auditing chapter 10 homework

8. Explain three situations in which the wording of a report with an unmodified opinion might depart from the auditors' standard report.

• Substantial doubt about an entity's ability to continue as a going concern exists. • Principles of accounting have not been consistently applied in relation to the prior year. • The auditors wish to emphasize some matter in the financial statements (e.g., significant related party transactions, significant events, uncertainties). • A group auditor makes reference to a component auditor.

c. In an audit report on combined financial statement, reference to the fact that a portion of the audit was performed by a component auditor is: 1. Not to be constructed as a qualification, but rather as a division of responsibility between the two CPA firms 2. Not in accordance with GAAS 3. A qualification that lessens the collective responsibility of both CPA firms 4. An example of a dual opinion requiring the signatures of both auditors

1. • There should not be a reference to the component auditor but should be a division of responsibility between the two CPA firms.

g. Which of the following ordinary involves the addition of an emphasis-of-matter paragraph to an audit report? 1. A consistency modification 2. An adverse opinion 3. A qualified opinion 4. Part of the audit has been performed by component auditors

1. • A consistency modification needs to add an emphasis-of-matter paragraph

h. An audit report for a public client indicates that the audit was performed in accordance with: 1. GAAS (united states) 2. SPCAOB (united states) 3. GAAP (united states) 4. GAAP (PCAOB)

2. • Public clients audits must be done in accordance with the standards of the Public Company Accounting Oversight Board (US).

k. 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 1. Yes Yes 2. Yes No 3. No Yes 4. No No

2. • Qualified opinion is correct while an unmodified with emphasis-of-matter is not correct.

b. The auditors' report should be dated as of the date the: 1. Report is delivered to the client 2. Auditors have accumulated sufficient evidence 3. Fiscal period under audit ends 4. Peer review of the working papers is completed

2. • The audit report should be dated as of the date of when the auditors have accumulated sufficient competent evidence.

f. 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

3. No Yes

d. 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: 1. An unmodified opinion 2. A disclaimer of opinion 3. An "except for" opinion 4. An improper type of reporting

4. • This type of reporting is an improper type because it's not showing the auditors opinion clearly.

Required: identify deviations from the appropriate nonpublic company audit report.

Introductory section • The financial statements should be individually named. Auditor's Responsibility section • We conducted our audit in accordance with auditing standards generally accepted in the United States of America. (This is missing and should be the second sentence) • Should be listed as (free of material misstatement) not (in conformity with generally accepted accounting principles.) • We believe that the audit provides a reasonable basis for our opinion. (This is missing from the final paragraph) Emphasis-of-Matter section • The section should be after the opinion section. • Shouldn't give an opinion concerning the entity's survival "beyond a reasonable period of time." Opinion section • Opinion should be unmodified. • The date the financial statements were audited needs to be listed. • The auditors should not reference consistency.

e. 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: 1. An emphasis-of-matter paragraph to the auditors' report 2. A footnote to the financial statement 3. The body od the financial statement 4. The "summary of significant accounting policies" section of the financial statements

1. • The only way to draw attention by the auditor is to use the emphasis-of-matter paragraph.

l. Which of the following is least likely to result in inclusion of an emphasis-of-matter paragraph in an audit report? 1. The company is a component of a larger business enterprise 2. An unusually important significant event 3. A decision not to conform accounts receivable 4. A risk or uncertainty

3. • A decision not to conform accounts receivable is least likely to result in inclusion of an emphasis-of-matter paragraph in the report.

i. An audit report for a pubic client indicates that the financial statements were prepared in conformity with: 1. GAAS (united states) 2. SPCAOB (united states) 3. GAAP (united states) 4. GAAP (PCAOB)

3. • Public clients audits financial statements must be done in conformity with generally accepted accounting principles (US).

j. 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 1. Yes Yes 2. Yes No 3. No Yes 4. No No

3. • Qualified report is not correct while the unmodified emphasis-of-matter is correct.

a. A material departure from GAAP will result in auditor considerations of: 1. Whether to issue an adverse opinion rather than a disclaimer of opinions 2. Whether to issue a disclaimer of opinion rather than a qualified opinion 3. Whether to issue an adverse opinion rather than a qualified opinion 4. Nothing, because none of these opinions is applicable to this type of exception

3. • The auditors should issue an adverse opinion not a qualified opinion in material departures from GAAP.

Questions: 1. The report's title is incorrect, as it should include the word "independent." 2. The report should have an addressee such as the board of directors. 3. There should be a section entitled Management's Responsibilities for the Financial Statements. 4. The first sentence of the Auditors' Responsibility section should state, "Our responsibility is to provide assurance..." not " Our responsibility is to express and opinion..." 5. The Auditors Responsibility and the Opinion sections should both refer to the component auditors. 6. The third paragraph under the Auditors' Responsibility section is not required- lets omit it. 7. The emphasis-of-matter paragraph should follow the opinion paragraph. 8. The Opinion section should indicate that the principles were consistently applied except for the change in method of inventory valuation, 9. The report should be dated; as of the date sufficient appropriate audit evidence has been gathered, not as of year-end. 10. The names of the individual financial statements should be included in the Opinion section.

Answers: 1. Correct. The title should include the word "independent." 2. Correct. The report should have an addressee. 3. Correct. There should be a section entitled Management's Responsibilities for the Financial Statements 4. Incorrect. The wording is correct. 5. Incorrect. There should be no mention of the component auditors since Johnson & Barkley are assuming the responsibilities. 6. Incorrect. The third paragraph is required under the Auditors' Responsibility section. 7. Correct. The emphasis-of-matter paragraph should follow the opinion paragraph. 8. Incorrect. The Opinion section should not mention consistency. 9. Correct. The report should be dated; as of the date sufficient appropriate audit evidence has been gathered. 10. Incorrect. The names of the individual financial statements should not be repeated in the Opinion section.