Chapter 3: Audit Reports Flashcards
Which of the following is a correct statement regarding the standard unmodified opinion audit report?
A) The format of the audit report for public and nonpublic entities are identical.
B) The auditor’s responsibility paragraph includes a statement that the auditors are responsible for selecting the appropriate accounting principles.
C) The audit report includes the name of the lead partner on the audit.
D) The scope paragraph includes a statement that the auditor considers internal controls when designing the audit procedures performed.
D) The scope paragraph includes a statement that the auditor considers internal controls when designing the audit procedures performed.
Auditing standards require that the audit report must be titled and that the title must
A) include the word “independent.”
B) indicate if the auditor is a CPA.
C) indicate if the auditor is a proprietorship, partnership, or corporation.
D) indicate the type of audit opinion issued.
A) include the word “independent.”
The auditor’s responsibility section of the standard unmodified opinion audit report states that the audit is designed to
A) discover all errors and/or irregularities.
B) discover material errors and/or irregularities.
C) conform to generally accepted accounting principles.
D) obtain reasonable assurance whether the statements are free of material misstatement.
D) obtain reasonable assurance whether the statements are free of material misstatement.
The audit report date on a standard unmodified opinion audit report indicates
A) the last day of the fiscal period.
B) the date on which the financial statements were filed with the Securities and Exchange Commission.
C) the last date on which users may institute a lawsuit against either the client or the auditor.
D) the last day of the auditor’s responsibility for the review of significant events that occurred after the date of the financial statements.
D) the last day of the auditor’s responsibility for the review of significant events that occurred after the date of the financial statements.
Which of the following is notexplicitly stated in the standard unmodified opinion audit report?
A) The financial statements are the responsibility of management.
B) The audit was conducted in accordance with generally accepted accounting principles.
C) The auditors believe that the audit evidence provides a reasonable basis for their opinion.
D) An audit includes assessing the accounting estimates used.
B) The audit was conducted in accordance with generally accepted accounting principles.
The standard unmodified opinion audit report for a nonpublic entity must
A) have a report title that includes the word “CPA.”
B) be addressed to the company’s stockholders and creditors.
C) be dated.
D) include an explanatory paragraph.
C) be dated.
The management’s responsibility section of the standard unmodified opinion audit report for a nonpublic company states that the financial statements are
A) the responsibility of the auditor.
B) the responsibility of management.
C) the joint responsibility of management and the auditor.
D) none of the above.
B) the responsibility of management.
The introductory paragraph of the standard unmodified opinion audit report for a nonpublic company performs which functions?
I. It states the CPA has performed an audit.
II. It lists the financial statements being audited.
III.It states the financial statements are the responsibility of the auditor.
A) I and II
B) I and III
C) II and III
D) I, II and III
A) I and II
Which of the following statements are true for the standard unmodified opinion audit report of a nonpublic entity?
I. The introductory paragraph states that management is responsible for the preparation and content of the financial statements.
II. The scope paragraph states that the auditor evaluates the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management.
A) I only
B) II only
C) I and II
D) Neither I nor II
B) II only
The first paragraph is the introductory paragraph and indicates that an audit was performed and the financial statements that were audited. The introductory paragraph also indicates that the financial statements are the responsibility of management and that the auditor’s responsibility is to express an opinion on the financial statements.
The auditor’s responsibility section of the standard unmodified opinion audit report states that the auditor is
A) responsible for the financial statements and the opinion on them.
B) responsible for the financial statements.
C) responsible for the opinion on the financial statements.
D) jointly responsible for the financial statements with management.
C) responsible for the opinion on the financial statements.
If the balance sheet of a private company is dated December 31, 2016, the audit report is dated February 8, 2017, and both are released on February 15, 2017, this indicates that the auditor has searched for subsequent events that occurred up to
A) December 31, 2016.
B) January 1, 2017.
C) February 8, 2017.
D) February 15, 2017.
C) February 8, 2017.
The appropriate audit report date for a standard unmodified opinion audit report for a nonpublic entity should be
A) the date the financial statements are given to the Board of Directors.
B) the date of the financial statements.
C) the date the auditor completed the auditing procedures in the field.
D) 60 days after the date of the financial statements as required by the SEC.
C) the date the auditor completed the auditing procedures in the field.
Most auditors believe that financial statements are “presented fairly” when the statements are in accordance with GAAP, and that it is also necessary to
A) determine that they are not in violation of FASB statements.
B) examine the substance of transactions and balances for possible misinformation.
C) review the statements using the accounting principles promulgated by the SEC.
D) assure investors that net income reported this year will be exceeded in the future.
B) examine the substance of transactions and balances for possible misinformation.
An audit provides a guarantee that a material misstatement will notexist in the financial statements.
TRUE OR FALSE
FALSE
AICPA auditing standards provide uniform wording for the auditor’s report to enable users of the financial statements to understand the audit report.
TRUE OR FALSE
TRUE
Users of the financial statements rely on the auditor’s report because of the absolute assurance the report provides.
TRUE OR FALSE
FALSE
The introductory paragraph of the auditor’s report states that the auditor is responsible for the preparation, presentation and opinion on financial statements.
TRUE OR FALSE
FALSE
The first paragraph is the introductory paragraph and indicates that an audit was performed and the financial statements that were audited. The introductory paragraph also indicates that the financial statements are the responsibility of management and that the auditor’s responsibility is to express an opinion on the financial statements.
The audit report date is the date the auditor completed audit procedures in the field.
TRUE OR FALSE
TRUE
The scope paragraph of the auditor’s responsibility section of the audit report issued for financial statements of a nonpublic company should refer to auditing standards generally accepted in the United States of America.
TRUE OR FALSE
TRUE
In the scope paragraph of the audit report issued for financial statements of a nonpublic company, the auditor expresses an opinion about the internal controls of the company.
TRUE OR FALSE
FALSE
The audit report is normally addressed to the company’s president or chief executive officer.
TRUE OR FALSE
FALSE
The phrase “accounting principles generally accepted in the United States of America” can be found in the opinion paragraph of a standard unmodified opinion report.
TRUE OR FALSE
TRUE
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of General Ring Corporation as of December 31, 2016 and 2015, and the results of their operations and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
The date of the auditor’s report is indicative of the last day of the auditor’s responsibility for the review of significant events occurring after the balance sheet date.
TRUE OR FALSE
TRUE
The phrase “auditing standards generally accepted in the United States of America” can be found in the opinion paragraph of a standard unmodified opinion report for a nonpublic company.
TRUE OR FALSE
FALSE
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
The phrase “Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material error” is included in the auditor’s opinion section of an audit report.
TRUE OR FALSE
FALSE
Scope
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
What category of audit report will be issued if the auditor concludes that the financial statements are notfairly presented?
A) disclaimer
B) qualified
C) standard unmodified opinion
D) adverse
D) adverse
The standard unmodified audit report
A) is sometimes called a clean opinion.
B) can be issued only with an explanatory paragraph.
C) can be issued if only a balance sheet and income statement are included in the financial statements.
D) is sometimes called a disclaimer report.
A) is sometimes called a clean opinion.
An audit of historical financial statements most commonly includes the
A) balance sheet, statement of retained earnings, and the statement of cash flows.
B) income statement, the statement of cash flows, and the statement of net working capital.
C) statement of cash flows, balance sheet, and the statement of retained earnings.
D) balance sheet, income statement, statement of cash flows, and the statement of changes in stockholders’ equity.
D) balance sheet, income statement, statement of cash flows, and the statement of changes in stockholders’ equity.
When analyzing the various types of audit reports,
A) the unmodified opinion with an emphasis-of-matter paragraph is the most common type of report.
B) companies will generally make the appropriate changes to their accounting records to avoid a qualification by the auditor.
C) management is more concerned about a qualified report than a disclaimer report.
D) an adverse report is issued when the auditor is unable to form an opinion on the financial statements.
B) companies will generally make the appropriate changes to their accounting records to avoid a qualification by the auditor.
Financial statement users are normally much more concerned about a disclaimer than an unmodified opinion audit report that contains an additional-emphasis-of-matter paragraph.
TRUE OR FALSE
TRUE
Financial statement users are normally much more concerned about a disclaimer or adverse opinion than an unmodified opinion audit report that contains an additional emphasis-of-matter or other matters para- graph.
An auditor will issue a disclaimer when he concludes that the financial statements are notfairly presented.
TRUE OR FALSE
FALSE
Disclaimer
He or she is unable to form an opinion as to whether the financial statements are fairly presented, or he or she is not independent.
Whenever an auditor issues an audit report for a public company, the auditor can choose to issue a report in which of the following forms?
I. A combined report on financial statements and internal control over financial reporting
II. Separate reports on financial statements and internal control over financial reporting
A) I only
B) II only
C) either I or II
D) neither I nor II
C) either I or II
The unqualified opinion audit report for public entities includes the following three paragraphs:
A) introductory, scope and management’s responsibility.
B) materiality, scope and report.
C) introductory, scope and opinion.
D) scope, fieldwork and conclusion.
C) introductory, scope and opinion.
Auditing standards for public companies are established by the
A) SEC.
B) FASB.
C) PCAOB.
D) IRS.
C) PCAOB.
Under PCAOB standards
A) the standard unmodified opinion audit report is referred to as an unqualified opinion audit report.
B) the scope paragraph states that the financial statements are the responsibility of management.
C) internal controls of a public company must be audited every five years.
D) the scope paragraph is the same as the scope paragraph for private companies.
A) the standard unmodified opinion audit report is referred to as an unqualified opinion audit report.
The separate report on internal control over financial reporting
A) cannot contain a cross-reference to the auditor’s report on the financial statements.
B) includes a paragraph that addresses the inherent limitations of internal controls.
C) is addressed to the PCAOB.
D) includes a scope paragraph which refers to the framework used to evaluate internal controls.
B) includes a paragraph that addresses the inherent limitations of internal controls.
Section 404(b) of the Sarbanes Oxley Act requires that the auditor of a public company attest to management’s report on the efficiency of internal controls over financial reporting.
TRUE OR FALSE
FALSE
Section 404(b) of the Sarbanes–Oxley Act requires the audi- tor of a public company to report on the effectiveness of internal control over finan- cial reporting.
Auditors of public company financial statements must issue separate reports on internal control over financial reporting.
TRUE OR FALSE
FALSE
PCAOB standards use the term “unqualified opinion” to refer to the standard unmodified opinion audit report.
TRUE OR FALSE
TRUE
Examples of unmodified opinions which contain modified wording (without adding an explanatory paragraph) include
A) the use of other auditors.
B) the lack of consistent application of generally accepted accounting principles.
C) substantial doubt about the audited company (or the entity) continuing as a going concern.
D) lack of consistent application of GAAP.
A) the use of other auditors.
A CPA may wish to emphasize specific matters regarding the financial statements even though an unqualified opinion will be issued. Normally, such explanatory information is
A) included in the scope paragraph.
B) included in the opinion paragraph.
C) included in a separate paragraph in the report.
D) included in the introductory paragraph.
C) included in a separate paragraph in the report.
All of the following are causes for the addition of an explanatory paragraph under both AICPA and PCAOB standards exceptfor
A) emphasis of a matter.
B) reports involving other auditors.
C) lack of consistent application of generally accepted accounting principles.
D) auditor agrees with a departure from promulgated accounting principles.
B) reports involving other auditors.
The term “explanatory paragraph” was replaced in the AICPA auditing standards with
A) going concern paragraph.
B) emphasis-of-matter paragraph.
C) departure from principles paragraph.
D) consistency paragraph.
B) emphasis-of-matter paragraph.
Which of the following are changes that affect the comparability of financial statements but notthe consistency and therefore, do nothave to be included in the auditor’s report?
A) error corrections not involving principles
B) changes in accounting estimates
C) variations in the format and presentation of financial information
D) all of the above
D) all of the above
Changes that affect comparability but not consistency and therefore need not be included in the audit report include the following:
- Changes in an estimate, such as a decrease in the life of an asset for depreciation purposes
- Error corrections not involving principles, such as a previous year’s mathematical error
- Variations in format and presentation of financial information
- Changes because of substantially different transactions or events, such as new endeavors in research and development or the sale of a subsidiary
Which of the following is least likely to cause uncertainty about the ability of an entity to continue as a going concern?
A) The entity is suing a competitor for a minor patent infringement.
B) The entity has lost a major customer.
C) The entity has significant recurring operating losses.
D) The entity has working capital deficiencies.
A) The entity is suing a competitor for a minor patent infringement.
When there is uncertainty about a company’s ability to continue as a going concern, the auditor’s concern is the possibility that the client may not be able to continue its operations or meet its obligations for a “reasonable period of time.” For this purpose, a reasonable period of time is considered not to exceed
A) six months from the date of the financial statements.
B) one year from the date of the financial statements.
C) six months from the date of the audit report.
D) one year from the date of the audit report.
B) one year from the date of the financial statements.
When the auditor concludes that there is substantial doubt about the entity’s ability to continue as a going concern, the appropriate audit report could be
I. an unmodified opinion audit report with an explanatory paragraph.
II. a disclaimer of opinion.
A) I only
B) II only
C) I or II
D) Neither I nor II
C) I or II
When a company’s financial statements contain a departure from GAAP with which the auditor concurs, the departure should be explained in
A) the scope paragraph.
B) an introductory paragraph.
C) the opinion paragraph.
D) a separate paragraph.
D) a separate paragraph.
William Gregory, CPA, is the principal auditor for an international corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Gregory is satisfied with the independence and professional reputation of the other auditor, as well as the quality of the other auditor’s examination. With respect to his report on the consolidated financial statements, taken as a whole, Gregory
A) must not refer to the examination of the other auditor.
B) must refer to the examination of the other auditor.
C) may refer to the examination of the other auditor.
D) must refer to the examination of the other auditors along with the percentage of consolidated assets and revenue that they audited.
C) may refer to the examination of the other auditor.
A company has changed its method of inventory valuation from an unacceptable one to one in conformity with generally accepted accounting principles. The auditor’s report on the financial statements of the year of the change should include
A) no reference to consistency.
B) a reference to a prior period adjustment in the opinion paragraph.
C) an explanatory paragraph that justifies the change and explains the impact of the change on reported net income.
D) an explanatory paragraph explaining the change.
D) an explanatory paragraph explaining the change.
Which of the following modifications of the auditor’s report does notinclude an explanatory paragraph?
A) A qualified report is due to a GAAP departure.
B) The report includes an emphasis of a matter.
C) There is a very material scope limitation.
D) A principal auditor accepts the work of an other auditor.
D) A principal auditor accepts the work of an other auditor.
No reference is made in the auditor’s report to other auditors who perform a portion of the audit when
I. The other auditor audited an immaterial portion of the audit.
II. The other auditor is well known or closely supervised by the principle auditor.
III.The principle auditor has thoroughly reviewed the work of the other auditor.
A) I and II
B) I and III
C) II and III
D) I, II and III
D) I, II and III
When an auditor is trying to determine how changes can affect consistency and and/or comparability, he should keep in mind that
A) changes that affect comparability but not consistency require an explanatory paragraph.
B) items that materially affect the comparability of financial statements requires a disclaimer of opinion.
C) changes that affect consistency require an explanatory paragraph if they are material.
D) changes that involve either comparability or consistency only need to be mentioned in the footnotes.
C) changes that affect consistency require an explanatory paragraph if they are material.
All of the following would require an emphasis of matter paragraph exceptfor
A) the existence of material related party transactions.
B) the lack of auditor independence.
C) important events occurring subsequent to the balance sheet date.
D) material uncertainties disclosed in the footnotes.
B) the lack of auditor independence.
Under AICPA auditing standards, the primary auditor issuing the opinion on the financial statements is called the
A) component auditor.
B) principal auditor.
C) group engagement partner.
D) majority auditor.
C) group engagement partner.
Which of the following is false concerning the principal CPA firm’s alternatives when issuing a report when another CPA firm performs part of the audit?
A) Issue a joint report signed by both CPA firms.
B) Make no reference to the other CPA firm in the audit report, and issue the standard unqualified opinion.
C) Make reference to the other auditor in the report by using modified wording (a shared opinion or report).
D) A qualified opinion or disclaimer, depending on materiality, is required if the principal auditor is not willing to assume any responsibility for the work of the other auditor.
A) Issue a joint report signed by both CPA firms.
Which of the following requires recognition in the auditor’s opinion as to consistency?
A) The correction of an error in the prior year’s financial statements resulting from a mathematical mistake in capitalizing interest.
B) A change in the estimate of provisions for warranty costs.
C) The change from the cost method to the equity method of accounting for investments in common stock.
D) A change in depreciation method which has no effect on current year’s financial statements but is certain to affect future years.
C) The change from the cost method to the equity method of accounting for investments in common stock.
The following are examples of changes that affect consistency and therefore require an explanatory paragraph if they are material:
- Changes in accounting principles, such as a change from FIFO to LIFO inventory valuation
- Changes in reporting entities, such as the inclusion of an additional company in combined financial statements
- Corrections of errors involving principles, by changing from an accounting principle that is not generally acceptable to one that is generally acceptable, including correction of the resulting error
When there is a lack of consistent application in accounting principles
A) the nature and impact of the change should be adequately disclosed.
B) the auditor should discuss the nature of the change and point the reader to the footnote that discusses the change.
C) the materiality of the change is evaluated based on the current year effect of the change.
D) all of the above.
D) all of the above.
An unmodified opinion audit report with an emphasis-of-matter paragraph is issued when the auditor believes the financials are fairly stated but also believes additional information should be provided.
TRUE OR FALSE
TRUE
Changes in accounting estimates requires the auditor to issue a modified audit report with a consistency paragraph inserted after the opinion paragraph.
TRUE OR FALSE
FALSE
The only unmodified opinion audit report that does notinclude an explanatory paragraph is when other auditors are involved. In this case only the introductory paragraph is modified.
TRUE OR FALSE
FALSE
Items that materially affect the comparability of the financial statements generally require disclosure in the footnotes.
TRUE OR FALSE
TRUE
Changes in an estimate, such as a change in the estimated useful life of an asset for depreciation purposes, affect consistency but not comparability, and therefore require an explanatory paragraph in the audit report.
TRUE OR FALSE
FALSE
Changes in reporting entities, such as the inclusion of an additional company in combined financial statements, affect comparability but not consistency, and therefore do notrequire an explanatory paragraph in the audit report.
TRUE OR FALSE
FALSE
When an auditor relies upon a different CPA firm to perform part of the audit and chooses to issue a shared opinion, only the auditor’s responsibility paragraph should be modified.
TRUE OR FALSE
FALSE
Notice that the report does not include a separate paragraph that discusses the shared responsibility, but does so in the auditor’s responsibility and opinion paragraphs.
When other auditors are involved in the audit and they qualify their portion of the audit, the principal auditor must decide if the amount in question is material to the financial statements as a whole.
TRUE OR FALSE
TRUE
The unmodified opinion audit report with emphasis-of-matter paragraph does notmeet the criteria of a complete audit with satisfactory results.
TRUE OR FALSE
FALSE
When there is a lack of consistent application of GAAP due to a new accounting pronouncement, no explanatory paragraph is required.
TRUE OR FALSE
FALSE
As a result of management’s refusal to permit the auditor to physically examine inventory, the auditor must depart from the unmodified opinion audit report because
A) the financial statements have not been prepared in accordance with GAAP.
B) the scope of the audit has been restricted by circumstances beyond either the client’s or auditor’s control.
C) the financial statements have not been audited in accordance with GAAS.
D) the scope of the audit has been restricted.
D) the scope of the audit has been restricted.
An adverse opinion is issued when the auditor believes
A) some parts of the financial statements are materially misstated or misleading.
B) the financial statements would be found to be materially misstated if an investigation were performed.
C) the auditor is not independent.
D) the overall financial statements are so materially misstated that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP.
D) the overall financial statements are so materially misstated that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP.
5) A qualified opinion can be issued for which of the following?
I. When a limitation on the scope of the audit has occurred
II. When the auditor lacks independence
III.When generally accepted accounting principles have not been used
A) I and II
B) I and III
C) II and III
D) I, II and III
B) I and III
In which situation would the auditor be choosing between “except for” qualified opinion and an adverse opinion?
A) The auditor lacks independence.
B) A client-imposed scope limitation
C) A circumstance-imposed scope limitation
D) Lack of full disclosure within the footnotes
D) Lack of full disclosure within the footnotes
When the auditor determines that the financial statements are fairly stated, but there is a nonindependent relationship between the auditor and the client, the auditor should issue
A) an adverse opinion.
B) a disclaimer of opinion.
C) either a qualified opinion or an adverse opinion.
D) either a qualified opinion or an unqualified opinion with modified wording.
B) a disclaimer of opinion.
If the auditor lacks independence, a disclaimer of opinion must be issued
A) if the client requests it.
B) only if it is highly material.
C) only if it is material but not pervasive.
D) in all cases.
D) in all cases.
If the phrase “except for” is present in the opinion paragraph of the audit report, the auditor has issued a(n)
A) adverse opinion.
B) disclaimer of opinion.
C) unqualified opinion.
D) qualified opinion.
D) qualified opinion.
When analyzing the various types of opinions that the auditor can issue,
A) an adverse opinion must contain the phrase “except for” in the opinion paragraph.
B) an adverse opinion can only be issued when there is a lack of knowledge by the auditor.
C) a disclaimer of opinion can be issued for material or immaterial misstatements.
D) a qualified opinion report can be used only when the auditor concludes that the overall financial statements are fairly stated.
D) a qualified opinion report can be used only when the auditor concludes that the overall financial statements are fairly stated.
Items that materially affect the comparability of financial statements generally require disclosure in the footnotes. If the client refuses to properly disclose the item, the auditor will most likely issue
A) a disclaimer.
B) an unqualified opinion.
C) a qualified opinion.
D) an adverse opinion.
C) a qualified opinion.
Which of the following scenarios does notresult in a qualified opinion?
A) A scope limitation prevents the auditor from completing an important audit procedure.
B) Circumstances exist that prevent the auditor from conducting a complete audit.
C) The auditor lacks independence with respect to the audited entity.
D) An accounting principle at variance with GAAP is used.
C) The auditor lacks independence with respect to the audited entity.
Whenever the client imposes restrictions on the scope of the audit, the auditor should be concerned that management may be trying to prevent discovery of misstatements. In such cases, the auditor will likely issue a
A) disclaimer of opinion in all cases.
B) qualification of both scope and opinion in all cases.
C) disclaimer of opinion whenever materiality is in question.
D) qualification of both scope and opinion whenever materiality is in question.
C) disclaimer of opinion whenever materiality is in question.
In which of the following circumstances would an auditor most likely express an adverse opinion?
A) The CEO refuses to let the auditor have access to the board of director meeting minutes.
B) The financial statements are not in conformity with the FASB statement on loss contingencies.
C) Information comes to the auditor’s attention that raises substantial doubt about the ability for the client to continue as a going concern.
D) Tests of controls show that the internal control structure is so poor that the auditor has to assess control risk at the maximum.
B) The financial statements are not in conformity with the FASB statement on loss contingencies.
Which of the following statements is true?
I. The auditor is required to issue a disclaimer of opinion in the event of a material uncertainty.
II. The auditor is required to issue a disclaimer of opinion in the event of a going concern problem.
A) I only
B) II only
C) I and II
D) Neither I nor II
D) Neither I nor II
A disclaimer of opinion is issued when the auditor has been unable to satisfy himself or herself that the overall financial statements are fairly presented. The necessity for disclaiming an opinion may arise because of a severe limitation on the scope of the audit or a nonindependent relationship under the AICPA Code of Professional Conduct between the auditor and the client.
The most common case in which conditions beyond the client’s and auditor’s control cause a scope restriction in an engagement is when the
A) auditor is not appointed until after the client’s year-end.
B) client won’t allow the auditor to confirm receivables for fear of offending its customers.
C) auditor doesn’t have enough staff to satisfactorily audit all of the client’s foreign subsidiaries.
D) client is going through Chapter 11 bankruptcy.
A) auditor is not appointed until after the client’s year-end.
When the client fails to make adequate disclosure in the body of the statements or in the related footnotes, it is the responsibility of the auditor to
A) inform the reader that disclosure is not adequate, and to issue an adverse opinion.
B) inform the reader that disclosure is not adequate, and to issue a qualified opinion.
C) present the information in the audit report and issue an unqualified or qualified opinion.
D) present the information in the audit report and to issue a qualified or an adverse opinion.
D) present the information in the audit report and to issue a qualified or an adverse opinion.
A qualified opinion audit report is issued when all auditing conditions have been met, no significant misstatements have been discovered, and it is the auditor’s opinion that the financial statements are fairly stated in accordance with GAAP.
TRUE OR FALSE
FALSE
Auditors should issue a disclaimer of opinion when there is a highly material client-imposed scope restriction.
TRUE OR FALSE
TRUE
Whenever an auditor issues a qualified report, he or she must use the term “except for “ in the opinion paragraph.
TRUE OR FALSE
TRUE
A qualified report can take the form of a qualification of both the scope and the opinion or of the opinion alone.
TRUE OR FALSE
TRUE
A qualified report can take the form of a qualification of both the scope and the opinion or of the opinion alone.
When an auditor discovers a highly material GAAP violation in the financial statements and the client refuses to correct it, the auditor should issue a disclaimer of opinion.
TRUE OR FALSE
FALSE
Client imposed restrictions on the audit always require a disclaimer of opinion.
TRUE OR FALSE
FALSE
An auditor should issue a qualified opinion with an explanatory paragraph whenever there is a material uncertainty affecting the financial statements.
TRUE OR FALSE
FALSE
A misstatement in the financial statements can be considered material if knowledge of the misstatement will affect a decision of
A) the PCAOB.
B) a reasonable user of the financial statements.
C) an accountant.
D) the SEC.
B) a reasonable user of the financial statements.
Misstatements must be compared with some measurement base before a decision can be made about materiality. A commonly accepted measurement base includes
A) net income.
B) total assets.
C) working capital.
D) all of the above.
D) all of the above.
When comparing misstatements with a measurement base, the auditor must consider the pervasiveness of the misstatement. Of the following examples, the most pervasive misstatement is a(n)
A) understatement of inventory.
B) understatement of retained earnings caused by a miscalculation of dividends payable.
C) misclassification of notes payable as a long-term liability when it should be current.
D) misclassification of salary expense as a selling expense.
A) understatement of inventory.
The dollar amount of some misstatements cannot be accurately measured. For example, if the client were unwilling to disclose an existing lawsuit, the auditor must estimate the likely effect on
A) net income.
B) users of the financial statements.
C) the auditor’s exposure to lawsuits.
D) management’s future decisions.
B) users of the financial statements.
If most or all users’ decisions that are based on the financial statements are likely to be significantly affected, the materiality level is
A) unrestricted.
B) material.
C) pervasive.
D) risky.
C) pervasive.
When a client fails to follow GAAP, the audit report can be unmodified, qualified, or adverse depending on the materiality. What factors affect materiality that an auditor should consider?
A) the dollar amount in comparison to a base
B) if the misstatement can be measured
C) the nature of the item
D) All the above are factors an auditor should consider regarding materiality.
D) All the above are factors an auditor should consider regarding materiality.
Which of the following is a correct statement regarding materiality?
A) There are well-defined guidelines that enable auditors to determine if something is material.
B) Misstatements must be compared with some benchmark before a decision can be made about the materiality level of the failure of a company to follow GAAP.
C) Pervasiveness is not considered when comparing potential misstatements with a base or benchmark.
D) To evaluate overall materiality, the auditor does not combine all unadjusted misstatements.
B) Misstatements must be compared with some benchmark before a decision can be made about the materiality level of the failure of a company to follow GAAP.
Management has recorded prepaid insurance as an asset in the previous year. This year, to reduce record-keeping costs, it expenses insurance. If the amount is immaterial to the financial statements,
A) a disclaimer opinion is issued.
B) a a qualified opinion is issued.
C) a standard unmodified opinion audit report is issued.
D) no audit report can be issued.
C) a standard unmodified opinion audit report is issued.
The highest level of materiality exists when
A) users are likely to make incorrect decisions if they rely on the overall financial statements.
B) there has been a departure from GAAP.
C) amounts are material but do not overshadow the financial statements as a whole.
D) a scope limitation has been imposed.
A) users are likely to make incorrect decisions if they rely on the overall financial statements.
Materiality is essential when an auditor considers his/her determination of the appropriate report for a given set of circumstances.
TRUE OR FALSE
TRUE
A pervasive exception is one that affects different parts of the financial statements.
TRUE OR FALSE
TRUE
An item with a “psychological” effect (e.g., where the item maintains an increasing earnings trend) is a qualitative factor that may affect the auditors decision regarding materiality.
TRUE OR FALSE
TRUE
As misstatements become more pervasive, the likelihood of issuing a disclaimer rather than a qualified opinion increases.
TRUE OR FALSE
FALSE
It is typically more difficult to evaluate the materiality of potential misstatements resulting from a scope limitation than for failure to follow GAAP.
TRUE OR FALSE
TRUE
A restriction on the scope of the auditor’s examination requires
A) a qualifying paragraph to be included in the introduction.
B) a qualifying paragraph preceding the opinion paragraph.
C) a disclaimer opinion.
D) a basis for a qualified opinion paragraph.
B) a qualifying paragraph preceding the opinion paragraph.
When a qualified or adverse opinion is issued, the qualifying paragraph is inserted
A) between the introductory and scope paragraphs.
B) between the scope and opinion paragraphs.
C) after the opinion paragraph, as a fourth paragraph.
D) immediately after the address, as the first paragraph.
B) between the scope and opinion paragraphs.
When the client fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the footnotes,
A) it is the auditor’s responsibility to present the information in the audit report.
B) the auditor should issue a qualified or an adverse opinion.
C) the qualification is put in an added paragraph preceding the opinion.
D) all of the above
D) all of the above
If the financial statements include an income statement and a balance sheet but exclude the statement of cash flows, the auditors
A) can issue an unqualified report.
B) should issue a qualified opinion due to the departure from GAAP.
C) should issue a qualified opinion because the missing statement of cash flows constitutes a scope limitation.
D) should include the statement of cash flows, modify the report and issue an unqualified opinion.
B) should issue a qualified opinion due to the departure from GAAP.
Which of the following is incorrect concerning scope limitations?
A) If client imposed, the auditor should be concerned about the client trying to prevent discovery of a material misstatement.
B) An unqualified opinion can result if auditors can perform alternative procedures and are satisfied that the information is fairly stated.
C) The most common circumstance imposed scope restriction is due to the client changing their auditors.
D) The most common circumstance imposed scope limitation is when the auditor is appointed after the balance sheet date.
C) The most common circumstance imposed scope restriction is due to the client changing their auditors.
When dealing with materiality and scope limitation conditions,
A) a disclaimer of opinion must be issued.
B) it is easier to evaluate the materiality of potential misstatements resulting from a scope limitation than for failure to follow GAAP.
C) scope limitations imposed by the client are always considered material.
D) a unqualified opinion may still be issued depending on the materiality of the scope limitation.
D) a unqualified opinion may still be issued depending on the materiality of the scope limitation.
When a pervasive scope limitation exists,
A) a disclaimer of opinion rather than a qualified opinion is generally required.
B) the auditor’s responsibility paragraph is modified to indicate that the auditor was not able to obtain sufficient appropriate evidence to express an audit opinion.
C) sections of the auditor’s responsibility paragraph are eliminated to avoid stating anything that might lead readers to believe that other parts of the financial statements might be fairly stated.
D) all of the above
D) all of the above
When there is a scope restriction, what type of audit report can be issued?
A) unmodified opinion
B) qualification of scope and opinion
C) disclaimer of opinion
D) any of the above
D) any of the above
Subsequent to the close of Spacely Sprockets fiscal year ending October 31, 2016, a major debtor has declared bankruptcy due to a series of events. The receivable is significantly material in relation to the financial statements, and recovery is doubtful. The debtor had confirmed the full amount due to Spacely Sprocket at the balance sheet date. Because the account was confirmed at the balance sheet date, Spacely refuses to disclose any information in relation to this subsequent event. The CPA believes that all other accounts were stated fairly at the balance sheet date. In addition, Spacely changed their method of inventory valuation from FIFO to LIFO. This change was disclosed in Note X to the financial statements. Accordingly, what type of opinion should be expressed?
A) unqualified with an explanatory paragraph
B) qualified due to a GAAP departure
C) qualified due to a scope limitation
D) a combination of B and C
B) qualified due to a GAAP departure
For the report containing a disclaimer for lack of independence, the disclaimer is in the
A) second or scope paragraph.
B) third or opinion paragraph.
C) first and only paragraph.
D) fourth or explanatory paragraph.
C) first and only paragraph.
When an adverse opinion is issued, a scope paragraph would be
A) qualified.
B) unchanged.
C) deleted.
D) expanded to identify the additional procedures which the auditor performed.
B) unchanged.
After the balance sheet date but prior to issuance of the auditor’s report the auditor learns that the client’s facility in a foreign country has been expropriated. Management refuses to disclose this information in a financial statement footnote or present pro-forma data as to the effect of the event. The auditor should
A) add a footnote to the financial statements.
B) disclaim an opinion due to the client imposed scope limitation.
C) provide the information in the report and modify the opinion.
D) issue an unqualified opinion but provide the information in the auditor report.
C) provide the information in the report and modify the opinion.
Financial statement users are typically more concerned with an unmodified report with explanatory paragraphs than they are with a disclaimer of opinion.
TRUE OR FALSE
FALSE
A lack of independence will override any other scope limitations and requires a disclaimer of opinion.
TRUE OR FALSE
TRUE
When a qualified opinion is issued, an explanatory paragraph is added immediately after the opinion paragraph to explain the nature of the qualification that affects the opinion.
TRUE OR FALSE
FALSE
In the case of a disclaimer due to lack of independence, the entire scope paragraph is excluded from the report.
TRUE OR FALSE
TRUE
When accounting principles are notconsistently applied, and the materiality level is immaterial, the auditor will issue a(n)
A) standard unmodified opinion.
B) unmodified opinion with an explanatory paragraph.
C) adverse opinion.
D) disclaimer opinion.
A) standard unmodified opinion.
The first step to be followed when deciding the appropriate audit report in a given set of circumstances is to
A) decide the appropriate type of report for the condition.
B) write the report.
C) determine whether any conditions exists requiring a departure from a standard unmodified opinion audit report.
D) decide the materiality for each condition.
C) determine whether any conditions exists requiring a departure from a standard unmodified opinion audit report.
In most audits, the auditor issues a(n)
A) modified opinion audit report.
B) standard unmodified opinion audit report.
C) scope limited audit report.
D) adverse audit report.
B) standard unmodified opinion audit report.
More than one modification should be included in the audit report when
A) the auditor is not independent and the auditor knows that the company has not followed generally accepted accounting principles.
B) there is substantial doubt about the going concern of the company and information about the causes of the uncertainties is not adequately disclosed in the footnotes.
C) there is a scope limitation and there is substantial doubt about the company’s ability to continue as a going concern.
D) all of the above
D) all of the above
When there is a justified departure from GAAP which is considered material, the auditor should issue a(n)
A) standard unmodified opinion.
B) disclaimer of opinion.
C) unmodified opinion with an explanatory paragraph.
D) adverse opinion.
C) unmodified opinion with an explanatory paragraph.
If there is a deviation in the statements’ preparation in accordance with GAAP and another accounting principle was applied on a basis that was notconsistent with that of the preceding year,
A) the auditor must choose which modification to include in the audit report.
B) only the most material modification can be disclosed.
C) more than one modification should be included in the report.
D) none of the above.
C) more than one modification should be included in the report.
After the auditor determines whether any conditions exist which require a departure from a standard unmodified opinion audit report, the next step in the decision process is to
A) write the report.
B) decide the materiality for each condition.
C) decide the appropriate type of report for the condition.
D) discuss the report with management.
B) decide the materiality for each condition.
For departures from GAAP or scope restrictions, the auditor must decide if the potential effect on the financial statements is
A) immaterial.
B) material.
C) highly material.
D) any of the above.
D) any of the above.
If the scope restriction imposed by the client is so material that the overall fairness of the financial statements is in question, the auditor should issue a(n)
A) standard unmodified opinion.
B) disclaimer of opinion.
C) adverse opinion.
D) unmodified opinion with revised wording in the scope paragraph.
B) disclaimer of opinion.
The final step in the auditor’s decision process for audit reports is to write the audit report.
TRUE OR FALSE
TRUE
Auditors usually make the materiality judgment by referring to a standard checklist.
TRUE OR FALSE
FALSE
Which of the following is correct regarding IFRS?
A) Companies that are required to file their financial statements with the SEC must follow IFRS starting in 2015.
B) Recent developments suggest that the SEC may be slowing down its efforts towards adopting IFRS any time soon.
C) When an auditor is engaged to report on financial statements prepared in accordance with IFRS, they must issue a qualified opinion.
D) The introductory paragraph of the audit report is modified to indicate that the audit was conducted in accordance with International Standards on Auditing.
B) Recent developments suggest that the SEC may be slowing down its efforts towards adopting IFRS any time soon.
Auditing standards in the United States allow an auditor to perform an audit of a nonpublic U.S. entity in accordance with both generally accepted auditing standards in the U.S. and the ISAs.
TRUE OR FALSE
TRUE
