Audit Chapter 3

) The standard unmodified audit report A) is sometimes called a clean opinion. B) can be issued only with an explanatory paragraph. C) can be issued if only a balance sheet and income statement are included in the financial statements. D) is sometimes called a disclaimer report.

A

The highest level of materiality exists when A) users are likely to make incorrect decisions if they rely on the overall financial statements. B) there has been a departure from GAAP. C) amounts are material but do not overshadow the financial statements as a whole. D) a scope limitation has been imposed.

A

The introductory paragraph of the standard unmodified opinion audit report for a nonpublic company performs which functions? I. It states the CPA has performed an audit. II. It lists the financial statements being audited. III. It states the financial statements are the responsibility of the auditor. A) I and II B) I and III C) II and III D) I, II and III

A

The most common case in which conditions beyond the client's and auditor's control cause a scope restriction in an engagement is when the A) auditor is not appointed until after the client's year-end. B) client won't allow the auditor to confirm receivables for fear of offending its customers. C) auditor doesn't have enough staff to satisfactorily audit all of the client's foreign subsidiaries. D) client is going through Chapter 11 bankruptcy.

A

If the financial statements include an income statement and a balance sheet but exclude the statement of cash flows, the auditors A) can issue an unqualified report. B) should issue a qualified opinion due to the departure from GAAP. C) should issue a qualified opinion because the missing statement of cash flows constitutes a scope limitation. D) should include the statement of cash flows, modify the report and issue an unqualified opinion.

B

In which of the following circumstances would an auditor most likely express an adverse opinion? A) The CEO refuses to let the auditor have access to the board of director meeting minutes. B) The financial statements are not in conformity with the FASB statement on loss contingencies. C) Information comes to the auditor's attention that raises substantial doubt about the ability for the client to continue as a going concern. D) Tests of controls show that the internal control structure is so poor that the auditor has to assess control risk at the maximum.

B

Most auditors believe that financial statements are "presented fairly" when the statements are in accordance with GAAP, and that it is also necessary to A) determine that they are not in violation of FASB statements. B) examine the substance of transactions and balances for possible misinformation. C) review the statements using the accounting principles promulgated by the SEC. D) assure investors that net income reported this year will be exceeded in the future.

B

When a qualified or adverse opinion is issued, the qualifying paragraph is inserted A) between the introductory and scope paragraphs. B) between the scope and opinion paragraphs. C) after the opinion paragraph, as a fourth paragraph. D) immediately after the address, as the first paragraph.

B

When analyzing the various types of audit reports, A) the unmodified opinion with an emphasis-of-matter paragraph is the most common type of report. B) companies will generally make the appropriate changes to their accounting records to avoid a qualification by the auditor. C) management is more concerned about a qualified report than a disclaimer report. D) an adverse report is issued when the auditor is unable to form an opinion on the financial statements.

B

When the auditor determines that the financial statements are fairly stated, but there is a nonindependent relationship between the auditor and the client, the auditor should issue A) an adverse opinion. B) a disclaimer of opinion. C) either a qualified opinion or an adverse opinion. D) either a qualified opinion or an unqualified opinion with modified wording.

B

When there is uncertainty about a company's ability to continue as a going concern, the auditor's concern is the possibility that the client may not be able to continue its operations or meet its obligations for a "reasonable period of time." For this purpose, a reasonable period of time is considered not to exceed A) six months from the date of the financial statements. B) one year from the date of the financial statements. C) six months from the date of the audit report. D) one year from the date of the audit report.

B

Which of the following is a correct statement regarding materiality? A) There are well-defined guidelines that enable auditors to determine if something is material. B) Misstatements must be compared with some benchmark before a decision can be made about the materiality level of the failure of a company to follow GAAP. C) Pervasiveness is not considered when comparing potential misstatements with a base or benchmark. D) To evaluate overall materiality, the auditor does not combine all unadjusted misstatements.

B

Which of the following is not explicitly stated in the standard unmodified opinion audit report? A) The financial statements are the responsibility of management. B) The audit was conducted in accordance with generally accepted accounting principles. C) The auditors believe that the audit evidence provides a reasonable basis for their opinion. D) An audit includes assessing the accounting estimates used.

B

A CPA may wish to emphasize specific matters regarding the financial statements even though an unqualified opinion will be issued. Normally, such explanatory information is A) included in the scope paragraph. B) included in the opinion paragraph. C) included in a separate paragraph in the report. D) included in the introductory paragraph.

C

If the balance sheet of a private company is dated December 31, 2016, the audit report is dated February 8, 2017, and both are released on February 15, 2017, this indicates that the auditor has searched for subsequent events that occurred up to A) December 31, 2016. B) January 1, 2017. C) February 8, 2017. D) February 15, 2017.

C

Items that materially affect the comparability of financial statements generally require disclosure in the footnotes. If the client refuses to properly disclose the item, the auditor will most likely issue A) a disclaimer. B) an unqualified opinion. C) a qualified opinion. D) an adverse opinion.

C

When an auditor is trying to determine how changes can affect consistency and and/or comparability, he should keep in mind that A) changes that affect comparability but not consistency require an explanatory paragraph. B) items that materially affect the comparability of financial statements requires a disclaimer of opinion. C) changes that affect consistency require an explanatory paragraph if they are material. D) changes that involve either comparability or consistency only need to be mentioned in the footnotes.

C

Which of the following requires recognition in the auditor's opinion as to consistency? A) The correction of an error in the prior year's financial statements resulting from a mathematical mistake in capitalizing interest. B) A change in the estimate of provisions for warranty costs. C) The change from the cost method to the equity method of accounting for investments in common stock. D) A change in depreciation method which has no effect on current year's financial statements but is certain to affect future years.

C

William Gregory, CPA, is the principal auditor for an international corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Gregory is satisfied with the independence and professional reputation of the other auditor, as well as the quality of the other auditor's examination. With respect to his report on the consolidated financial statements, taken as a whole, Gregory A) must not refer to the examination of the other auditor. B) must refer to the examination of the other auditor. C) may refer to the examination of the other auditor. D) must refer to the examination of the other auditors along with the percentage of consolidated assets and revenue that they audited.

C

) The audit report date on a standard unmodified opinion audit report indicates A) the last day of the fiscal period. B) the date on which the financial statements were filed with the Securities and Exchange Commission. C) the last date on which users may institute a lawsuit against either the client or the auditor. D) the last day of the auditor's responsibility for the review of significant events that occurred after the date of the financial statements.

D

As a result of management's refusal to permit the auditor to physically examine inventory, the auditor must depart from the unmodified opinion audit report because A) the financial statements have not been prepared in accordance with GAAP. B) the scope of the audit has been restricted by circumstances beyond either the client's or auditor's control. C) the financial statements have not been audited in accordance with GAAS. D) the scope of the audit has been restricted.

D

If the phrase "except for" is present in the opinion paragraph of the audit report, the auditor has issued a(n) A) adverse opinion. B) disclaimer of opinion. C) unqualified opinion. D) qualified opinion.

D

Misstatements must be compared with some measurement base before a decision can be made about materiality. A commonly accepted measurement base includes A) net income. B) total assets. C) working capital. D) all of the above.

D

When there is a lack of consistent application in accounting principles A) the nature and impact of the change should be adequately disclosed. B) the auditor should discuss the nature of the change and point the reader to the footnote that discusses the change. C) the materiality of the change is evaluated based on the current year effect of the change. D) all of the above.

D

Which of the following are changes that affect the comparability of financial statements but not the consistency and therefore, do not have to be included in the auditor's report? A) error corrections not involving principles B) changes in accounting estimates C) variations in the format and presentation of financial information D) all of the above

D

Which of the following is a correct statement regarding the standard unmodified opinion audit report? A) The format of the audit report for public and nonpublic entities are identical. B) The auditor's responsibility paragraph includes a statement that the auditors are responsible for selecting the appropriate accounting principles. C) The audit report includes the name of the lead partner on the audit. D) The scope paragraph includes a statement that the auditor considers internal controls when designing the audit procedures performed.

D

Which of the following modifications of the auditor's report does not include an explanatory paragraph? A) A qualified report is due to a GAAP departure. B) The report includes an emphasis of a matter. C) There is a very material scope limitation. D) A principal auditor accepts the work of an other auditor.

D

A qualified opinion audit report is issued when all auditing conditions have been met, no significant misstatements have been discovered, and it is the auditor's opinion that the financial statements are fairly stated in accordance with GAAP.

False

An auditor will issue a disclaimer when he concludes that the financial statements are not fairly presented.

False

As misstatements become more pervasive, the likelihood of issuing a disclaimer rather than a qualified opinion increases.

False

Changes in accounting estimates requires the auditor to issue a modified audit report with a consistency paragraph inserted after the opinion paragraph.

False

Changes in reporting entities, such as the inclusion of an additional company in combined financial statements, affect comparability but not consistency, and therefore do not require an explanatory paragraph in the audit report.

False

The audit report is normally addressed to the company's president or chief executive officer.

False

The introductory paragraph of the auditor's report states that the auditor is responsible for the preparation, presentation and opinion on financial statements.

False

The unmodified opinion audit report with emphasis-of-matter paragraph does not meet the criteria of a complete audit with satisfactory results.

False

When an auditor discovers a highly material GAAP violation in the financial statements and the client refuses to correct it, the auditor should issue a disclaimer of opinion.

False

Indicate which changes would require an explanatory paragraph in the audit report. -Change in the estimated life of an asset -Variation in the format of financial statements

N,N

An auditor determines the financial statements include at least a material departure from GAAP. Which type of opinion may be issued? -Disclaimer -Qualified -Adverse

N,Y,Y

To emphasize the fact that the auditor is independent, a typical addressee of the audit report could be -Company Controller -Shareholders -Board of Directors

N,Y,Y

AICPA auditing standards provide uniform wording for the auditor's report to enable users of the financial statements to understand the audit report.

True

Items that materially affect the comparability of the financial statements generally require disclosure in the footnotes.

True

PCAOB standards use the term "unqualified opinion" to refer to the standard unmodified opinion audit report.

True

An auditor who issues a qualified opinion because sufficient appropriate evidence was not obtained should describe the limitations in an explanatory paragraph. The auditor should also modify the -Scope paragraph -Opinion Paragraph -Notes to the financial statements

Y,Y,N

If most or all users' decisions that are based on the financial statements are likely to be significantly affected, the materiality level is A) unrestricted. B) material. C) pervasive. D) risky.

c

The separate report on internal control over financial reporting

i dont know this one