Auditing Final Ch 12

If audit teams are unable to apply an auditing procedure to an account balance or class of transactions, the audit team should first:

Attempt to determine whether alternative auditing procedures are available and can be applied.

Which of the following situations would not ordinarily require auditors to modify the Opinion Section of the report on the financial statements of a non-issuer?

A change from one generally accepted accounting principle to another. A change from one generally accepted accounting principle to another would require the addition of an emphasis-of-matter paragraph, but would not require the Opinion Section to be modified.

In the standard audit report under GAAS, some responsibilities are required to be stated in the report ("explicit"), while other responsibilities are implied ("implicit"). Which combination below correctly identifies the auditors' responsibilities as explicit or implicit? (a)(b)(c)(d)1.GAAPExplicitExplicitImplicitImplicit2.ConsistencyImplicitExplicitExplicitImplicit3.Going concernImplicitImplicitExplicitExplicit4.OpinionExplicitExplicitImplicitImplicit

Option A

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. Both the report and type of opinion expressed on prior years' financial statements should be referenced in the report on the current year's financial statements.

The date of the auditors' report is the date when the ______.

auditors have obtained sufficient evidence to support the opinion

When a predecessor auditor has examined comparative financial statements and that report is not presented with the successor auditor's report, the successor auditor should:

indicate that comparative year(s) were examined by the predecessor auditor and disclose the type of opinion issued. This is the appropriate action when the predecessor auditors' report is not presented

A non-accelerated filer ______ required to have an audit of its ICFR.

is not

Matters communicated to those in charge of governance that are the most significant and may include areas of higher risk areas required significant judgment, or significant transactions or events are referred to as ___ ___matters.

key audit

Responsibility to evaluate whether substantial doubt about continued existence of the entity exists rests with the ______.

management

SEC filing and audit requirements apply to ______.

public entities only

The phrase "except for" is used in ______.

qualified opinions only

A deficiency or combination of deficiencies important enough to merit attention to those charged with governance is identified as a(n) _____ deficiency.

significant

Auditors normally disclaim an opinion or even withdraw from the engagement ______.

when a scope limitation is client-imposed

Which report would not be appropriate for a public accounting firm to provide on the ICFR for issuers?

Disclaimer of opinion—significant deficiencies exist. A disclaimer is used when the audit team's scope is limited but not when significant deficiencies exist.

In their examination, the auditors concluded that True Fax's financial statements presented its financial condition, results of operations, and cash flows in accordance with GAAP. In his "Letter to Stockholders" in the annual report, True Fax's president states that this year was the most profitable year in the company's history. Actually, the company did better profit-wise last year according to the audited financial statements. What type of opinion should the auditors issue

An unmodified opinion with an additional section noting the inconsistency. Given these circumstances, the auditors should issue an unmodified opinion with an additional section noting the inconsistency. Note that there were no problems with the conduct of the audit or the fairness of the financial statements.

Which of the following statements is not true with respect to the audit examinations and reports for issuers and nonissuer?

Auditors are required to express an opinion on internal control in the audit of nonissuers but not in the audit of issuers. The reporting requirement for internal control over financial reporting is related to the audit of issuers, not nonissuers.

If auditors examine all years presented in comparative form, which of the following best describes their responsibility for prior years' financial statements in their current report?

Auditors should consider whether information has come to their attention that might affect their previous opinion on the prior years' financial statements. Auditors are responsible for considering whether their previous opinion(s) are still appropriate.

Auditors were unable to obtain sufficient appropriate evidence concerning certain transactions because a fire destroyed all the entity's accounting records. Given these circumstance, auditors would most likely choose between a(n)

Disclaimer of opinion and a qualified opinion. The scope limitation related to the lack of records would require auditors would choose between a qualified opinion and a disclaimer of opinion.

True or false: If a material departure from GAAP is noted during an audit examination of an issuer, the financial statements may still be filed with the SEC to satisfy reporting requirements as long as the audit opinion is included.

False This would be classified as a "deficient" filing by the SEC and would not satisfy its reporting requirements.

When auditors mention consistency in their report, a reader of the financial statements may infer that

GAAP has been not consistently observed in the current period in relation to the preceding period. An emphasis-of-matter paragraph is added to an otherwise standard (unmodified) report if there is a material change in the application of GAAP.

Which of the following sections of the standard report on the financial statements of a nonissuer would be modified in response to a material departure from GAAP? Basis for Opinion /Auditor'sResponsibilities a.YesYes b.YesNo c.NoYes d.NoNo

Option B The Basis for Opinion Section would be modified, but the Responsibilities for the Audit Section would not be modified.

The auditors conclude that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's financial statements adequately disclose its financial difficulties, the auditors' report is required to include an additional section that refers to a disclosure in the financial statements that references Management's plans/ Material misstatements a.YesYes b.YesNo c.NoYes d.NoNo

Option b

The audit team found that the entity has not capitalized a material amount of leases in the financial statements. When considering the materiality of this departure from GAAP, the auditors would choose between which reporting options?

Qualified opinion or adverse opinion. Because this is a material departure from GAAP, the reporting options are to issue either a qualified or adverse opinion.

A paragraph in the Opinion Section of the auditors' report states: "In our opinion, with the exception of the effects of not observing inventory in one of the client's Siberian warehouses, ... the financial statements present fairly, in all material respects..." This paragraph expresses a(n)

Qualified opinion. This scope limitation would result in either a qualified opinion or a disclaimer of opinion.

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. If a previously issued opinion is no longer appropriate, the auditors' report would reference the type of opinion issued as well as the fact that the current opinion differs from the opinion originally issued.

Under which of the following conditions can a disclaimer of opinion never be issued?

The audit team has determined that the entity uses the NIFO (next-in, first-out) inventory costing method. Auditors cannot disclaim an opinion when departures from GAAP exist and they have conducted a GAAS audit (qualified or adverse opinions are appropriate).

In which of the following situations could auditors express an unmodified opinion with an emphasis-of-matter paragraph?

The auditors wish to emphasize that the entity had lost a significant customer. While the loss of a significant customer does not affect the financial statements or the conduct of the audit, it could be referenced in an emphasis-of-matter paragraph.

Which of the following would not be addressed in an emphasis-of-matter or other-matter paragraph?

The financial statement effects of a material departure from generally accepted accounting principles. This issue would be addressed in the Basis for Opinion paragraph.

In which of the following circumstances would auditors be most likely to express an adverse opinion?

The financial statements are not in accordance with generally accepted accounting principles regarding the valuation of marketable securities. A material and pervasive departure from GAAP would result in the auditor issuing an adverse opinion on the financial statements.

Which of the following is not an element or statement included in the Basis for Opinion Section of a standard (unmodified) report on the financial statements of an issuer?

The tenure of the auditor. The tenure of the auditor would be included along with the signature, date, and location of the audit firm, but not in the Basis for Opinion section.

R. Wolfe became the new auditor for Royal Corporation, succeeding C. Mason, who audited the financial statements last year. Wolfe needs to report on Royal's comparative financial statements and should disclose in the report an explanation about other auditors having audited the prior year:

To describe the prior audit and the opinion but not name Mason as the predecessor auditor. The predecessor auditors should be named only if their report is included.

A departure from GAAP is ____ , when it can be isolated to a particular account group or transactions without materially affecting other accounts

compartmentalized

If a departure from GAAP is _____ , affecting numerous accounts and financial statement relationships, or is material to the point that the financial statements as a whole are misleading a(n) _____ opinion must be issued.

pervasive, adverse

When audit teams are unable to obtain sufficient appropriate evidence, either a client-imposed or circumstance-imposed _____ _____ exists

scope limitations

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. The standard (unmodified) report does not call for economic analysis or commentary in an emphasis-of-matter paragraph.

When auditors wish to issue an unmodified opinion but highlight that the entity changed its method of accounting for software development costs, they would most appropriately identify the change in accounting method in which of the following?

An emphasis-of-matter paragraph. Emphasis-of-matter paragraphs discuss issues related to users' understanding of the financial statements, such as consistency.

Which of these situations would require auditors to include an emphasis-of-matter paragraph about consistency to an otherwise unmodified opinion?

Entity changed its inventory costing method from FIFO to LIFO. Changing from FIFO to LIFO is a change in accounting principle, which requires an emphasis-of-matter paragraph related to consistency.

Auditors who are reporting on financial statements that contain a material departure from GAAP should:

Express a qualified or adverse opinion and modify the Opinion Section and Basis for Opinion Section. A departure from GAAP results in either a qualified or adverse opinion, with both the Opinion Section and Basis for Opinion Section modified.

In which of the following instances would a qualified opinion be an appropriate option? ScopeLimitation / GAAPDeparture a.YesYes b.NoYes c.YesNo d.NoNo

Option A

How is the auditors' responsibility for expressing the opinion on financial statements disclosed in the standard (unmodified) report for a nonissuer?

Stated explicitly in the Auditor's Responsibility for the Audit of the Financial Statements Section.

The audit team determined that the entity is suffering financial difficulty and its going-concern status is seriously in doubt. Assuming that the entity adequately disclosed this matter in the financial statements, the auditors must choose between which of the following report alternatives?

Unmodified opinion with a reference to going-concern or disclaimer of opinion. The choice between an unmodified opinion with reference to going-concern matters or a disclaimer of opinion depends on the audit team's perception of the magnitude of the uncertainty.

The group auditors decide not to assume responsibility for the work of component auditors who audited a wholly owned subsidiary of the group financial statements. The total assets and revenues of the subsidiary represent 27% and 28% of the related group financial statements. If no issues are encountered in either the group auditors' or component auditors' examination, what type of opinion should the group auditors issue?

Unmodified opinion. If no issues are encountered with the financial statements or the conduct of the audit, an unmodified opinion (in a report modified for the division of responsibility) would be issued.

When a scope limitation is material and alternative procedures cannot be performed, a(n) ______.

qualified or disclaimer of opinion must be issued

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. Modification of the report to indicate the work of component auditors with an unmodified opinion is a viable reporting option.

When no material issues are encountered during the audit and the financial statements are prepared in accordance with GAAP a(n) audit report is appropriate

standard or unmodified