Disclaimer of Opinion Flashcards
When disclaiming an opinion due to a client-imposed scope limitation on a nonpublic company’s financial statements, an auditor should indicate in a separate paragraph why the audit did not comply with generally accepted auditing standards. The auditor should also omit which of the two sections (paragraphs) below?
Auditor
Responsibility Opinion No Yes Yes Yes Yes No No No
No No
Neither the auditor responsibility section nor the opinion paragraph is deleted, although they are both modified.
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
The financial statements fail to contain adequate disclosure of related-party transactions.
The client refuses to permit its attorney to furnish information requested in a letter of audit inquiry.
The auditor is engaged after fiscal year-end and is unable to observe physical inventories or apply alternative procedures to verify their balances.
The auditor is unable to determine the amounts associated with illegal acts committed by the client’s management.
The financial statements fail to contain adequate disclosure of related-party transactions.
This answer is correct because a failure to contain adequate disclosure of related-party transactions represents a departure from generally accepted accounting principles and disclaimers are not appropriate in such circumstances.
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
The auditor is unable to determine the amounts associated with an employee fraud scheme.
Management does not provide reasonable justification for a change in accounting principles.
The client refuses to permit the auditor to confirm certain accounts receivable or apply alternative procedures to verify their balances.
The chief executive officer is unwilling to sign the management representation letter.
Management does not provide reasonable justification for a change in accounting principles.
When management does not provide reasonable justification of a change in accounting principles either a qualified or an adverse opinion is appropriate, not a disclaimer.
When the auditor is unable to determine the amounts associated with the illegal acts of client personnel because of an inability to obtain sufficient appropriate audit evidence, the auditor should issue a(n)
An illegality opinion.
Disclaimer of opinion.
Adverse opinion.
Unmodified opinion with a separate other-matter paragraph.
Disclaimer of opinion.
This answer is correct because in such circumstances, the auditor is to either qualify or disclaim an opinion, and in this question qualified is not one of the answer choices.
Restrictions imposed by a client prohibit the observation of physical inventories, which account for an extremely significant portion of total assets (65%). Alternative audit procedures cannot be applied, although the auditor was able to examine satisfactory evidence for all other items in the financial statements. The auditor should issue a(n)
Qualified opinion.
Disclaimer of opinion.
Unmodified opinion with a separate emphasis-of-matter paragraph.
Unmodified opinion with an explanation in the scope paragraph.
Disclaimer of opinion.
This answer is correct because scope limitations relating to such a pervasive portion of the financial statements are likely to result in a disclaimer of opinion.
When management refuses to disclose illegal activities which were identified by the independent auditor, the independent auditor may be charged with violating the AICPA Code of Professional Conduct for
Withdrawing from the engagement.
Issuing a disclaimer of opinion.
Failure to uncover the illegal activities during prior audits.
Reporting these activities to the audit committee.
Issuing a disclaimer of opinion.
This answer is correct because in such situations in which the auditor knows of the illegal act, a simple disclaimer will not suffice, since the lack of disclosure represents a departure from GAAP. This departure from GAAP will result in a qualified opinion or an adverse opinion.
Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?
The auditor is unable to obtain the audited financial statements of a consolidated investee.
Management does not provide reasonable justification for a change in accounting principles.
The company failed to make a count of its physical inventory during the year and the auditor was unable to apply alternative procedures to verify inventory quantities.
Management refuses to allow the auditor to have access to the company’s canceled checks and bank statements.
Management does not provide reasonable justification for a change in accounting principles.
This answer is correct because a lack of reasonable justification for a change in accounting principle is a departure from GAAP, and such departures require either a qualified or adverse opinion.
Morris, CPA, suspects that a pervasive scheme of illegal bribes exists throughout the operations of Worldwide Import-Export, Inc., a new audit client. Morris notified the audit committee and Worldwide’s legal counsel, but neither could assist Morris in determining whether the amounts involved were material to the financial statements or whether senior management was involved in the scheme. Under these circumstances, Morris should
Express an unmodified opinion with a separate other-matter paragraph.
Disclaim an opinion on the financial statements.
Express an adverse opinion on the financial statements.
Disclaim an opinion on the financial statements.
This answer is correct because the inability to obtain sufficient appropriate audit evidence will lead to a situation in which the auditor generally should disclaim an opinion on the financial statements.
When a client will not make essential corporate minutes available to the auditor, the audit report will probably contain a(n) Unmodified opinion. Adverse opinion. Qualified opinion. Disclaimer of opinion.
Disclaimer of opinion.
This answer is correct because when restrictions that so significantly limit the scope of the audit are imposed by the client, the auditor generally will be required to disclaim an opinion on the financial statements.
The auditor would most likely issue a disclaimer of opinion because of
The client’s failure to present supplementary information required by the FASB.
Inadequate disclosure of material information.
A client-imposed scope limitation.
The qualification of an opinion by the other auditor of a subsidiary where there is a division of responsibility.
A client-imposed scope limitation.
This answer is correct because scope limitations lead to either a qualified opinion or a disclaimer of opinion.
Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?
The chief financial officer and the chief executive officer are unwilling to sign the management representation letter.
The auditor is unable to determine the extent of or the amounts associated with a pervasive employee fraud scheme.
Management refuses to produce documentation verifying the ownership of its equipment and production facilities.
The company issues financial statements that purport to present financial position and results of operations, but refuses to include the related statement of cash flows.
The company issues financial statements that purport to present financial position and results of operations, but refuses to include the related statement of cash flows.
This answer is correct because a client who presents financial statements that purport to present financial position and result of operations is required to also include a statement of cash flows—otherwise, a departure from GAAP exists which will result in a qualified or adverse opinion, but not a disclaimer.
When a client with a history of much costly litigation will not permit inquiry of outside legal counsel, the audit report will ordinarily contain a(n)
Disclaimer of opinion.
“Except for” qualified opinion.
Standard unmodified opinion.
Unmodified opinion with a separate other-matter paragraph.
Disclaimer of opinion.
This answer is correct because such a client imposed scope limitation is most likely to result in a disclaimer of opinion.
Morris, CPA, suspects that a pervasive scheme of illegal bribes exists throughout the operations of Worldwide Import-Export, Inc., a new audit client.
Morris notified the audit committee and Worldwide’s legal counsel, but neither could assist Morris in determining whether the amounts involved were material to the financial statements or whether senior management was involved in the scheme.
Under these circumstances, Morris should
Express an unmodified opinion with a separate emphasis-of-matter paragraph.
Disclaim an opinion on the financial statements.
Express an adverse opinion on the financial statements.
Express an unmodified opinion with a separate other-matter paragraph.
Disclaim an opinion on the financial statements.
Morris should disclaim an opinion because of the pervasiveness of the scheme and the nature of the items involved.
Although the auditor was not precluded by the client from obtaining sufficient evidence to evaluate the impact of the illegal bribes on the financial statements, the fact that they could not ascertain whether senior management was involved is a critical deficiency.
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
The auditor is engaged after fiscal year-end and is unable to observe physical inventories or apply alternative procedures to verify their balances.
The auditor is unable to determine the amounts associated with illegal acts committed by the client’s management.
The financial statements fail to contain adequate disclosure concerning related party transactions.
The client refuses to permit its attorney to furnish information requested in a letter of audit inquiry.
The financial statements fail to contain adequate disclosure concerning related party transactions.
A disclaimer is issued when the scope limitations pertaining to the audit are so pervasive that the auditor in unable to express an opinion. Lack of adequate disclosures in the financial statements is a GAAP departure, not a scope limitation. Thus, a disclaimer of opinion would not be appropriate.
When disclaiming an opinion due to a client-imposed scope limitation, an auditor should indicate in a separate paragraph why the audit did not comply with generally accepted auditing standards. The auditor should also
Modify the Auditor’s
Responsibility Section Omit the opinion paragraph No Yes Yes Yes No No Yes No
Yes No
A disclaimer report omits the scope paragraph (the second paragraph in the auditor’s responsibility section that describes an audit) and adds a separate paragraph explaining why the audit did not comply with generally accepted auditing standards (Basis for Disclaimer of Opinion). The scope paragraph is omitted because any descriptions of procedures performed could be misunderstood. If a disclaimer is issued, the auditor does not feel that the audit work performed was sufficient to render an opinion. The opinion paragraph remains but it indicates that the scope of work was insufficient to support an opinion.
