Auditing & Assurance Chapter 12

Which of the following statements is not included in the Auditor's Responsibility section of the standard (unmodified) report?

"In accordance with accounting principles generally accepted in the United States of America."

Which of the following statements is not included in the Auditor's Responsibility section of the standard (unmodified) report on the entity's financial statements?

"We have audited the accompanying financial statements..."

Which of the following is an example of a material accounting change that requires recognition in an unmodified opinion on the entity's financial statements?

A change in the entity's form of reporting entity

A material misstatement is considered pervasive

Adverse Opinion

The client has elected to not follow GAAP

Adverse Opinion

Which of the following is not included in the standard (unmodified) report on the financial statements?

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

In which of the following should an auditors' report refer to the lack of consistency when there is a change in accounting principle that is significant?

An emphasis-of-matter paragraph following the opinion paragraph

How do auditors make the following representations when issuing the standard (unmodified) auditors' report?

Consistent application of accounting principles: Implicitly Used of judgement in selecting audit preferences: Explicitly

When financial statements are presented in comparative form and another firm audited the prior-years' financial statements (but the other firm's report is not presented with the financial statements), the auditors' report on the current-year financial statements should

Refer to the report and type of opinion issued by the other firm on the prior-years' financial statements.

If the opinion issued on prior-years' financial statements is no longer appropriate and financial statements are presented in comparative form, the auditors' current report should

Reference the type of opinion issued on the prior-years' 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

Refers to the component auditors, describes the extent of the component auditors' work, and expresses an unmodified 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 should be modified to refer to the other report?

Report on Financial Statements: YES Report on Internal Control over Financial Reporting: YES

Which of the following would not be communicated to users in the auditors' report on an entity's financial statements and related disclosures?

Specific details regarding the audit examination, such as the materiality threshold used to identify material misstatements

Which of the following is true with respect to the auditors' report on summary financial statements?

The report will indicate whether the summary financial statements are fairly stated in relation to the full financial statements.

Which of the following situations would require auditors to add an other-matter paragraph to their report on comparative financial statements?

The updated opinion issued on prior-years' financial statements differs from the opinion originally issued on those financial statements.

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

Unmodified Opinion

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

Unqualified Opinion with a Emphasis-of-Matter Paragraph

Restrictions imposed by an entity prohibited the observation of physical inventories, which accounted for 35 percent of total assets. Alternative auditing procedures were not feasible, although the auditors were able to examine satisfactory evidence for all other items in the financial statements. The auditors would most likely express

a disclaimer of opinion on the entity's financial statements.

Auditors will issue an adverse opinion when

a violation of generally accepted accounting principles is sufficiently material and pervasive that a qualified opinion is not justified.

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

A report that acknowledges reliance on the reports of component auditors is a type of report modification known as a(n)

division of responsibility.

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

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

materially

When auditors are engaged to examine an entity's financial statements but decide to issue a disclaimer of opinion because of a scope limitation, the report would not

modify the Auditor's Responsibility section to identify the basis for the disclaimer.

When a circumstance-imposed scope limitation has a material but not pervasive effect on the sufficiency of the auditors' evidence, the auditors' report will

modify the opinion paragraph.

When auditors qualify their opinion on the entity's financial statements because of inadequate disclosure, the auditors should describe the nature of the omission in an additional paragraph and modify

neither the introductory paragraph nor Auditor's Responsibility section.

When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditors should

not refer to consistency in the report.

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

one year

Auditors should disclose the substantive reasons for expressing an adverse opinion on the entity's financial statements in an additional paragraph

preceding the opinion paragraph.

Situations in which auditors provide additional copies of a previous issued report or grant entities permission to use a previously issued report in a document containing financial statements after its original date are known as

reissued reports.

"As described in Note 5 to the financial statements, General Express changed its statistical method of computing product warranty expense for the year ended December 31, 2014..." is an illustration of a

report with a consistency modification.

The auditors conclude that there is a material inconsistency in the "other information" in an annual report to shareholders containing audited financial statements. If the auditors conclude that the financial statements do not require revision, but the entity refuses to revise or eliminate the material inconsistency, the auditors may

revise the report on the entity's financial statements to include an other-matter paragraph describing the material inconsistency.

The issuance of a disclaimer of opinion generally indicates

the auditors cannot form an opinion on the fairness of presentation of the financial statements as a whole.

When a previously expressed opinion is updated from qualified to unmodified, the auditors' report on comparative financial statements should

update the previously expressed opinion and explain the reasons for the change, including a reference to the footnote describing the change.

Principles Not Consistently Applied

As discussed in Note XX to the financial statements, the Company adopted SFAS XXX as of December 31, 20XX. Our opinion is not modified with respect to this standard.

Auditor Discretionary Circumstances

As discussed in Note XX to the financial statements, the Company is a defendant in a lawsuit.

When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the situation in the

Auditor's Responsibility section: NO Notes to the financial statements: NO

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

Disclaimer of Opinion

Holmes, CPA, assisted Williams Corporation in preparing its financial statements and gave Williams permission to use Holmes's name in communications containing these financial statements. If Holmes did not audit the financial statements, what type of opinion should be expressed?

Disclaimer of opinion because Holmes did not audit the financial statements

Which of the following best reflects the auditors' reporting responsibility under generally accepted auditing standards?

Other Information Accompanying the Financial Statements: Exception Required Supplementary Information: Required

Going Concern Opinion

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, but there is substantial doubt about its ability to continue as a going concern.

The group auditors decide not to refer to the audit of component auditors who audited a subsidiary of the group financial statements. After making inquiries about the component auditors' professional reputation and independence, the group auditor most likely would

contact the component auditors and review the audit programs and working papers pertaining to the subsidiary.

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

evidence

Auditors who are reporting on financial statements that contain a material departure from generally accepted accounting principles should include an additional paragraph and

express a qualified or adverse opinion.

Independent auditors must consider whether the entity has the ability to continue as a going concern. If a substantial doubt exists but disclosure is adequate and no other basis exists for modifying the report, the auditors would normally

express an unmodified opinion with an emphasis-of-matter paragraph describing the going-concern uncertainty.

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

follows

Which of the following guidelines should be followed when a disclaimer of opinion is issued?

he report should identify the financial statements accompanying the disclaimer of opinion.

An auditor may report on summary financial statements that are derived from a complete set of audited financial statements only if the auditor

indicates whether the information is fairly stated in all material respects in relation to the complete financial statements.

Reference in a group auditors' report to the fact that part of the audit of group financial statements was performed by component auditors most likely would be an indication of

involvement of component auditors in the audit of the group financial statements.

The auditors include an emphasis-of-matter paragraph in an otherwise unmodified report on the entity's financial statements to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph

is appropriate and would not otherwise affect the unmodified opinion.

The auditors' report on the entity's financial statements included an additional paragraph disclosing a difference of opinion between the auditors and the entity for which the auditors believed an adjustment to the financial statements should be made. The opinion paragraph of the auditors' report should express a(n)

qualified opinion citing a departure from generally accepted accounting principles.

If financial statements contain a material but nonpervasive departure from generally accepted accounting principles, the auditors should render a(n)

qualified opinion with reference to departure.

When financial statements contain a departure from GAAP, the auditors should explain the unusual circumstances in a separate paragraph and express an opinion that is

qualified or adverse, depending on the overall materiality and pervasiveness of the GAAP departure.

When audited financial statements are presented in a document containing other information, the auditors should

read the other information to determine that it is consistent with the audited financial statements.

When other information is presented in a document with audited financial statements, the auditors' report should

reference the other information only if inconsistencies or material misstatements are identified between this information and the financial statements.

When a predecessor auditor has examined the prior-years' financial statements presented in comparative format, the current auditors' report should

reference the predecessor auditors' report in an other-matter paragraph.