Types of Reports II

Question 1

What is the objective of the audit of GAAP-based financial statements?

Answer 1

To express an opinion on the fairness with which;

• the statements present financial position,
• results of operations; and
• cash flows in accordance with generally accepted accounting principles

Question 2

What is a reason for an auditor to express an adverse opinion?

Answer 2

WHEN; the financial statements as a whole are not presented fairly in conformity with GAAP

E.g. financial statements are not in conformity with the FASB Codification’s guidance regarding the capitalization of leases

Question 3

What is a “piecemeal opinion?”

Answer 3

an opinion on a specific element of the statements when an auditor has disclaimed an opinion or expressed an adverse opinion on the statements as a whole

NOTE: This is not acceptable because it contradicts the disclaimer or adverse opinion

Question 4

What type of report would the CPA provide in the event he was not able to obtain sufficient appropriate audit evidence for opening inventory due to inadequate financial records?

Answer 4

He would Most Likely Provide;

• An Unmodified Opinion for the Balance Sheet; and
• A Disclaimer of Opinion for the rest of the Financial Statements (E.g. Income Statement and Cash Flow Statement)

Note: In the second case (i.e. the Disclaimer) he would do so because he is NOT able to form an opinion as to the fairness of these statements

Question 5

What would be an accurate statement in an auditor’s report for an Adverse Opinion?

Answer 5

“The financial statements referred to above do not present fairly the financial position, results of operations, or cash flows in conformity with U.S. generally accepted accounting principles”

Note: The essence of an adverse opinion is that the statements reported on, as a whole, are materially and pervasively misstated

Question 6

What parts of the Auditor’s report are changed when an Adverse Opinion is expressed?

Answer 6

The sections modified are the;

• Auditor’s Responsibility Section
• Opinion Paragraph

Note: The introductory paragraph and management’s responsibility section are unchanged

Question 7

What are a CPA’s options when their name is included in a client financial statements but they have not audited or reviewed these interim financial statements?

Answer 7

They should request that either;

• Their name not be included in the communication; or
• The financial statements be marked as unaudited, with a notation that no opinion is expressed on them

Question 8

Which paragraph should the auditor’s expression of an adverse opinion be expressed in?

Answer 8

In a paragraph;

• Preceding the opinion paragraph (i.e. comes before)

Question 9

What is a major purpose of the auditor’s report on financial statements?

Answer 9

To clarify for the public the nature of the auditor’s responsibility and performance

Why? - Because this reduces the gap between the nature of the auditor’s responsibility and performance against the public’s perception of the audit function

Question 10

What type of report would an auditor issue if they were not able to confirm a financial statement item but was satisfied concerning alternative procedures?

Answer 10

They would issue an;

• Unmodified Opinion

Note: Because the auditor was able to apply alternative procedures, there is no need for an emphasis-of-matter paragraph ONLY a Unmodified Opinion

Question 11

What type of opinion would an auditor express for inadequate disclosure?

Answer 11

The auditor would express an;

• Modified or Adverse opinion depending on the pervasiveness and materiality

Question 12

What should the opinion paragraph include when the auditor expresses an adverse opinion?

Answer 12

A direct reference to a separate paragraph disclosing the basis for the opinion

Note: This paragraph should precede (i.e. come before) the opinion paragraph

Question 13

Who should an auditor address their report to when they are engaged by a client to audit the financial statements of a non-client?

Answer 13

The auditor should address the auditor’s report to the client whom engaged them

Question 14

What financial statements are considered U.S. GAAP-based financial statements to be mentioned in the auditor’s report?

Answer 14

The balance sheet and;

• the statements of Income
• statements of changes in equity; and
• statements of cash flows

Question 15

What is a major requirement in financial statements in meeting adequate disclosure?

Answer 15

All information believed by the auditor to be essential to the fair presentation of the financial statements must be disclosed;

• no matter how confidential management believes the data to be

Question 16

When an auditor qualifies an opinion (i.e. because of the omission of information) what paragraphs of the auditor’s report should he modify?

Answer 16

The Auditor’s Responsibility Paragraph Section; and the

• Opinion Paragraph

Question 17

What is an appropriate statement in the auditor’s report when expressing a qualified opinion because of inadequate disclosure?

Answer 17

“In our opinion, except for the omission of information described in the Basis for Qualified Opinion paragraph, the financial statements referred to above present fairly . . .”

Note: The key here is that the Phrase “Except For” is appropriate phrasing for such a report

Question 18

What situation would your auditor report refer to both the auditing standards of the PCAOB and generally accepted auditing standards (GAAS)?

Answer 18

For the audit of a nonissuer (i.e. Non-public company) in accordance with the standards issued by the PCAOB

Question 19

What would be a basis for an auditor to dual date the audit report?

Answer 19

Due to the auditor’s willingness to;

• Extend auditing procedures

Why? - Because this would be appropriate if;

• the auditor is willing to accept responsibility to the later date and accordingly extends subsequent events procedures to that date

E.g. the auditor may choose the later date as the date for the entire report

Question 20

What (user) reading audience should the adequacy of disclosure be a reflection of?

Answer 20

Users with a reasonable knowledge of business