Teste De Pratica A1 Flashcards
Which of the following statements is correct concerning an auditor’s responsibilities regarding financial statements?
A. The adoption of sound accounting policies is an implicit part of an auditor's responsibilities. B. An auditor may not draft an entity's financial statements based on information from management's accounting system. C. An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's opinion. D. Making suggestions that are adopted about an entity's internal control environment impairs an auditor's independence.
Explanation
Choice “C” is correct. An auditor’s responsibility is to express an opinion on financial statements based on an audit.
Choice “A” is incorrect. The adoption of sound accounting policies is an implicit part of management’s responsibilities, not the auditor’s responsibilities.
Choice “B” is incorrect. An auditor may draft an entity’s financial statements based on information from management’s financial system. This would be referred to as a compilation engagement.
Choice “D” is incorrect. An auditor often makes suggestions that are adopted about an entity’s internal control environment.
Which of the following factors should most influence an auditor’s decision to modify the audit opinion of an issuer’s financial statements?
A. Whether the auditor's opinion is based in part on the report of another auditor. B. Uncertainties related to management's estimates as of the reporting date that are adequately disclosed in the footnotes to the financial statements. C. The effect of a misstatement on the financial statements taken as a whole. D. The types of users expected to rely on the financial statements.
Choice “C” is correct. The effect of a misstatement on the financial statements taken as a whole should most likely influence an auditor’s decision to modify the audit opinion.
Choice “A” is incorrect. The auditor considers the total misstatements accumulated from the entire entity (including misstatements identified by the component auditor) when determining the appropriate audit opinion. The actual opinion rendered by another auditor on the component does not directly influence the auditor’s decision. (For example, a misstatement may be material to the component financial statements, but the same misstated amount may not be material to the group financial statements. This is why the auditor considers the aggregated misstatement for the financial statements as a whole rather than just the opinion rendered on a specific component.)
Choice “B” is incorrect. An auditor is unlikely to modify the opinion related to uncertainties related to management’s estimates that are adequately disclosed. If an entity follows GAAP and the auditor obtains sufficient appropriate evidence, there is no need to modify the type of opinion rendered.
Choice “D” is incorrect. The types of users expected to rely on the financial statements would be considered when determining the materiality amount.
During an audit, the auditor sent the client’s attorney a letter of inquiry for any pending litigation or unasserted claims. The attorney returned the letter, indicating that the attorney would not respond to the inquiry. Under these circumstances the auditor most likely would:
A. Increase tests of controls concerning the related liability account B. Place increased reliance on information obtained from management C. Consider the impact of a scope limitation D. Obtain information concerning contingency guarantees from bank confirmations
Choice “C” is correct. Refusal of the client’s attorney to respond to inquiry is an example of a scope limitation. The auditor must consider the impact of the scope limitation on the audit opinion to be issued.
Choice “A” is incorrect. Testing the liability account does not address the completeness of the reliability account. Responses from the client’s attorney are necessary to determine whether additional liability should potentially be recorded.
Choice “B” is incorrect. The auditor is required to inquire of the client’s legal counsel concerning litigation, claims, and assessments. The auditor cannot replace a response from counsel with information obtained from management.
Choice “D” is incorrect. While bank confirmations may be helpful additional sources of information on contingencies, the auditor still is required to inquire of the client’s legal counsel concerning litigation, claims, and assessments.
An auditor of a nonissuer should disclose the substantive reasons for expressing an adverse opinion in a Basis for Adverse Opinion section:
A. Preceding the Opinion section. B. Within the notes to the financial statements. C. Following the Opinion section. D. Preceding the introductory paragraph.
Choice “C” is correct. The auditor should disclose the substantive reasons for expressing an adverse opinion in a separate Basis for Adverse Opinion section following the Opinion section.
Choice “A” is incorrect. The Basis for Adverse Opinion section follows, not precedes, the Opinion section.
Choice “B” is incorrect. The auditor cannot include any type of explanatory material in the financial statements, which are the responsibility of management.
Choice “D” is incorrect. There is no introductory paragraph within the auditor’s report.
When forming an opinion on the financial statements, the auditor is least likely to evaluate whether:
A. Earnings forecasts by investors are met. B. Financial statements provide adequate disclosures to enable intended users to understand the effect of material events and transactions. C. The terminology used in the financial statements is appropriate. D. Accounting estimates made by management are reasonable.
Choice “A” is correct. When forming an opinion on the financial statements, the auditor is least likely to evaluate whether earnings forecasts made by investors are met.
Choice “B” is incorrect. When forming an opinion on the financial statements, the auditor should evaluate whether, based on the financial reporting framework, the financial statements provide adequate disclosures to enable intended users to understand the effect of material events and transactions.
Choice “C” is incorrect. When forming an opinion on the financial statements, the auditor should evaluate whether, based on the financial reporting framework, the terminology used in the financial statements is appropriate.
Choice “D” is incorrect. When forming an opinion on the financial statements, the auditor should evaluate whether, based on the financial reporting framework, the accounting estimates made by management are reasonable.
Management refuses to allow an auditor to observe inventory. Inventory accounts for 60% of the entity’s assets. Alternative auditing procedures cannot be applied. Based on this information, the auditor should:
A. Issue an unmodified opinion with an emphasis-of-matter paragraph. B. Issue an unmodified with an other-matter paragraph. C. Issue a qualified or adverse opinion. D. Issue a disclaimer of opinion or withdraw from the engagement.
Choice “D” is correct. Due to the significance of the inventory balance, the effects of undetected misstatements could be both material and pervasive. In this situation, U.S. GAAS allows the auditor to consider whether to withdraw or disclaim an opinion on the financial statements.
Choice “A” is incorrect. An unmodified opinion with an emphasis-of-matter paragraph would not be appropriate as the auditor is facing a significant scope limitation.
Choice “B” is incorrect. An unmodified opinion with an other-matter paragraph would not be appropriate as the auditor is facing a significant scope limitation.
Choice “C” is incorrect. A qualified or adverse opinion is not appropriate when an auditor is unable to obtain sufficient appropriate audit evidence. A qualified or adverse opinion is appropriate when the auditor is able to obtain sufficient appropriate audit evidence and concludes that there is a misstatement that is material (qualified) or material and pervasive (adverse.)
In an audit of an issuer, which of the following occasions is the earliest an audit report may be dated?
A. When the auditor has obtained sufficient appropriate audit evidence to support an opinion. B. When the financial statements are filed with the Securities and Exchange Commission (SEC). C. When all working papers are compiled and assembled, and all superseded documentation has been deleted. D. When the auditor completes field work and all audit documentation has been reviewed.
Choice “A” is correct. The earliest an audit report may be dated is when the auditor has obtained sufficient appropriate evidence to support an opinion.
Choice “B” is incorrect. An audit report may be dated earlier than when the financial statements are filed with the Securities and Exchange Commission (SEC).
Choice “C” is incorrect. The audit report may be dated earlier than when all working papers are compiled and assembled and all superseded documentation has been deleted.
Choice “D” is incorrect. The completion of field work and review of all documentation does not necessarily indicate that the audit report should be dated on that date because additional evidence may be required. The earliest an audit report may be dated is when it is determined that sufficient and appropriate evidence has been obtained.
For an auditor of an issuer, critical audit matters should be communicated in the Critical Audit Matters section, which:
A. Immediately precedes the Basis for Opinion section. B. Immediately precedes the Opinion on the Financial Statements section. C. Immediately follows the Opinion on the Financial Statements section. D. Immediately follows the Basis for Opinion section.
Choice “D” is correct. The Critical Audit Matters section immediately follows the Basis for Opinion section.
Choice “A” is incorrect. The Opinion on the Financial Statements precedes the Basis for Opinion section.
Choice “B” is incorrect. The Opinion on the Financial Statements is the first section of an issuer report.
Choice “C” is incorrect. The Basis for Opinion section follows the Opinion on the Financial Statements Section.
When an auditor of a nonissuer qualifies an opinion because of inadequate disclosure, the auditor should describe the nature of the omission in a separate paragraph and modify the:
Auditor’s
Responsibility section
Opinion
section
A. No
No
B. Yes
Yes
C. No
Yes
D. Yes
No
Choice “C” is correct. In a nonissuer report qualified for inadequate disclosure, the auditor would modify the auditor’s responsibility if they were issuing a disclaimer of opinion but not when issuing a qualified opinion. The auditor would modify the Opinion section by adding an “except for …” statement. The Auditor’s Responsibility section is not changed when a qualified opinion is issued.
Choice “A” is incorrect. The Opinion section would be modified by adding an “except for…” statement when issuing a qualified opinion. The Auditor’s Responsibility section would remain unchanged.
Choice “B” is incorrect. Only the Opinion section would be modified by adding an “except for…” statement when issuing a qualified opinion.
Choice “D” is incorrect. The opposite is true. The Opinion section would be modified and the Auditor’s Responsibility section would remain unchanged when a qualified opinion is issued.
When qualifying an opinion due to an inability to obtain sufficient appropriate audit evidence, an auditor of a nonissuer should include the reasons for that inability to obtain sufficient information in:
Management’s
Responsibility
Section
Basis for
Qualified Opinion
Section
A. No
Yes
B. Yes
No
C. Yes
Yes
D. No
No
Choice “A” is correct. When a qualified opinion results from an inability to obtain sufficient appropriate audit evidence, the situation should be described in a Basis for Qualified Opinion section following the Qualified Opinion section and should be referred to in the Qualified Opinion section. The scope limitation is not mentioned in the Management’s Responsibility paragraph.
Choice “B” is incorrect. The opposite is true. The Management’s Responsibility section remains unchanged when a qualified opinion is issued, but the Basis for Qualified Opinion section should describe the reasons for the qualification.
Choice “C” is incorrect. The reasons for the inability to obtain sufficient appropriate audit evidence should only be described in the Basis for Qualified Opinion section of the auditor’s report and the Management’s Responsibility section should remain unchanged.
Choice “D” is incorrect. The reasons for the inability to obtain sufficient appropriate audit evidence should be described in the Basis for Qualified Opinion section of the auditor’s report.
Prepared under U.S. auditing standards, an auditor’s report that refers to a material misstatement contains the words, “In our opinion, because of the significance of the matter . . . the accompanying consolidated financial statements do not present fairly the financial position . . . .” This is considered a(n):
A. Adverse opinion B. Qualified opinion C. Example of inappropriate wording D. Disclaimer of opinion
Choice “A” is correct. An adverse opinion would include the phrase, “In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion section of our report, the accompanying consolidated financial statements do not present fairly the financial position…”
Choice “B” is incorrect. A qualified opinion due to a material misstatement should include the phrase, “In our opinion, except for the omission of information described in the Basis for Qualified Opinion section of our report…”
Choice “C” is incorrect. This wording is appropriate for an adverse opinion.
Choice “D” is incorrect. A disclaimer of opinion should include the phrase, “Because of the significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these financial statements.”
When a qualified opinion results from a limitation on the scope of the audit of a nonissuer, the situation should be described in a Basis for Modification paragraph:
A. Preceding the opinion paragraph and referred to only in the introductory paragraph of the auditor's report. B. Following the opinion paragraph and referred to only in the management's responsibility paragraph of the auditor's report. C. Following the Opinion section, should have the heading "Basis for Qualified Opinion" and should describe the reasons for the inability to obtain sufficient appropriate audit evidence. D. Following the opinion paragraph and referred to in both the introductory and opinion paragraphs of the auditor's report.
Choice “C” is correct. When a qualified opinion results from a limitation of scope, it should be described in an Basis for Qualified Opinion section following the Opinion section and it should describe the reasons for the inability to obtain sufficient appropriate audit evidence. Furthermore, the Opinion section should have the heading “Qualified Opinion.”
Choice “A” is incorrect. The Basis for Qualified Opinion section should follow the opinion paragraph, and there is no introductory paragraph in the auditor’s report.
Choice “B” is incorrect. The Management’s Responsibility section remains unchanged from the standard report when a qualified opinion is issued.
Choice “D” is incorrect. There is no introductory paragraph in the auditor’s report. Additionally, the Opinion section should contain “except for…” language.
Which of the following would cause an auditor of an entity’s financial statements to issue either a qualified opinion or a disclaimer of opinion?
A. Inadequate disclosure of an uncertainty. B. The use of inappropriate accounting principles. C. Unreasonable accounting estimates. D. Scope limitation involving a recorded uncertainty.
Choice “D” is correct. An auditor would issue either a qualified opinion or a disclaimer of opinion when there is a scope limitation (GAAS issue).
Choice “A” is incorrect. An auditor would issue either a qualified or an adverse opinion when there is inadequate disclosure (GAAP issue).
Choice “B” is incorrect. An auditor would issue either a qualified or an adverse opinion when the entity uses inappropriate accounting principles (GAAP issue).
Choice “C” is incorrect. An auditor would issue either a qualified or an adverse opinion when the entity uses unreasonable accounting estimates (GAAP issue).
Restrictions imposed by a retail entity that is a new client prevent an auditor from observing any physical inventories. These inventories account for 40% of the entity’s assets, and this issue also impacts the auditor’s ability to audit the cost of goods sold, impacting both the income statement and the statement of stockholder’s equity. Alternative auditing procedures cannot be applied due to the nature of the entity’s records. Under these circumstances, the auditor should express a(an):
A. Unmodified opinion with an emphasis-of-matter paragraph. B. Qualified opinion. C. Disclaimer of opinion. D. Adverse opinion.
Choice “C” is correct. Since the auditor is unable to observe inventory or apply alternative audit procedures, a scope limitation exists. Due to the significance of the inventory balance (40% of total assets is material) and the pervasiveness of the issue also impacting net income, a disclaimer of opinion (rather than simply a qualification) is appropriate.
Choice “A” is incorrect. Since the scope limitation relates to a material balance, an unmodified opinion is not appropriate.
Choice “B” is incorrect. Since the inventory balance is so material and the issue impacts multiple financial statement items including inventory and cost of goods sold, a qualified opinion is not sufficient in this case.
Choice “D” is incorrect. An adverse opinion is not an appropriate response to a scope limitation.
Which of the following best describes when an auditor most likely would modify the audit opinion?
A. The auditor concludes that the financial statements as a whole are materially misstated. B. The auditor identifies an immaterial misstatement in the financial statements. C. The entity selects IFRS as the applicable financial reporting framework. D. The auditor concludes that the financial statements are presented fairly.
Choice “A” is correct. An auditor should modify the opinion when the auditor concludes that the financial statements as a whole are materially misstated.
Choice “B” is incorrect. An auditor’s report should be modified when the financial statements are materially, not immaterially, misstated.
Choice “C” is incorrect. The applicable financial reporting framework is the financial reporting framework that is acceptable in view of the nature of the entity and the objective of the financial statements, or that is required by law or regulation. IFRS is an acceptable financial reporting framework.
Choice “D” is incorrect. An auditor should express an unmodified (unqualified) opinion when the auditor concludes that the financial statements are presented fairly.
An auditor of a nonissuer should disclose the reasons for an inability to obtain sufficient appropriate audit evidence in a basis-for-modification paragraph:
A. Preceding the auditor’s responsibility paragraph. B. Following the opinion paragraph. C. Preceding the opinion paragraph. D. Within the notes to the financial statements.
Choice “B” is correct. An auditor should disclose the reasons for an inability to obtain sufficient appropriate audit evidence in a basis-for-modification paragraph following the opinion paragraph.
Choice “A” is incorrect. The management’s responsibility paragraph, not the basis-for-modification paragraph, should immediately precede the auditor’s responsibility paragraph.
Choice “C” is incorrect. The basis-for-modification section paragraph would come after, and not before, the opinion section of the auditor’s report.
Choice “D” is incorrect. The auditor cannot include explanatory material within the financial statements, which are the responsibility of management.
When qualifying an opinion because of an insufficiency of audit evidence in an audit of a nonissuer, an auditor should describe the situation in the:
Basis for
Qualified Opinion
section
Notes to the
financial statements
A. No
Yes
B. No
No
C. Yes
Yes
D. Yes
No
Choice “D” is correct. When a qualified opinion results from a limitation on the scope of the audit or an insufficiency of audit evidence, the situation should be described in the Basis for Qualified Opinion section following the Opinion section and referred to in the Opinion section of the auditor’s report. It is not appropriate for the scope of the audit to be explained in a note to the financial statements, since the description of the audit scope is the responsibility of the auditor and not that of the client.
Choice “A” is incorrect. The opposite is true. The reason for issuing a qualified opinion would be described in the Basis of Qualified Opinion section of the auditor’s report and not in the notes to the financial statements.
Choice “B” is incorrect. The reason for issuing a qualified opinion would be described in the Basis of Qualified Opinion section of the auditor’s report.
Choice “C” is incorrect. The auditor does not disclose items in the notes to the financial statements as the notes are management’s responsibility. The reason for issuing a qualified opinion would be described in the Basis of Qualified Opinion section of the auditor’s report.
An auditor was unable to obtain sufficient appropriate audit evidence concerning certain transactions due to an inadequacy in the entity’s accounting records. The auditor would choose between issuing a(an):
A. Disclaimer of opinion and a qualified opinion. B. Adverse opinion and a disclaimer of opinion. C. Qualified opinion and an unmodified opinion with an emphasis-of-matter paragraph. D. Unmodified opinion with an emphasis-of-matter paragraph and an adverse opinion.
Choice “A” is correct. Client-imposed restrictions of scope such as those caused by inadequate records would cause the auditor to choose between issuing a disclaimer of opinion and a qualified opinion.
Choice “C” is incorrect. An unmodified opinion would only be justified if the transactions in question were not material, but in such situations, no emphasis-of-matter paragraph would be required.
Choices “D” and “B” are incorrect. An adverse opinion pertains to GAAP and would not be used for reporting restrictions of scope.
Which of the following situations best describes when an auditor should express an adverse opinion?
A. The auditor obtained sufficient appropriate audit evidence and concludes that misstatements are material but not pervasive to the financial statements. B. The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements could be both material and pervasive. C. The auditor obtained sufficient appropriate audit evidence and concludes that misstatements are both material and pervasive to the financial statements. D. The auditor obtains sufficient appropriate audit evidence and concludes that the financial statements are presented fairly.
Choice “C” is correct. An auditor should express an adverse opinion when the auditor has obtained sufficient appropriate audit evidence and concludes that misstatements are both material and pervasive to the financial statements.
Choice “A” is incorrect. An auditor should express a qualified opinion when the auditor has obtained sufficient appropriate audit evidence and concludes that misstatements are material but not pervasive to the financial statements.
Choice “B” is incorrect. An auditor should express a disclaimer of opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements could be both material and pervasive.
Choice “D” is incorrect. An auditor should express an unmodified (unqualified) opinion when the auditor obtains sufficient appropriate audit evidence and concludes that the financial statements are presented fairly.
A client has capitalizable leases but refuses to capitalize them in the financial statements. Which of the following reporting options does an auditor have if the amounts pervasively distort the financial statements?
A. Unmodified opinion. B. Adverse opinion. C. Disclaimer opinion. D. Qualified opinion.
Choice “B” is correct. The scenario above indicates a material departure from GAAP that is neither necessary nor justified by the client. When a misstatement is both material and pervasive, the auditor should issue an adverse opinion.
Choice “A” is incorrect. An unmodified opinion cannot be issued because the financial statements are not fairly presented in conformity with GAAP.
Choice “C” is incorrect. A disclaimer opinion would not be used by the auditor for the above scenario as there are no apparent scope limitations to inhibit the auditor from rendering an opinion.
Choice “D” is incorrect. A misstatement that is both material and pervasive is too significant to justify a qualified opinion.
An auditor was unable to obtain audited financial statements or other evidence supporting an entity’s investment in a foreign subsidiary. Between which of the following opinions should the entity’s auditor choose?
A. Adverse and unmodified with an emphasis-of-matter paragraph added. B. Qualified and disclaimer. C. Disclaimer and unmodified with an emphasis-of-matter paragraph added. D. Qualified and adverse.
Choice “B” is correct. When an auditor is unable to obtain audited financial statements or other evidence supporting an entity’s investment in a subsidiary (foreign or domestic), the auditor should issue a qualified or disclaimer of opinion depending on the materiality of the investment in the subsidiary.
Choice “A” is incorrect. An adverse opinion is only issued when the financial statements are not presented fairly in conformity with GAAP and an unmodified opinion with an emphasis-of-matter paragraph is not appropriate for a scope limitation.
Choice “C” is incorrect. An option would be a disclaimer of opinion (if issue considered both material and pervasive), however, an unmodified opinion with an emphasis-of-matter paragraph is not appropriate for a scope limitation.
Choice “D” is incorrect. An option would be a qualified opinion (if issue considered material but not pervasive), however, an adverse opinion is not appropriate for a scope limitation (financial statement issue only).
Under which of the following circumstances would an auditor most likely issue either a qualified or a disclaimer of opinion?
A. The financial statements contain an immaterial departure from generally accepted accounting principles (GAAP). B. There is substantial doubt about the entity's ability to continue as a going concern. C. The auditor performed alternative substantive procedures to provide adequate assurance due to missing documentation. D. The client's attorney refused to respond to the letter of audit inquiry.
Choice “D” is correct. The refusal of a client’s attorney to respond to an audit inquiry letter is an example of a scope limitation. The auditor must use professional judgment in determining whether that scope limitation warrants a qualified opinion or a disclaimer of opinion.
Choice “A” is incorrect. If the financial statements contain an immaterial departure from GAAP, an unmodified opinion still may be used. When the issue reaches a material level, the auditor would consider using a different opinion such as qualified, adverse, or a disclaimer.
Choice “B” is incorrect. If there is substantial doubt about the entity’s ability to continue as a going concern, the auditor could issue an unmodified opinion. The report would be updated to include either a separate going concern section or an optional emphasis-of-matter (explanatory) paragraph depending on the circumstances regarding management’s plans to alleviate and the appropriateness of financial statement disclosures.
Choice “C” is incorrect. One of the auditor’s responsibilities is to determine whether sufficient, appropriate audit evidence has been obtained. If the auditor performed alternative or additional substantive procedures to obtain adequate assurance, that is not a basis for modifying the auditor’s report on the entity’s financial statements.
How are management’s responsibility and the auditor’s responsibility represented in the auditor’s report of a nonissuer?
Management’s
Responsibility
Auditor’s
Responsibility
A. Implicitly
Explicitly
B. Implicitly
Implicitly
C. Explicitly
Implicitly
D. Explicitly
Explicitly
Choice “D” is correct. The responsibility of the auditor and the responsibility of management are stated explicitly in the auditor’s report of a nonissuer. There is a Management’s Responsibility section and an Auditor’s Responsibility section.
Choice “A” is incorrect. Management’s responsibilities related to the audit are explicitly stated in the Management’s Responsibility section of the auditor’s report.
Choice “B” is incorrect. In an auditor’s report, there is a section for explicitly stating both management and the auditor’s responsibilities related to the audit.
Choice “C” is incorrect. The auditor’s responsibilities related to the audit are explicitly stated in the Auditor’s Responsibility section of the auditor’s report.
A client’s fixed asset experienced a significant impairment loss but the client refuses to record the impairment loss in the financial statements. Which of the following opinions is an auditor most likely to issue if the amount of loss is material but not pervasive to the financial statements?
A. Unmodified opinion B. Disclaimer opinion C. Qualified opinion D. Adverse opinion
Choice “C” is correct. The scenario above indicates a material departure from GAAP that is neither necessary nor justified by the client. When a misstatement is material but not pervasive, the auditor should issue a qualified opinion.
Choice “A” is incorrect. An unmodified opinion cannot be issued because the financial statements are not fairly presented.
Choice “B” is incorrect. A disclaimer of opinion would not be used by the auditor for the above scenario as there are no apparent scope limitations to inhibit the auditor from rendering an opinion.
Choice “D” is incorrect. When a misstatement is material but not pervasive, the auditor should issue a qualified opinion. When a misstatement is both material and pervasive, the auditor should issue an adverse opinion.
Morris, CPA, suspects that a pervasive scheme of illegal bribes exists throughout the operations of Worldwide Import-Export, Inc., a new audit client. Morris notified the audit committee and Worldwide’s legal counsel, but neither could assist Morris in determining whether the amounts involved were material to the financial statements or whether senior management was involved in the scheme. Under these circumstances, Morris should:
A. Express an adverse opinion on the financial statements. B. Issue a special report regarding the illegal bribes. C. Express an unmodified opinion with an other-matter paragraph. D. Disclaim an opinion on the financial statements.
Choice “D” is correct. Since the CPA could not determine whether the suspected illegal bribes were material to the financial statements, or whether senior management was involved in the scheme, Morris should disclaim an opinion on the financial statements.
Choice “A” is incorrect. An adverse opinion is inappropriate since the suspected material illegal bribes have not been proven, nor has any material effect on the financial statements been determined.
Choice “B” is incorrect. Special reports are not issued regarding illegal bribes.
Choice “C” is incorrect. An unmodified opinion with an other-matter paragraph is not appropriate if suspected material illegal bribes cannot be disproven.
If an auditor is precluded by the issuer from obtaining sufficient appropriate evidence to evaluate whether an illegal act that could be material to the financial statements has occurred, then the auditor generally should:
A. Disclaim an opinion on the financial statements. B. Issue an unqualified opinion on the financial statements with an other-matter paragraph. C. Issue a qualified opinion on the financial statements. D. Issue an unqualified opinion on the financial statements with an explanatory paragraph.
Choice “A” is correct. A disclaimer of opinion is expressed when the auditor is unable to obtain sufficient appropriate audit evidence to base an opinion on, and the auditor concludes that the possible effects of any undetected misstatements could be both material and pervasive. If the issuer is preventing an auditor from obtaining such evidence, the auditor should disclaim an opinion.
Choice “B” is incorrect. Since the issuer is preventing the auditor from obtaining sufficient appropriate audit evidence and the illegal act could be material and pervasive to the financial statements, the auditor generally should disclaim an opinion. Issuing an unqualified opinion on the financial statements, even with an other-matter paragraph, is not appropriate.
Choice “C” is incorrect. Since the issuer is preventing the auditor from obtaining sufficient appropriate audit evidence and the illegal act could be material and pervasive to the financial statements, the auditor generally should disclaim an opinion. Issuing a qualified opinion on the financial statements is not appropriate.
Choice “D” is incorrect. Since the issuer is preventing the auditor from obtaining sufficient appropriate audit evidence and the illegal act could be material and pervasive to the financial statements, the auditor generally should disclaim an opinion. Issuing an unqualified opinion on the financial statements, even with an explanatory paragraph, is not appropriate.
Which of the following phrases would an auditor of a nonissuer most likely include in the auditor’s report when expressing a qualified opinion due to inadequate disclosure?
A. Do not present fairly. B. Except for the omission of the information described in the basis for qualified opinion section. C. Subject to the departure from generally accepted accounting principles, as described above. D. With the foregoing explanation of these omitted disclosures.
Choice “B” is correct. When inadequate disclosure has a material but not pervasive effect on the financial statements, the auditor’s opinion should state “In our opinion, except for the omission of the information described in the basis for qualified opinion section of our report . . .”
Choice “A” is incorrect. The statement “do not present fairly” would be used in an adverse opinion, not a qualified opinion.
Choice “C” is incorrect. This language is not used. When inadequate disclosure has a material but not pervasive effect on the financial statements, the auditor’s opinion should state “In our opinion, except for the omission of the information described in the basis for qualified opinion section of our report . . .”
Choice “D” is incorrect. This language is not used. When inadequate disclosure has a material but not pervasive effect on the financial statements, the auditor’s opinion should state “In our opinion, except for the omission of the information described in the basis for qualified opinion section of our report . . .”
SkillB
In order to form an opinion on the financial statements, the auditor should consider whether:
A. Management has correctly identified the appropriate auditing standards. B. The financial statements are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework. C. Sufficient appropriate evidence was obtained as required by the Financial Accounting Standards Board (FASB). D. The financial statements are prepared, in all material respects, in accordance with the requirements of generally accepted auditing standards (GAAS).
Choice “B” is correct. In order to form an opinion on the financial statements, the auditor should consider whether the financial statements are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework.
Choice “A” is incorrect. The auditor, not management, must determine the appropriate auditing standards for the engagement.
Choice “C” is incorrect. In order to form an opinion, the auditor should take into account whether sufficient appropriate evidence was obtained as required by generally accepted auditing standards (GAAS). The FASB issues guidance on generally accepted accounting principles (GAAP).
Choice “D” is incorrect. In order to form an opinion, the auditor should consider whether the financial statements are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework (i.e., GAAP.) GAAS provides guidance on how to perform the audit.
In an audit of an issuer, an auditor is least likely to include which of the following information related to a critical audit matter in the audit report?
A. A statement that disclaims the auditor's responsibility for critical audit matters. B. Description of the principal considerations that led the auditor to determine that the matter was a critical audit matter. C. Reference to relevant financial statement accounts that relate to the critical audit matter. D. Description of how the critical audit matter was addressed in the audit.
Choice “A” is correct. Language that could be viewed as disclaiming, qualifying, restricting, or minimizing the auditor’s responsibility for the critical audit matters is not appropriate and may not be used.
Choice “B” is incorrect. For each critical audit matter identified, the auditor should include a description of the principal considerations that led the auditor to determine that the matter was a critical audit matter.
Choice “C” is incorrect. For each critical audit matter identified, the auditor should reference relevant financial statement accounts that relate to the critical audit matter.
Choice “D” is incorrect. For each critical audit matter identified, the auditor should include a description of how the critical audit matter was addressed in the audit.
An auditor of a nonissuer may not issue a qualified opinion when:
A. The auditor lacks independence with respect to the entity. B. Management prevents the auditor from observing the entity's inventory. C. The entity omits the statement of cash flows from its financial statements. D. The auditor's report refers to the work of an actuary.
Choice “A” is correct. An auditor of a nonissuer may not issue a qualified opinion when the auditor lacks independence with respect to the entity. A disclaimer of opinion should be issued when an auditor lacks independence.
Choice “B” is incorrect. An auditor may issue a qualified opinion if management prevents the auditor from observing the entity’s inventory.
Choice “C” is incorrect. An auditor may issue a qualified opinion if the entity omits the statement of cash flows from its financial statements.
Choice “D” is incorrect. An auditor may issue a qualified opinion and refer to the work of the actuary in the opinion if the qualified opinion is a result of the findings of the actuary. In this case, the auditor should indicate that the reference to the specialist does not reduce the auditor’s responsibility for the audit opinion.
An auditor most likely would issue a disclaimer of opinion due to:
A. Management's refusal to furnish a client representation letter. B. Inadequate disclosure of material information. C. A material departure from a generally accepted accounting principle. D. An inconsistent application of a generally accepted accounting principle.
Choice “A” is correct. A disclaimer results from scope limitations, such as management’s refusal to furnish a client representation letter.
Choice “B” is incorrect. Inadequate disclosure of material information is a departure from GAAP and a financial statement issue. This scenario may lead to a qualified or adverse opinion, but not a disclaimer of opinion.
Choice “C” is incorrect. A material departure from GAAP is a financial statement issue and may lead to a qualified or adverse opinion, but not a disclaimer of opinion.
Choice “D” is incorrect. An inconsistent application of GAAP is a financial statement issue and may lead to a qualified or adverse opinion, but not a disclaimer of opinion.
In which of the following circumstances would an auditor be most likely to express an adverse opinion?
A. The financial statements are not in conformity with the GAAP rules regarding the capitalization of leases. B. Tests of controls show that the entity's internal control is so poor that it cannot be relied upon. C. The chief executive officer refuses the auditor access to minutes of board of directors' meetings. D. Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue as a going concern.
Choice “A” is correct. An adverse opinion is issued when the financial statements are not presented in accordance with GAAP.
Choice “B” is incorrect. If internal control is so poor that it cannot be relied upon, the auditor must consider the effect on the audit procedures and subsequent report, but would not issue an adverse opinion.
Choice “C” is incorrect. The client’s refusal to provide access to the minutes of the Board of Directors’ meetings would result in a disclaimer of opinion.
Choice “D” is incorrect. Substantial doubt with regard to the entity’s ability to continue as a going concern should be disclosed in either an emphasis-of-matter paragraph (optional when doubt is alleviated) or a separate section of the auditor’s report (doubt remains) appended to an otherwise unmodified (unqualified) opinion.
Under which of the following circumstances would an auditor’s expression of an unmodified opinion be inappropriate?
A. Analytical procedures indicate that many year-end account balances are not comparable with the prior year's balances. B. There are significant deficiencies in the design and operation of the entity's internal control. C. The financial statements are prepared on the entity's income tax basis. D. The auditor is unable to obtain the audited financial statements of a significant subsidiary.
Choice “D” is correct. If the auditor is unable to obtain the audited financial statements of a significant subsidiary, a scope limitation exists. Assuming the effect is material, the auditor would issue either a qualified opinion or a disclaimer of opinion.
Choice “A” is incorrect. An unmodified opinion may still be expressed when there are significant changes in year-end account balances as compared to prior year balances, as long as the auditor has obtained sufficient appropriate audit evidence about the current balances.
Choice “B” is incorrect. Significant deficiencies in the design and operation of an entity’s internal control do not preclude issuance of an unmodified opinion, although they do increase the risk of material misstatement and will likely result in modifications to the nature, timing, and extent of the auditor’s testing.
Choice “C” is incorrect. Financial statements prepared on an entity’s income tax basis are “special purpose framework financial statements.” The auditor may issue a special report, which can include an unmodified opinion, on special purpose framework financial statements.
The auditor’s report should include reference to the United States as the country of origin of:
I.
The accounting principles used to prepare the financial statements.
II.
The auditing standards the auditor followed in performing the audit.
A. Both I and II. B. Neither I nor II. C. I only. D. II only.
Choice “A” is correct. The auditor’s report should include reference to the United States as the country of origin of both the accounting principles used to prepare the financial statements and the auditing standards the auditor followed in performing the audit.
Choice “B” is incorrect, since the auditor’s report should include reference to the country of origin of both the accounting principles used to prepare the financial statements and the auditing standards the auditor followed in performing the audit.
Choice “C” is incorrect, since the auditor’s report should include reference to the country of origin of the auditing standards the auditor followed in performing the audit.
Choice “D” is incorrect, since the auditor’s report should include reference to the country of origin of the accounting principles used to prepare the financial statements.
A critical audit matter is a matter that was communicated or is required to be communicated to the audit committee and:
A. Involves a particularly complex transaction approved by management. B. Requires a significantly larger sample size to test. C. Relates to accounts or disclosures that are immaterial to the financial statements. D. Involves an especially challenging judgment made by the auditor.
Choice “D” is correct. A critical audit matter is a matter that was communicated or is required to be communicated to the audit committee and involves an especially challenging judgment made by the auditor.
Choice “A” is incorrect. A critical audit matter is a matter that was communicated or is required to be communicated to the audit committee and involves a particularly complex judgment made by the auditor (not a complex transaction made by management.)
Choice “B” is incorrect. The sample size generally is not a factor considered when identifying critical audit matters.
Choice “C” is incorrect. A critical audit matter is a matter that was communicated or is required to be communicated to the audit committee and relates to accounts or disclosures that are material (not immaterial) to the financial statements.
An auditor most likely would issue a disclaimer of opinion because of:
A. The omission of the statement of cash flows. B. Management's refusal to furnish written representations. C. A material departure from generally accepted accounting principles. D. Inadequate disclosure of material information.
Choice “B” is correct. Management’s refusal to furnish written representations is a significant client imposed restriction on the scope of an audit, ordinarily warranting a disclaimer of opinion.
Choice “A” is incorrect. A qualified report would be appropriate when a “statement of cash flows” is omitted and the scope of the audit is not restricted.
Choice “C” is incorrect. A departure from GAAP would result in either a qualified or adverse opinion, depending on materiality.
Choice “D” is incorrect. Inadequate disclosure would result in a qualified or adverse opinion.
For purposes of generally accepted auditing standards, a modified opinion refers to:
Qualified
Opinion
Unmodified Opinion With an
Emphasis-of-Matter Paragraph
A. No
No
B. No
Yes
C. Yes
No
D. Yes
Yes
Choice “C” is correct. Modified opinions include a qualified opinion, an adverse opinion, or a disclaimer of opinion. An unmodified opinion with an emphasis-of-matter paragraph is not considered a modified opinion. Further, the emphasis-of-matter paragraph should indicate that the auditor’s opinion is not modified with respect to the matter emphasized.
Choice “A” is incorrect. A qualified opinion is considered to be a modified opinion.
Choices “D” and “B” are incorrect. A qualified opinion is considered to be a modified opinion, but an unmodified opinion with an emphasis-of-matter paragraph is considered to be an unmodified opinion. The purpose of the emphasis-of-matter paragraph is to bring the report user’s attention to a specific matter and should specifically clarify that the matter did not lead to a modified opinion.
Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?
A. Management does not provide reasonable justification for a change in accounting principles. B. Management refuses to allow the auditor to have access to the company's canceled checks and bank statements. C. The company failed to make a count of its physical inventory during the year and the auditor was unable to apply alternative procedures to verify inventory quantities. D. The auditor is unable to obtain the audited financial statements of a consolidated investee.
Choice “A” is correct. If management does not provide reasonable justification for a change in accounting principles, the auditor would issue a qualified or adverse opinion, depending on materiality.
Choice “B” is incorrect. If management refuses to allow the auditor to have access to the company’s canceled checks and bank statements, a qualified opinion or a disclaimer of opinion would be issued, depending on materiality.
Choice “C” is incorrect. If the company failed to make a count of its physical inventory during the year and the auditor was unable to apply alternative procedures to verify inventory quantities, a qualified opinion or a disclaimer of opinion would be issued, depending on materiality.
Choice “D” is incorrect. If the auditor is unable to obtain the audited financial statements of a consolidated investee, a qualified opinion or a disclaimer of opinion would be issued, depending on materiality.
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
A. The client refuses to permit its attorney to furnish information requested in a letter of audit inquiry. B. The auditor is unable to determine the amounts associated with illegal acts committed by the client's management. C. The auditor is engaged after fiscal year-end and is unable to observe physical inventories or apply alternative procedures to verify their balances. D. The financial statements fail to contain adequate disclosure of related party transactions.
Choice “D” is correct. The failure of the financial statements to contain adequate disclosure of related party transactions, or other required disclosures, would result in a qualified or adverse opinion, not a disclaimer of opinion.
Choice “A” is incorrect. A client’s refusal to permit its attorney to furnish information requested in a letter of audit inquiry would generally result in a disclaimer of opinion.
Choice “B” is incorrect. The auditor’s inability to determine the amounts associated with illegal acts committed by the client’s management could result in a disclaimer.
Choice “C” is incorrect. The auditor’s inability to observe physical inventories or apply alternative procedures to verify their balances could result in a disclaimer.
The auditor may not issue a qualified opinion when:
A. A scope limitation prevents the auditor from completing an important procedure. B. The auditor is not independent with respect to the audited entity. C. The financial statements contain a material departure from generally accepted accounting principles. D. The auditor is unable to observe a physical inventory count.
Choice “B” is correct. When an auditor is not independent with respect to an entity, only a disclaimer of opinion may be issued.
Choice “A” is incorrect. A scope limitation may result in a qualified opinion.
Choice “C” is incorrect. A GAAP departure may result in a qualified opinion.
Choice “D” is incorrect. An inability to observe the physical inventory count is a scope limitation that may result in a qualified opinion, if acceptable alternative procedures cannot be performed.
If a publicly 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(an):
A. Disclaimer of opinion. B. Review report. C. Qualified opinion. D. Unmodified opinion with an emphasis-of-matter paragraph.
Choice “C” is correct. If a company issues financial statements that purport to present financial position and results of operations but omits the related statement of cash flows, the auditor will normally conclude that the omission requires qualification of the opinion.
Choice “A” is incorrect. If the company fails to present its statement of cash flows, this is considered inadequate disclosure. The auditor would not issue a disclaimer of opinion for inadequate disclosure.
Choice “B” is incorrect. The auditor would not issue a review report when performing an audit.
Choice “D” is incorrect. The auditor cannot issue an unmodified report if the client omits a statement of cash flows from the financial statements.
Which of the following procedures is an auditor least likely to perform if material disclosures required by GAAP are omitted?
A. Discuss the omission of such information with those charged with governance. B. Discuss the omission of such information with management. C. Disclose the omitted information in the notes to the financial statements. D. Disclose the omitted information in the basis-for-modification paragraph.
Choice “C” is correct. Management is responsible for the financial statements. The auditor may include information within the auditor’s report, but may not include information within the financial statements and the related notes.
Choice “A” is incorrect. When material disclosures required by GAAP are omitted, the auditor should first discuss the omission of such information with management. If necessary, the auditor should also discuss this with those charged with governance.
Choice “B” is incorrect. When material disclosures required by GAAP are omitted, the auditor should first discuss the omission with management.
Choice “D” is incorrect. When material disclosures required by GAAP are omitted, the auditor should disclose the omitted information in the basis-for-modification paragraph.
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
A. The chief executive officer is unwilling to sign the management representation letter. B. The auditor is unable to determine the amounts associated with an employee fraud scheme. C. Management does not provide reasonable justification for a change in accounting principle. D. The client refuses to permit the auditor to confirm certain accounts receivable or apply alternative procedures to verify their balances.
Choice “C” is correct. A disclaimer of opinion means that the auditor was unable to obtain sufficient appropriate audit evidence to provide a reasonable basis for an opinion, thus, no opinion is expressed. An unjustified change in accounting principle could result in a material misstatement of the financial statements that would result in a qualified or adverse opinion, not a disclaimer of opinion.
Choice “A” is incorrect. Refusal of management to sign a management representation letter casts doubt on the audit evidence gathered and is a scope limitation that would likely result in a disclaimer of opinion.
Choice “B” is incorrect. An inability to determine amounts associated with an employee fraud scheme is a scope limitation that may result in a disclaimer of opinion.
Choice “D” is incorrect. Refusal by the client to permit the auditor to confirm accounts receivable is a scope limitation that may result in a disclaimer of opinion.
Tech Company has disclosed an uncertainty due to pending litigation. The auditor’s decision to issue a qualified opinion rather than an unmodified opinion most likely would be determined by the:
A. Inability to estimate the amount of loss. B. Entity's lack of experience with such litigation. C. Lack of insurance coverage for possible losses from such litigation. D. Lack of sufficient evidence.
Choice “D” is correct. Lack of sufficient evidence to support management’s assertions would most likely cause an auditor to issue a qualified or disclaimer of opinion.
Choice “A” is incorrect. As long as it is fully disclosed, an inability to estimate the amount of loss from a future event (outcome of pending legislation) would most likely result in an unmodified opinion.
Choices “B” and “C” are incorrect. Neither a lack of experience nor a lack of insurance coverage would impact the auditor’s report.
Which of the following best describes the earliest date for an auditor’s report?
A. The date audit documentation was completed. B. The date the auditor has obtained sufficient appropriate audit evidence to support the opinion. C. The last day of audit fieldwork. D. The date all audit procedures have been completed and the audit file has been assembled.
Choice “B” is correct. The auditor’s report should be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence to support the opinion.
Choice “A” is incorrect. Audit documentation may be completed after the date of the audit report. Generally, changes to audit documentation after the date of the audit report are administrative in nature. For example, the auditor may sort and cross-reference workpapers.
Choice “C” is incorrect. The auditor’s report should be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence to support the opinion. The auditor may not have received sufficient appropriate evidence by the last day of fieldwork. For example, the partner’s review of the audit evidence may take place after the last day of fieldwork.
Choice “D” is incorrect. The final assembly of the audit file often occurs after the date of the audit report. This assembly may occur up to 45 or 60 days following the report release date for issuers and nonissuers, respectively.
Green, CPA, was engaged to audit the financial statements of Essex Co. after its fiscal year had ended. The timing of Green’s appointment as auditor and the start of fieldwork made confirmation of accounts receivable by direct communication with the debtors ineffective. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green’s auditor’s report most likely contained a(an):
A. Unmodified opinion. B. Qualified opinion due to a departure from generally accepted auditing standards. C. Qualified opinion due to a scope limitation. D. Unmodified opinion with an emphasis-of-matter paragraph.
Choice “A” is correct. There is a presumption that the auditor will request the confirmation of accounts receivable during an audit unless accounts receivable are immaterial, the use of confirmations would be ineffective, or the assessed inherent risk is so low that the evidence expected to be provided by analytical procedures or other substantive tests of details would be sufficient. In this example, the confirmation of accounts receivable by direct communication with the debtors would be ineffective. If Green was able to apply alternative audit procedures and was satisfied as to the reasonableness of the account balances, then an unmodified opinion could be issued.
Choice “B” is incorrect. Since Green was able to perform alternative procedures and was satisfied as far as the reasonableness of the account balances, there is no departure from generally accepted auditing standards.
Choice “C” is incorrect. Since Green was able to perform alternative procedures and was satisfied as far as the reasonableness of the account balances, there is no scope limitation.
Choice “D” is incorrect. Since Green was satisfied as far as the accounts receivable balances, there is no need to add an emphasis-of-matter paragraph.
Riley, a CPA firm, is performing an audit in accordance with U.S. generally accepted auditing standards. Riley’s client is Michelson Inc., a U.S.-based company that has identified U.S. generally accepted accounting principles as the applicable financial reporting framework. In which sections of the auditor’s report should Riley refer to U.S. generally accepted accounting principles (GAAP)?
A. Opinion and Management's Responsibility B. Management's Responsibility and Auditor's Responsibility C. Opinion and Basis for Opinion D. Basis for Opinion and Auditor's Responsibility
Choice “A” is correct. Under U.S. auditing standards, the auditor expresses an opinion on the financial statements’ conformity with GAAP in the Opinion section and the Management’s Responsibility section that the management is responsible for the preparation and fair presentation of the financial statements in accordance with GAAP.
Choice “B” is incorrect. The Auditor’s Responsibility section would refer to GAAS rather than GAAP, which the Management’s Responsibility section would include a reference to GAAP.
Choice “C” is incorrect. The Basis for Opinion section would refer to GAAS rather than GAAP.
Choice “D” is incorrect. The Auditor’s Responsibility section of the report would refer to GAAS rather than GAAP.
If an auditor is unable to determine whether management’s estimate of the effects of future events is reasonable, and the effect of those events is believed to be material, he or she should express:
A. A qualified opinion or an adverse opinion. B. An unmodified opinion with an emphasis-of-matter paragraph following the opinion paragraph. C. An unmodified opinion with no additional paragraphs. D. A qualified opinion or a disclaimer of opinion.
Choice “D” is correct. This is a scope limitation, which results in either a qualified opinion or a disclaimer of opinion. (Note that the question does not say that management’s estimate is unreasonable, just that the auditor is unable to determine whether the estimate is reasonable.)
Choice “A” is incorrect. An adverse opinion is not expressed for scope limitations.
Choices “B” and “C” are incorrect. A scope limitation believed to have a material effect would not result in an unmodified opinion.
An auditor’s responsibility to express an opinion on the financial statements of a nonissuer under U.S. auditing standards is:
A. Explicitly represented in the Auditor's Responsibility paragraph. B. Explicitly represented in the Basis for Opinion paragraph of the auditor's report. C. Explicitly represented in an emphasis-of-matter paragraph of the auditor's report. D. Implicitly represented in the auditor's report.
Choice “A” is correct. The auditor’s responsibility to express an opinion on the financial statements under U.S. auditing standards is explicitly represented in the first sentence of the Auditor’s Responsibility section of the nonissuer audit report. It says “Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.”
Choice “B” is incorrect. The Basis for Opinion paragraph references the Auditor’s Responsibility section of the report but does not explicitly state the responsibility to express an opinion within the content.
Choice “C” is incorrect. An emphasis-of-matter paragraph does not explicitly represent the auditor’s opinion to express an opinion. Emphasis-of-matter and other-matter paragraphs are used in certain circumstances to add additional communications to the auditor’s report without modifying the auditor’s opinion.
Choice “D” is incorrect. The responsibility to express an opinion is explicitly represented (i.e., clearly stated), not implicitly represented (i.e., assumed).
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:
A. Add an emphasis-of-matter paragraph to the auditor's report that justifies the reason for the omission. B. Explain to Zag that the omission requires a qualification of the auditor's opinion. C. Prepare the statement of cash flows as an accommodation to Zag and express an unmodified opinion. D. Refuse to accept the engagement as proposed because of the client-imposed scope limitation.
Choice “B” is correct. The auditor would explain to the client that in order for the entity’s financial statements to be in conformity with GAAP, there must be adequate disclosures of all material matters including all financial statements and the supporting footnotes. As a result, the auditor would tell Zag that without adequate disclosure of the entity’s cash flows, the audit report would have to be issued with a qualified or adverse audit opinion.
Choice “A” is incorrect. Missing the statements of cash flows would not result in an unmodified opinion with an additional emphasis-of-matter paragraph because no statement of cash flows is a material departure from GAAP.
Choice “C” is incorrect. The responsibility to prepare the statement of cash flows is solely the client’s.
Choice “D” is incorrect. The auditor is not required to refuse to accept the engagement, but the client should be made aware that the missing statement of cash flows will result in a qualified or adverse opinion.
When an independent CPA is associated with the financial statements of a publicly held entity but has not audited or reviewed such statements, the appropriate form of report to be issued must include a(an):
A. Disclaimer of opinion. B. Compilation report. C. Unaudited association report. D. Qualified opinion.
Choice “A” is correct. A “disclaimer of opinion” must be issued when a CPA is “associated” with FS of a publicly held entity, but has not audited or (interim) reviewed such FS.
Choice “B” is incorrect. A “compilation report” refers to a report related to a non-public entity.
Choice “C” is incorrect. There is no such thing as an “unaudited association report.”
Choice “D” is incorrect. The auditor did not audit the FS, so he/she cannot issue an opinion on them.
An auditor may not issue a qualified opinion when:
A. The auditor lacks independence with respect to the audited entity. B. The auditor's report refers to the work of a specialist. C. An accounting principle at variance with GAAP is used. D. A scope limitation prevents the auditor from completing an important audit procedure.
Choice “A” is correct. If the auditor lacks independence with respect to an audit client, the auditor must disclaim an opinion on the financial statements. A qualified opinion is not an option.
Choice “B” is incorrect. The auditor’s report may make reference to the use of a specialist only if the specialist’s findings result in a change to the auditor’s report, such as a qualified opinion.
Choice “C” is incorrect. A departure from GAAP (which is not sufficiently material to warrant an adverse opinion) may justify a qualification of the auditor’s report.
Choice “D” is incorrect. A scope limitation may result in a qualified opinion or a disclaimer of opinion.
Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?
A. The company issues financial statements that purport to present financial position and results of operations, but refuses to include the related statement of cash flows. B. The auditor is unable to determine the extent of or the amounts associated with a pervasive employee fraud scheme. C. Management refuses to produce documentation verifying the ownership of its equipment and production facilities. D. The chief financial officer and the chief executive officer are unwilling to sign the management representation letter.
Choice “A” is correct. An expression of a disclaimer of opinion would be inappropriate when the company issues financial statements that purport to present financial position and results of operations, but refuses to include the related statement of cash flows. The statement of cash flows is a requirement of GAAP to be considered a complete set of financial statements. A material misstatement of financial statements, such as the omission of information that is required to be presented, would result in a qualified or adverse opinion.
Choice “B” is incorrect. An auditor may express a disclaimer of opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion. For example, when an auditor is unable to determine the extent of or the amounts associated with a pervasive employee fraud scheme, there is not sufficient appropriate audit evidence, and an expression of disclaimer of opinion may be appropriate.
Choice “C” is incorrect. An auditor may express a disclaimer of opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion. When management refuses to produce documentation verifying the ownership of its equipment and production facilities, a client-imposed scope limitation exists, and an expression of disclaimer of opinion may be appropriate.
Choice “D” is incorrect. An auditor may express a disclaimer of opinion when, due to a scope limitation, the auditor is unable to perform all the tests necessary to complete an audit. When the CFO and CEO refuse to sign the management representation letter, a client-imposed scope limitation exists, and the auditor would express a disclaimer of opinion.
In which of the following circumstances would an auditor not express an unmodified opinion?
A. The auditor is unable to obtain audited financial statements of a consolidated investee. B. Quarterly financial data required by the SEC has been omitted. C. There has been a justified material change between periods in accounting principles. D. The auditor wishes to emphasize an unusually important subsequent event.
Choice “A” is correct. The inability to obtain audited financial statements of a consolidated investee represents a scope limitation that may result in either a qualified opinion or a disclaimer of opinion.
Choice “B” is incorrect. Omission of selected quarterly data required by SEC regulations is disclosed in an other-matter paragraph added to an otherwise unmodified opinion.
Choice “C” is incorrect. A material change in accounting principles between periods that is justified is disclosed in an emphasis-of-matter paragraph added to an otherwise unmodified opinion.
Choice “D” is incorrect. Emphasis of a matter is disclosed in an additional paragraph added to an otherwise unmodified opinion.
When disclaiming an opinion because of an insufficiency of audit evidence in an audit of a nonissuer, an auditor should refer to the situation in the:
Responsibilities
of Management
section
Notes to the
financial statements
A. No
Yes
B. Yes
Yes
C. Yes
No
D. No
No
Choice “D” is correct. When a disclaimer of opinion is issued due to a lack of sufficient audit evidence, the lack of evidence should be disclosed in the Basis for Disclaimer of Opinion section rather than the Responsibilities of Management section of the auditor’s report.
Choices “B” and “A” are incorrect. Management (and not the auditor) prepares the notes to the financial statements. The auditor therefore would not refer to this (or any other) situation in the notes to the financial statements.
Choice “C” is incorrect. The auditor does not refer to the situation in the Responsibilities of Management section of the report.
An auditor may issue a qualified opinion under which of the following circumstances?
Lack of sufficient
appropriate
audit evidence
Restrictions of the
scope of the audit
A. No
No
B. Yes
Yes
C. Yes
No
D. No
Yes
Choice “B” is correct. Yes - Yes.
An auditor may issue a qualified opinion (or a disclaimer, depending on materiality) when there is a lack of sufficient appropriate audit evidence, or when there are restrictions on the scope of the audit.
Choice “A” is incorrect. A qualified opinion can be issued when material, but not pervasive, audit or financial statement issues are identified.
Choice “C” is incorrect. A qualified opinion can be issued when a scope limitation exists and it is determined to be material, but not pervasive, to the financial statements.
Choice “D” is incorrect. A qualified opinion can be issued when there is a financial statement issue that is determined to be material, but not pervasive, to the financial statements.
When disclaiming an opinion due to a client-imposed scope limitation in an audit of a nonissuer, an auditor should indicate in the Basis for Disclaimer of Opinion section why the auditor could not obtain sufficient appropriate audit evidence. The auditor should also omit the:
Auditor’s
Responsibility
section
Opinion
section
A. Yes
Yes
B. No
Yes
C. Yes
No
D. No
No
Choice “D” is correct. When disclaiming an opinion because of scope limitations, the auditor should indicate in a separate paragraph(s) the reasons that the audit did not comply with GAAS (in the Basis for Disclaimer of Opinion section). The Auditor’s Responsibility section is revised to mention the disclaimer, but is not omitted. The Opinion section is not omitted; however it indicates that no opinion is expressed.
Choice “A” is incorrect. Neither section would be omitted, but both would require changes from the standard unmodified auditor’s report.
Choice “B” is incorrect. The Opinion section would not be omitted, however, it would be changed to state that no opinion is expressed.
Choice “C” is incorrect. The Auditor’s Responsibility section would not be omitted, however, it would be amended from the standard unmodified auditor’s report.
If comparative information is presented in a nonissuer’s financial statements and the audit client asks the auditor to express an opinion on all periods presented, then the auditor should first:
A. Issue a separate audit report on the prior period information with an appropriate expression of opinion. B. Request additional written representations from management identifying the substantive reasons that the entity wants to have an opinion, including the prior period information. C. Consider whether the information included for the prior period contains sufficient detail to constitute a fair presentation in accordance with the applicable financial reporting framework.
Choice “C” is correct. The auditor’s first step would be to consider whether the comparative information for the prior period meets the requirements of the applicable financial reporting framework. If the auditor determines that the information does meet the requirements of the framework, then the auditor may consider the procedures that they must perform to opine on all periods.
Choice “A” is incorrect. The first step is to consider whether the prior period information is in compliance with the financial reporting framework. Additionally, if the auditor is able to express an opinion on all periods, it would not be expected that the reports would be separate.
Choice “B” is incorrect. While it is important to understand why management has requested opinions on all periods presented, written representations would not be the first step to take. The auditor would assess the information’s compliance with the financial reporting framework before taking further steps.
Choice “D” is incorrect. The auditor may ultimately consider including an additional paragraph. However, it is not the first step that the auditor would take upon receiving the audit client’s request to express an opinion on all periods presented.
In which of the following situations would an auditor ordinarily choose between expressing an “except for” qualified opinion or an adverse opinion?
A. The auditor did not observe the entity's physical inventory and is unable to become satisfied as to its balance by other auditing procedures. B. The financial statements fail to disclose information that is required by generally accepted accounting principles. C. The auditor is asked to report only on the entity's balance sheet and not on the other basic financial statements. D. Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.
Choice “B” is correct. Failure to disclose information that is required by GAAP is a departure from GAAP. Departures from GAAP result in a qualified or an adverse opinion.
Choice “A” is incorrect. If the auditor is unable to observe physical inventory and is unable to become satisfied through alternative means, that is a scope limitation. Scope limitations result in either a qualified opinion or a disclaimer of opinion.
Choice “C” is incorrect. The auditor can report on one financial statement and not the others. This does not preclude issuance of an unmodified opinion.
Choice “D” is incorrect. If, after considering identified conditions and events and management’s plans, the auditor concludes that substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time remains, the audit report should include a separate section with the heading “Substantial Doubt About the Entity’s Ability to Continue as a Going Concern” to reflect that conclusion.
When an independent CPA is associated with the financial statements of a publicly held entity but has not audited or reviewed such statements, the appropriate form of report to be issued must include a(an):
A. Disclaimer of opinion. B. Report on pro forma financial statements. C. Unaudited association report. D. Regulation S-X exemption.
Choice “A” is correct. When an accountant is associated with the financial statements of a public entity, but has not audited or reviewed such statements, the accountant must issue a report disclaiming any opinion on the statements.
Choice “B” is incorrect. A disclaimer of opinion would be necessary and there would be no requirement to report on pro forma financial statements as a result of the association with the financial statements by the independent CPA.
Choice “C” is incorrect. A disclaimer of opinion would be necessary on the unaudited financial statements. There is no such report called an unaudited association report.
Choice “D” is incorrect. A disclaimer of opinion would be necessary. An exception from Regulation S-X would not be applicable.
An auditor of a nonissuer concludes that a client’s illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the pervasiveness of the effect on the financial statements, the auditor should express either a (an):
A. Unmodified opinion with an other-matter paragraph or a qualified opinion. B. Disclaimer of opinion or an unmodified opinion with an emphasis-of-matter paragraph. C. Qualified opinion or an adverse opinion. D. Adverse opinion or a disclaimer of opinion.
Choice “C” is correct. If the financial statements, including accompanying notes, fail to disclose information that is required by generally accepted accounting principles, the auditor should express a qualified or adverse opinion, depending on pervasiveness.
Choice “A” is incorrect. An unmodified opinion with an other-matter paragraph is not appropriate for a client with a material undisclosed item or GAAP departure.
Choice “B” is incorrect. Neither a disclaimer of opinion nor an unmodified opinion with an emphasis-of-matter paragraph is appropriate for a client with a material undisclosed item or GAAP departure.
Choice “D” is incorrect. A disclaimer of opinion is not an appropriate report for inadequate disclosure or a GAAP departure.
When an auditor of a nonissuer qualifies an opinion because of the inability to confirm accounts receivable by direct communication with debtors, the wording of the qualified opinion paragraph of the auditor’s report should indicate that the qualification pertains to the:
A. Limitation on the auditor's scope. B. Departure from generally accepted auditing standards. C. Lack of sufficient appropriate audit evidence. D. Possible effects on the financial statements.
Choice “D” is correct. When an auditor of a nonissuer qualifies his or her opinion because of a scope limitation, such as the inability to confirm accounts receivable, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself.
Choice “A” is incorrect. The Qualified Opinion section of the auditor’s report would not refer to the scope limitation directly, but would include “except for” language related to the opinion.
Choice “B” is incorrect. A departure from generally accepted auditing standards would not have taken place when the auditor appropriately issued a qualified opinion. Additionally, such language would not be contained in the Qualified Opinion section of the auditor’s report.
Choice “C” is incorrect. The lack of sufficient appropriate audit evidence would not be referenced in the Qualified Opinion section of the report.
An auditor most likely would issue an adverse opinion due to:
A. Management’s refusal to provide written representations. B. Inadequate disclosure of material information. C. The auditor is unable to obtain the audited financial statements of a consolidated investee. D. The inability to determine the extent of or the amounts associated with a pervasive employee fraud scheme
Choice “B” is correct. Inadequate disclosure of material information is a departure from GAAP and may result in either a qualified or adverse opinion, depending on materiality.
Choice “A” is incorrect. Management’s refusal to provide written representations (a type of audit evidence) is a significant client-imposed restriction on the audit, which may result in a disclaimer of opinion.
Choice “C” is incorrect. If the auditor is unable to obtain the audited financial statements of a consolidated investee, a qualified opinion or a disclaimer of opinion would be issued, depending on materiality.
Choice “D” is incorrect. An auditor may issue a qualified or disclaimer of opinion when an auditor is unable to obtain sufficient appropriate audit evidence. For example, when an auditor is unable to determine the extent of or the amounts associated with a pervasive employee fraud scheme, there is not sufficient appropriate audit evidence, and a qualified or disclaimer of opinion may be appropriate.
The opinion paragraph in an auditor’s report for a nonissuer should include a statement that:
A. Indicates that management is responsible for the fair presentation of the financial statements. B. Describes the auditor's responsibility for expressing an opinion on the financial statements. C. Identifies the applicable financial reporting framework and its origin. D. Includes the word independent to clearly indicate that the report is from an independent auditor.
Choice “C” is correct. The opinion paragraph in an auditor’s report should include a statement regarding the auditor’s opinion and an indication of the applicable financial reporting framework and its origin.
Choice “A” is incorrect. An indication of management’s responsibility for the fair presentation of the financial statements should be included in a separate paragraph explaining management’s responsibility rather than in the opinion paragraph.
Choice “B” is incorrect. A description of the auditor’s responsibility would be included in a separate paragraph stating the auditor’s responsibility rather than in the opinion paragraph.
Choice “D” is incorrect. The word independent should be included in the report title, and not the opinion paragraph in an auditor’s report.
When an auditor of a nonissuer expresses an adverse opinion, the Opinion section should include:
A. The principal effects of the departure from generally accepted accounting principles. B. The substantive reasons for the financial statements being incorrect or misleading. C. A direct reference to a separate section disclosing the basis for the opinion. D. A description of the uncertainty or scope limitation that prevents an unmodified opinion.
Choice “C” is correct. The opinion paragraph in an adverse opinion should state that, in the auditor’s opinion, because of the significance of the matter(s) discussed in the Basis for Adverse Opinion section, the accompanying consolidated financial statements do not present fairly…
Choice “A” is incorrect. The principal effects of the departure from GAAP are not included in the Opinion section.
Choice “B” is incorrect. The substantive reasons for the financial statements being incorrect or misleading are discussed in the Basis for Adverse Opinion section, not the Opinion section.
Choice “D” is incorrect. Scope limitations pertain to disclaimers of opinion, not adverse opinions.
(It is very important to memorize the qualifying phrases in the qualified, adverse, and disclaimer of opinions.)
In which of the following situations would a disclaimer of opinion be the most appropriate?
A. The auditor is unable to obtain the audited financial statements of a significant subsidiary. B. There is insufficient disclosure in the notes to the financial statements of reportable segments. C. The internal auditor lacks independence. D. The financial statements are presented in accordance with the cash basis of accounting.
Choice “A” is correct. If the auditor is unable to obtain the audited financial statements of a significant subsidiary, a scope limitation exists. Assuming that the effect is material and pervasive, the auditor would issue a disclaimer of opinion.
Choice “B” is incorrect. Inadequate disclosure is a GAAP issue and would result in a qualified or adverse opinion, depending on materiality.
Choice “C” is incorrect. The internal auditor is not independent. If the external auditor is not independent, then the auditor must issue a disclaimer of opinion.
Choice “D” is incorrect. Financial statements may be prepared using a special purpose framework, such as the cash basis of accounting.
March, CPA, is engaged by Monday Corp., a client, to audit the financial statements of Wall Corp., a company that is not March’s client. Monday expects to present Wall’s audited financial statements with March’s auditor’s report to 1st Federal Bank to obtain financing in Monday’s attempt to purchase Wall. In these circumstances, March’s auditor’s report would usually be addressed to:
A. Both Monday Corp. and 1st Federal Bank. B. Monday Corp., the client that engaged March. C. 1st Federal Bank. D. Wall Corp., the entity audited by March.
Choice “B” is correct. The auditors should address their report to the entity that engaged them. In this case, Monday Corp. engaged the auditor to perform an acquisition audit and the report should be addressed to Monday.
Choices “C” and “A” are incorrect. Even though the bank will be relying on the audited financial statements in determining whether to make the loan, the bank did not directly engage the auditing firm and accordingly, the report should not be addressed to them.
Choice “D” is incorrect. Wall Corp. did not engage the auditors and thus the report should not be addressed to them.
When an independent CPA assists in preparing the financial statements of a publicly held entity, but has not audited or reviewed them, the CPA should issue a disclaimer of opinion. In such situations, the CPA has no responsibility to apply any procedures beyond:
A. Determining whether management has elected to omit substantially all required disclosures. B. Documenting that internal control is not being relied on. C. Ascertaining whether the financial statements are in conformity with GAAP. D. Reading the financial statements for obvious material misstatements.
Choice “D” is correct. The accountant is only required to read the financial statements for obvious material misstatements.
Choice “A” is incorrect. The accountant is not required to evaluate conformity with GAAP, including determining whether management has elected to omit substantially all required disclosures.
Choice “B” is incorrect. The accountant need not document that internal control is not being relied on.
Choice “C” is incorrect. The accountant is not required to evaluate conformity with GAAP, but any known departures should be described in the disclaimer.
An auditor is unable to complete a procedure during an audit. Based on this situation, which opinion is least likely to be rendered?
A. A disclaimer of opinion. B. A qualified opinion. C. An adverse opinion. D. An unmodified opinion.
Choice “C” is correct. An adverse opinion is rendered when there is a departure from GAAP, which is not the case in this question.
Choice “A” is incorrect. A disclaimer of opinion may be issued due to a highly material scope limitation.
Choice “B” is incorrect. A qualified opinion may be issued due to a material scope limitation.
Choice “D” is incorrect. An unmodified opinion would be rendered if the effect on the financial statements were immaterial, or if acceptable alternative procedures could be performed.
A CPA’s report on audited financial statements under U.S. auditing standards would be inappropriate if it referred to:
A. Evaluating the appropriateness of accounting policies used. B. The CPA's assessment of sampling risk factors. C. Significant estimates made by management. D. Management's responsibility for the financial statements.
Choice “B” is correct. The CPA’s report on audited financial statements does not include matters related to the auditor’s assessment of specific risk factors.
Choices “A” and “C” are incorrect. The CPA’s audit includes evaluating the appropriateness of the accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. This is mentioned in the auditor’s responsibility paragraph.
Choice “D” is incorrect. The CPA’s report on audited financial statements includes an explanation that management is responsible for the preparation and fair presentation of the financial statements.
In which of the following sections of an auditor’s report for a nonissuer does an auditor communicate the nature of the engagement and the specific financial statements covered by the audit?
A. Scope B. Emphasis-of-matter C. Basis for Opinion D. Opinion
Choice “D” is correct. The auditor’s Opinion section indicates the nature of the engagement (i.e., audit), the financial statements covered in the (audit) engagement, the name of the entity whose financial statements have been audited, and the dates covered by each financial statement.
Choice “A” is incorrect. There is no scope paragraph in a nonissuer audit report.
Choice “B” is incorrect. Emphasis-of-matter paragraphs are used when required by SAS or when the auditor believes they are necessary. They are used when referring to a matter that is appropriately presented or disclosed in the financial statements and is of such importance that it is fundamental to the users’ understanding of the financial statements. This paragraph does not affect the auditor’s opinion.
Choice “C” is incorrect. The Basis for Opinion section references GAAS, auditor independence, and states whether or not the auditor believes sufficient appropriate evidence was obtained to provide a basis for the auditor’s opinion.
Park, CPA, was engaged to audit the financial statements of Tech Co., a new client, for the year ended December 31, Year 3. Park obtained sufficient audit evidence for all of Tech’s financial statement items except Tech’s opening inventory. Due to inadequate financial records, Park could not verify Tech’s January 1, Year 3, inventory balances. Park’s opinion on Tech’s Year 3 financial statements most likely will be:
Balance sheet
Income statement
A. Disclaimer
Adverse
B. Disclaimer
Disclaimer
C. Unmodified
Adverse
D. Unmodified
Disclaimer
Choice “D” is correct. When the auditor is unable to satisfy himself or herself regarding the amount of beginning inventory, he or she must disclaim an opinion on the income statement because of the inability to verify the cost of goods sold during the year. The auditor may, however, still be able to issue an unmodified opinion on the balance sheet, since inventory can be verified as of the balance sheet date.
Choice “A” is incorrect. An unmodified opinion could be issued on the balance sheet as the balance sheet contains ending balances rather than opening balances. Additionally, the inability to obtain sufficient appropriate evidence on an income statement item (cost of goods sold in this scenario) is considered an audit issue rather than a financial statement issue. Therefore, a qualified or disclaimer of opinion would be appropriate rather than an adverse opinion.
Choice “B” is incorrect. Beginning inventory would impact cost of goods sold, an income statement item. If an auditor was unable to obtain sufficient appropriate evidence regarding the cost of goods sold amount recorded in the financial statements, a disclaimer of opinion would be necessary on the income statement.
Choice “C” is incorrect. The inability to obtain sufficient appropriate evidence on an income statement item (cost of goods sold in this scenario) is considered an audit issue rather than a financial statement issue. Therefore, a qualified or disclaimer of opinion would be appropriate rather than an adverse opinion.
An auditor who is unable to form an opinion on a new client’s opening inventory balances may issue an unmodified opinion on the current year’s:
A. Balance sheet only. B. Statement of cash flows only. C. Income statement only. D. Statement of shareholders' equity only.
Choice “A” is correct. The only statement where the auditor can issue an unmodified opinion in this scenario would be the balance sheet, because the balance sheet reports on ending balances and the auditor would not need beginning inventory information to form an opinion.
Choice “B” is incorrect. The statement of cash flows would be impacted by the inability of the auditor to determine whether net income is correct and, therefore, a scope limitation with respect to the statement of cash flows would be present resulting in either a qualified opinion or disclaimer of opinion.
Choice “C” is incorrect. If the auditor is unable to form an opinion on a new client’s opening inventory balances, cost of goods sold cannot be determined and, therefore, the auditor would be unable to determine whether net income is correct. This is a scope limitation, and a qualified or disclaimer of opinion would be necessary.
Choice “D” is incorrect. Net income impacts retained earnings and, therefore, the auditor would not be able to form an opinion on the statement of stockholder’s equity. This would be a scope limitation and would result in either a qualified opinion or disclaimer of opinion.
Under which of the following circumstances would the expression of an adverse opinion be inappropriate?
A. Management does not provide reasonable justification for a change in accounting principles. B. Management refuses to allow the auditor to contact legal counsel. C. The company issues financial statements that purport to present financial position and results of operations, but it refuses to include the related statement of cash flows. D. The financial statements do not adequately disclose litigation that is probable to result in a material loss.
Choice “B” is correct. An auditor may express a qualified or disclaimer of opinion when, due to a scope limitation, the auditor is unable to perform all the tests necessary to complete an audit. Management’s refusal to permit inquiry of the attorneys generally will result in a disclaimer of opinion or withdrawal from the audit.
Choice “A” is incorrect. If management does not provide reasonable justification for a change in accounting principles, the auditor would issue a qualified or adverse opinion, depending on materiality.
Choice “C” is incorrect. The statement of cash flows is a requirement of GAAP to be considered a complete set of financial statements. A material misstatement of financial statements, such as the omission of information that is required to be presented, would result in a qualified or adverse opinion.
Choice “D” is incorrect. Litigation that is probable to result in a material loss must be disclosed. (If the litigation loss amount can be estimated, then an amount should also be accrued.) Inadequate disclosure results in a qualified or adverse opinion.
Which of the following is true about modifications to the independent auditor’s unmodified opinion report for a nonissuer?
A. A disclaimer of opinion and an adverse opinion both include modification to the introductory paragraph. B. An auditor would modify different paragraphs when rendering either a qualified opinion due to a departure from GAAP or an adverse opinion due to a departure from GAAP. C. An auditor would modify the same paragraphs when rendering either a qualified opinion due to a departure from GAAP or a qualified opinion due to a scope limitation. D. Modifications to the independent auditor's report result in qualified, adverse or negative assurance opinions, or a disclaimer of opinion.
Choice “C” is correct. A qualified opinion due to a scope limitation and a qualified opinion due to a GAAP departure require modifications to both the Opinion section and the Basis for Opinion section of the auditor’s report.
Choice “A” is incorrect. The auditor’s report does not contain an introductory paragraph.
Choice “B” is incorrect. When there is a departure from GAAP that has a material effect on the financial statements, both the Opinion section and Basis for Opinion section of the auditor’s report would require modification. This is true regardless of whether the opinion is qualified or adverse.
Choice “D” is incorrect. A “negative assurance opinion” is not one of the independent auditor’s opinions. The possible opinions are unmodified, qualified, adverse or disclaimer.
A scope limitation sufficient to preclude an unmodified opinion always will result when management:
A. Prevents the auditor from reviewing the audit documentation of the predecessor auditor. B. Engages the auditor after the year-end physical inventory is completed. C. Requests that certain material accounts receivable not be confirmed. D. Refuses to acknowledge its responsibility for the fair presentation of the financial statements in conformity with GAAP.
Choice “D” is correct. The management’s responsibility paragraph of the standard unmodified report includes a statement that the financial statements are the responsibility of the company’s management. Management’s refusal to accept responsibility for the fair presentation of the financial statements therefore precludes issuance of this standard report.
Choice “A” is incorrect. Preventing the review of documentation of the predecessor auditor would be a reason not to accept the engagement.
Choice “B” is incorrect. There would likely be alternative procedures that could be performed by the auditor to obtain sufficient appropriate evidence about the inventory balances.
Choice “C” is incorrect. There would likely be alternative procedures that could be performed by the auditor to obtain sufficient appropriate evidence about the accounts receivable balances that could not be confirmed.
During an audit, the auditor notes that the client’s financial statements are not in conformity with GAAP regarding the recording of leases. Based on this situation, which opinion is least likely to be rendered?
A. A disclaimer of opinion. B. An adverse opinion. C. An unmodified opinion. D. A qualified opinion.
Choice “A” is correct. A disclaimer of opinion is issued when there is a significant scope limitation, when the auditor is not independent, or when the financial statements are not audited, which is not the case in this question.
Choice “B” is incorrect. An adverse opinion may be issued when the effect of the GAAP departure is material and pervasive.
Choice “C” is incorrect. An unmodified opinion may be issued when the effect of the GAAP departure is deemed to be immaterial.
Choice “D” is incorrect. A qualified opinion may be issued when the effect of the GAAP departure is material.
In which case would an unmodified opinion not be appropriate?
A. There is a change in accounting principle that has a material effect on the current year financial statements. B. A material related party transaction has occurred and has been accounted for appropriately, but it has not been adequately disclosed in the financial statements. C. There is an unjustified departure from GAAP, but it does not have a material effect on the financial statements. D. There is a justified departure from GAAP.
Choice “B” is correct. Inadequate disclosure of a material related party transaction would result in a qualified or adverse opinion.
Choice “A” is incorrect. A material change in accounting principle would result in the addition of an emphasis-of-matter paragraph to the unmodified opinion.
Choice “C” is incorrect. An immaterial unjustified departure from GAAP would not affect the unmodified opinion. Note that if the effect were material, a qualified or adverse opinion would be appropriate.
Choice “D” is incorrect. A justified departure from GAAP results in the addition of an emphasis-of-matter paragraph to the unmodified opinion.
Which of the following is true regarding the audit report for an issuer?
A. Reference may be made to either PCAOB standards or generally accepted auditing standards. B. Reference should be made to both PCAOB standards and generally accepted auditing standards. C. PCAOB standards should not be mentioned at all, although their use is implied in the auditor's report. D. The report should include references to PCAOB standards and generally accepted accounting principles.
Choice “D” is correct. An auditor reporting on the audit of financial statements of an issuer should indicate in the Basis for Opinion section that the engagement was conducted in accordance with PCAOB standards, and should refer to GAAP in the Opinion on the Financial Statements section.
Choice “A” is incorrect. An auditor reporting on the audit of financial statements of an issuer should indicate in the Basis for Opinion Section that the engagement was conducted in accordance with PCAOB standards. Referring to generally accepted auditing standards instead is not an option, as audits of issuers must follow PCAOB standards.
Choice “B” is incorrect. An auditor reporting on the audit of financial statements of an issuer is required to refer to PCAOB standards. There is no requirement to reference GAAS.
Choice “C” is incorrect. An auditor reporting on the audit of financial statements of an issuer should indicate in the audit report that the engagement was conducted in accordance with PCAOB standards. This is an explicit statement in the report; it is not implied or assumed.
Which of the following phrases should be included in the opinion paragraph when an auditor expresses a qualified opinion?
When read in
conjunction with
Note X
With the foregoing
explanation
A. Yes
No
B. No
Yes
C. Yes
Yes
D. No
No
Choice “D” is correct. No − No.
A qualified opinion phrase is, “In our opinion, except for [reference to matter giving rise to qualification] described in the Basis for Qualification section of our report…”
Choice “A” is incorrect, as “when read in conjunction with Note X” is not a phrase included in the opinion paragraph of a qualified opinion.
Choice “B” is incorrect, as “with the foregoing explanation” is not a phrase included in the opinion paragraph of a qualified opinion.
Choice “C” is incorrect. Neither phrase is included in the opinion paragraph of a qualified opinion.
(This is why it’s important to memorize the qualifying phrases as well as the unmodified (unqualified) auditor’s report.)
A limitation on the scope of an audit sufficient to preclude an unmodified opinion will usually result when management:
A. Does not provide the auditor with an engagement letter specifying the responsibilities of both the entity and the auditor. B. Is unable to obtain audited financial statements supporting the entity's investment in a foreign subsidiary. C. Fails to correct a significant deficiency in internal control communicated to those charged with governance after the prior year's audit. D. Refuses to disclose in the notes to the financial statements related party transactions authorized by the Board of Directors.
Choice “B” is correct. Restrictions on the scope of the audit, such as the timing of the work, the inability to obtain sufficient appropriate audit evidence, or an inadequacy in the accounting records, may require the auditor to qualify or disclaim an opinion. Inability to obtain audited financial statements supporting the entity’s investment in a foreign subsidiary is such a restriction on the scope of the audit.
Choice “A” is incorrect. The auditor sends an engagement letter to the client, not vice versa.
Choice “C” is incorrect. Management may choose not to correct a significant deficiency in internal control if the cost of correcting the condition outweighs the benefit.
Choice “D” is incorrect. Client refusal to disclose related party transactions in the notes to the financial statements is a GAAP problem, not a scope problem. For a GAAP problem, the auditor must either issue a qualified or adverse opinion.
Which of the following statements is a basic element of the auditor’s report under U.S. auditing standards?
A. The disclosures provide reasonable assurance that the financial statements are free of material misstatement. B. The auditor evaluated the overall internal control. C. An audit includes evaluating the reasonableness of significant accounting estimates made by management. D. The financial statements are consistent with those of the prior period.
Choice “C” is correct. Under U.S. auditing standards, the auditor’s audit report includes a statement that: “In performing an audit in accordance with GAAS, we evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management…”
Choice “A” is incorrect. The audit report does not state that disclosures provide reasonable assurance that the financial statements are free of material misstatement. The correct statement is: “Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement…”
Choice “B” is incorrect. The audit report does not state that the auditor evaluated the overall internal control. The correct statement is “In performing an audit in accordance with GAAS, we obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstance…”
Choice “D” is incorrect. The audit report does not state “The financial statements are consistent with those of the prior period.” Consistency is implicitly reported; only if there is an inconsistency is an explicit statement included.
According to U.S. GAAS, when the auditor is not independent but is required by law or regulation to report on the financial statements, the auditor’s report should disclaim an opinion and should:
State That “The Auditor
Is Not Independent”
Provide the Reasons
for Lack of Independence
A. Yes
No
B. No
No
C. No
Yes
D. Yes
Yes
Choice “A” is correct. When the auditor is not independent but is required by law or regulation to report on the financial statements, the auditor should disclaim an opinion and should specifically state that the auditor is not independent. The auditor is not required to provide the reasons for the lack of independence. However, an auditor may choose to provide the reasons for the lack of independence. If so, the auditor should include all the reasons for the lack of independence.
Choice “B” is incorrect. The auditor is required to state his or her lack of independence.
Choice “C” is incorrect. The auditor is required to state his or her lack of independence but is not required to provide the reasons.
Choice “D” is incorrect. The auditor is not required to provide reasons for the lack of independence. However, an auditor may choose to provide the reasons for the lack of independence and should include all reasons.
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?
A. The financial statements are free from material misstatement, but disclosure of the proposed adjustments is required in the notes to the financial statements. B. The financial statements do not conform with generally accepted accounting principles (GAAP). C. The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements. D. The financial statements contain unadjusted misstatements that should result in a qualified opinion.
Choice “C” is correct. An unmodified opinion states that the financial statements are presented fairly, in all material respects. Since the collective effect of the proposed adjustments is immaterial, an unmodified opinion should be expressed. In addition, footnote disclosure of proposed immaterial adjustments is not required.
Choice “A” is incorrect. The AICPA defines fair presentation as reflecting the underlying transactions of a company in a manner that represents the financial statements within a range of acceptable limits. Since the collective effect of the proposed adjustments is immaterial, the financial statements would be considered to conform to generally accepted accounting principles, and footnote disclosure of the proposed adjustments would not be required.
Choice “B” is incorrect. The AICPA defines fair presentation as reflecting the underlying transactions of a company in a manner that represents the financial statements within a range of acceptable limits. Since the collective effect of the proposed adjustments is immaterial, the financial statements would be considered to conform to generally accepted accounting principles.
Choice “D” is incorrect. An unmodified opinion states that the financial statements are presented fairly, in all material respects. Since the collective effect of the proposed adjustments is immaterial, an unmodified opinion should be expressed.
Which of the following items is explicitly included in an audit report expressing an unmodified opinion?
A. We conducted our audit in accordance with generally accepted accounting principles. B. The procedures selected depend on management's approval, including the assessment of the risks of any errors resulting from fraud. C. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our review of the financial statements. D. We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks.
Choice “D” is correct. The auditor’s responsibility paragraph of the unmodified opinion audit report explicitly states that an audit includes identifying and assessing the risks of material misstatement and designing and performing audit procedures responsive to those risks.
Choice “A” is incorrect. The audit is conducted in accordance with auditing standards generally accepted in the United States of America.
Choice “B” is incorrect. The correct statement reads consistent with choice A and not choice D.
Choice “C” is incorrect. The audit evidence provides a basis for the auditor’s opinion, not for a review. This is an audit engagement, not a review.
An auditor decides to issue a qualified opinion on an entity’s financial statements because a major inadequacy in its computerized accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the auditor’s report should state that the qualification pertains to:
A. A departure from generally accepted auditing standards. B. Inadequate disclosure of necessary information. C. A client-imposed scope limitation. D. The possible effects on the financial statements.
Choice “D” is correct. When an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself.
Choice “A” is incorrect. A scope limitation is a departure from generally accepted auditing standards. However, when an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself.
Choice “B” is incorrect. Inadequate disclosure of necessary information is a departure from GAAP, rather than a scope limitation.
Choice “C” is incorrect. When an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself.
When financial statements contain a departure from U.S. GAAP because, due to unusual circumstances, the statements would otherwise be misleading, the auditor should express an opinion that is:
A. Adverse. B. Qualified or adverse, depending on pervasiveness. C. Unmodified. D. Qualified.
Choice “C” is correct. When circumstances indicate that a financial presentation in accordance with U.S. GAAP would be misleading, a departure from U.S. GAAP is permissible. In such cases, the auditor should issue an unmodified opinion because the financial statements are not materially misstated.
Choices “D”, “A”, and “B” are incorrect. The auditor’s opinion need not be qualified or adverse because the financial statements are presented fairly.
An auditor’s report under U.S. auditing standards that refers to a scope limitation that is material but not pervasive contains the words, “In our opinion, except for the below-mentioned limitation on the scope of our audit . . . .” This is considered a(n):
A. Qualified opinion B. Example of inappropriate wording C. Disclaimer of opinion D. Adverse opinion
Choice “B” is correct. “In our opinion, except for the below-mentioned limitation on the scope of our audit . . .” is an example of inappropriate wording. When the auditor expresses a qualified opinion due to a scope limitation, the auditor should state in the opinion paragraph that the qualification pertains to the possible effects of the matter on the financial statements and not to the scope limitation itself. The wording used should be, “In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion section . . . .”
Choice “A” is incorrect. A qualified opinion due to a scope limitation should include the phrase, “In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion section . . . .”
Choice “C” is incorrect. A disclaimer of opinion should include the phrase, “Because of the significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these financial statements.”
Choice “D” is incorrect. An adverse opinion would include the phrase, “. . . do not present fairly . . . .”
Block, a CPA firm, is finalizing the audit of a nonissuer. In drafting the audit report containing an unmodified opinion, how should Block make the following representations in the audit opinion on comparative financial statements?
Consistent
application of
accounting principles
Examination
of evidence
on a test basis
A. Implicitly
Explicitly
B. Explicitly
Explicitly
C. Implicitly
Implicitly
D. Explicitly
Implicitly
Choice “A” is correct. Consistency is implicit in the auditor’s report, and will be explicitly mentioned in an emphasis-of-a-matter paragraph only if there are issues with consistency. Within the Auditor’s Responsibility section of the report, the following statement is explicitly made: “Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.”
Choice “B” is incorrect. Only the examination of evidence on a test basis is explicitly stated in the auditor’s report. The statement is included in the Auditor’s Responsibility section.
Choice “C” is incorrect. Only consistency in the application of accounting principles is implicit in the auditor’s report.
Choice “D” is incorrect. The consistency of the application of accounting principles is implicit while the examination of evidence on a test basis is explicitly stated in the Auditor’s Responsibility section.
The responsibilities of an auditor include all of the following except which one?
A. Maintaining professional skepticism and exercising professional judgment throughout the planning and performance of the audit. B. A minimum amount of technical knowledge of and experience in the industry in which the audit client operates. C. Complying with relevant ethical requirements. D. Appropriate competence and capabilities to perform the audit.
Choice “B” is correct. This is not a responsibility of the auditor. The appropriate amount of technical knowledge of the industry can be obtained by the auditor. Experience in the industry is not required.
Choice “A” is incorrect. An auditor is responsible for maintaining professional skepticism and exercising professional judgment throughout an audit.
Choice “C” is incorrect. An auditor is responsible for complying with all relevant ethical requirements.
Choice “D” is incorrect. An auditor is responsible for ensuring the members of the engagement team have the appropriate competence and capabilities to perform the audit.
To obtain reasonable assurance, an auditor should:
A. Ensure that management does not conceal any fraudulent activities on the part of employees. B. Design the audit to detect all instances of illegal acts. C. Examine all available corroborating evidence supporting management's assertions. D. Plan the work and properly supervise any assistants.
Choice “D” is correct. To obtain reasonable assurance, an auditor must plan the work and properly supervise assistants, as well as determine and apply appropriate materiality levels, identify and assess risks of material misstatement whether due to fraud or error, and obtain sufficient appropriate audit evidence.
Choice “A” is incorrect. It would not be possible for the auditor to ensure that management does not conceal any fraudulent activities of employees.
Choice “B” is incorrect. An auditor has a reasonable responsibility to design the audit to detect material instances of illegal acts, errors, and irregularities. It would not be feasible to design an audit to detect all instances of illegal acts.
Choice “C” is incorrect. An auditor examines some (but not all) available corroborating evidence supporting management’s assertions. Examination of all evidence would not be feasible.
An auditor of a nonissuer exercising professional skepticism with respect to the risks of material misstatement due to fraud will most appropriately:
A. Assess the entity's document-retention controls before using documents as audit evidence. B. Consider the reliability of information to be used as audit evidence. C. Authenticate documents used as audit evidence. D. Adopt an attitude of acceptance unless evidence indicates otherwise.
Choice “B” is correct. An auditor exercising professional skepticism with respect to the risks of material misstatement due to fraud will most appropriately consider the reliability of information to be used as audit evidence.
Choice “A” is incorrect. An auditor exercising professional skepticism does not need to assess the entity’s document-retention controls before using documents as audit evidence.
Choice “C” is incorrect. An auditor is not required to authenticate audit evidence. The auditor may accept records and documents as genuine unless the auditor has reason to believe the contrary.
Choice “D” is incorrect. An auditor exercising professional skepticism should critically assess audit evidence rather than adopting an initial attitude of acceptance.
