Chapter 17 auditing

Which of the following circumstances generally results in the issuance of a report that includes an opinion that is other than unmodified?

The auditor is unable to obtain sufficient appropriate audit evidence.

Which of the following is least likely to result in an emphasis of matter paragraph being added to an unmodified auditor's report on the financial statements of a client that sells jewelry through a retail store?

- Reliance placed upon a specialist to evaluate the diamonds.

Which of the following will result in emphasis of matter as to consistency in the auditor's report, regardless of whether the item is fully disclosed in the financial statements?

A change from an unacceptable accounting principle to a generally accepted one.

Which of the following accounting changes requires an emphasis of matter paragraph regarding consistency in the auditors' report?

A change from the straight line method of depreciation to an accelerated method for a class of fixed asset

Which of the following ordinarily involves the addition of an emphasis-of-matter paragraph to an audit report?

A consistency modification

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

Which of the following is least likely to result in inclusion of an emphasis-of-matter paragraph in an audit report?

A decision not to confirm accounts receivable

An audit client has refused to allow the auditors to perform a generally accepted auditing procedure and there are no other effective alternate procedures available. The circumstance would normally result in the issuance of:

A disclaimer of opinion

When an adverse opinion is expressed, the opinion paragraph should include a direct reference to

A separate paragraph (section) which discusses the basis for the opinion rendered

Doe, an independent auditor, was engaged to perform an audit of the financial statements of Ally Incorporated one month after its fiscal year had ended. Although the inventory count was not observed by Doe, and accounts receivable were not confirmed by direct communication with debtors, Doe was able to obtain sufficient appropriate audit evidence by applying alternative auditing procedures. Doe's audit report will probably contain

A standard unmodified opinion

Which of the following is not explicitly included in an audit report for a nonpublic company?

A statement that he auditor believes that his or her audit provides a reasonable basis for expressing negative assurance.

An auditor's report on comparative financial statements should be dated as of the date of the

Accumulation of sufficient appropriate audit evidence

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

A scope restriction is least likely to result in a(an)

Adverse opinion.

Assume that the opinion paragraph of an auditos' 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

If group auditors make no reference to component auditors whose work they have relied on as a part of the basis for their report, the group auditors

Are assuming responsibility for the work of the component auditors.

The auditors' report shold be dated as of the date the

Auditors have accumulated sufficient evidence

For a particular entity's financial statements to be presented fairly in conformity with generally accepted accounting principles, it is not required that the principles selected

Be applied on a basis consistent with those followed in the prior year

When an auditor has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the current financial statement date (9/30/X1), the auditor's responsibility includes

Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern

Client-imposed restrictions significantly limit the scope of the auditors' procedures, and they are unable to obtain sufficient appropriate audit evidence. The possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.

Disclaimer

When the auditor is unable to determine the amounts associated with noncompliance with a law by client personnel, the auditor should issue a(an)

Disclaimer of opinion.

If an accounting change has no material effect on the financial statements in the current year, but the change is reasonably certain to have a material effect in later years, the change should be

Disclosed in the notes to the financial statements of the current year

For a continuing audit client, when a complete set of financial statements is presented on a comparative basis for two years, the auditors' opinion would refer to

Each of the years in the two-year period

Draves Company owns substantial properties that have appreciated significantly in value since the date of purchase. The properties were appraised and are reported in the balance sheet at the appraised values (which materially exceed costs) with related disclosures. The CPAs velieve that the appraised values reported in the balance sheet reasonably estimate the assets' current values.

Either qualified or adverse

Slade Company has material investments in stocks of subsidiary companies. Stocks of the subsidiary companies are actively traded in the market. Management insists that all investments be carried at original costs, and the CPA firm is satisfied that the original costs are accurate. The CPA firm believes that the client will never ultimately realize a substantial portion of the investments because the market value is much lovwer than the cost, the client has fully disclosed the facts in notes to the financial statements.

Either qualified or adverse

During the audit of Eagle Company, the CPA firm has encountered a significant scope limitation relating to inventory record availability and is unable to obtain sufficient appropriate audit evidence in that area.

Either qualified or disclaimer

The Rotter Company changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading due to pervasive misstatements. The change (including its dollar effect) has been described in the notes to the 20X4 statements, which are being presented by themselves. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should

Express an adverse opinion with a basis for modification paragraph disclosing the reason (the accounting change) for the opinion.

An emphasis of a matter paragraph ordinarily

Follows the opinion paragraph.

Which of the following is a "registration statement" that is filed with the SEC by a company planning to issue securities to the public?

Form S-1.

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

Generally accepted accounting principles (United States)

CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the group auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct?

In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements.

After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to

Increase ownership equity

When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern, the auditor most likely would express a qualified opinion if

Information about the entity's ability to continue as a going concern is not disclosed in the financial statements

Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

Inquiring of the entity's legal counsel about litigation, claims, and assessments.

Which of the following is a general purpose financial reporting framework?

International Financial Reporting Standards International Standards of Auditing

The auditors include an emphasis of matter paragraph in report with an unmodified opinion in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise. The inclusion of this paragraph

Is appropriate and would not negate the unmodified opinion.

A basis for modification paragraph in the audit of the financial statements of a nonpublic company

Is only included with qualified, adverse or disclaimers of opinion

When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should

Issue an "except for" qualification or an adverse opinion

Morgan, CPA, is the group auditor for a multinational corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the component auditor, as well as the quality of the component auditor's audit. With respect to Morgan's report on the consolidated financial statements, taken as a whole, Morgan

May refer to the audit of the component auditor

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated?

No - Qualified Yes - Adverse

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?

No - Qualified Yes - Unmodified with Emphasis-of-Matter

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

A basis for modification paragraph is ordinarily placed

Preceding the opinion section

When a client declines to disclose essential information in the financial statements or notes, the auditor of the financial statements should

Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.

London Company has material investments in stocks of subsidiary companies. Stocks of the subsidiary companies are not actively traded in the market, and the CPA firm's engagement does not extend to any subsidiary company. The CpA firm is able to determine that all investments are carried at original cost, but has no real idea of market value. Although the difference between cost and market could be material, it could not have a pervasive effect on the overall financial statements.

Qualified

The auditors believe that the financial statements have been presented in conformity with generally ccepted accounting principles in all respects, except that a loss contingency that should be disclosed through a note to the financial statements is not included. While they consider this a material omission, they do not believe that it pervasively affects the financial statements.

Qualified

If the predecessor auditors do not reissue their audit report on comparative financial statements the successor auditors should

Refer to the report of the predecessor auditors.

Which of the following is least likely to result in qualification of the auditors' opinion due to a scope limitation?

Reliance placed upon the report of component auditors

A client has changed the salvage values of a number of its fixed assets. The auditors believe that the salvage values are realistic. The appropriate report on the financial statements is

Standard unmodified.

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)

Which of the following modifications of the auditors' report does not include an additional paragraph?

The audit report indicates a division of responsibility between two CPA firms.

The unmodified standard audit report of a nonpublic company does not explicitly state that

The audit was conducted in accordance with accounting principles generally accepted in the United States of America.

If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows

The auditors should issue a qualified report for the departure from generally accepted accounting principles

Which of the following is not a difference between the audit report of a nonpublic and public company?

The public company report has an additional paragraph referring to the client's fraud prevention procedures

Which of the following would be most likely to be an appropriate addressee for an audit report?

The shareholders of the corporation whose financial statements were examined.

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

The statements are not in conformity with FASB requirements regarding the capitalization of leases

In which of the following circumstances will it be most likely that an adverse opinion is considered appropriate?

The statements are not in conformity with generally accepted accounting principles regarding pension plans.

When reporting on comparative financial statements where the financial statements of the prior period have been examined by a predecessor auditor whose report is not presented, the successor auditor should indicate in the report

The type of opinion expressed by the predecessor auditor.

Under which of the following set of circumstances might the auditors disclaim an opinion?

There are significant scope limitations on the audit

An independent auditor has concluded that substantial doubt remains about a client's ability to continue as a going concern, but the client's financial statements have properly disclosed all of its solvency problems. The auditor would probably issue a(an)

Unmodified opinion with an appropriate emphasis of matter paragraph

Bowless Company is engaged in a hazardous trae and has obtained insurance coverage related to the hazard. Although the likelihood is remote, a material portion of the company's assets could be destroyed by a serious accident.

Unmodified standard report

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

Unmodified-standard

The client has changed from LIFO and FIFO for invnetory 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

When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for:

Updating the report on the previous financial statements regardless of the opinion previously issued

After performing all necessary procedures the predecessor auditors reissue a prior-period report on financial statements at the request of the client without revising the original wording. The predecessor auditors should

Use the date of the previous report

The term "except for" in an audit report is

Used in a qualified opinion

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

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?

Yes - Qualified No - Unmodified with Emphasis-of-Matter

When an auditor does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should

Issue an unmodified opinion with no reference to this omission

An auditor of financial statements believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to

Lease rather than purchase operating facilities

It is not appropriate for the auditors' report to refer a reader to a financial statement note for details regarding a(an)

Limitation in the scope of the audit

An auditor has been asked to report on the balance sheet of Kane Company but not on the other basic financial statements. The auditor will have access to all information underlying the basic financial statements. Under these circumstances, the auditor

May accept the engagement