MODIFICATION Flashcards
A company’s financial statements (FS) report inventories valued at $10 million, stated only at cost. This violates IFRS, as inventories should be recorded at the lower of cost or net realizable value. The misstatement impacts the profit and net assets by $2 million. The total materiality threshold is $1.5 million.
Question: What type of audit opinion should the auditor issue?
Options: A. Unmodified opinion
B. Qualified opinion
C. Adverse opinion
D. Disclaimer of opinion
B. Qualified opinion
The misstatement is material but not pervasive, so a qualified opinion is appropriate.
The auditor was denied access to verify the financial records of a major subsidiary contributing 60% of the consolidated assets. Alternative procedures could not be performed.
Question:
Which type of opinion is most appropriate for this situation?
Options:
A. Unmodified opinion
B. Qualified opinion
C. Adverse opinion
D. Disclaimer of opinion
D. Disclaimer of opinion
The limitation is material and pervasive because the subsidiary contributes 60% of consolidated assets.
The misstatement in the financial statements affects 70% of total assets and is fundamental to understanding the financial position.
Question:
How should the auditor classify this misstatement?
Options:
A. Material and pervasive
B. Material but not pervasive
C. Immaterial
D. Substantive but not pervasive
A. Material and pervasive
The misstatement affects a substantial portion of the financial statements and is fundamental to understanding them.
During the audit, management restricts access to verify the year-end inventory records, which represent 50% of the company’s net assets. The auditor believes this limitation will lead to a material misstatement if not resolved. Management refuses to lift the restriction or provide alternative evidence.
Question:
What should the auditor do next?
Options:
A. Issue a qualified opinion
B. Communicate with Those Charged With Governance (TCWG) and consider withdrawing from the engagement
C. Perform alternative procedures to obtain sufficient appropriate audit evidence
D. Issue an unmodified opinion
AB. Communicate with Those Charged With Governance (TCWG) and consider withdrawing from the engagement
If management refuses to lift the restriction and alternative procedures are impossible, the auditor should escalate and evaluate withdrawal.
The company adopts an accounting policy inconsistent with IFRS, leading to a misstatement that affects net income by $1 million. The misstatement is material but confined to one area of the financial statements.
Question:
What opinion should the auditor issue?
Options:
A. Unmodified opinion
B. Qualified opinion
C. Adverse opinion
D. Disclaimer of opinion
B. Qualified opinion
The misstatement is material but confined to a single area, warranting a qualified opinion.
What does “pervasive” mean in the context of financial statement misstatements?
Options:
A. The misstatement is limited to a single account or disclosure.
B. The misstatement affects a substantial portion of the financial statements and is fundamental to the users’ understanding.
C. The misstatement can be corrected with alternative procedures.
D. The misstatement is immaterial
B. The misstatement affects a substantial portion of the financial statements and is fundamental to the users’ understanding.
This is the definition of “pervasive” under ISA 705.
When does an auditor issue a qualified opinion due to misstatement?
Options:
A. When the impact is material and pervasive.
B. When sufficient audit evidence is unobtainable.
C. When the impact is material but not pervasive.
D. When there are no misstatements.
C. When the impact is material but not pervasive
A qualified opinion is issued for material misstatements that do not extend across the financial statements.
Question:
Which type of audit opinion states that the financial statements do not provide a true and fair view?
Options:
A. Unmodified opinion
B. Qualified opinion
C. Adverse opinion
D. Disclaimer of opinion
. Adverse opinion
An adverse opinion states that the financial statements do not provide a true and fair view.
scope limitation arises when:
Options:
A. The auditor disagrees with management on an accounting policy.
B. The auditor is unable to obtain sufficient appropriate audit evidence.
C. There is a material misstatement in the financial statements.
D. All financial statement elements comply with the applicable financial reporting framework.
B. The auditor is unable to obtain sufficient appropriate audit evidence.
This is the definition of a scope limitation.
Which of the following conditions would lead to an adverse opinion?
Options:
A. Material misstatements are not pervasive.
B. Material misstatements are pervasive and fundamental to the understanding of financial statements.
C. Material scope limitations exist but alternative procedures can be performed.
D. The financial statements are prepared in accordance with IFRS
B. Material misstatements are pervasive and fundamental to the understanding of financial statements.
Material and pervasive misstatements result in an adverse opinion.
Which of the following is NOT an example of a material misstatement?
Options:
A. Inventory is recorded above net realizable value.
B. Financial statements omit required IFRS disclosures.
C. Accounting policies are applied consistently.
D. Cash is understated due to an error in bank reconciliation
C. Accounting policies are applied consistently.
Consistent application of accounting policies does not constitute a misstatement.
A disclaimer of opinion is issued when:
Options:
A. The impact is material but not pervasive.
B. The auditor is unable to obtain sufficient appropriate audit evidence, and the effect is material and pervasive.
C. The financial statements are misstated in accordance with IFRS.
D. Management provides sufficient evidence late in the audit process
The auditor is unable to obtain sufficient appropriate audit evidence, and the effect is material and pervasive.
A disclaimer of opinion is issued when sufficient evidence cannot be obtained, and the limitation is pervasive.
Which of the following situations would most likely require a qualified opinion?
Options:
A. Disclosures are adequate, but there is a misclassification in financial statements.
B. Material disclosures required by IFRS are omitted, but the issue is not pervasive.
C. Management imposes a limitation that prevents inventory valuation.
D. Alternative audit procedures confirm no material misstatements.
: B. Material disclosures required by IFRS are omitted, but the issue is not pervasive.
A qualified opinion is appropriate when omissions are material but not pervasive.
The basis for an adverse opinion should include:
Options:
A. A detailed description of how the misstatement was corrected.
B. A statement that the misstatement is both material and pervasive.
C. An emphasis on the unmodified elements of the financial statements.
D. A summary of alternative audit procedures performed.
B. A statement that the misstatement is both material and pervasive.
The basis for adverse opinion must explain the material and pervasive nature of the misstatement.
Under what circumstance should an auditor consider withdrawing from an engagement?
Options:
A. When a material misstatement exists but is not pervasive.
B. When management imposes a limitation, and it is not possible to perform alternative procedures.
C. When the financial statements are fairly presented, but there are minor disclosure issues.
D. When the engagement is almost complete, and a misstatement is discovered
: B. When management imposes a limitation, and it is not possible to perform alternative procedures.
Withdrawal should be considered if management-imposed limitations prevent the auditor from obtaining sufficient evidence.
