Chapter 1 Set 3

Question 1

Who should auditor’s address their reports to?

Answer 1

The entity that engaged them

Question 2

If the financial statements, including accompanying notes, fail to disclose information that is required by generally accepted accounting principles, the auditor should express what?

Answer 2

a qualified or adverse opinion, depending on pervasiveness

Question 3

When an independent CPA assists in preparing the financial statements of a publicly held entity, but has not audited or reviewed them, the CPA should issue a disclaimer of opinion. In such situations, the CPA has no responsibility to apply any procedures beyond what?

Answer 3

Reading the financial statements for obvious material misstatements

Question 4

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 is?

Answer 4

Is appropriate and would not negate the unmodified opinion, note that this is an emphasis-of-matter paragraph and should be added to an otherwise unmodified opinion in this case

Question 5

When single-year financial statements are presented, an auditor ordinarily would express an unmodified opinion with no emphasis of matter or other matter paragraph if the?

Answer 5

Prior year’s financial statements were audited by another CPA whose report, which expressed an unmodified opinion, is not presented

Question 6

When the auditor is unable to satisfy himself or herself regarding the amount of beginning inventory, he or she must disclaim what?

Answer 6

An adverse opinion on the income statement because of the inability to verify the cost of goods sold during the year. The auditor may, however, still be able to issue an unmodified opinion on the balance sheet, since inventory can be verified as of the balance sheet date.

Question 7

Which paragraphs of an auditor’s report on financial statements under U.S. auditing standards should refer to generally accepted auditing standards (GAAS) and generally accepted accounting principles (GAAP?

Answer 7

GAAS - Auditor’s Responsibility Paragraph

GAAP - Opinion Paragraph

Question 8

When is an adverse opinion issued?

Answer 8

When the financial statements are not presented in accordance with GAAP

Question 9

When an auditor qualifies an opinion because of inadequate disclosure, the auditor should describe the nature of the omission in a separate paragraph and modify the what?

Answer 9

In a report qualified for inadequate disclosure, the auditor would add a paragraph titled Basis for Qualified Opinion preceding the Opinion paragraph and modify the Opinion paragraph by adding an “except for…” statement.

Question 10

If a company issues financial statements that purport to present financial position and results of operations but omits the related statement of cash flows, what will the auditor express?

Answer 10

A qualified opinion

Question 11

When an entity changes its method of accounting for income taxes, which has a material effect on comparability, the auditor should refer to the change in an emphasis-of-matter paragraph added to the auditor’s report. This paragraph should identify the nature of the change and?

Answer 11

Refer to the financial statement note that discusses the change in detail, it should look something like:
“As discussed in Note X to the financial statements, the company changed its method of accounting for income taxes in X2.”

Question 12

In the auditor’s report under U.S. GAAS, the group engagement partner decides not to make reference to another CPA who audited a client’s subsidiary. The group engagement partner could justify this decision if, among other requirements, the group engagement partner is what?

Answer 12

Satisfied as to the independence and professional reputation of the component auditor

Question 13

What would be considered restrictions on the scope of an audit?

Answer 13

• timing of the work
• inability to obtain sufficient appropriate audit evidence
• inadequacy in the accounting records
  these may require the auditor to qualify or disclaim an opinion

Question 14

Failure to disclose information that is required by GAAP is a departure from GAAP. Departures from GAAP result in what?

Answer 14

Either a qualified or adverse opinion

Question 15

Scope limitations result in either?

Answer 15

Either a qualified opinion or a disclaimer of opinion

Question 16

When an auditor expresses an adverse opinion, the opinion paragraph should include?

Answer 16

The opinion paragraph in an adverse opinion should state that, in the auditor’s opinion, because of the significance of the matter(s) described in the basis for adverse opinion paragraph, the financial statements are….

Question 17

The failure of the financial statements to contain adequate disclosure of related party transactions, or other required disclosures, would result in?

Answer 17

qualified or adverse opinion

Question 18

How does an auditor make the following representations when issuing the auditor’s report on comparative financial statements under U.S. auditing standards?

Answer 18

Under U.S. auditing standards, the auditor explicitly states in the Auditor’s Responsibility paragraph of the opinion: “We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.” Consistency is implied in the auditor’s report.

Question 19

What is used for reporting restrictions of scope?

Answer 19

Qualified or disclaimer of opinion

Question 20

If the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented, the successor auditor should indicate in an Other-Matter paragraph of the report that?

Answer 20

1) that the financial statements of the prior period were audited by another auditor
2) the date of the previous report
3) the type of report issued by the predecessor auditor,
4) if the report was other than an unmodified report, the substantive reasons therefor