Chapter 18: Reports on Audited Financial Statements

Question 1

Adverse opinion

Answer 1

the auditors opinion that the F/S do not present fairly in accordance with GAAP due to a pervasively material misstatement.

Question 2

Critical (or Key) audit matter

Answer 2

Any matter arising from the audit of the F/S communicated to the audit committee and that 1. relates to accounts or disclosures that are material to the F/S and 2. involved especially challenging, subjective, or complex auditor judgement.

Question 3

Disclaimer of opinion

Answer 3

the auditor’s indication that no opinion is expressed on the F/S. The auditor will disclaim an opinion if a pervasive scope limitation arises or if it is determined that the auditor lacks independence.

Question 4

Explanatory paragraph

Answer 4

a paragraph that is used under certain circumstances to provide additional explanation to users of the financial statements. Explanatory paragraphs do not affect the auditor’s unqualified opinion.

Question 5

Generally accepted auditing standards

Answer 5

Standards against which the quality of the auditor’s performance is measured.

Question 6

Materiality

Answer 6

the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of users.

Question 7

Qualified opinion

Answer 7

the auditor’s opinion that the financial statements present fairly, in all material respects, in accordance with GAAP, “except for” a material misstatement that does not, however, pervasively affect users’ ability to rely on the F/S. Can also be issued for a scope limitation that is of limited significance.

Question 8

Reasonable assurance

Answer 8

a term that implies some risk that a material misstatement could be present in the financial statements without the auditor detecting it, even when the auditor has exercised due care.

Question 9

Representation letter

Answer 9

a letter that corroborates oral representation made to the auditor by management or by other auditors and documents the continued appropriateness of such representations.

Question 10

Scope limitation

Answer 10

A lack of evidence that may preclude the auditor from issuing a clean opinion, usually resulting from an inability to conduct an audit procedure considered necessary.

Question 11

Unqualified/unmodified opinion

Answer 11

the auditor’s opinion that the F/S present fairly, in all material respects, the client’s financial position, results of operations, and cash flows in accordance with generally accepted accounting principles that is, a “clean” opinion. “Unqualified” is the term used for audits conducted from public companies under PCAOB standards, while “unmodified” is the term used for audits conducted for other entities under ASB standards.