Qualified for Misstatement Flashcards
An auditor’s examination reveals a misstatement in segment information that is material in relation to the financial statements taken as a whole. If the client refuses to make modifications to the presentation of segment information, the auditor should issue a(n)
Qualified opinion.
Unmodified opinion with an emphasis of matter paragraph.
Standard unmodified opinion.
Disclaimer of opinion.
Qualified opinion.
This answer is correct because this, like other departures from GAAP, leads to either a qualified opinion or an adverse opinion.
A CPA engaged to examine financial statements observes that the accounting for a certain material item is not in conformity with generally accepted accounting principles, and that this fact is prominently disclosed in a footnote to the financial statements. The CPA should
Express an unmodified opinion and insert an emphasis-of-matter paragraph referring to the footnote.
Disclaim an opinion.
Not allow the accounting treatment for this item to affect the type of opinion because the deviation from generally accepted accounting principles was disclosed.
Qualify the opinion because of the deviation from generally accepted accounting principles.
Qualify the opinion because of the deviation from generally accepted accounting principles.
This answer is correct because when financial statements are materially affected by a departure from generally accepted accounting principles an auditor should issue either a qualified or an adverse opinion
A client decides not to make an auditor’s proposed adjustments that collectively are not material and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation?
The financial statements are free from material misstatement, and no disclosure of the omitted proposed adjustments is required in the audit report.
The financial statements do not materially conform with generally accepted accounting principles (GAAP).
The financial statements contain unadjusted misstatements that should result in a qualified opinion.
The financial statements are free from material misstatement, but disclosure of the proposed adjustments is required in the notes to the financial statements.
The financial statements are free from material misstatement, and no disclosure of the omitted proposed adjustments is required in the audit report.
This answer is correct because material, not immaterial, departures require disclosure in the audit report.
If the auditor believes that required disclosures of a significant nature are omitted from the financial statements under examination, the auditor should decide between issuing
A qualified opinion or an adverse opinion.
A disclaimer of opinion or a qualified opinion.
An adverse opinion or a disclaimer of opinion.
An unmodified opinion or a qualified opinion.
A qualified opinion or an adverse opinion.
This answer is correct because material disclosures required by GAAP, if omitted, cause the financial statements to be in violation of GAAP. When the financial statements are materially affected by a departure from GAAP, the auditor should express a qualified or an adverse opinion.
An auditor’s report that refers to the use of an accounting principle at variance with generally accepted accounting principles contains the words, “In our opinion, with the foregoing explanation, the financial statements referred to above present fairly…” This is considered a(n)
Adverse opinion.
Qualified opinion.
Unmodified opinion with an emphasis-of-matter paragraph.
Example of inappropriate reporting.
Example of inappropriate reporting.
This answer is correct because the professional standards do not allow such a statement.
Which of the following narrative disclosures appearing in notes to financial statements would an auditor be most likely to consider inappropriate?
The related-party transaction was consummated on terms no less favorable than those that would have been obtained if the transaction had been with an unrelated party.
The accounts of subsidiaries in which the corporation has more than 50% ownership are fully consolidated.
Legal and other costs associated with the covenant-not-to-compete will be amortized using the straight-line method during the next 3 years.
Minor fluctuations in foreign currency exchange rates are not reflected in the accompanying financial statements.
The related-party transaction was consummated on terms no less favorable than those that would have been obtained if the transaction had been with an unrelated party.
This answer is correct because representations to the effect that a transaction was consummated on terms no less favorable than those that would have been obtained if the transaction had been with an unrelated party are difficult to substantiate and the auditor may be unable to reach a conclusion as to the propriety thereof.
When the financial statements contain a departure from generally accepted accounting principles, the effect of which is material, the auditor should
Qualify the opinion and explain the effect of the departure from generally accepted accounting principles in a separate paragraph.
Qualify the opinion and describe the departure from generally accepted accounting principles within the opinion paragraph.
Disclaim an opinion and explain the effect of the departure from generally accepted accounting principles in a separate paragraph.
Disclaim an opinion and describe the departure from generally accepted accounting principles within the opinion paragraph.
Qualify the opinion and explain the effect of the departure from generally accepted accounting principles in a separate paragraph.
This answer is correct because the professional standards require an auditor to qualify the opinion paragraph and explain the effect of the departure from GAAP in a separate paragraph (or issue an adverse opinion).
A company issues audited financial statements under circumstances which require the presentation of a statement of cash flows. If the company refuses to present a statement of cash flows, the independent auditor should
Disclaim an opinion.
Prepare a statement of cash flows and note in an other-matter paragraph of the report that this statement is auditor-prepared.
Prepare a statement of cash flows and disclose in a footnote that this statement is auditor-prepared.
Qualify his opinion with an “except for” qualification and a description of the omission in a basis for modification paragraph of the report.
Qualify his opinion with an “except for” qualification and a description of the omission in a basis for modification paragraph of the report.
This answer is correct because the omission of a statement of cash flows is a departure from GAAP and an “except-for” qualified report with a basis for modification paragraph is appropriate.
In which of the following circumstances would an auditor be required to issue a qualified report with a separate basis for qualified opinion paragraph?
The auditor satisfactorily performed alternative accounts receivable procedures because scope limitations prevented performance of normal procedures.
The financial statements reflect the immaterial effects of a change in accounting principles from one period to the next.
A particular note to the financial statements discloses a company accounting method which deviates from generally accepted accounting principles.
The financial statements of a significant subsidiary were examined by another auditor, and reference to the other auditor’s report is to be made in the principal auditor’s report.
A particular note to the financial statements discloses a company accounting method which deviates from generally accepted accounting principles.
This answer is correct because when the financial statements are affected by a departure from generally accepted accounting principles, the auditor will express a qualified opinion. When the auditor intends to express a qualified report, s/he should disclose all the substantive reasons in a basis for qualified opinion paragraph.
An auditor's report included an additional paragraph disclosing that there is a difference of opinion between the auditor and the client for which the auditor believed an adjustment to the financial statements should be made. The auditor views the misstatement involved as material, but not so pervasively material as to make the overall financial statements misleading. The opinion paragraph of the auditor's report most likely expressed a(n) Unmodified opinion. Qualified opinion. Adverse opinion. Disclaimer of opinion.
Qualified opinion.
This answer is correct because a material misstatement that does not pervasively misstate the financial statements results in a qualified opinion.
When an auditor has substantial doubt about an entity’s ability to continue as a going concern because of the probable discontinuance of operations, the auditor most likely would express a qualified opinion if
The effects of the adverse financial conditions likely will cause a bankruptcy filing.
Information about the entity’s ability to continue as a going concern is not disclosed.
Management has no plans to reduce or delay future expenditures.
Negative trends and recurring operating losses appear to be irreversible.
Information about the entity’s ability to continue as a going concern is not disclosed.
This answer is correct because, when management does not disclose such information in the financial statements, a departure from GAAP exists; departures from GAAP lead to either a qualified or adverse opinion.
Zag Co. issues financial statements that present financial position and results of operations but Zag omits the related statement of cash flows. Zag would like to engage Brown, CPA, to audit its financial statements without the statement of cash flows although Brown’s access to all of the information underlying the basic financial statements will not be limited. Under these circumstances, Brown most likely would
Add an emphasis-of-matter paragraph to the standard auditor’s report that justifies the reason for the omission.
Refuse to accept the engagement as proposed because of the client-imposed scope limitation.
Explain to Zag that the omission requires a qualification of the auditor’s opinion.
Prepare the statement of cash flows as an accommodation to Zag and express an unmodiified opinion.
Explain to Zag that the omission requires a qualification of the auditor’s opinion.
This is correct because in this circumstance GAAP require inclusion of a statement of cash flows, and omission of such results in a qualified opinion.
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REPT-0046B
Use V-O keys to navigate.When an auditor qualifies an opinion because of inadequate disclosure, the auditor should describe the nature of the omission in a basis for qualification paragraph and modify the
Introductory
paragraph
Auditor
responsibility
paragraphs
Opinion
paragraph Yes No No Yes Yes No No Yes Yes No No Yes
No Yes Yes
In addition to requiring the inclusion of a separate basis for qualification matter paragraph, AU-C 705 indicates that the opinion paragraph and the auditor’s responsibility section should be modified. The Auditor’s responsibility section would state “We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.” A “Basis for Qualified Opinion” paragraph is added to the report. Finally, the opinion paragraph is modified to discuss the qualified opinion.
Zag Co. issues financial statements that present financial position and results of operations but Zag omits the related statement of cash flows. Zag would like to engage Brown, CPA, to audit its financial statements without the statement of cash flows although Brown’s access to all of the information underlying the basic financial statements will not be limited. Under these circumstances, Brown most likely would
Add an emphasis-of-matter paragraph to the standard auditor’s report that justifies the reason for the omission.
Refuse to accept the engagement as proposed because of the client-imposed scope limitation.
Explain to Zag that the omission requires a qualification of the auditor’s opinion.
Prepare the statement of cash flows as an accommodation to Zag and express an unmodified opinion.
Explain to Zag that the omission requires a qualification of the auditor’s opinion.
When an entity omits a statement of cash flows, the auditor may accept an engagement to audit the other financial statements, but should qualify the opinion, since a statement of cash flows is required when general-purpose financial statements present financial position and results of operation.
If a privately held company issues financial statements that purport to present its financial position and results of operations, but omits the statement of cash flows, the auditor ordinarily will express a(n)
Disclaimer of opinion.
Qualified opinion.
Review report.
Unmodified opinion with a separate emphasis-of-matter paragraph.
Qualified opinion.
Omission of the statement of cash flows results in a qualified opinion due to a GAAP departure.
