Audit Chapter 18

When reporting on comparative financial statements for a private company, which of the following circumstances should ordinarily cause the auditor to change the previously issued opinion on the prior year's financial statements?

A departure from generally accepted accounting principles caused an adverse opinion on the prior year's financial statements, and those statements have been properly restated.

Adverse opinion

A material misstatement is considered pervasive

Disclaimer of Opinion

Auditors determine that the possible effects on the financial statements of the inability to obtain sufficient evidence (i.e. a scope limitation) could be both material and pervasive

Unqualified opinion with an emphasis-of-matter paragraph

Auditors have doubt about a company's ability to continue as a going concern

Unmodified opinion

Auditors have obtained sufficiently appropriate evidence to conclude that the financial statements are not materially misstated

In which of the following circumstances would an auditor usually choose between issuing a qualified opinion or a disclaimer of opinion on a client's financial statements?

Inability of the auditor to obtain sufficient appropriate evidence.

A basic assumption that underlies financial reporting is that an entity will continue as a going concern.

TRUE

An auditor must disclaim an opinion when the auditor lacks independence.

TRUE

Changes that affect comparability but that do not involve a change in accounting principle or the correction of a misstatement are normally disclosed in the footnotes but do not require an explanatory paragraph in the audit report.

TRUE

In which of the following situations would an auditor ordinarily issue an unqualified/unmodified financial statement audit opinion with no explanatory (or emphasis-of-matter/other-matter) paragraph?

The auditor decides not to refer to the report of another auditor as a basis, in part, for the auditor's opinion.

Which of the following best describes the auditor's responsibility for "other information" included in the annual report to stockholders that contains financial statements and the auditor's report?

The auditor has no obligation to corroborate the "other information" but should read the "other information" to determine whether it is materially consistent with the financial statements.

Adverse opinion

The client has elected to not follow GAAP

Tech Company has appropriately disclosed an uncertainty due to pending litigation. The auditor's decision to issue a qualified opinion on Tech's financial statements would most likely result from:

a lack of sufficient evidence.

Eagle Company, a public company, had a computer failure and lost part of its financial data. As a result, the auditor was unable to obtain sufficient audit evidence relating to Eagle's inventory account. Assuming the inventory account is at least material, the auditor would most likely choose either:

a qualified opinion or a disclaimer of opinion.

When an auditor is asked to express an opinion on an entity's rent and royalty revenues, he or she may:

accept the engagement, provided the auditor's opinion is expressed in a special report that clearly states that only these specific accounts were audited.

A(n) __________ opinion is appropriate if a material misstatement is considered pervasive.

adverse

Auditors may add an emphasis-of-matter paragraph that refers to a matter that is __________ presented or disclosed.

appropriately

Auditors __________ an opinion when they are unable to form an opinion.

disclaim

In addition to an emphasis of a matter paragraph, auditors could issue a(n) __________ in a going concern situation.

disclaimer

Changes in accounting estimates __________ result in an explanatory paragraph.

do not

If substantial doubt about a going concern exists, an __________ paragraph is the most common resolution.

emphasis-of-matter

When there is significant doubt as to the ability to continue as a going concern, a(n) __________ paragraph may be added.

emphasis-of-matter

Limitations on the scope of an audit may create a situation in which the auditors are unable to obtain sufficient __________.

evidence

When items are identified that affect the going concern assumption, auditors must gather __________.

evidence

An emphasis-of-matter paragraph always __________ the opinion paragraph.

follows

Comparative financial statements for a public company include the prior year's statements, which were audited by a predecessor auditor. The predecessor's report is not presented along with the comparative financial statements. If the predecessor's report was unqualified, the successor should:

indicate in the auditor's report that the predecessor auditor expressed an unqualified opinion.

An auditor includes a separate paragraph in an otherwise unmodified financial statement audit report to emphasize that the entity being reported upon had significant transactions with related parties. The inclusion of this separate paragraph:

is appropriate and would not negate the unmodified opinion.

Qualified opinions are issued when the financial statements are __________ misstated.

materially

Auditors are __________ required to perform procedures specifically designed to test the going concern assumption.

not

A going concern evaluation should include evaluation of __________ from the balance sheet date.

one year

A going concern is to be evaluated for a period not to exceed __________ beyond the date of the financial statements.

one year

An emphasis of a matter paragraph always follows the __________ paragraph.

opinion

When reporting on financial statements prepared on the basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that:

states that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles.

King, CPA, was engaged to audit the financial statements of Chang Company, a private company, after its fiscal year had ended. King neither observed the inventory count nor confirmed the receivables by direct communication with debtors but was satisfied that both were fairly stated after applying appropriate alternative procedures. King's financial statement audit report most likely contained a(n):

unmodified opinion.

A public entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements but is reasonably certain to have a substantial effect in later years. The client's financial statements contain no material misstatements and the auditor concurs that this change is justified. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n):

unqualified opinion.