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Audit final > Chapter 17 > Flashcards

Chapter 17 Flashcards

1
Q

Standard unqualified audit report states that audit was performed in conformity with auditing standards and gives opinion that financials are presented fairly in conformity with GAAP – cannot be issued if what?: (name one of the three)

A

There are conditions about which financial statement users should be informed (explanatory paragraph)

There are material departures from GAAP (GAAP departure)

The auditors are unable to obtain sufficient appropriate audit evidence (scope limitation)

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2
Q

See Slide 5 for an Unqualified Audit Report for nonpublic clients

A

Slide 5

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3
Q

See slide 6 for an Unqualified Audit Report for a Public client. Difference really is around number 4-5

A

slide 6

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4
Q

The report date indicates the last day audit procedures were performed in the field. True or false?

A

True

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5
Q

Reports on the financial statements ordinarily include an opinion on just the financial statements themselves . True or False?

A

False: Financial statements and financial statement DISCLOSURES. The notes to the financial statements are considered an integral part of the financial statements.

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6
Q

Define an Unmodified opinion— with an other matter paragraph?

A

(after opinion paragraph). To emphasize a matter other than those presented or disclosed in the financial statements (e.g., other information in documents containing audited financial statements).

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7
Q

What is the overall condition required for issuance of an Unmodified opinion?

A

The auditors are able to obtain sufficient appropriate audit evidence (NO SCOPE LIMITATIONS) to obtain reasonable assurance that the financial statements as a whole are free from material misstatements (NO MATERIAL GAAP DEPARTURES). BUT there may be additional significant information to bring to financial statement users’ attention (ADDITIONALY EXPLANATORY PARAGRAPH MAY BE NEEDED)

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8
Q

What is an Unmodified opinion—with an emphasis of matter paragraph?

A

(after opinion paragraph). To emphasize a matter appropriately presented in the financial statements (e.g., a change in accounting principles).

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9
Q

What is an unmodified opinion on group financial statements

A

(modify entire report – no separate paragraph). When two or more CPA firms are involved in an audit and the group auditor (firm that does most of the work) does not wish to take responsibility for the work of the component auditors.

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10
Q

What is an unmodified Opinion with Emphasis of Matter Paragraph: Substantial Doubt about Client’s Going Concern Status?

A

-Significant recurring operating losses,
adverse financial ratios, working capital
deficiencies

  • Inability to pay obligations as they come
    due (defaults)

-Loss of major customers, uninsured
catastrophes, work stoppages

-Major Legal proceedings

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11
Q

Unmodified opinion—standard report is what?

A

This report may be issued only when the auditors have obtained sufficient appropriate audit evidence to conclude the financial statements are not misstated and there is no need to alter the report for the situations below

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12
Q

When there is an Unmodified Opinion with Emphasis of Matter Paragraph:GAAP Not Consistently Applied, how might accounting principles in current periods incosistent with other periods?

A

Examples:

  1. Acceptable changes in accounting principles (e.g., LIFO to FIFO)
  2. Changes in reporting entities (e.g., merger)
  3. Corrections of errors from prior periods

Auditor required to modify the report when there is inconsistency by adding an explanatory paragraph after the opinion paragraph in the report.

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13
Q

See slide 13 for characteristics of group audits

A

slide 13

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14
Q

Other Matters Auditors may Choose to Include in an Unmodified Opinion with Emphasis of Matter Paragraph

A
  • A particularly significant risk or uncertainty (e.g., major law suit)
  • Significant related party transactions
  • A major catastrophe
  • Unusually important significant events
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15
Q

One of the Departures from anUnqualified Unmodified Opinion is a Depature from GAAP. What is the other?

A

A scope limitation - auditor unable to accumulate sufficient appropriate evidence to make a conclusion on the financials.

Types of scope limitations:
Imposed by circumstances
E.g., important accounting records destroyed

Due to nature of audit
E.g., Engaged too late in year to observe client’s beginning inventory

Imposed by client (VERY concerning)
E.g., Client refuses to allow auditors to send confirmations to customers

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16
Q

Define a Qualified Opinion

A

A qualified opinion states that financial statements are presented fairly in conformity with generally accepted accounting principles “except for” the effects of some scope or departure matter (material but not pervasive departure from GAAP or scope limitation).

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17
Q

that due to a significant scope limitation, the auditors were unable to form an opinion on the financial statements (pervasive scope limitation). What kind of report would this be?

A

A disclaimer of Opinion

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18
Q

Adverse Opinion is defined as

A

An adverse opinion states that the financial statements are not presented fairly in conformity with generally accepted accounting principles (pervasive departure from GAAP).

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19
Q

See slide 20 forn an example of a qualified report with a departure from gaap?

A

Slide 20

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20
Q

Define an Adverse Opinion

A

Auditor believes the financial statements are
not presented fairly in conformity with GAAP
(departure is pervasive). Auditor believes departure causes financial
statements taken as a whole to be misleading. Explanatory paragraph added before opinion
paragraph and opinion changed

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21
Q

when the auditor is unable to be
satisfied that the overall financial statements
are fairly presented, this is issued

A

Disclaimer of Opinion. The auditor lacks the knowledge/ability to be able to
fully evaluate the financial statements; therefore, the
auditor removes scope paragraph, adds
explanatory paragraph, and disclaims opinion

22
Q

See slide for an example of an opinion paragraph that’s adverse

A

In our opinion, because of the effects of the matters discussed above, the financial statements referred to above do not present fairly, in conformity with accounting principles generally accepted in the United States of America, the financial position of XYZ Company as of December 31, 20X5, or the results of its operations or its cash flows for the year then ended.

23
Q

Example Explanatory and Disclaimer of Opinion Paragraphs:

A

See slide 24

24
Q

Placement of Additional/Explanatory Paragraphs before the opinion paragraph are for emphasis of matter and other matter paragraphs

A

False:

Before opinion paragraph—Basis for Modification (Qualified, Adverse, Disclaimer) Paragraphs

Following opinion paragraph—Emphasis of matter and other matter paragraphs

25
Q

Define a Pervasice scope limitation

A

sometimes a lack of auditor independence

or severe enough going concern risk

26
Q

See slide 28 for Audit Report Decisions for GAAP Departures

A

Slide 28

27
Q

See slide 26 for audit report type specifications

A

Slide 26

28
Q

See slide 27 for an overall summary of audit reports

A

Slide 27

29
Q

When reporting on Comparative financial Statements, the same opinion must be expressed on different years. True or False?

A

False. Can express different opinions on different years. Auditor should update report for all prior periods presented for comparison if necessary.

30
Q

Is it acceptable to express an unqualified opinion on one statement while expressing another type on the others? (issue separate audit reports)

A

Yes, it is. Example: Auditors retained after client has taken its beginning inventory. A disclaimer may be issue on the income statement (the auditor doesn’t know if income is reasonably stated), but an unqualified opinion may be issued on the year-end balance sheet.

31
Q

See slide 29 for all Audit Report Decisions for Scope Limitations

A

Slide 29

32
Q

Define a Form 10-Q

A

quarterly report containing UNAUDITIED but REVIEWED financial information

33
Q

The current report filed for reporting significant events (e.g., merger, change in auditors) is a form 10-k - True or False?

A

False. This is a form 8-k. The form 10-k is the annual report containing audited financial statements and other detailed financial information; also includes management and auditor reports on ICOFR

34
Q

registration statements for companies planning to issue securities to the public should do the forms S-1 through S-11. tRUE OR fALSE?

A

True

35
Q

Forms SB-1 and SB-2 are more simplified registration forms for small businesses. True or false?

A

True

36
Q

5.

Changes in accounting estimates ______ result in an explanatory paragraph.

A

Changes in estimates do not require an explanatory paragraph.

37
Q

.

An emphasis-of-matter paragraph always _______ the opinion paragraph.

A

ALways

38
Q

Auditors may add an emphasis-of-matter paragraph that refers to a matter that is _________ presented or disclosed

A

appropriately

39
Q

A(n) _____ opinion is appropriate if a material misstatement is considered pervasive.

A

adverse

40
Q

.

When there is significant doubt as to the ability to continue as a going concern, a(n) _________ paragraph may be added.

A

emphasis-of=matter

41
Q

The term material may be defined as “sufficiently important to influence decisions made by reasonable users of financial statements.’’ True or False?

A

True

42
Q

When a client omits notes to audited financial statements, the auditor should add an emphasis-of-matter section to the report indicating such omission and issue an unmodified report.

A

False

43
Q

Emphasis-of-matter paragraphs are potentially appropriate in all reports except those with unmodified opinions. True… or false?

A

False

44
Q

If a company is faced with any uncertainty such as the prospect of a strike or the possible imposition of wage and price controls, the auditors should issue a qualified or adverse opinion. True or false?

A

False

45
Q

A standard unmodified audit report does not mention consistency of application of accounting principles. - True or false

A

true

46
Q

pon the advice of its auditors, Smith Company changed the method of computing depreciation from the straight-line method to an accelerated method with a material effect upon the financial statements. The auditors’ report:

A

should include an additional emphasis-of-matter paragraph highlighting the accounting change.

47
Q

A Form S-1 must be filed with the SEC if a US company is planning to issue securities to the public.
correct True
False

A

true

48
Q

The auditors are not allowed to change their opinion on financial statements that were reported on in prior years.

A

false - they are

49
Q

When an adverse opinion is expressed, the opinion paragraph should include a direct reference to:

A

a separate paragraph that discusses the basis for the opinion expressed.

50
Q

Jones, CPA, accepts a new client late in Year 5 and therefore had no opportunity to observe the physical inventory taken at December 3l, Year 4. Jones found it impossible to obtain evidence by other auditing procedures as to the beginning inventories for Year 5. Jones observed the physical inventory at December 3l, Year 5 and completed the audit satisfactorily. The report to be issued should:

A

be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows.

Audit final (6 decks)

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