Intro to Audit Report

Question 1

A lawyer limits a response concerning a litigated claim because the lawyer is unable to determine the likelihood of an unfavorable outcome. Which type of opinion should the auditor express if the litigation is adequately disclosed and the range of potential loss is material in relation to the client’s financial statements considered as a whole? A. Adverse. B. Unaudited. C. Qualified. D. Unmodified.

Answer 1

D. Unmodified. This answer is correct because if the contingency has been adequately disclosed by the client, the auditor would issue an unmodified opinion.

Question 2

When issuing an unmodified opinion, the auditor who evaluates the audit findings should be satisfied that the Amount of known misstatement is documented in the management representation letter. Estimate of the total likely misstatement is less than a material amount. Amount of known misstatement is acknowledged and recorded by the client. Estimate of the total likely misstatement includes the adjusting entries already recorded by the client.

Answer 2

Estimate of the total likely misstatement is less than a material amount. The requirement is to identify the necessary condition for an auditor to be able to issue an unmodified opinion. Answer (b) is correct because if the estimate of likely misstatement is equal to or greater than a material amount a material departure from generally accepted accounting principles exists and thus AU-C 705 requires either a qualified or adverse opinion in such circumstances. Answer (a) is incorrect because the amount of known misstatement (if any) need not be documented in the management representation letter. Answer (c) is incorrect because it ordinarily is not necessary for the client to acknowledge and record immaterial known misstatements. Answer (d) is incorrect because the total likely misstatement need not include the adjusting entries already recorded by the client.

Question 3

After performing all necessary procedures a predecessor auditor reissues a prior-period report on financial statements at the request of the client without revising the original wording. The predecessor auditor should Delete the date of the report. Dual date the report. Use the reissue date. Use the date of the previous report.

Answer 3

Use the date of the previous report This answer is correct because when a predecessor auditor reissues an audit report, without revising the original wording, the auditor should use the date of the previous report. This avoids any implications that the auditor has re-examined any records, transactions, or events after the date of the original report.

Question 4

An investor is reading the financial statements of the Stankey Corporation and observes that the statements are accompanied by an auditor’s unmodified report. From this the investor may conclude that Any disputes over significant accounting issues have been settled to the auditor’s satisfaction. The auditor is satisfied that Stankey is financially sound. The auditor has ascertained that Stankey’s financial statements have been prepared accurately. Informative disclosures in the financial statements but not necessarily in Stankey’s footnotes are to be regarded as reasonably adequate.

Answer 4

Any disputes over significant accounting issues have been settled to the auditor’s satisfaction. This answer is correct because an unmodified audit report indicates that disputes over significant accounting issues have been settled to the auditor’s satisfaction. If any such disputes have not been settled, the auditor should render an opinion other than unmodified.

Question 5

An entity’s comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented. If the predecessor’s report was qualified, the successor should Issue an updated comparative audit report indicating the division of responsibility. Explain to the client that comparative financial statements may not be presented under these circumstances. Express an opinion only on the current year’s financial statements and make no reference to the prior year’s statements. Indicate the substantive reasons for the qualification in the predecessor auditor’s opinion.

Answer 5

Indicate the substantive reasons for the qualification in the predecessor auditor’s opinion. This answer is correct because when a predecessor auditor’s report is not presented, the successor auditor’s report should indicate that (1) the financial statements of the prior period were audited by another auditor, (2) the date of that report, (3) the type of report, and (4) if the report is other than standard, and the reasons therefore.

Question 6

In which of the following paragraphs (section) of an auditor’s report on a nonpublic company does an auditor communicate the nature of the audit procedures performed? Introductory paragraph. Opinion paragraph. Auditor’s Responsibilities paragraph. Emphasis-of-matter paragraph.

Answer 6

Auditor’s Responsibilities paragraph. This is correct because the nature of the procedures performed is included in the auditor’s responsibilities section.

Question 7

When comparative financial statements are presented, which statements are being referred to when the term “taken as a whole” is used in an audit report?

Periods presented plus one preceding period.

Current period only.

Current period and those of the other periods presented.

Current and immediately preceding period only.

Answer 7

Current period and those of the other periods presented. This answer is correct because the professional standards state that this term should be considered to apply not only to the financial statements of the current period but also to those of one or more prior periods that are presented on a comparative basis with those of the current period.

Question 8

When a predecessor auditor reissues the report on the prior period’s financial statements at the request of the former client, the predecessor auditor should:

Indicate in the introductory paragraph of the reissued report that the financial statements of the subsequent period were audited by another CPA.

Obtain an updated management representation letter and compare it to that obtained during the prior period audit.

Compare the prior period’s financial statements that the predecessor reported on with the financial statements to be presented for comparative purposes.

Add an other-matter paragraph to the reissued report stating that the predecessor has not performed additional auditing procedures concerning the prior period’s financial statements.

Answer 8

Compare the prior period’s financial statements that the predecessor reported on with the financial statements to be presented for comparative purposes. This answer is correct because the predecessor auditor should (1) read the financial statements of the current period, (2) compare the prior period financial statements with the subsequent financial statements being presented for comparative purposes, and (3) obtain a letter of representations from the successor auditor.

Question 9

A CPA’s standard report on a nonpublic company’s audited financial statements would be inappropriate if it referred to:

Management’s responsibility for the financial statements.

An assessment of the entity’s accounting principles.

Significant estimates made by management.

The CPA’s assessment of sampling risk factors.

Answer 9

The CPA’s assessment of sampling risk factors. This answer is correct because CPAs do not include an assessment of sampling risk factors in an audit report.

Question 10

When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for

Expressing dual date opinions.

Updating the report on the previous financial statements only if there has not been a change in opinion.

Updating the report on the previous financial statements only if the previous report was qualified and the reasons for qualification no longer exist.

Updating the report on the previous financial statements regardless of the opinion previously issued.

Answer 10

Updating the report on the previous financial statements regardless of the opinion previously issued. This answer is correct because a continuing auditor should update his report on the financial statements of the one or more prior periods presented regardless of the opinion previously issued.

Question 11

Which of the following representations does an auditor make explicitly and which implicitly when issuing an unmodified opinion?

Conformity with GAAP Adequacy of disclosure

Explicitly Explicitly

Implicitly Implicitly

Implicitly Explicitly

Explicitly Implicitly

Answer 11

Explicitly Implicitly This answer is correct because audit reports are required to include an explicit statement on conformance with GAAP but do not explicitly mention adequacy of disclosure.

Question 12

Does an auditor make the following representation explicitly or implicitly when issuing a nonpublic company standard auditor’s report on comparative financial statements?

I Consistent application of accounting principles

II Examination of sufficient and appropriate evidence

A. Explicitly I Explicitly II

B. Implicitly I Implicitly II

C. Implicitly I Explicitly II

D. Explicitly I Implicitly II

Answer 12

C. Implicitly I Explicitly II

This answer is correct because the standard audit report treats consistency implicitly (does not mention consistency unless an inconsistency in the application of accounting principles exists) and explicitly states that evidence obtained is sufficient and appropriate.

Question 13

How does an auditor make the following representations when issuing the nonpublic company standard auditor’s report on comparative financial statements?

Consistent application of accounting

principles Reasonableness of accounting estimates

A. Implicitly I Explicitly II

B. Explicitly I Implicitly II

C. Implicitly I Implicitly II

D. Explicitly I Explicitly II

Answer 13

A. Implicitly I Explicitly II

This answer is correct because consistency is not explicitly referred to, but the reasonableness of accounting estimates is referred to.

Question 14

When auditing a public entity’s financial statements that include segment information, the auditor should:

Make certain the segment information is labeled unaudited and determine that the information is consistent with audited information.

Make certain the segment information is labeled unaudited and perform only analytical procedures on the segment information.

Audit the segment information, and, if the information is adequate and in conformity with GAAP, do not make reference to the segment information in the auditor’s report.

Audit the segment information and, if the information is adequate and in conformity with GAAP, refer to the segment information in the auditor’s report.

Answer 14

Audit the segment information, and, if the information is adequate and in conformity with GAAP, do not make reference to the segment information in the auditor’s report. This answer is correct because no reference need be made to the segment information when the information has been audited and is found to be adequate and in conformity with GAAP.

Question 15

Miller Co. uses the first-in, first-out method of costing for its international subsidiary’s inventory and the last-in, first-out method of costing for its domestic inventory. Under these circumstances, Miller should issue an auditor’s report with an

“Except for” qualified opinion.

Unmodified opinion.

Emphasis-of-matter paragraph as to consistency.

Opinion modified as to consistency.

Answer 15

Unmodified opinion.

This answer is correct because the use of such differing methods may be appropriate due to the circumstances and therefore an unmodified opinion may be issued.

Question 16

Comparative financial statements include the financial statements of a prior period which were examined by a predecessor auditor, whose report is not presented. If the predecessor auditor’s report was qualified, the successor auditor should:

Express an opinion on the current year statements alone and make no reference to the prior year statements.

Issue a standard short-form comparative report indicating the division of responsibility.

Obtain written approval from the predecessor auditor to include the prior year’s financial statements.

Disclose the reasons for any qualification included in the predecessor auditor’s opinion.

Answer 16

Disclose the reasons for any qualification included in the predecessor auditor’s opinion.

This answer is correct because the professional standards require that when the predecessor auditor’s opinion was other than unmodified, the successor should describe the nature of any reasons for the qualification.

Question 17

The prior year’s financial statements of YZ, Inc., which were audited by Pate, CPA, are presented for comparative purposes without Pate’s audit report. Jennings, CPA, the successor auditor, should indicate in the current year audit report that the prior year’s financial statements were examined by another auditor:

Only if Pate’s opinion was other than unmodified.

But should not indicate the type of opinion expressed by Pate.

Only if the prior year’s financial statements have been restated.

But should not name Pate as the predecessor auditor.

Answer 17

But should not name Pate as the predecessor auditor. This answer is correct because the professional standards require that the predecessor auditor not be named when that auditor’s report is not presented, but that the following information be indicated in the introductory paragraph of the successor auditor’s report: (1) the financial statements of the prior period were examined by other auditors, (2) the date of the other auditor’s report, (3) the type of opinion expressed, and (4) the substantive reasons therefore, if it was other than unmodified.

Question 18

How are management’s responsibility and the auditor’s responsibility represented in both public and nonpublic company standard audit reports?

I. Management’s responsibility

II. Auditor’s responsibility

Explicitly I Explicitly II

Implicitly I Implicitly II

Implicitly I Explicitly II

Explicitly I Implicitly II

Answer 18

Explicitly I Explicitly II

This answer is correct because standard reports explicitly state that the financial statements are the responsibility of the company’s management and that the auditor’s responsibility is to express an opinion on the financial statements based on his/her audit.

Question 19

When the financial statements of a nonpublic entity for a prior period have not been audited and are presented, for comparative purposes, with current period statements that have been audited:

The auditor should request removal of the unaudited statements since it is improper to present them for comparative purposes with audited statements.

The auditor should identify the financial statements that were not examined in a separate paragraph in the auditor’s report accompanying the current statements.

The unaudited statements do not need to be marked “unaudited” as this may confuse the users of the statements.

The auditor’s report accompanying the statements should not mention that the prior period statements are unaudited, but the unaudited statements should be marked “unaudited.”

Answer 19

The auditor should identify the financial statements that were not examined in a separate paragraph in the auditor’s report accompanying the current statements.

This answer is correct because in such circumstances the auditor may add a separate paragraph to the audit report and identify the financial statements.

Question 20

Skates, an independent auditor, was engaged to perform an examination of the financial statements of Apex Incorporated 1 month after its fiscal year had ended. Although the inventory count was not observed by Skates, and accounts receivable were not confirmed by direct communication with creditors, Skates was able to gain satisfaction by applying alternative auditing procedures.

Skates’ auditor’s report will probably contain An “except for” qualification.

An unmodified opinion and a basis for modification paragraph.

Either a qualified opinion or a disclaimer of opinion.

A standard unmodified opinion.

Answer 20

A standard unmodified opinion.

This answer is correct because, although the auditor was not able to observe the inventory count or confirm accounts receivable, the auditor was able to gain satisfaction through the use of alternative procedures. In these circumstances, an unmodified opinion may be issued.

Question 21

Grant Company’s financial statements adequately disclose uncertainties that concern future events, the outcome of which are not susceptible to reasonable estimation:

The auditor’s report should include a(n) Unmodified opinion.

A qualified opinion that uses the term “with the possible exception of.”

A qualified opinion that uses the term “except for.”

Adverse opinion.

Answer 21

Unmodified opinion. This answer is correct because Grant Company adequately disclosed the uncertainties that are not susceptible of reasonable estimation as per GAAP. Such matters are to be regarded as uncertainties for the purposes of considering the need for adding an emphasis-of-matter paragraph to what remains an unmodified opinion.

Question 22

For an entity’s financial statements to be presented fairly in conformity with generally accepted accounting principles, the principles selected should:

Be applied on a basis consistent with those followed in the prior year.

Be approved by the Auditing Standards Board or the appropriate industry subcommittee.

Reflect transactions in a manner that presents the financial statements within a range of acceptable limits.

Match the principles used by most other entities within the entity’s particular industry.

Answer 22

Reflect transactions in a manner that presents the financial statements within a range of acceptable limits Match the principles used by most other entities within the entity’s particular industry..

Question 23

GAAS require the auditor’s report to contain either an expression of opinion regarding the financial statements or an assertion to the effect that an opinion cannot be expressed. The objective of this requirement is to prevent:

An auditor from expressing different opinions on each of the basic financial statements.

Restrictions on the scope of the audit, whether imposed by the client or by the inability to obtain evidence.

Misinterpretations regarding the degree of responsibility the auditor is assuming.

An auditor from reporting on one basic financial statement and not the others.

Answer 23

Misinterpretations regarding the degree of responsibility the auditor is assuming. The objective is to prevent users of audited financial statements from misinterpreting the degree of responsibility the auditor is assuming when the auditor’s name is associated with financial statements.

Question 24

When financial statements contain a departure from GAAP because, due to unusual circumstances, the statements would otherwise be misleading, the auditor should explain the unusual circumstances in a separate paragraph and express an opinion that is:

Unmodified.

Qualified.

Adverse.

Qualified or adverse, depending on materiality.

Answer 24

Unmodified. When strict adherence to GAAP would result in misleading financial statements, the auditor may issue an unmodified opinion accompanied by an emphasis-of-matter paragraph describing the GAAP departure.

Question 25

If an auditor is satisfied that there is only a remote likelihood of a loss resulting from the resolution of a matter involving an uncertainty, the auditor should express a(n):

Unmodified opinion.

Unmodified opinion with a separate emphasis-of-matter paragraph.

Qualified opinion or disclaimer of opinion, depending upon the materiality of the loss.

Qualified opinion or disclaimer of opinion, depending on whether the uncertainty is adequately disclosed.

Answer 25

Unmodified opinion. If there is only a remote likelihood of a loss resulting from an uncertainty, GAAP does not require adjustment or disclosure. The auditor should express an unmodified opinion.

Question 26

When issuing an unmodified opinion, the auditor who evaluates the audit findings should be satisfied that the:

Amount of known misstatement is documented in the management representation letter.

Estimate of the total likely misstatement is less than a material amount.

Amount of known misstatement is acknowledged and recorded by the client.

Estimate of the total likely misstatement includes the adjusting entries already recorded by the client.

Answer 26

Estimate of the total likely misstatement is less than a material amount. In order to issue an unmodified opinion, the auditor must be confident that no material misstatements exist in the financial statements. While misstatements may exist, in total they must be believed to be less than a material amount.