Chapter 1 Set 2

Question 1

What events would cause an auditor to issue a report that omits any reference to consistency?

Answer 1

A change in accounting estimate (such as a change in the useful life of a depreciable asset) is accounted for prospectively and does not affect the comparability of financial statements between periods

Question 2

What are examples of mitigating risk factors?

Answer 2

• postponement of expenditures (including R&D)
• plans to dispose of assets
• plans to borrow money or restructure debt
• plans to increase ownership equity (sell stock)

Question 3

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

Answer 3

Closing balance sheet only, (note that the auditor will issue a disclaimer of opinion on the statements of income, retained earnings and cash flows)

Question 4

What statement is a basic element of the auditor’s report under U.S. auditing standards?

Answer 4

Under U.S. auditing standards, the auditor’s audit report includes a statement that “An audit includes evaluating…significant estimates made by management…”

Question 5

An auditor may not issue a qualified opinion when?

Answer 5

The auditor lacks independence with respect to the audited entity

Question 6

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

Answer 6

Believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed

Question 7

Under GAAS, concerning the unmodified audit opinion, it requires what?

Answer 7

Auditor’s Responsibility Paragraph

Question 8

Under GAAP, concerning the unmodified audit opinion, it requires what?

Answer 8

Management’s Responsibility Paragraph and Opinion Paragraph

Question 9

What does an Unmodified Opinion state?

Answer 9

That financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows on the entity in conformity with applicable financial reporting framework

Question 10

When should an auditor’s report be modified?

Answer 10

1) the auditor concludes that the financial statements as a whole are materially misstated (GAAP)
2) the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement (GAAS)

Question 11

What is a qualified opinion?

Answer 11

(both GAAP and GAAS) States that except for the effects of the matter to which qualification relates, the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity in conformity with the applicable financial reporting framework

Question 12

What is an adverse opinion?

Answer 12

(GAAP) states that the financial statements do not present fairly the financial position, results of operations, or cash flows of the entity in conformity with the applicable financial reporting framework

Question 13

What is a disclaimer of opinion?

Answer 13

(GAAS) states that the auditor does not express an opinion on the financial statements because the auditor was not able to obtain sufficient appropriate audit evidence to provide a basis for an opinion

Question 14

When does an auditor use an emphasis-of-matter paragraph?

Answer 14

• going concern
• consistency
• changing prior opinion
• special purpose framework
  Must be placed immediately after the opinion paragraph

Question 15

Why is an emphasis-of-matter paragraph used?

Answer 15

It is used when referring to a matter that is appropriately disclosed in the financial statements and is of such importance that it is fundamental to the users’ understanding of the financial statements

Question 16

Why is an other-matter paragraph used?

Answer 16

It refers to matters other than those presented or disclosed in the financial statements that are relevant to the user’s understanding of the audit, the auditor’s responsibilities, or the auditor’s report

Question 17

What is a disclaimer of opinion?

Answer 17

A disclaimer of opinion means that the auditor was unable to obtain sufficient appropriate audit evidence to provide a reasonable basis for an opinion

Question 18

When inadequate disclosure has a material but not pervasive effect on the financial statements, the auditor’s opinion should state what?

Answer 18

“In our opinion, except for the omission of the information described in the Basis for Qualified Opinion paragraph…”

Question 19

What phrase should an emphasis-of-matter paragraph contain if an auditor has doubt in a company’s going concern?

Answer 19

“substantial doubt about its (the entity’s) ability to continue as a going concern”

Question 20

When another auditor performs a substantial portion of the audit, and when the group engagement partner makes reference to the audit of another auditor (component auditor), the report should indicate what?

Answer 20

a division of responsibility