Auditing Chap 17

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 results in an emphasis-of-matter paragraph. Qualified and adverse opinions include a basis for modification paragraph. When a report refers to component auditors no additional paragraph is added.

Which of the following is least likely to result in inclusion of an additional paragraph being added to an audit report?

A decision not to confirm accounts receivable. Explanation: An emphasis-of-matter paragraph is appropriate when an auditor wishes to emphasize a matter concerning the financial statements, but not a matter concerning the scope of the audit engagement. An emphasis-of-matter paragraph is not appropriate since confirming accounts receivable relates to the scope of the audit.

The client has changed from LIFO to FIFO for inventory valuation purposes; the auditors do not concur with this change. The effect is considered material and pervasive.

Adverse Explanation : Because the auditor does not concur with the change it is a departure from GAAP. Because the amount is material and pervasive, an adverse opinion is appropriate.

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. Explanation: The auditor communicates through the auditors' report. Note that the client will include a discussion of the related party transactions in a note to the financial statements.

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 improper type of reporting. Explanation: This phrase does not give the reader of the report a clear-cut indication of the auditors' opinion. The phrase appears to modify the standard opinion paragraph, but is not forceful enough to constitute qualifying language.

An audit report for a public client indicates that the financial statements were prepared in conformity with:

Generally accepted accounting principles (United States). Explanation : An audit report for a public client indicates that the financial statements are presented in conformity with generally accepted accounting principles (United States). The PCAOB does not issue accounting standards.

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. Explanation: Reference to the work of a component auditor is not, in itself, a qualification of the group audit report. This reference does not lessen the auditors' collective responsibility. Rather, it merely divides this responsibility among two or more CPA firms.

An audit report for a public client indicates that the audit was performed in accordance with:

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

The auditors decide not to make reference to the report of a component auditor that audited a portion of group financial statements.

Unmodified—standard. Explanation: When no reference is made to the component auditors a standard unmodified report is issued.

The client has changed from LIFO to FIFO for inventory valuation purposes; the auditors concur with this change. The effect is considered material to the financial statements, although inventory is not a large part of total assets.

Unmodified—with an emphasis-of-matter paragraph. Explanation : Since the auditor concurs that the change is desirable, an unmodified opinion with an emphasis-of-matter paragraph is appropriate.

A material departure from generally accepted accounting principles will result in auditor consideration of:

Whether to issue an adverse opinion rather than a qualified opinion. Explanation : When the auditors take exception to the application of accounting principles in the client's financial statements, they will issue either a qualified or adverse opinion, depending on whether the misstatement is considered pervasive.