Auditing Chapter 17
A qualified opinion for a departure from GAAP ordinarily indicates that a portion of the financial statements do not follow GAAP and disclaims an opinion on the other parts of the financial statements. T/F
False
A qualified opinion is appropriate when a departure from generally accepted accounting principles is material enough to deserve mention in the auditors' report, but not material enough to call for expression of a disclaimer of opinion. T/F
False
A scope limitation during an audit will result in either a qualified or adverse opinion, depending upon the pervasiveness of the misstatement T/F
False
An audit report for a public client indicates that the audit was performed in accordance with: Generally accepted auditing standards (United States). Standards of the Public Company Accounting Oversight Board (United States). Generally accepted accounting principles (United States). Generally accepted accounting principles (Public Company Accounting Oversight Board).
Standards of the Public Company Accounting Oversight Board (United States).
An audit report for a public client indicates that the financial statements were prepared in conformity with: Generally accepted auditing standards (United States). Standards of the Public Company Accounting Oversight Board (United States). Generally accepted accounting principles (United States). Generally accepted accounting principles (Public Company Accounting Oversight Board).
Generally accepted accounting principles (United States).
A USA nonpublic company audit report indicates that the audit was performed in accordance with "generally accepted accounting principles." T/F
False
Which of the following accounting changes requires an emphasis-of-matter paragraph regarding consistency in a nonpublic company auditors' report? A change in the estimated useful lives of a class of fixed assets. A write-off of a patent because future benefits do not appear to exist. A change from the straight-line method of depreciation to an accelerated method for a class of fixed assets. A change in calculating bad debt expense from one percent to two percent of credit sales.
A change from the straight-line method of depreciation to an accelerated method for a class of fixed assets.
Which of the following ordinarily involves the addition of an emphasis-of-matter paragraph to an audit report of a nonpublic company? A consistency modification. An adverse opinion. A qualified opinion. Part of the audit has been performed by component auditors.
A consistency modification.
A scope restriction is least likely to result in a(an): Qualified opinion. Disclaimer of opinion. Adverse opinion. Standard unmodified opinion.
Adverse opinion.
The auditors who wish to draw reader attention to a financial statement note disclosure on significant transactions with related parties should disclose this fact in: An emphasis-of-matter paragraph to the auditors' report. A footnote to the financial statements. The body of the financial statements. The "summary of significant accounting policies" section of the financial statements.
An emphasis-of-matter paragraph to the auditors' report.
Assume that the opinion paragraph of an auditors' report begins as follows: "With the explanation given in Note 6, . . . the financial statements referred to above present fairly . . ." This is: An unmodified opinion. A disclaimer of opinion. An "except for" opinion. An improper type of reporting.
An improper type of reporting
The auditors' report should be dated as of the date the: Report is delivered to the client. Auditors have accumulated sufficient appropriate evidence. Fiscal period under audit ends. Peer review of the working papers is completed.
Auditors have accumulated sufficient appropriate evidence.
When an auditor of a nonpublic company has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the date the financial statements will be released (1/26/X2), the auditor's responsibility includes: Preparing prospective financial information to verify whether management's plans can be effectively implemented. Projecting conditions and events from one year prior to this year's date (12/31/X0) to 12/31/X1. Issuing an adverse or negative assurance opinion, depending upon materiality, due to the possible effects on the financial statements. Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.
Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.
When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should: Issue an unmodified opinion with a basis for modification paragraph. Withdraw from the engagement. Issue an "except for" qualification or an adverse opinion. Issue an "except for" qualification or a disclaimer of opinion.
Issue an "except for" qualification or an adverse opinion.
When an auditor does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should: Issue an unmodified opinion, but disclose elsewhere in the report this departure from a customary procedure. Issue an unmodified opinion with no reference to this omission. Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables. Issue an adverse opinion.
Issue an unmodified opinion with no reference to this omission.
Which of the following is not correct relating to an audit report for a public company? It includes the term "PCAOB Compliant" in the title. It refers to standards of the Public Company Accounting Oversight Board. It must include the city and state in which it was issued. It includes an additional paragraph indicating that the auditors have also issued a report on the client's internal control over financial reporting.
It includes the term "PCAOB Compliant" in the title.
In an audit report on combined financial statements, reference to the fact that a portion of the audit was performed by a component auditor is: Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms. Not in accordance with generally accepted auditing standards. A qualification that lessens the collective responsibility of both CPA firms. An example of a dual opinion requiring the signatures of both auditors.
Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms.
A nonpublic company's change in accounting principles that the auditors believe is not justified is likely to result in which of the following types of audit opinions? Qualified Unmodified with Emphasis-of-Matter (1) Yes Yes (2) Yes No (3) No Yes (4) No No Option 1 Option 2 Option 3 Option 4
Option 2
What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated? Qualified Adverse (1) Yes Yes (2) Yes No (3) No Yes (4) No No Option 1 Option 2 Option 3 Option 4
Option 3
When the matter is properly disclosed in the financial statements of a nonpublic company, the likely result of substantial doubt about the ability of the client to continue as a going concern is the issuance of which of the following audit opinions? Qualified Unmodified with Emphasis-of-Matter (1) Yes Yes (2) Yes No (3) No Yes (4) No No Option 1 Option 2 Option 3 Option 4
Option 3
When a client declines to disclose essential information in the financial statements or notes, the auditor of the financial statements should: Provide the information in the audit report, if practicable, and qualify the opinion because of a limitation on the scope of the audit. Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP. Issue a disclaimer of opinion because the client has interfered with the auditor's function of assessing the adequacy of disclosure. Issue an unmodified opinion, but inform the reader by including the omitted information in the audit report.
Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.
A standard unmodified audit report does not mention consistency of application of accounting principles. T/F
True
A material departure from generally accepted accounting principles will result in auditor consideration of: Whether to issue an adverse opinion rather than a disclaimer of opinion. Whether to issue a disclaimer of opinion rather than a qualified opinion. Whether to issue an adverse opinion rather than a qualified opinion. Nothing, because none of these opinions is applicable to this type of exception.
Whether to issue an adverse opinion rather than a qualified opinion.
The primary responsibility for the adequacy of disclosure in the financial statements of a publicly-held company rests with the: partner assigned to the audit engagement. management of the company. auditor in charge of the field work. Securities and Exchange Commission.
management of the company.
If the auditors indicate in the report that the opinion is based, in part, on the report of component auditors who were responsible for the audit of part of the total financial statement data, the auditors are: in effect qualifying the opinion. properly indicating a division of responsibility, and the report should further indicate in an appropriate quantitative form the proportionate responsibility being assumed by each set of auditors. taking complete responsible for the work of the other auditors. abrogating responsibility to those users who rely on the CPA firm's reputation as a basis for relying on the reported financial statements.
properly indicating a division of responsibility, and the report should further indicate in an appropriate quantitative form the proportionate responsibility being assumed by each set of auditors.
An auditors' opinion exception arising from a limitation on the scope of the audit should be explained in: a note to the financial statements. the auditors' report. both a note to the financial statements and the auditors' report. the mandatory adjusting entry whenever such a scope limitation occurs.
the auditors' report.
For most American corporations, a Form S-1 must be filed with the SEC if a U.S. company is planning to issue securities to the public. T/F
True
Audit reports for group audit engagements are considered to be qualified reports. T/F
False
Which of the following is not an acceptable financial reporting framework? Cash basis. International accounting standards basis. Generally accepted auditing standards basis. Tax basis.
Generally accepted auditing standards basis.
Which of the following is least likely to result in inclusion of an additional paragraph being added to an audit report? The company is a component of a larger business enterprise. An unusually important significant event. A decision not to confirm accounts receivable. A risk or uncertainty.
A decision not to confirm accounts receivable.
Which of the following is not an acceptable financial reporting framework? Cash basis. International accounting standards basis. Generally accepted auditing standards basis. Tax basis.
Generally accepted auditing standards basis.
The Rotter Company, a nonpublic company, changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading due to pervasive misstatements. The change (including its dollar effect) has been described in the notes to the 20X4 statements. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should: Express an adverse opinion with the basis for modification paragraph disclosing the reason (the accounting change) for the opinion. Express an unmodified opinion with an emphasis-of-matter paragraph and disclose the accounting change from 20X3 and its effect on the financial statements. Disclaim an opinion and explain all of the reasons therefore. Express an adverse opinion regarding the 20X4 financial statements, without a basis for modification paragraph since the reason will be included in the notes to the statements.
Express an adverse opinion with the basis for modification paragraph disclosing the reason (the accounting change) for the opinion.
Emphasis-of-matter paragraphs in nonpublic company audit reports are potentially appropriate in all reports except those with unmodified opinions. T/F
False
If a company is faced with any uncertainty such as the prospect of a strike, the auditors should issue a qualified or adverse opinion. T/F
False
The auditors are not allowed to change their opinion on financial statements that were reported on in prior years. T/F
False
The auditors should generally issue a qualified opinion if circumstances involved make it impossible for them to observe the physical inventory or to confirm accounts receivable, even when sufficient appropriate audit evidence has been gathered using alternate procedures. T/F
False
A PCAOB public company audit report indicates that the audit was performed in accordance with PCAOB standards. T/F
True
A change in accounting principle from one generally accepted accounting principle to another normally would not prevent the issuance of an unmodified audit opinion, provided the effects of the change are set forth in a note to the financial statements and the change is justified. T/F
True
Your audit of the Abbox Co. reveals that the firm's poor financial condition creates substantial doubt about its ability to continue as a going concern. Assuming that the financial statements have otherwise been prepared in accordance with generally accepted accounting principles and do include proper presentation of the matter, what disclosure should you make of the company's precarious financial position? You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes. You should issue an adverse opinion on the financial statements. You need not insist on any particular disclosure, since the company's poor financial condition is clearly indicated by the financial statements themselves. You should provide adequate disclosure and appropriately qualify your opinion because of the uncertainty.
You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes.
When an adverse opinion is expressed, the opinion paragraph should include a direct reference to: a note to the financial statements which discusses the basis for the opinion. the paragraph that describes management's responsibilities. the consistency or lack of consistency in the application of generally accepted accounting principles. a separate paragraph that discusses the basis for the opinion expressed.
a separate paragraph that discusses the basis for the opinion expressed.
Upon the advice of its auditors, Smith Company changed the method of computing depreciation from the straight-line method to an accelerated method with a material effect upon the financial statements. The auditors' report: must be qualified for the accounting change. should include an additional paragraph highlighting the accounting change. should contain modification of the opinion paragraph. should be a standard unmodified report.
should include an additional paragraph highlighting the accounting change.
An auditors' opinion exception arising from a limitation on the scope of the audit should be explained in: a note to the financial statements. the auditors' report. both a note to the financial statements and the auditors' report. the mandatory adjusting entry whenever such a scope limitation occurs.
the auditors' report.
Which of the following is not explicitly included in an audit report for a nonpublic company? A statement that the auditor believes that the audit provides a reasonable basis for expressing negative assurance. A statement that the auditor's responsibility is to express an opinion on the financial statements. A statement that the financial statements are the responsibility of management. A title with the word "independent."
A statement that the auditor believes that the audit provides a reasonable basis for expressing negative assurance.
The unique nature of modified opinions makes them desirable to most clients. T/F
False
When a client omits notes to audited financial statements, the auditor should add an emphasis-of-matter section to the report indicating such omission and issue an unmodified report. T/F
False
CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the group auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct? Such assumption of responsibility violates the profession's standards. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements. In such circumstances, when appropriate requirements have been met, Firm A should issue an unmodified opinion on the financial statements but should make appropriate reference to Firm B in the audit report. CPA firm A should normally qualify its audit report on the basis of the scope limitation involved when another CPA firm is involved.
In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements.
The unmodified standard audit report of a nonpublic company does not explicitly state that: The financial statements are the responsibility of the company's management. The audit was conducted in accordance with accounting principles generally accepted in the United States of America. The auditors believe that the audit provides a reasonable basis for their opinion. An audit includes evaluating the appropriateness of accounting policies used.
The audit was conducted in accordance with accounting principles generally accepted in the United States of America.
Which of the following summarizes auditor reporting responsibility with respect to consistency? To give assurance that adequate disclosure will be made so that there will be comparability of financial statements between companies in the same industry. To give assurance that users will be informed of the lack of comparability of financial statements between periods due to changes in accounting principles. To give assurance that the comparability of financial statements between periods has not been materially affected by any type of change. To give assurance only that the same accounting principles have been applied to all similar transactions within each period presented.
To give assurance that users will be informed of the lack of comparability of financial statements between periods due to changes in accounting principles.
Which of the following summarizes auditor reporting responsibility with respect to consistency? To give assurance that adequate disclosure will be made so that there will be comparability of financial statements between companies in the same industry. To give assurance that users will be informed of the lack of comparability of financial statements between periods due to changes in accounting principles. To give assurance that the comparability of financial statements between periods has not been materially affected by any type of change. To give assurance only that the same accounting principles have been applied to all similar transactions within each period presented.
To give assurance that users will be informed of the lack of comparability of financial statements between periods due to changes in accounting principles.
A qualified opinion that is issued because of a departure from generally accepted accounting principles should contain a separate section explaining the departure and its effects. T/F
True
An adverse opinion is an opinion that the financial statements are not presented fairly in accordance with generally accepted accounting principles. T/F
True
No emphasis-of-matter paragraph is added to a nonpublic company audit report when the group auditor chooses not to rely upon the component auditor. T/F
True
Substantial doubt about a nonpublic client's ability to remain a going concern ordinarily results in a report with an unmodified opinion with an emphasis-of-matter paragraph or a disclaimer of opinion when the doubt is properly disclosed in the financial statements. T/F
True
The term material may be defined as "sufficiently important to influence decisions made by reasonable users of financial statements.'' T/F
True
Your audit of the Abbox Co. reveals that the firm's poor financial condition creates substantial doubt about its ability to continue as a going concern. Assuming that the financial statements have otherwise been prepared in accordance with generally accepted accounting principles and do include proper presentation of the matter, what disclosure should you make of the company's precarious financial position? You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes. You should issue an adverse opinion on the financial statements. You need not insist on any particular disclosure, since the company's poor financial condition is clearly indicated by the financial statements themselves. You should provide adequate disclosure and appropriately qualify your opinion because of the uncertainty.
You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes.
When an adverse opinion is expressed, the opinion paragraph should include a direct reference to: a note to the financial statements which discusses the basis for the opinion. the paragraph that describes management's responsibilities. the consistency or lack of consistency in the application of generally accepted accounting principles. a separate paragraph that discusses the basis for the opinion expressed.
a separate paragraph that discusses the basis for the opinion expressed.
A note to the financial statements of the First Security Bank indicates that the company self insures itself for the first $500,000 of liability to employees, with liability insurance for the remainder. Based upon this, one would expect the auditors' report to express: an adverse opinion. a disclaimer of opinion. a standard unmodified opinion. a qualified opinion.
a standard unmodified opinion.
A note to the financial statements of the First Security Bank indicates that the company self insures itself for the first $500,000 of liability to employees, with liability insurance for the remainder. Based upon this, one would expect the auditors' report to express: an adverse opinion. a disclaimer of opinion. a standard unmodified opinion. a qualified opinion.
a standard unmodified opinion.
Jones, CPA, accepts a new client late in Year 5 and therefore had no opportunity to observe the physical inventory taken at December 31, Year 4. Jones found it impossible to obtain evidence by other auditing procedures as to the beginning inventories for Year 5. Jones observed the physical inventory at December 31, Year 5 and completed the audit satisfactorily. The report to be issued should: be unmodified. be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows. be qualified as to all of the statements. be a disclaimer of opinion.
be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows.
Jones, CPA, accepts a new client late in Year 5 and therefore had no opportunity to observe the physical inventory taken at December 31, Year 4. Jones found it impossible to obtain evidence by other auditing procedures as to the beginning inventories for Year 5. Jones observed the physical inventory at December 31, Year 5 and completed the audit satisfactorily. The report to be issued should: be unmodified. be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows. be qualified as to all of the statements. be a disclaimer of opinion.
be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows.
If the auditors believe that related party transactions are not adequately described in the notes to the financial statements, they should: disclaim an opinion. qualify their opinion or issue an adverse opinion. add an emphasis-of-matter paragraph to their unmodified opinion. consider more thoroughly the client's going concern status.
qualify their opinion or issue an adverse opinion.
If the auditors believe that related party transactions are not adequately described in the notes to the financial statements, they should: disclaim an opinion. qualify their opinion or issue an adverse opinion. add an emphasis-of-matter paragraph to their unmodified opinion. consider more thoroughly the client's going concern status.
qualify their opinion or issue an adverse opinion.
A client company has changed its accounting practices during the year, materially affecting its financial statements so as to make them seriously misleading and not in conformity with generally accepted accounting principles. The CPAs examining these financial statements should: render an adverse opinion and give reasons. modify the opinion with respect to consistency and, in an emphasis-of-matter paragraph, explain the changes and their effects on the net income of the period. disclaim an opinion and give reasons. modify the opinion with respect to consistency, referring to explanatory notes of the financial statements to fulfill disclosure requirements.
render an adverse opinion and give reasons.
Upon the advice of its auditors, Smith Company changed the method of computing depreciation from the straight-line method to an accelerated method with a material effect upon the financial statements. The auditors' report: must be qualified for the accounting change. should include an additional paragraph highlighting the accounting change. should contain modification of the opinion paragraph. should be a standard unmodified report.
should include an additional paragraph highlighting the accounting change.