TBS Flashcards
In auditing the long-term investments account, an auditor is unable to obtain audited financial statements for an investee located in a foreign country. The auditor concludes that sufficient appropriate audit evidence regarding this investment cannot be obtained.
What type of opinion(s) would apply and what paragraphs would be modified?
Either a disclaimer of opinion or an “except for” qualified opinion.
Describe the circumstances in a basis-for-modification paragraph preceding the opinion paragraph and modify the opinion
paragraph.
EXPLANATION:
The inability to obtain sufficient appropriate audit evidence is a scope
limitation.
We know that long-term investments is material. We do not, however, know if it is so material that a material misstatement would also result in a material misstatement to the financial statements taken as a whole.
As a minimum, we will issue a qualified opinion since we cannot express an
opinion about an item that is material to the financial statements.
If it is pervasive, however, we would not be able to express an opinion on the
financial statements taken as a whole and would issue a disclaimer.
Either of these represents a modification of the opinion paragraph which would be
preceded by a paragraph entitled either basis for qualification or basis for
disclaimer of opinion, as appropriate.
Due to recurring operating losses and working capital deficiencies, an
auditor has substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. However, the financial statement disclosures concerning these matters are adequate.
What type of opinion(s) would apply and what paragraphs would be modified?
An unmodified opinion
Describe the circumstances in an emphasis-of-matter paragraph following the opinion paragraph without modifying the other paragraphs.
EXPLANATION:
As long as an entity properly discloses a substantial doubt about its ability to continue as a going concern, the auditor will issue a report with an unmodified opinion. Due to the significance of a going concern doubt, however, the auditor is required to draw attention to it.
This will be done by including an emphasis-of-matter paragraph, which always immediately follows the opinion paragraph.
A principal auditor decides to take responsibility for the work of another CPA who audited a wholly-owned subsidiary of the entity and issued an unmodified opinion. The total assets and revenues of the subsidiary represent 17% and 18%, respectively, of the total assets and revenues of the entity being audited.
What type of opinion(s) would apply and what paragraphs would be modified?
An unmodified opinion
Issue the standard auditor’s report without modification.
EXPLANATION:
When an auditor decides to take responsibility for the work of another auditor, there should be no indication in the audit report that portion of the financial statements was audited by another auditor.
Neither the opinion nor any of the other paragraphs are modified since the auditor was able to obtain sufficient appropriate audit evidence and there were apparently no material misstatements.
An entity issues financial statements that present financial position and results of operations but omits the related statement of cash flows. Management discloses in the notes to the financial statements that it does not believe the statement of cash flows to be a use financial statement.
What type of opinion(s) would apply and what paragraphs would be modified?
An “except for” qualified opinion
Describe the circumstances in a basis for modification paragraph preceding the opinion paragraph and modify the introductory and opinion paragraphs.
EXPLANATION:
The omission of the statement of cash flows is a violation of GAAP and would result in a qualified opinion.
It’s omission does not, however, cause the remaining financial statements to be materially misstated and, as a result, an adverse opinion would not be
appropriate.
Since the introductory paragraph names that financial statements that are being audited, it will have to be modified to
omit mention of the statement of cash flows.
A basis for modification paragraph is required for any modified opinion, which would before the opinion paragraph.
In addition, the opinion paragraph is modified to indicate the qualification and to eliminate the reference to cash flows.
An entity changes its inventory valuation method from FIFO to LIFO. The auditor concurs with the change, although it has a material effect on the comparability of the entity’s financial statements.
What type of opinion(s) would apply and what paragraphs would be modified?
An unmodified opinion
Describe the circumstances in an emphasis-of-matter paragraph following the opinion paragraph without modifying the other paragraphs.
EXPLANATION:
A user assumes financial statements were prepared in a manner consistent with the previous year unless the auditor report indicate otherwise.
Since the auditor concurs with the change in accounting principles and since there is no indication that it was not accounted for and disclosed properly, there is no basis for a modified opinion.
The auditor will alert users to the inconsistency with an emphasis-of-matter paragraph, which always immediately follows the opinion paragraph.
An entity is a defendant in a lawsuit alleging infringement of certain patent rights. However, the ultimate outcome of the litigation cannot be reasonably estimated by management. The auditor believes there is a reasonable possibility of a significantly material loss, but the lawsuit is adequately disclosed in the notes to the financial statements.
What type of opinion(s) would apply and what paragraphs would be modified?
An unmodified opinion
Describe the circumstances in an emphasis-of-matter paragraph following the opinion paragraph without modifying the other paragraphs.
EXPLANATION:
When the entity has a loss contingency that is reasonably possible, it is required to be disclosed but not accrued. If it is adequately disclosed, there is no basis for modifying the auditor’s opinion and an unmodified opinion will be issued.
Since it is material, however, the auditor will likely wish to bring it to the attention of users of the financial statements, which will be done by adding a emphasis-of-matter paragraph immediately following the opinion paragraph.
An entity discloses in the notes to the financial statements certain lease obligations. The auditor believes that the failure to capitalized these leases is a departure from generally accepted accounting principles.
What type of opinion(s) would apply and what paragraphs would be modified?
Either an “except for” qualified opinion or an adverse opinion.
Describe the circumstances in a basis-for-modification paragraph preceding the opinion paragraph and modify the opin
paragraph.
EXPLANATION:
If the auditor believes there is a violation of GAAP that the client refuses to correct, the auditor will issue a qualified opinion if the matter is material to the financial statements but is not so material as to cause the financial statements taken as a whole to be materially misstated.
If it is so material as to affect the fairness of the financial statements taken as a whole, an adverse opinion would be
required.
In either case, the opinion paragraph would be modified and a basis-for-modification paragraph will be added immediate before the opinion paragraph.
