and internal control over financial reporting, which of the following should be modified to refer to the other report?

Report on Financial Statements Report on Internal Control over Financial Reporting
A. No Yes

B. Yes No

C. No No

D. Yes Yes

Answer 2

Yes Yes

Question 3

3. If the opinion issued on prior-years’ financial statements is no longer appropriate and financial statements are presented in comparative form, the auditors’ current report should
   A. Reference the type of opinion issued on the prior-years’ financial statements and indicate that the current opinion on these financial statements differs from that expressed in the prior years.
   B. Indicate that the opinion on the prior-years’ financial statements cannot be relied upon.
   C. Express the revised opinion on the prior-years’ financial statements without referencing the previously-issued opinion.
   D. Not reference the prior-years’ financial statements.

Answer 3

Reference the type of opinion issued on the prior-years’ financial statements and indicate that the current opinion on these financial statements differs from that expressed in the prior years.

Question 4

4. The introductory paragraph of the auditors’ report indicates that an audit has been conducted and identifies the financial statements the
   auditors examined.
   True
   False

Answer 4

True

Question 5

5. In all cases where auditors are associated with unaudited financial statements, the auditors must issue a disclaimer of opinion.
   True
   False

Answer 5

True

Question 6

6. If financial statements contain an immaterial departure from accounting principles, the auditors can render a(n)
   A. Qualified opinion.
   B. “Subject to” opinion.
   C. Unmodified opinion with an additional paragraph.
   D. Unmodified opinion.

Answer 6

Unmodified opinion.

Question 7

7. If the audit scope is restricted in some specific respect, but sufficient appropriate evidence is gathered by performing other procedures, the auditors’ standard report need not be modified.
   True
   False

Answer 7

True

Question 8

8. When financial statements are presented in comparative form and another firm audited the prior-years’ financial statements (but the other firm’s report is not presented with the financial statements), the auditors’ report on the current-year financial statements should
   A. Refer to any procedures performed by the current auditor to verify the opinion on the prior-years’ financial statements.
   B. Disclaim an opinion on the prior-years’ financial statements.
   C. Refer to the report and type of opinion issued by the other firm on the prior-years’ financial statements.
   D. Not refer to the prior-years’ financial statements.

Answer 8

Refer to the report and type of opinion issued by the other firm on the prior-years’ financial statements.

Question 9

9. Which of the following reporting options would auditors use if the entity changed the estimated lives of its property, plant and equipment and
   accounted for the change correctly?
   A. Unmodified opinion with an emphasis-of-matter paragraph.
   B. Qualified opinion.
   C. Unmodified opinion.
   D. Disclaimer of opinion.

Answer 9

Unmodified opinion.

Question 10

10. If the auditors encounter a material scope limitation in the examination of the entity’s financial statements, which of the following types of opinions could be issued?
    A. Disclaimer of opinion or qualified opinion.
    B. Adverse opinion or disclaimer of opinion.
    C. Unmodified opinion with an emphasis-of-matter paragraph or qualified opinion.
    D. Adverse opinion or qualified opinion.

Answer 10

Disclaimer of opinion or qualified opinion.

Question 11

11. If comparative financial statements were examined by predecessor auditors, those auditors’ reports must be presented along with the auditors’
    report.
    True
    False

Answer 11

False

Question 12

12. Which of the following is not a difference in the audit examinations and reports for public and nonpublic entities?
    A. Management is responsible for the fairness of the financial statements for public entities, but the auditors are responsible for
    the fairness of the financial statements for nonpublic entities.
    B. Audit examinations for nonpublic entities are based on user demand but based on legislative requirements for public entities.
    C. Auditors are required to express an opinion on internal control in the audit of nonpublic entities but not in the audit of public entities.
    D. The reports for both public and nonpublic entities express an opinion on the entity’s financial statements.

Answer 12

Auditors are required to express an opinion on internal control in the audit of nonpublic entities but not in the audit of public entities.

Question 13

13. Auditors are required to issue a report on internal control over financial reporting in the audit of a public entity, but not in the audit of a
    nonpublic entity.
    True
    False

Answer 13

True

Question 14

14. The auditors’ report on summary financial statements will indicate whether those statements are fairly stated in relation to the complete
    financial statements.
    True
    False

Answer 14

True

Question 15

15. Which of the following would cause the auditors to issue a report on the entity’s financial statements other than a standard (unmodified)
    report?
    A. The financial statements present fairly the financial condition, results of operations, and cash flows of the entity.
    B. As the result of a scope limitation, auditors performed alternative procedures to satisfy themselves as to the fairness of the
    account balance.
    C. The entity omitted necessary information from its footnote disclosures that were material to the financial statements.
    D. The group auditors assumed responsibility for the work of component auditors in the audit of group financial statements.

Answer 15

The entity omitted necessary information from its footnote disclosures that were material to the financial statements.

Question 16

16. In a standard (unmodified) report, which of the following paragraphs or sections would indicate that auditors conducted their audits in
    accordance with generally accepted auditing standards?
    A. Opinion paragraph.
    B. Emphasis-of-matter paragraph.
    C. Introductory paragraph.
    D. Auditor’s Responsibility section.

Answer 16

Auditor’s Responsibility section.

Question 17

17. Which of the following report modifications would be necessary if group auditors are indicating the involvement of component auditors in the
    audit of group financial statements?
    A. A reference to component auditors’ work in the introductory paragraph.
    B. A reference to the report of component auditors in an other-matter paragraph.
    C. A reference to the components (and dollar and percentage magnitudes of the components) examined by component auditors in the Auditor’s Responsibility section.
    D. A reference to the report of component auditors providing a basis for the opinion in the Management’s Responsibility section.

Answer 17

A reference to the components (and dollar and percentage magnitudes of the components) examined by component auditors in the Auditor’s Responsibility section.

Question 18

18. When component auditors are involved in the audit of group financial statements, the group auditors may issue a report that
    A. Refers to the component auditors, describes the extent of the component auditors’ work, and expresses an unmodified opinion.

B. Places primary responsibility for the reporting on the component auditors.

C. Does not consider or evaluate the component auditors’ work but expresses an unmodified opinion in a standard report.

D. Names the component auditors, describes their work, and presents only the group auditors’ report.

Answer 18

Refers to the component auditors, describes the extent of the component auditors’ work, and expresses an unmodified opinion.

Question 19

19. When auditors render an adverse opinion on the entity’s financial statements, the
    A. Departures do not need to be explained in the auditors’ report.
    B. Auditors do not possess sufficient appropriate evidence.
    C. Auditors require less evidence to support the opinion compared to that for an unmodified opinion.
    D. Introductory paragraph, Management’s Responsibility section, and Auditor’s Responsibility section should not be modified.

Answer 19

Introductory paragraph, Management’s Responsibility section, and Auditor’s Responsibility section should not be modified.

Question 20

20. 
When auditors wish to issue an unmodified opinion but highlight that the entity changed its method of accounting for software development costs, they would most appropriately identify the change in accounting method in which of the following?
A. An emphasis-of-matter paragraph.
B. The opinion paragraph.
C. The introductory paragraph.
D. An other-matter paragraph.

Answer 20

An emphasis-of-matter paragraph.

Question 21

21. R. Wolfe became the new auditor for Royal Corporation, succeeding C. Mason, who audited the financial statements last year. Wolfe needs to report on Royal’s comparative financial statements and should disclose in the report an explanation about other auditors having audited the prior year
    A. To describe the audit and the opinion and name Mason as the predecessor auditor.
    B. To describe the prior audit and the opinion but not name Mason as the predecessor auditor.
    C. Only if Mason’s opinion last year was qualified.
    D. To describe the audit but not reveal the type of opinion issued by Mason.

Answer 21

To describe the prior audit and the opinion but not name Mason as the predecessor auditor.

Question 22

22. Which of the following is not included in the Auditor’s Responsibility section of the standard (unmodified) report on the entity’s financial
    statements?
    A. A statement that the audit was conducted in accordance with generally accepted auditing standards.
    B. A conclusion that the financial statements are in accordance with GAAP.
    C. The fact that an audit includes assessing the accounting policies used by the entity.
    D. The fact that the auditors performed the audit to obtain audit evidence about the amounts and disclosures in the financial statements.

Answer 22

A conclusion that the financial statements are in accordance with GAAP.

Question 23

23. When the financial statements contain a departure from GAAP, the auditors must render an adverse opinion on the entity’s financial
    statements.
    True
    False

Answer 23

False

Question 24

24. An adverse opinion indicates that the financial statements are not presented in accordance with GAAP.
    True
    False

Answer 24

True

Question 25

25. Which of the following is not included in the standard (unmodified) report on the financial statements? A. An emphasis-of-matter paragraph commenting on the effect of economic conditions on the entity. B. An identification of the financial statements that were audited. C. An opinion that the financial statements present financial position in accordance with GAAP. D. A general description of an audit.

Answer 25

An emphasis-of-matter paragraph commenting on the effect of economic conditions on the entity.

Question 26

26. If group auditors choose to rely on the work of component auditors, the group auditors must refer to the component auditors in their report by name. True False

Answer 26

False

Question 27

27. Under which of the following conditions can a disclaimer of opinion never be issued? A. The auditors have determined that the entity uses the NIFO (next-in, first-out) inventory costing method. B. The entity does not allow the auditors access to evidence about important accounts. C. The auditors own stock in the entity. D. The entity’s going-concern problems are highly material and pervasive.

Answer 27

The auditors have determined that the entity uses the NIFO (next-in, first-out) inventory costing method.

Question 28

28. If other auditors examined prior-year financial statements presented in comparative form, the auditors’ report on the current-year financial statements should not reference the prior-year financial statements. True False

Answer 28

False

Question 29

29. If auditors cannot apply specific auditing procedures during the examination, the opinion paragraph in the report must be qualified. True False

Answer 29

False

Question 30

30. Which of these situations would require auditors to append an emphasis-of-matter paragraph about consistency to an otherwise unmodified opinion? A. Entity sold one of its subsidiaries and consolidated six subsidiaries this year compared to seven last year. B. Entity corrected a prior mistake in accounting for interest capitalization. C. Entity changed its inventory costing method from FIFO to LIFO. D. Entity changed its estimated allowance for uncollectible accounts receivable.

Answer 30

Entity changed its inventory costing method from FIFO to LIFO.

Question 31

31. The first paragraph of the standard report on the entity's financial statements is referred to as the scope paragraph. True False

Answer 31

False

Question 32

32. The auditors’ report should be dated as of the date of the entity’s financial statements. True False

Answer 32

False

Question 33

33. When there is a material departure from GAAP, auditors may issue either an adverse opinion or disclaimer of opinion on the entity's financial statements. True False

Answer 33

False

Question 34

34. Auditors are not responsible for determining whether there is a substantial doubt about an entity's ability to continue as a going concern. True False

Answer 34

False

Question 35

35. The introductory paragraph of the auditors' report identifies management's responsibility for the financial statements. True False

Answer 35

False

Question 36

36. The Auditor’s Responsibility section of the auditors’ report contains a general description of the audit work and reference to generally accepted auditing standards. True False

Answer 36

True

Question 37

37. Which of the following is included in the introductory paragraph of the standard (unmodified) report on the entity’s financial statements? A. The fact that an audit provides a reasonable basis for an opinion. B. The names of the financial statements audited. C. The auditors’ responsibility to express an opinion on the entity’s financial statements. D. Management’s responsibility for the financial statements.

Answer 37

The names of the financial statements audited.

Question 38

38. How is the auditors’ responsibility for expressing the opinion on financial statements disclosed in the standard (unmodified) report? A. Stated explicitly in the Auditor’s Responsibility section. B. Stated explicitly in the opinion paragraph. C. Stated explicitly in the introductory paragraph. D. Unstated but understood in the Auditor’s Responsibility section.

Answer 38

Stated explicitly in the Auditor’s Responsibility section.

Question 39

``` 39. Company A hired Samson & Delilah, CPAs, to audit the financial statements of Company B and deliver the report to Megabank. Who is the client? A. Company A. B. Samson & Delilah. C. Megabank. incorrect Company B. ```

Answer 39

Company A.

Question 40

40. Auditors would be more likely to issue a disclaimer of opinion when a scope limitation is client imposed as opposed to circumstance imposed. True False

Answer 40

True

Question 41

41. Auditors found that the entity has not capitalized a material amount of leases in the financial statements. When considering the materiality of this departure from GAAP, the auditors would choose between which reporting options? A. Unmodified opinion or qualified opinion. B. Unmodified opinion or disclaimer of opinion. C. Unmodified opinion with an emphasis-of-matter paragraph or an adverse opinion. D. Qualified opinion or adverse opinion.

Answer 41

Qualified opinion or adverse opinion.

Question 42

42. The auditors determined that the entity is suffering financial difficulty and its going-concern status is seriously in doubt. Assuming that the entity adequately disclosed this matter in the financial statements, the auditors must choose between which of the following auditors’ report alternatives? A. Standard (unmodified) report or a disclaimer of opinion. B. Standard (unmodified) report or adverse opinion. C. Qualified opinion or adverse opinion. D. Unmodified opinion with a reference to going-concern or disclaimer of opinion.

Answer 42

Unmodified opinion with a reference to going-concern or disclaimer of opinion.

Question 43

43. When component auditors are involved in the audit of group financial statements, the Auditor’s Responsibility section of the group auditor’s report would be modified. True False

Answer 43

True

Question 44

44. If a going-concern uncertainty exists, auditors may not issue which of the following reports on the entity’s financial statements? A. An adverse opinion because of a pervasive departure from GAAP, assuming that the disclosures about going-concern uncertainties are adequate. B. A disclaimer of opinion resulting from an uncertainty about the ability of the entity to continue in existence. C. An unmodified opinion with an emphasis-of-matter paragraph explaining the going-concern problem. D. An opinion qualified for a GAAP departure if the auditors believe the disclosures about going-concern uncertainties are inadequate.

Answer 44

An adverse opinion because of a pervasive departure from GAAP, assuming that the disclosures about going-concern uncertainties are adequate.