Ch 18 SmartBook

The auditor's standard unqualified audit report for a public company includes ______.

- "Opinion" section - "Critical Audit Matters" section - how long the auditor has served - name and signature of the audit firm - audit report location and date

Circumstances that likely will result in an audit opinion that departs from an unqualified opinion include

- a departure from GAAP - a scope limitation - lack of auditor independence

An auditor issues a qualified opinion when there is

- a specific departure from GAAP but overall the financial statements present fairly in conformity with GAAP - a scope limitation when the overall financial statements are presented fairly in accordance with GAAP

When a circumstance such as a fire restricts the scope of the engagement,

- alternative procedures can be used to gather sufficient appropriate evidence - the auditor can issue a standard unqualified opinion

In deciding if they qualify to serve as the "principal auditor" for a consolidated entity, the auditor considers the ______.

- auditor's overall knowledge of the combined entity's financial statements - materiality of the portion of the consolidated financial statements audited by the other auditors - importance of the portion of the consolidated financial statements audited by the other auditors

Before reissuing a report on the financial statements of prior periods which will be presented for comparative purposes, a predecessor auditor should

- compare the prior period financial statements on which the predecessor reported with the current year statements on which the successor will report - read the current period financial statements

In identifying CAMS, auditors must take into account

- degree of auditor judgment related to areas that involved significant management judgment - the nature and timing of significant unusual transactions

An auditor issued a qualified opinion on prior period financial statements due to lack of conformity with GAAP. The entity has fixed the issue in the current year and appropriately restated the prior period financial statements. If the restated prior period statements are presented with the current statements as comparatives, the auditor should

- express an unmodified opinion on the restated financial statements - disclose that the previously issued financial statements have been corrected and restated

In determining what matters should be considered CAMs, the auditor is required to take into account the _________.

- extent of audit effort and judgment related to significant unusual transactions - degree of auditor subjectivity in applying audit procedures to address the matter - nature and extent of audit effort required to address the matter

That an entity will continue as a going concern

- is evaluated by the auditor - is a basic assumption of financial reporting - is assessed by management

The auditor's report does not refer to the work of other auditors when the principal auditor

- is satisfied as to the professional reputation and independence of the other auditor - accepts full responsibility for the work done and conclusions drawn by other auditors

If an entity fails to disclose information in the financial statements or footnotes as required by GAAP, the auditor should

- issue a qualified or adverse audit report - provide the omitted information, if practicable, in the audit report

If an auditor is not independent, the auditor

- issues a two sentence report - must withdraw from the engagement or disclaim an opinion

When the auditor is not required to audit management's assessment of internal control over financial reporting, the auditor must add an explanatory paragraph in the Basis for Opinion section indicating

- no opinion on ICFR is being expressed - the company was not required to have an audit of its ICFR

A change from an inappropriate use or application of an accounting principle in prior years to an acceptable accounting principle in the current year ______.

- requires the prior period financial statements to be restated retroactively - requires an explanatory paragraph to highlight a lack of comparability

If prior period financial statements have been audited but the predecessor's report will not be included, the successor auditor indicates in an explanatory paragraph immediately following the opinion paragraph

- the date and the type of report issued by the predecessor auditor - that the prior period financial statements were audited by other auditors

An auditor may use a disclaimer of opinion when

- there is insufficient appropriate evidence to form an opinion - there is a lack of independence

When a scope limitation exists but overall the financial statements present fairly in conformity with GAAP, the auditor will

- use the words "except for" in the report - issue a qualified opinion

True or false: If a GAAP departure's effect is so pervasive that the financial statements taken as a whole do not fairly present the entity's financial position, results of operations, and cash flows in accordance with GAAP, the auditor should withdraw from the engagement and disclaim an opinion.

False

True or false: When a correction to a material misstatement in previously issued financial statements is made, the auditor is not required to mention the misstatement in the current year report.

False

True or false: Prior period statements received a qualified or adverse opinion because the entity did not follow GAAP. If the entity conforms to GAAP in the current year and restates the prior period results, the auditor should express an unqualified opinion on the restated prior period financial statements presented as comparatives.

True

Which of the following is included in the footnotes to the financial statements but does not require an explanatory paragraph in the auditor's report?

a change in accounting principles that does not have a material effect in the current year but is expected to have a material effect in future years

A disclaimer of opinion is not an option when there is

a known departure from GAAP

When the auditor is not required to audit management's assessment of internal control over financial reporting, the auditor must ______.

add an explanatory paragraph to the Basis for Opinion section

When the auditor determines that the entity has changed its use (or application) of accounting principles between periods or has corrected a material misstatement in previously issued financial statements in a way that materially affects the comparability of the financial statements being reported on, the auditor must

add an explanatory paragraph to the report

The auditor's standard unqualified audit report for a public company contains the

addressee report title audit report date "Basis for Opinion" section

When there is a lack of consistency in the application of accounting principles due to accounting changes, an auditor

adds an explanatory paragraph to a standard unqualified audit report

If the effects of a departure from GAAP are seen by the auditor as pervasively material in terms of the overall financial statements, the auditor will issue a(n) ______ opinion.

adverse

When the financial statements do not present fairly due to a GAAP departure that materially affects the financial statements overall, the auditor will issue a(n) ________ opinion

adverse

If an entity fails to disclose information in the financial statements or footnotes as required by GAAP, the audit opinion options are

adverse qualified

An auditor would be most likely to issue an unqualified opinion and add a discussion of the change in an explanatory paragraph when

an entity makes a change in an accounting principle and the auditor concurs with the change

Materiality is not a factor when considering

auditor independence

Under ASB standards

both emphasis-of-matter and other-matter paragraphs are sometimes required

Changes that affect comparability, but not consistency, include a change in _______.

classification accounting estimate

The auditor considers whether the comparability of the financial statements between periods has been materially affected (1) by a change in accounting principles or (2) by a material adjustment to correct a misstatement in previously issued financial statements to identify _______ matters that might need to be included in the audit report.

consistency

When an entity has changed auditors, the predecessor auditor can reissue, at the request of the entity, the report on the financial statements of prior periods when those prior period statements are presented for comparative purposes. The predecessor auditor must

determine if the previously issued reports are still appropriate

When there is a known departure from GAAP, a(n) ______ opinion is not an option.

disclaimer of

Under ASB standards, when an auditor makes reference in the audit report to an issue that has been appropriately presented or disclosed in the financial statements, the auditor is using a(n) ________________________ paragraph.

disclaimer of opinion

When there is a lack of auditor independence, the auditor ______.

disclaims an opinion

If the auditor wishes to draw special attention to a particular matter that is properly presented or disclosed in the financial statements, the auditor may choose to include a(n) _______ paragraph in the auditor's report.

emphasis

Under PCAOB standards

explanatory paragraphs are sometimes required, but emphasis paragraphs are always optional

True or false: The concept of materiality plays a limited role in the auditor's choice of audit reports.

false

An ASB audit report ______.

indicates the audit was conducted in accordance with generally accepted auditing standards

An error was judged to be material by the auditor even though it did not rise to conventional levels of materiality in quantitative terms. This was likely because the error was

intentional

An entity is issuing comparative financial statements. In prior years, the auditor expressed a standard unqualified report. This year the entity has inappropriately not capitalized certain lease obligations. The auditor should

issue a qualified opinion for a GAAP departure clarifying the departure only affects the current year's statements

If a departure from GAAP is pervasive and the financial statements taken as a whole do not fairly present the entity's financial position, results of operations, and cash flows in accordance with GAAP, the auditor should

issue an adverse opinion

If an entity's disclosures with respect to its ability to continue as a going concern are inadequate, the result could be for the auditor to

issue an adverse opinion issue a qualified opinion

If an entity makes a change in accounting principle and the auditor concurs with the change, the auditor will

issue an unqualified opinion and add a discussion of the change in an explanatory paragraph

An intentional management error can be considered ___________ by the auditor regardless of the magnitude of the error.

material

An auditor disclaimed an opinion on the prior period financial statements but was able to conduct the current year audit without limitations. In this case, the auditor

may issue an unmodified opinion on this year's statements

Generally, the procedures applied in an audit of an element, account, or item are ______ than if the same information were considered part of an audit of the overall financial statements.

more extensive

For public companies registered with the SEC, the financial statements

must have a clean audit opinion

A change in accounting estimate ______ requires an explanatory paragraph in the audit report.

never

When an auditor is not independent, the reason(s) for the lack of independence should ______ ASB standards.

not be stated under PCAOB standards, but may be stated under

A change in accounting principles that does not have a material effect in the current year but that is expected to have a material effect in future years is ______.

not mentioned in the auditor's report

Under ASB standards, when an issue other than those presented or disclosed in the financial statements is relevant to understanding the audit, the auditor's responsibilities, or the auditor's report, a(n) _______ _______ paragraph can be included in the audit report.

other matter

The auditor considers the materiality and the importance of the portion of the consolidated financial statements audited by other auditors when determining whether they qualify to serve as the _____ auditor on the engagement

principal

A material, but not pervasive, scope limitation will normally result in a(n)

qualified opinion

When an auditor is not independent, the auditor must disclaim an opinion

regardless of the significance of the condition that caused the lack of independence

Other comprehensive bases of accounting (OCCBOA) include

regulatory other cash tax

An inability to collect sufficient appropriate evidence is considered a(n)

scope limitation

For public companies, qualified and adverse opinions on financial statements are not accepted by

the SEC

When an entity issues comparative financial statements,

the audit report is the date of the most recently completed audit

When a client significantly restricts the scope of the engagement

the auditor should consider disclaiming an opinion

The principal auditor is sharing responsibility for the audit report with other auditors when ______.

there is a reference to the other auditors in the audit report

An auditor is most likely to issue a qualified opinion on an entity when

there is substantial doubt about the entity's ability to continue as a going concern and the financial problems are not adequately disclosed

Management's going concern assessment is independently assessed by auditors

to ensure management's assessment has been adequately conducted and disclosed

If a departure from GAAP is judged to be immaterial, the auditor issues a(n) ______ opinion

unqualified

When the auditor concludes there is substantial doubt about the entity's ability to continue as a going concern and management has adequately disclosed the financial problems, the auditor will typically express a(n) ______ opinion with an explanatory paragraph

unqualified

When the auditor concludes there is substantial doubt about the entity's ability to continue as a going concern and management has adequately disclosed the financial problems, the auditor will typically express a(n) ______ opinion with an explanatory paragraph.

unqualified