SU 16: Reports -- Opinions and Disclaimers

Question 1

For entity’s f/s to be presented fairly in conformity with GAAP, issue is not necessary

Answer 1

Be applied on a consistent basis with those followed in the prior year. The f/s should reflect underlying transactions and events in a manner that presents financial position, results of operations, an cash flows stated w/in a range of acceptable limits. A lack of consistency does not preclude fair presentation with GAAP. Example, if the entity changes from one GAAP to another and the auditors concurs with the change, a reference in the auditor’s report is required, but the f/s will still conform with GAAP.

Question 2

The 4th standard or reporting requires either a report contain an expression of opinion as whole or an assertion to the effect an opinion cannot be expressed. The objective of the 4th standard is to

Answer 2

Misrepresentations regarding the degree of responsibility the auditor is assuming. The 4th standard of reporting states “in all cases in which the auditor’s name is associated with f/s, the report should contain a clear cut indication of the auditor’s work, if any, and the degree of responsibility the auditor is taking.” The standard is trying prevent misinterpretations of responsibility the auditor is assuming when their name is associated with f/s.

Question 3

If an auditor is aware that their name is to be included in a client-prepared written communication of an issuer containing unaudited f/s they should request

Answer 3

(1) their name not be included in the communication or (2) that the f/s be marked as unaudited with a notation to the effect that they do not express an opinion on them (AU 504)

Question 4

A SH report includes audited f/s and a statement that f/s are the responsibility of management, may the auditor refer to the statement?

Answer 4

No, the auditor may not make reference in the report regarding mgmts assertion that the f/s are mgmt’s responsibility. Such a modification of the standard report may lead users to erroneous belief that the auditor is giving assurances about mgmts representations concerning matters discussed in mgmt report. The statement in the introductory paragraph about management’s responsibility should not be elaborated upon in std rpt or referenced in mgmt rpt (AU 508)

Question 5

What is part of basic report

Answer 5

An auditor includes assessing significant estimates made by mgmt. It includes a statement “An audit also includes assessing the accounting principles used and significant estimates made by mgmt, as well as, evaluating the overall f/s presentation.”

Question 6

The existence of audit risk is recognized by the statement in the auditor’s std report that the auditor

Answer 6

Obtains reasonable assurance about whether f/s are free from material misstatements. The existence of audit risk is recognized by the statement. AU 312 Audit risk is the risk that the auditor expresses an opinion when f/s are materially misstated. Audit risk exists because no assurance is absolute.

Question 7

What are some of the implicit and explicit representations an auditor makes when expressing an unqualified opinion
Conformity with GAAP and Adequacy of Disclosure

Answer 7

The opinion paragraph of the standard auditor’s report explicitly states whether f/s are in conformity with GAAP. The 3rd standard of reporting states “ when an auditor determines that informative disclosure are not reasonably adequate, the auditor must state in the auditor’s report” Thus, adequacy of disclosure is implicit in the standard report.

Question 8

In Yr 3, an auditor re-issues the report from Yr 1 f/s per the client’s request. The f/s are not restated, and the auditor does not revises wording of the report. What can the auditor do

Answer 8

The auditor can use the original report date on re-issued report (AU 530), use of original date in a re-issued report removes implication that records, transactions, or events after such date have been audited or reviewed. The auditor will then have no responsibility to carry out procedures relating to the period between original issuance and re-issuance (but see AU 711 regarding filing under SEC 1933)

Question 9

CPA auditing Yr 1 completes fieldwork for company 3/6/Yr 2 and had sufficient appropriate evidence to support opinion. A sub event occurred 4/10 requiring Yr 1 ADJ CPA learned about on 4/24/Yr2. This occurred prior to issuance of f/s. What should CPA do

Answer 9

If ADJ made w/o disclosure of event, report ordinarily dated 3/6/Yr 2.
If sub event requiring ADJ after report date and prior to issuance of f/s and event comes to auditor’s attention statements s/b ADJ and opinion modified or disclaimed. When ADJ is made w/o disclosure report date s/b no earlier than auditor attaining suff and appropriate evidence (AU 530)

Question 10

What statements are not forceful enough for a qualified opinion and which are acceptable

Answer 10

1 Read in conjunction with Note X
2 With the foregoing explanation
3 Subject to
AU 508 states the auditor should use a phrase such as “with the exception of” or “except for” to qualify an opinion. Wording such as “with foregoing explanation” is neither clear nor forceful enough and is not acceptable. Moreover, the notes are a part of the f/s, and a reference such as “ read in conjunction with note X” is likely to misunderstood. Also “subject to” is not forceful enough

Question 11

Can a qualified opinion be expressed for the following circumstances 1.) Lack of sufficient appropriate evidence 2.) restrictions on scope and why

Answer 11

Yes, A qualified opinion is expressed because of departures from GAAP, a lack of sufficient appropriate evidence, or restrictions on scope, AU 508 states an auditor may qualify or disclaim an opinion because of the above whether imposed by client or by circumstances.

Question 12

CPA cannot determine amounts involved in illegal acts or extent of management involvement the CPA should

Answer 12

If an auditor is precluded form applying the necessary procedures or after applying extended procedures they are unable to determine whether illegal acts or fraud may have a material affect on the f/s, they should disclaim or qualify an opinion. When the auditor cannot determine mgmt involvement they should disclaim or qualify opinion.

Question 13

What is the wording for a qualified opinion based on scope limitation

Answer 13

AU 508 states that, when an auditor qualifies and opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to possible effects on the f/s on the scope limit itself.

Question 14

If an auditor cannot become satisfied with inventory and did not observe beg physical inventory and could not becomes satisfied via other procedures the auditor could express an unqualified opinion on

Answer 14

Only the balance sheet. A scope restriction on observation of inventory, may prevent an auditor from obtaining the evidence required to support an unqualified opinion. If they can’t be satisified regarding inventory a qualified opinion or disclaimer opinion must be expressed. Depending on the importance of the omitted procedure. Because the BS reports only on ending inventory balance, the auditor can express an unqualified opinion on it alone, assuming, satificiation with ending bal.

Question 15

What must an auditor do when mgmt refuses to include any information segment the auditor believes is required

Answer 15

Issue a qualified opinion. The standard report on f/s prepared in conformity with GAAP implicitly applies to segment information included in these statements. The auditor should not refer to segment information unless the audit reveals a related material misstatement or omission, or was subject to a scope limitation. Under AU 508, if material info is not included that the auditor feels s/b disclosed, the auditor should modify opinion for inadequate disclosure and in include omitted info in report, if applicable

Question 16

Qualified vs Adverse Opinion

Answer 16

Substantial doubt about entities ability to continue as a going concern. When an auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time, they should include an explanatory pg in the report to describe the uncertainty. By itself, this doubt does not require departure from unqualified opinion. However, if the entity’s disclosures are inadequate, the departure from GAAP may result in a qualified or adverse opinion

Question 17

If f/s fail to disclose info that is required under GAAP what should be done

Answer 17

Departures from GAAP, including inadequate disclosures, may result in either a qualified or adverse opinion. The auditor must exercise judgement as to the materiality of departure and weight factors such as $ magnitude, significance to the entity, persuasiveness of misstatement, and the impact on the f/s as a whole. If not significant enough for adverse s/b qualified.

Question 18

What is the basis for adverse opinion. If company fails to conform with FASB guidance regarding lease capitalization

Answer 18

An adverse opinion is expressed when f/s as whole are not presented fairly in conformity with GAAP. FASB is authoritative w/ regard to GAAP

Question 19

The nature of f/s on which a qualified report was issued

Answer 19

The essence of an adverse opinion is that the statements reported on, taken as a whole are not fairly presented with GAAP (AU 508). The f/s s/b bsed on principles having general acceptance that are appropriate in the circumstances. If f/s fail to meet standard they are misleading.

Question 20

With adverse opinion the opinion should include

Answer 20

A direct reference to a separate pg disclosing the basis for the opinion. This paragraph should precede the opinion paragraph and state (1) all the substantive reason for adverse opinion (2) principal effects of the subject matter of the adverse opinion

Question 21

When is a disclaimer opinion not appropriate

Answer 21

Management does not provide justification for change in accounting principle. If management does not provide a reasonable justification for change in accounting principle an adverse or qualified opinion s/b expressed.

Question 22

1.) In our opinion, except for the omission of the statement of cash flows

Answer 22

a. B, qualified. A qualified reports used language “except for” or “with the exception of”

Question 23

2.) The scope of our work was not sufficient to enable us

Answer 23

a. D, disclaimer. A scope limitation that does not allow the auditor to collect sufficient appropriate evidence results in a disclaimer.

Question 24

3.) As discussed in Note 12, the company changed its method of computing depreciation

Answer 24

a. A, unqualified. Reference to a change in accounting principle is a paragraph added to the end of an unqualified report

Question 25

4.) We are not independent with respect to XYZ Company

Answer 25

a. D, Disclaimer. Lake of independence by the auditor results in a disclaimer of opinion

Question 26

5.) Except for the effects of not capitalization certain lease obligations as discussed in the preceding paragraph

Answer 26

a. B, qualified. A qualified reports used language “except for” or “with the exception of”

Question 27

6.) Based on our audit and report of other auditors

Answer 27

a. A, unqualified. A reference to other auditors is a division of responsibility that does not affect the opinion on the f/s

Question 28

7.) For the year then ended not audited by us

Answer 28

a. D, disclaimer. F/s that were not audited require a disclaimer of opinion

Question 29

8.) Raises substantial doubt about its ability to continue as a going concern

Answer 29

a. A, unqualified. Reference to going concern is a paragraph added to the end of an unqualified opinion

Question 30

9.) Presents fairly in material respects

Answer 30

a. A, unqualified. An unqualified opinion states that the f/s are presented fairly

Question 31

10.) In our opinion, except for the effects of such adjustments, if any

Answer 31

a. B, qualified. A qualified reports used language “except for” or “with the exception of”

Question 32

1.) First Standard of reporting – Application of GAAP

Answer 32

a. The auditor must state in the auditor’s report
i. D, whether f/s are presented
ii. H, in accordance with GAAP

Question 33

2.) Second standard of reporting – consistency of GAAP

Answer 33

a. The auditor must identify in the auditor’s report
i. F, those circumstances in which such principles
ii. J, have not been consistently
iii. G, observed in the current period
iv. B, in relation to the preceding period

Question 34

3.) Third standard of reporting – disclosure

Answer 34

a. When the auditor determines that informative disclosures
i. A, are not reasonably adequate
ii. E, the auditor must so state
iii. I, in the auditor’s report

Question 35

1.) The paragraph does not state whether the statements are in conformity with GAAP

Answer 35

a. False, this is not a deficiency because the introductory paragraph should not include an opinion on the f/s

Question 36

2.) The paragraph does not state that the audit was in accordance with GAAS

Answer 36

a. False, the scope paragraph should report to US GAAP

Question 37

3.) The magnitude of the portions of the f/s audited by the other auditor is not disclosed in the paragraph

Answer 37

a. True, division of responsibility with other auditors should quantified in the introductory paragraph

Question 38

4.) The other auditor should not be named unless the other auditor’s report is presented together with that of the principal auditor

Answer 38

a. True, the name of the other auditors should not be included unless their report is presented

Question 39

5.) The responsibility of management is not disclosed

Answer 39

a. True, the sentence “these f/s are the responsibility of management” should be included in the introductory paragraph.

Question 40

6.) The responsibility of the auditor is not disclosed

Answer 40

a. True, the sentence “Our responsibility is to express an opinion on these f/s based on our audits” should be included in the introductory paragraph.

Question 41

7.) The paragraph does not state that the audit was according to US GAAP

Answer 41

a. True, the scope paragraph should refer to US GAAP

Question 42

8.) No reference is made to tests of accounting records and other necessary procedures

Answer 42

a. False, the scope paragraph should include a sentence “an audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the f/s”

Question 43

9.) Assessing significant accounting estimates is not mentioned

Answer 43

a. True, the scope paragraph should include the sentence “an audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall f/s presentation.”

Question 44

10.) Emphasis of a matter is not appropriate unless opinion is modified

Answer 44

a. False, an auditor can choose to add a paragraph to emphasize a matter without modifying the opinion

Question 45

11.) Reference to the specialist should not be made if the auditor does not modify the opinion as a result of the findings of the specialist

Answer 45

a. False, if the reference helps the reader understand the nature of the report, then the reference is appropriate

Question 46

12.) All the substantive reasons for the qualified opinion are not disclosed in a separate explanatory paragraph.

Answer 46

a. True, the issue that caused the qualification in the opinion should be identified in a separate paragraph preceding the opinion paragraph.

Question 47

13.) A “subject to” qualification is not a proper form of reporting

Answer 47

a. True, the term “subject to” should not be used as qualifying language in a report

Question 48

14.) Reference to the other auditor is not made in the opinion paragraph

Answer 48

a. True, reference to the other auditors should be made in the introductory, scope and opinion paragraphs.

Question 49

15.) The company whose f/s were audited in not identified in the opinion paragraph

Answer 49

a. True, the opinion paragraph should reference the client’s name

Question 50

16.) The draft does not refer to both years (Y1 and Y2) in the opinion paragraph

Answer 50

a. True, the opinion should specifically identify the years for which the opinion applies

Question 51

17.) The paragraph does not refer to cash flows

Answer 51

a. True, the opinion paragraph should refer to the statement of cash flows

Question 52

18.) The opinion paragraph does not refer to the consistent application of GAAP

Answer 52

a. False, the opinion paragraph is silent as to consistency

Question 53

19.) The country of origin of GAAP should not be given

Answer 53

a. False, the country of origin of the accounting standards should be identified in the opinion paragraph

Question 54

20.) Dual dating should not be used when a subsequent event occurs before field work is complete

Answer 54

a. True, dual dating is used when the disclosure of an event is between the completion of field work and the issuance of the f/s

Question 55

First Standard of Reporting

Answer 55

The auditor must state in the auditor’s report whether the F/S present fairly in accordance with GAAP. GAAP provide standards for which to measure financial presentation (AU 411)

Question 56

Third Standard of Reporting

Answer 56

When the auditor determines that informative disclosures are not reasonably adequate the auditor must so state in the report. If management omits information required by GAAP, the auditor should provide the necessary disclosures in the report, if practicable, and express an adverse or qualified opinion (AU 431)

Question 57

The Second Standard of Reporting

Answer 57

The auditor must identify in the auditor’s report those circumstances in which such principles have not been consistently in the current period in relation to the previous period.

Question 58

The Fourth Standard of Reporting

Answer 58

The auditor must express an opinion regarding the F/S, taken as a whole, or state that an opinion cannot be expressed, in the auditor’s report.

Question 59

Qualified Opinion

Answer 59

Materially but not pervasively misstated “except for” both misstatement and cannot obtain sufficient appropriate evidence.

Question 60

Adverse Opinion

Answer 60

Materially and pervasively misstated

Question 61

Qualified Opinion

Answer 61

Cannot obtain sufficient appropriate evidence if the effects are material but not pervasive on the f/s

Question 62

Disclaimer Opinion

Answer 62

Cannot obtain sufficient appropriate evidence if the effects are material and pervasive on the f/s

Question 63

Auditor’s Report

Answer 63

Title
Addressee
Intro Paragraph
Management's Responsibility
Auditor's Responsibility
Opinion

Question 64

Unmodified

Answer 64

is the conclusion that the financial statements are presented fairly, in all material respects, in accordance with the framework.

Question 65

Pervasive effects

Answer 65

1. Are not limited to specific elements, accounts, or items of the statements;
2. Represent or could represent a substantial proportion of the statements if limited to specific elements, accounts, or items; and
3. Are, with regard to disclosures, fundamental to users’ understanding of the statements.

Question 66

misstatement

Answer 66

arises from fraud or error. It is a difference between (1) the amount, classification, presentation, or disclosure of a financial statement item and (2) the amount, etc., required for it to be presented fairly.