Auditing Chapter 12 Questions

The Auditor's Responsibility paragraph of an auditor's report contains the following sentences: We did not audit the financial statements of EZ Inc., a wholly-owned subsidiary, which statements reflect total assets and revenues constituting 27 percent and 29 percent, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ Inc., is based solely on the report of the other auditors. These sentences: a. Are an improper form of reporting. b. Require a departure from an unqualified opinion. c. Indicate a division of responsibility. d. Assume responsibility for the other auditor.

. Indicate a division of responsibility

Under which of the following circumstances would a disclaimer of opinion not be appropriate? a. Management does not provide reasonable justification for a change in accounting principle. b. The chief executive officer is unwilling to sign the management representation letter. c. The auditor is unable to determine the amounts associated with an employee fraud scheme. d. The client refuses to permit the auditor to confirm certain accounts receivable or apply alternative procedures to verify their balances.

. Management does not provide reasonable justification for a change in accounting principle.

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. Ascertaining whether the financial statements are in conformity with GAAP. b. Determining whether management has elected to omit substantially all required disclosures. c. Documenting that internal control is not being relied on. d. Reading the financial statements for obvious material misstatements.

. Reading the financial statements for obvious material misstatements

Match the opinion, paragraphs modified and location of additional paragraph with the scenarios below *Wording* *Location of added* *Opinion* *Modified* paragraph Unqualified I) All A) None Qualified II) None B) Before opinion Adverse III) Opinion C) After opinion Disclaimer IV) Intro/Opinion/ D) Before or after the Auditors Responsibility opinion V) Auditors Responsibility/Opinion Scenarios 1) Immaterial justified departure from GAAP____, ______, _____ 2) Material scope restriction which does not overshadow the financial statements as a whole _____, _____, ______

1) Unqulified, None, None 2) Qualified, Opinion, Before opinion

When reporting under GAAS, certain statements are required in all auditors' reports ("explicit") and others are required only under certain conditions ("implicit"). Which combination that follows correctly describes the auditors' responsibilities for reporting?

1. GAAP - Explicit 2. Consistency - Implicit 3. Disclosure - Implicit 4. Opinion - Explicit

Which of the following is not included in the standard report on the financial statements? a. An identification of the financial statements that were audited b. A general description of an audit c. An opinion that the financial statements present financial position in accordance with GAAP d. An emphasis-of-matter paragraph commenting on the effect of economic conditions on the entity.

An emphasis-of-matter paragraph commenting on the effect of economic conditions on the entity.

When auditors wish to issue an unqualified opinion but highlight that the entity changed its method of accounting for software development costs, they would most appropriately identify the change in accounting method in which of the following? a. The introductory paragraph b. The opinion paragraph c. An emphasis-of -matter paragraph d. An other-matter paragraph

An emphasis-pf-matter paragraph

An auditor would express an unmodified opinion with an emphasis-of-matter paragraph added to the auditor's report for: A material weakness An unjustified in internal accounting change control a. No Yes b. No No c. Yes No d. Yes Yes

B

An auditor most likely would express an unmodified opinion and would not add emphasis-of-matter or other-matter paragraphs to the report if the auditor: a. Wishes to emphasize that the entity had significant transactions with related parties. b. Discovers that supplementary information required by FASB has been omitted. c. Concurs with the entity's change in its method of computing depreciation. d. Believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed.

Believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed.

Company A hired Samson & Delilah, CPAs, to audit the financial statements of Company B and deliver the report to Megabank. Who is the client? a. Megabank b. Samson & Delilah c. Company A. d. Company B

Company A

When an auditor concludes there is substantial doubt about a continuing audit client's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to: a. Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements. b. Reissue the prior year's auditor's report and add an emphasis-of-matter paragraph that specifically refers to "substantial doubt" and "going concern." c. Consider the adequacy of disclosure about the client's possible inability to continue as a going concern. d. Report to the client's audit committee that management's accounting estimates may need to be adjusted.

Consider the adequacy of disclosure about the client's possible inability to continue as a going concern.

R. Wolfe became the new auditor for Royal Corporation, succeeding C. Mason, who audited the financial statements last year. Wolfe needs to report on Royal's comparative financial statements and should disclose in the report an explanation about other auditors having audited the prior year a. Only if mason's opinion last year was qualified b. Describing the prior audit and the opinion but not naming Mason as the predecessor auditor. c. To describe the audit but not reveal the type of opinion issued by mason d. to describe the audit and the opinion but not name mason as the predecessor auditor.

Describing the prior audit and the opinion but not naming Mason as the predecessor auditor.

The group auditor decides not to refer to the component auditor who audited a subsidiary of the group auditor's client. In this situation, the group auditor most likely would: a. Determine the type of work to be performed by the group auditor on the financial information of the component. b. Add an emphasis-of-matter paragraph to the auditor's report indicating that the subsidiary's financial statements are not material to the consolidated financial statements. c. Document in the engagement letter that the group auditor assumes no responsibility for the component auditor's work and opinion. d. Obtain written permission from the component auditor to omit the reference in the group auditor's report.

Determine the type of work to be performed by the group auditor on the financial information of the component.

Reference in a group engagement partner's report to the fact that part of the audit was performed by another auditor most likely would be an indication of the: a. Divided responsibility between the auditors who conducted the audits of the components of the overall financial statements. b. Lack of materiality of the portion of the financial statements audited by the other auditor. c. Different opinions the auditors are expressing on the components of the financial statements that each audited. d. Group engagement partner's recognition of the component auditor's competence, reputation, and professional certification.

Divided responsibility between the auditors who conducted the audits of the components of the overall financial statements.

Which of these situations would require auditors to append an explanatory paragraph about consistency to an otherwise unqualified opinion? a. Entity changed its estimated allowance for uncollectible accounts receivable b. Entity corrected a prior mistake in accounting for interest capitalization c. entity sold one of its subsidiaries and consolidated six subsidiaries this year compared to seven last year d. Entity changed its inventory costing method from FIFO to LIFO.

Entity changed its inventory costing method from FIFO to LIFO.

Which of the following phrases would an auditor most likely include in the auditor's report when expressing a qualified opinion due to inadequate disclosure? a. Subject to the departure from generally accepted accounting principles, as described above. b. With the foregoing explanation of these omitted disclosures. c. Do not present fairly. d. Except for the omission of the information described in the Basis for Qualified Opinion paragraph.

Except for the omission of the information described in the Basis for Qualified Opinion paragraph.

According to PCAOB standards the engagement partner's signature is mandatory on the auditor's report a. True b. False

False

A scope limitation can result in which of the following types of opinions? I.Unqualified (standard report) II. Unqualified (with explanatory paragraph) III. Qualified IV. Adverse V. Disclaimer III and IV I, II and IV III or V I, III or V All of the above

I, III or V

. For an entity's financial statements to be presented fairly in accordance with an applicable financial reporting framework, the framework selected should: a. Include an adequate description of the framework in the financial statements. b. Be U.S. GAAP, for all audits performed in the United States. c. Be approved by the Auditing Standards Board or the appropriate industry subcommittee. d. Match the reporting framework used by most other entities within the entity's particular industry.

Include an adequate description of the framework in the financial statements.

An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph: a. Is considered an "except for" qualification of the opinion. b. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation." c. Is appropriate and would not negate the unqualified opinion. d. Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.

Is appropriate and would not negate the unqualified opinion.

. In the auditor's report, the principal auditor decides not to make reference to another CPA who audited a client's subsidiary. The principal auditor could justify this decision if, among other requirements, the principal auditor a.Issues an unqualified opinion on the consolidated financial statements b. Learns that the other CPA issued an unqualified opinion on the subsidiary's financial statements c. Is unable to review the audit programs and working papers of the other CPA d. Is satisfied as to the independence and professional reputation of the other CPA

Is satisfied as to the independence and professional reputation of the other CPA

Under U.S. auditing standards, when an auditor believes there is substantial doubt about the ability of an entity to continue as a going concern, all of the following should be included in the audit documentation, except: a. The auditor's conclusion about whether substantial doubt remains or is alleviated. b. The effect of the auditor's conclusion on the auditor's report. c. Management's conclusion regarding whether substantial doubt remains or is alleviated. d. The conditions that gave rise to the substantial doubt.

Management's conclusion regarding whether substantial doubt remains or is alleviated.

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. 1st Federal Bank. c. Wall Corp., the entity audited by March. d. Monday Corp., the client that engaged March.

Monday Corp., the client that engaged March.

When there has been a change in accounting principle, but the effect of the change on the comparability of the financial statements is not material, the auditor should a. Refer to the change in an explanatory paragraph b. Explicitly concur that the change is preferred c. Not refer to consistency in the auditor's report d. Refer to the change in the opinion paragraph

Not refer to consistency in the auditor's report

For an audit firm reporting on a publicly traded client the scope paragraph indicates that the audit was conducted in accordance with the standards of the _______________ , and was designed to provide _______________ assurance that the financial statements are free from material misstatement

PCAOB Reasonable

Auditors found that the entity has not capitalized a material amount of leases in the financial statements. When considering the materiality of this departure from GAAP, the auditors would choose between which reporting options? a. Unmodified opinion or disclaimer of opinion b. Unmodified opinion or qualified opinion c. Unmodified opinion with an emphasis-of-matter paragraph or an adverse opinion d. Qualified opinion or adverse opinion.

Qualified opinion or adverse opinion.

An auditor 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. Qualified opinion or an adverse opinion. b. Unmodified opinion with an other-matter paragraph or a qualified opinion. c. Adverse opinion or a disclaimer of opinion. d. Disclaimer of opinion or an unmodified opinion with an emphasis-of-matter paragraph.

Qualified opinion or an adverse opinion.

If the auditors decide to present separate reports on the entity's financial statements and internal control over financial reporting, which of the following reports should be modified to reference the other report? *Report on FS* *Report on Inter Cont over FS* a. Yes Yes b. Yes No c. No Yes d. No No

Report on Financial Statements - yes Report on Internal Control over financial Reporting - yes

How is the auditors' own responsibility for expressing the opinion on financial statements disclosed in the standard (unmodified) report? a. Stated explicitly in the Auditor's Responsibility section b. Unstated but understood in the Auditor's responsibility section c. Stated explicitly in the opinion paragraph d. Stated explicitly in the introductory paragraph

Stated explicitly in the Auditor's Responsibility section

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 material change between periods in accounting principles. d. The auditor wishes to emphasize an unusually important subsequent event.

The auditor is unable to obtain audited financial statements of a consolidated investee.

An auditor may not issue a qualified opinion when: a. An accounting principle at variance with GAAP is used. b. The auditor lacks independence with respect to the audited entity. c. A scope limitation prevents the auditor from completing an important audit procedure. d. The auditor's report refers to the work of a specialist.

The auditor lacks independence with respect to the audited entity.

Under which of the following conditions can a disclaimer of opinion never be issued? a. The entity's going -concern problems are hightly material and pervasive b. The entity does not allow the auditors access to evidence about important accounts c. The auditors own stock in the entity d. The auditors have determined that the entity uses the NIFO (next-in, first-out) inventory costing method.

The auditors have determined that the entity uses the NIFO (next-in, first-out) inventory costing method.

. Materiality is not a factor when considering the possible effect of a lack of auditor independence. True or False

True

The auditors determined that the entity is suffering financial difficulty and the going-concern status is seriously in doubt. Assuming the entity adequately disclosed this matter in the financial statements, the auditors must choose between which of the following auditors' report alternatives? a. Unmodified opinion with a reference to going-concern or disclaimer of opinion b. Standard (unmodified) report or disclaimer of opinion c. Qualified opinion or adverse opinion d. Standard (unmodified) report or adverse opinion

Unmodified opinion with a reference to going-concern or disclaimer of opinion

An explanatory paragraph following the opinion paragraph of an auditor's report describes an uncertainty as follows: As discussed in Note 10 to the financial statements, the Company is a defendant in a lawsuit alleging infringement of certain patent rights and claiming damages. Discovery proceedings are in progress. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements. What type of opinion should the auditor express under these circumstances? a. Adverse b. Qualified due to a scope limitation c. Qualified due to a GAAP violation d. Unqualified e. Not enough information

Unqualified

In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion? a. The auditor is unable to apply necessary procedures concerning an investor's share of an investee's earnings recognized on the equity method. b. Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going concern are inadequately disclosed. c. The auditor did not observe the entity's physical inventory and is unable to become satisfied about its balance by other auditing procedures. d. There has been a change in accounting principles that has a material effect on the comparability of the entity's financial statements.

b. Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going concern are inadequately disclosed.

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's financial statements adequately disclose its financial difficulties, the auditor's report is required to include an emphasis-of-matter paragraph that specifically uses the phrase(s): "Reasonable period of time, not to exceed one year" "Going concern" a. No No b. Yes No c. No Yes d. Yes Yes

c. No Yes

When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the situation in the: Auditor's Responsibility Notes to the Paragraph financial statements a. No No b. No Yes c. Yes No d. Yes Yes

c. Yes No

. 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. II only. b. Neither I nor II. c. I only. d. Both I and II.

d. Both I and II.

When issuing an adverse opinion the auditor should modify the opinion paragraph to read, "the financial statements _______________ present....."

do not (for adverse opinions)

1. Auditing standards require that the audit report must be titled and that the title must: a. include the word "independent." b. indicate if the auditor is a CPA. c. indicate if the auditor is a proprietorship, partnership, or incorporated. d. indicate the type of audit opinion issued.

include the word "independent."

When financial statements are presented in comparative form and another firm audited the prior year's financial statements (but the other firm's report is not presented with the financial statements), the auditor's report on the current-year financial statements should a. Disclaim an opinion on the prior-years' financial statements b. Not refer to the prior-years' financial statements c. Refer to any procedures performed by the current auditor to verify the opinion on the prior-years' financial statements d. refer to the report and type of opinion issued by the other firm on the prior year's financial statements

refer to the report and type of opinion issued by the other firm on the prior year's financial statements

If the opinion issued on prior year's financial statements is no longer appropriate and financial statements are presented in comparative form, the auditors' current report should a. Not refer to the prior-year financial statements b. Indicate that the opinion on the prior-years' financial statements cannot be relied upon. c. reference the type of opinion issued on the prior year's financial statements and indicate that the current opinion on these financial statements differs from that expressed in the prior years. d. Express the revised opinion on the prior-years' financial statements without referencing the previously-issued opinion.

reference the type of opinion issued on the prior year's financial statements and indicate that the current opinion on these financial statements differs from that expressed in the prior years.

When component auditors are involved in the audit of group financial statements, the group auditors may issue a report that a. refers to the component auditors, describes the extent of the component auditors' work, and expresses an unmodified opinion. b. Does not consider or evaluate the component auditors' work but expresses an unmodified opinion in a standard report. c. Places primary responsibility for the reporting on the component auditors d. Names the component auditors, describes their work, and presents only the group auditors' report.

refers to the component auditors, describes the extent of the component auditors' work, and expresses an unmodified opinion.