ACC 450 Ch 17 Practice Qs, Audit - Chapter 17, Chapter 17 Exercise 12-2 12-4

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated: Qualified Adverse Yes Yes Yes No No Yes No No

No Yes

16. An auditor was hired after year-end and was unable to observe the counting of the year-end inventory. However, she was able to apply other procedures and determined that ending inventory and related information are properly stated.

1. Because the auditor has satisfied herself through performing other procedures, a standard report is appropriate.

An auditor reporting on group financial statements decides to take responsibility for the work of a component auditor who audited a 70 percent owned subsidiary and issued an unmodified opinion. The total assets and revenues of the subsidiary are 5 percent and 8 percent, respectively, of the total assets and revenues of the entity being audited

1. Because the auditor takes responsibility for the work of the component auditor, there is no mention of the component auditor.

10. A client uses the specific identification method of accounting for valuable items in inventory, and LIFO for less valuable items. The auditor concurs that this is a reasonable practice.

1. Consistency is a between periods concept; using different inventory valuation methods such as here is acceptable and does not result in an emphasis-of-matter paragraph on consistency.

1. A company has not followed generally accepted accounting principles in the recording of its leases.

7. This is a departure from GAAP.

8. A client changed from the method it uses to calculate postemployment benefits from one acceptable method to another one. The effect of the change is immaterial this year, but is expected to be material in the future.

1. A change in accounting principles with an immaterial effect (even if expected to become material in the future) does not result in addition of an emphasis-of-matter paragraph on consistency.

Which of the following is least likely to result in inclusion of an emphasis-of-matter paragraph in 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.

An audit client has refused to allow the auditors to perform a generally accepted auditing procedure and there are no other effective alternate procedures available. The circumstance would normally result in the issuance of: An adverse opinion. A disclaimer of opinion. A standard unmodified opinion with a qualified scope paragraph. An unmodified report with an emphasis of matter paragraph.

A disclaimer of opinion.

Doe, an independent auditor, was engaged to perform an audit of the financial statements of Ally Incorporated one month after its fiscal year had ended. Although the inventory count was not observed by Doe, and accounts receivable were not confirmed by direct communication with debtors, Doe was able to obtain sufficient appropriate audit evidence by applying alternative auditing procedures. Doe's audit report will probably contain: An "except for" qualification. A standard unmodified opinion. An unmodified opinion and an emphasis of matter paragraph. Either a qualified opinion or a disclaimer of opinion.

A standard unmodified opinion.

Which of the following ordinarily involves the addition of an emphasis-of-matter paragraph to an audit report? A. A consistency modification. B. An adverse opinion. C. A qualified opinion. D. Part of the audit has been performed by component auditors.

A. A consistency modification.

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: A. An emphasis-of-matter paragraph to the auditors' report. B. A footnote to the financial statements. C. The body of the financial statements. D. The "summary of significant accounting policies" section of the financial statements.

A. An emphasis-of-matter paragraph to the auditors' report.

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: A. Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms. B. Not in accordance with generally accepted auditing standards. C. A qualification that lessens the collective responsibility of both CPA firms. D. An example of a dual opinion requiring the signatures of both auditors.

A. Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms.

A scope restriction is least likely to result in a(an): Standard unmodified opinion. Qualified opinion. Adverse opinion. Disclaimer of opinion.

Adverse opinion

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 evidence. Fiscal period under audit ends. Peer review of the working papers is completed.

Auditors have accumulated sufficient evidence.

A 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 A. Yes Yes B. Yes No C. No Yes D. No No

B. Qualified: Yes, Unmodified with Emphasis-of-Matter No

An audit report for a public client indicates that the audit was performed in accordance with: A. Generally accepted auditing standards (United States). B. Standards of the Public Company Accounting Oversight Board (United States). C. Generally accepted accounting principles (United States). D. Generally accepted accounting principles (Public Company Accounting Oversight Board).

B. Standards of the Public Company Accounting Oversight Board (United States).

Which of the following is least likely to result in inclusion of an emphasis-of-matter paragraph in an audit report? A. The company is a component of a larger business enterprise. B. An unusually important significant event. C. A decision not to confirm accounts receivable. D. A risk or uncertainty.

C. A decision not to confirm accounts receivable.

An audit report for a public client indicates that the financial statements were prepared in conformity with: A. Generally accepted auditing standards (United States). B. Standards of the Public Company Accounting Oversight Board (United States). C. Generally accepted accounting principles (United States). D. Generally accepted accounting principles (Public Company Accounting Oversight Board).

C. Generally accepted accounting principles (United States).

When the matter is properly disclosed in the financial statements, 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 A. Yes Yes B. Yes No C. No Yes D. No No

C. Qualified: No, Unmodified with Emphasis-of-Matter Yes

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated? Qualified Adverse A. Yes Yes B. Yes No C. No Yes D. No No

C. Qualified: No, Unmodified with Emphasis-of-Matter: Yes

A material departure from generally accepted accounting principles will result in auditor consideration of: A. Whether to issue an adverse opinion rather than a disclaimer of opinion. B. Whether to issue a disclaimer of opinion rather than a qualified opinion. C. Whether to issue an adverse opinion rather than a qualified opinion. D. Nothing, because none of these opinions is applicable to this type of exception.

C. Whether to issue an adverse opinion rather than a qualified opinion.

If the auditors believe that related party transactions are not adequately described in the notes to the financial statements, they should: A. add an emphasis-of-matter paragraph to their unmodified opinion. B. consider more thoroughly the client's going concern status. C. qualify their opinion or issue an adverse opinion. D. disclaim an opinion.

C. 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: A. disclaim an opinion and give reasons. B. 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. C. render an adverse opinion and give reasons. D. modify the opinion with respect to consistency, referring to explanatory notes of the financial statements to fulfill disclosure requirements.

C. render an adverse opinion and give reasons.

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: A. An unmodified opinion. B. A disclaimer of opinion. C. An "except for" opinion. D. An improper type of reporting.

D. An improper type of reporting.

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? A. You should provide adequate disclosure and appropriately qualify your opinion because of the uncertainty. B. You need not insist on any particular disclosure, since the company's poor financial condition is clearly indicated by the financial statements themselves. C. You should issue an adverse opinion on the financial statements. D. 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.

D. 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 the auditor is unable to determine the amounts associated with noncompliance with a law by client personnel, the auditor should issue a(an): Disclaimer of opinion. Adverse opinion. Unmodified opinion with a separate emphasis of matter paragraph. Standard unmodified opinion.

Disclaimer of opinion.

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).

An auditor has been asked to report on the balance sheet of Kane Company but not on the other basic financial statements. The auditor will have access to all information underlying the basic financial statements. Under these circumstances, the auditor: Should refuse the engagement because there is a client-imposed scope limitation. May accept the engagement. May accept the engagement but must disclaim an opinion because of an inability to apply the procedures considered necessary. Should refuse the engagement because of a departure from generally accepted auditing standards.

May accept the engagement.

When the matter is properly disclosed in the financial statements, 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 Yes Yes Yes No No Yes No No

No Yes

A basis for modification paragraph is ordinarily placed: Based on the auditor's judgment either before or after the opinion section. Within the "Auditor's Responsibility" section of the audit report. After the opinion section. Preceding the opinion section.

Preceding the opinion section.

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).

In which of the following circumstances would an auditor of financial statements be most likely to express an adverse opinion? The chief executive officer refuses the auditor access to minutes of board of directors' meetings. Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue in existence. The statements are not in conformity with FASB requirements regarding the capitalization of leases. Tests of controls show that the entity's internal control is so poor that it can not be relied upon.

The statements are not in conformity with FASB requirements regarding the capitalization of leases.

When reporting on comparative financial statements where the financial statements of the prior period have been examined by a predecessor auditor whose report is not presented, the successor auditor should indicate in the report: The type of opinion expressed by the predecessor auditor. Whether the predecessor auditor's review of the current year's financial statements revealed any matter that might have a material effect on the successor auditor's opinion. The identity of the predecessor auditor who examined the financial statements of the prior year. The reasons why the predecessor auditor's report is not presented

The type of opinion expressed by the predecessor auditor.

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.

6. A client changed the depreciable life of certain assets from 10 years to 12 years. The auditor concurs with the change.

1. A proper change in estimate does not require an emphasis-of-matter paragraph.

22. A client is issuing two years of comparative financial statements. The first year was audited by another auditor who is being asked to reissue her audit report. (Reply as to the successor auditor's report.)

1. A standard report is issued on the second year. The other auditor's report on the first year is reissued and included.

19. In auditing the long-term investments account of a new client, an auditor finds that a large contingent liability exists that is material to the consolidated company. It is probable that this contingent liability will be resolved with a material loss in the future, but the amount is not estimable. Although no adjusting entry has been made, the client has provided a note to the financial statements that describes the matter in detail.

1. Because the amount is not estimable, no adjusting entry can be recorded. The auditor might choose to emphasize this matter, but the problem's background rules out this treatment.

2. A company has not followed generally accepted accounting principles in the recording of its leases. The amounts involved are immaterial.

1. Because the amounts involved are immaterial, no audit report modification is necessary.

The auditors' report should be dated as of the date the: A. Report is delivered to the client. B. Auditors have accumulated sufficient evidence. C. Fiscal period under audit ends. D. Peer review of the working papers is completed.

B. Auditors have accumulated sufficient evidence.

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.

9. A client changed the salvage value of certain assets from 5 percent to 10 percent of original cost. The auditor concurs with the change.

1. This is a change in estimate that does not result in addition of an emphasis-of-matter paragraph on consistency.

14. An auditor reporting on group financial statements decides not to take responsibility for the work of a component auditor who audited a 70 percent owned subsidiary and issued an unqualified opinion. The total assets and revenues of the subsidiary are 5 percent and 8 percent, respectively, of the total assets and revenues of the entity being audited.

10. In this situation the auditor's responsibility section and the opinion sections have additional wording added, but there is no emphasis-of-matter paragraph in what remains a report with an unmodified opinion.

21. A client is issuing two years of comparative financial statements. The first year was audited by another auditor who is not being asked to reissue her audit report. (Reply as to the successor auditor's report.)

10. The successor auditor reports on year 2. But an other-matter paragraph is added indicating (1) the prior-period statements were audited by other auditors, (2) the date and type of report issued and, (3) if the report was other than standard, the reasons therefore.

23. A client's financial statements follow GAAP, but the auditor wishes to emphasize in his audit report a significant related party transaction that is adequately described in the notes to the financial statements.

2. This is an emphasis-of-matter situation.

4. A client changed its depreciation method for production equipment from the straight-line method to the units-of-production method based on hours of utilization. The auditor concurs with the change.

2. This situation involves a lack of consistency.

7. A client changed the depreciable life of certain assets from 10 years to 12 years. The auditor does not concur with the change. Confined to fixed assets and accumulated depreciation, the misstatements involved are not considered pervasive.

3. Because the auditor does not concur with the change in estimate, it is treated as a departure from GAAP. A qualified report is appropriate because the misstatements are not considered pervasive.

18. An auditor discovered that a client made illegal political payoffs to a candidate for president of the United States. The auditor was unable to determine that amounts associated with the payoffs because of the client's inadequate record-retention policies, although there is no likelihood that the financial statements are pervasively misstated, they may be materially misstated. The client refuses to disclose the payoffs in a note to the financial statements.

3. The lack of disclosure results in a departure from GAAP. Because the effect is less than pervasive, a qualified opinion is appropriate.

12. Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. The notes to the financial statements do not adequately disclose the substantial doubt situation, and the auditor believes the omission fundamentally affects the users' understanding of the financial statements.

4. The lack of disclosure creates a departure from GAAP. Because effects are pervasive (fundamental to users' understanding of the financial statements is a characteristic of pervasiveness), an adverse opinion is appropriate.

11. Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. The notes to the financial statements adequately disclose the situation.

6. This is a situation in which there is substantial doubt about a client's going concern.

3. A company valued its inventory at current replacement cost. While the auditor believes that the inventory costs do approximate replacement costs, these costs do not approximate any GAAP inventory valuation method.

7. Although the auditor believes that the costs approximate replacement costs, they depart from GAAP.

20. In auditing the long-term investments account of a new client, an auditor finds that a large contingent liability exists that is material to the consolidated company. It is probable that this contingent liability will be resolved with a material loss in the future, and this amount is reasonably estimable as $2,000,000. Although no adjusting entry has been made, the client has provided a note to the financial statements that describes the matter in detail and includes the $2,000,000 estimate in that note.

7. Because the amount is estimable, an adjusting entry should be recorded; since it was not, a departure from GAAP exists.

5. A client changed its depreciation method for production equipment from the straight-line to a units-of-production method based on hours of utilization. The auditor does not concur with the change.

7. Because the auditor does not concur with the change, it is treated as a departure from GAAP.

24. A client's financial statements follow GAAP except that they do not include a note on a significant related party transaction.

7. This is a departure from GAAP. No information is provided on whether the omission is considered pervasive.

15. An auditor was hired after year-end and was unable to observe the counting of the year-end inventory. She is unable to apply other procedures to determine whether ending inventory and related information are properly stated.

8. Scope Limitation

17. An auditor discovered that a client made illegal political payoffs to a candidate for president of the United States. The auditor was unable to determine that amounts associated with the payoffs because of the client's inadequate record-retention policies. The client has added a note to the financial statements to describe the illegal payments and has stated that the amounts of the payments are not determinable.

8. This is a scope limitation because of the inadequate record retention policies and the auditor's inability to perform other procedures.

Which of the following ordinarily involves the addition of an emphasis-of-matter paragraph to an audit report? A consistency modification. An adverse opinion. A qualified opinion. Part of the audit has been performed by component auditors.

A consistency modification.

An auditor's report on comparative financial statements should be dated as of the date of the: Issuance of the report. Accumulation of sufficient appropriate audit evidence. Last related-party transaction disclosed in the statements. Latest financial statements being reported on.

Accumulation of sufficient appropriate audit evidence.

Morgan, CPA, is the group auditor for a multinational corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the component auditor, as well as the quality of the component auditor's audit. With respect to Morgan's report on the consolidated financial statements, taken as a whole, Morgan: May refer to the audit of the component auditor. Must refer to the audit of the component auditor. Must not refer to the audit of the component auditor. May refer to the audit of the component auditor, in which case Morgan must include in the audit report on the consolidated financial statements a qualified opinion with respect to the audit of the component auditor.

May refer to the audit of the component auditor.

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.

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 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 Yes Yes Yes No No Yes No N

Yes No