Audit Ch 3
18) EPM, Inc., is a private manufacturing company with a calendar year-end. Their financial statements include a balance sheet, a statement of income, statement of cash flows, and statement of stockholders' equity. For the most recent audit, Harrington and Perry, LLP, audited the 2015 and 2016 financial statements. The auditors completed all significant fieldwork on March 5, 2017 and issued the audit report on March 16, 2017. Required: Consider all the facts given and write the standard unmodified opinion audit report, including all eight sections of the report.
: Independent Auditor's Report To the Board of Directors and Shareholders of EPM, Inc. We have audited the accompanying balance sheets of EPM, Inc., as of December 31, 2016 and 2015, and the related statements of income, changes in stockholders' equity, and cash flows for the years then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of EPM, Inc., as of December 31, 2016 and 2015, and the results of their operations and cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America. Harrington and Perry, LLP March 5, 2017 Terms: Audit report format for private company Diff: Challenging Objective: LO 3-1 AACSB: Analytic
3) To emphasize the fact that the auditor is independent, a typical addressee of the audit report could be A) Company Controller Shareholders Board of Directors No Yes Yes B) Company Controller Shareholders Board of Directors No No Yes C) Company Controller Shareholders Board of Directors Yes Yes No D) Company Controller Shareholders Board of Directors Yes No No
: A Terms: Audit report addressee Diff: Easy Objective: LO 3-1 AACSB: Reflective
2) Auditing standards require that the audit report must be titled and that the title must A) include the word "independent." B) indicate if the auditor is a CPA. C) indicate if the auditor is a proprietorship, partnership, or corporation. D) indicate the type of audit opinion issued.
: A Terms: Auditing standards require audit report title Diff: Easy Objective: LO 3-1 AACSB: Reflective
2) The standard unmodified audit report A) is sometimes called a clean opinion. B) can be issued only with an explanatory paragraph. C) can be issued if only a balance sheet and income statement are included in the financial statements. D) is sometimes called a disclaimer report.
: A Terms: Conditions for standard unmodified audit report Diff: Easy Objective: LO 3-2 AACSB: Reflective
10) The introductory paragraph of the standard unmodified opinion audit report for a nonpublic company performs which functions? I. It states the CPA has performed an audit. II. It lists the financial statements being audited. III. It states the financial statements are the responsibility of the auditor. A) I and II B) I and III C) II and III D) I, II and III
: A Terms: Introductory paragraph of auditor's report Diff: Moderate Objective: LO 3-1 AACSB: Reflective
9) The highest level of materiality exists when A) users are likely to make incorrect decisions if they rely on the overall financial statements. B) there has been a departure from GAAP. C) amounts are material but do not overshadow the financial statements as a whole. D) a scope limitation has been imposed.
: A Terms: Materiality levels Diff: Moderate Objective: LO 3-6 AACSB: Reflective
3) When comparing misstatements with a measurement base, the auditor must consider the pervasiveness of the misstatement. Of the following examples, the most pervasive misstatement is a(n) A) understatement of inventory. B) understatement of retained earnings caused by a miscalculation of dividends payable. C) misclassification of notes payable as a long-term liability when it should be current. D) misclassification of salary expense as a selling expense.
: A Terms: Pervasive misstatements Diff: Moderate Objective: LO 3-6 AACSB: Reflective
16) The most common case in which conditions beyond the client's and auditor's control cause a scope restriction in an engagement is when the A) auditor is not appointed until after the client's year-end. B) client won't allow the auditor to confirm receivables for fear of offending its customers. C) auditor doesn't have enough staff to satisfactorily audit all of the client's foreign subsidiaries. D) client is going through Chapter 11 bankruptcy.
: A Terms: Scope restriction beyond client and auditor control Diff: Challenging Objective: LO 3-5 AACSB: Reflective
14) In which of the following circumstances would an auditor most likely express an adverse opinion? A) The CEO refuses to let the auditor have access to the board of director meeting minutes. B) The financial statements are not in conformity with the FASB statement on loss contingencies. C) Information comes to the auditor's attention that raises substantial doubt about the ability for the client to continue as a going concern. D) Tests of controls show that the internal control structure is so poor that the auditor has to assess control risk at the maximum.
: B Terms: Adverse opinion circumstances Diff: Moderate Objective: LO 3-5 AACSB: Reflective
7) When the auditor determines that the financial statements are fairly stated, but there is a nonindependent relationship between the auditor and the client, the auditor should issue A) an adverse opinion. B) a disclaimer of opinion. C) either a qualified opinion or an adverse opinion. D) either a qualified opinion or an unqualified opinion with modified wording.
: B Terms: Audit report when auditor not independent Diff: Moderate Objective: LO 3-5 AACSB: Reflective
4) When analyzing the various types of audit reports, A) the unmodified opinion with an emphasis-of-matter paragraph is the most common type of report. B) companies will generally make the appropriate changes to their accounting records to avoid a qualification by the auditor. C) management is more concerned about a qualified report than a disclaimer report. D) an adverse report is issued when the auditor is unable to form an opinion on the financial statements.
: B Terms: Audit reports in various situations Diff: Moderate Objective: LO 3-2 AACSB: Reflective
15) Most auditors believe that financial statements are "presented fairly" when the statements are in accordance with GAAP, and that it is also necessary to A) determine that they are not in violation of FASB statements. B) examine the substance of transactions and balances for possible misinformation. C) review the statements using the accounting principles promulgated by the SEC. D) assure investors that net income reported this year will be exceeded in the future.
: B Terms: Financial statements are presented fairly in accordance with GAAP Diff: Challenging Objective: LO 3-1 AACSB: Reflective
11) Which of the following statements are true for the standard unmodified opinion audit report of a nonpublic entity? I. The introductory paragraph states that management is responsible for the preparation and content of the financial statements. II. The scope paragraph states that the auditor evaluates the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management. A) I only B) II only C) I and II D) Neither I nor II
: B Terms: Introductory paragraph and scope paragraph Diff: Moderate Objective: LO 3-1 AACSB: Reflective
1) A misstatement in the financial statements can be considered material if knowledge of the misstatement will affect a decision of A) the PCAOB. B) a reasonable user of the financial statements. C) an accountant. D) the SEC.
: B Terms: Materiality Diff: Moderate Objective: LO 3-6 AACSB: Reflective
7) Which of the following is a correct statement regarding materiality? A) There are well-defined guidelines that enable auditors to determine if something is material. B) Misstatements must be compared with some benchmark before a decision can be made about the materiality level of the failure of a company to follow GAAP. C) Pervasiveness is not considered when comparing potential misstatements with a base or benchmark. D) To evaluate overall materiality, the auditor does not combine all unadjusted misstatements.
: B Terms: Materiality Diff: Moderate Objective: LO 3-6 AACSB: Reflective
4) The dollar amount of some misstatements cannot be accurately measured. For example, if the client were unwilling to disclose an existing lawsuit, the auditor must estimate the likely effect on A) net income. B) users of the financial statements. C) the auditor's exposure to lawsuits. D) management's future decisions.
: B Terms: Misstatements accurately measured Diff: Moderate Objective: LO 3-6 AACSB: Reflective
5) A qualified opinion can be issued for which of the following? I. When a limitation on the scope of the audit has occurred II. When the auditor lacks independence III. When generally accepted accounting principles have not been used A) I and II B) I and III C) II and III D) I, II and III
: B Terms: Qualified opinion Diff: Moderate Objective: LO 3-5 AACSB: Reflective
7) Which of the following is not explicitly stated in the standard unmodified opinion audit report? A) The financial statements are the responsibility of management. B) The audit was conducted in accordance with generally accepted accounting principles. C) The auditors believe that the audit evidence provides a reasonable basis for their opinion. D) An audit includes assessing the accounting estimates used.
: B Terms: Standard unmodified opinion audit report Diff: Easy Objective: LO 3-1 AACSB: Reflective
9) The management's responsibility section of the standard unmodified opinion audit report for a nonpublic company states that the financial statements are A) the responsibility of the auditor. B) the responsibility of management. C) the joint responsibility of management and the auditor. D) none of the above.
: B Terms: Standard unqualified audit report for a nonpublic entity; eight parts of the report Diff: Easy Objective: LO 3-1 AACSB: Reflective
13) If the balance sheet of a private company is dated December 31, 2016, the audit report is dated February 8, 2017, and both are released on February 15, 2017, this indicates that the auditor has searched for subsequent events that occurred up to A) December 31, 2016. B) January 1, 2017. C) February 8, 2017. D) February 15, 2017.
: C Terms: Audit report subsequent event dating Diff: Moderate Objective: LO 3-1 AACSB: Reflective
13) Whenever the client imposes restrictions on the scope of the audit, the auditor should be concerned that management may be trying to prevent discovery of misstatements. In such cases, the auditor will likely issue a A) disclaimer of opinion in all cases. B) qualification of both scope and opinion in all cases. C) disclaimer of opinion whenever materiality is in question. D) qualification of both scope and opinion whenever materiality is in question.
: C Terms: Client imposed restrictions on scope of audit Diff: Moderate Objective: LO 3-5 AACSB: Reflective
11) Items that materially affect the comparability of financial statements generally require disclosure in the footnotes. If the client refuses to properly disclose the item, the auditor will most likely issue A) a disclaimer. B) an unqualified opinion. C) a qualified opinion. D) an adverse opinion.
: C Terms: Disclosure and comparability Diff: Challenging Objective: LO 3-5 AACSB: Reflective
5) If most or all users' decisions that are based on the financial statements are likely to be significantly affected, the materiality level is A) unrestricted. B) material. C) pervasive. D) risky.
: C Terms: Materiality qualifications Diff: Moderate Objective: LO 3-6 AACSB: Reflective
3) An auditor can express a qualified opinion due to a A) Departure from GAAP Lack of Consistency Lack of Sufficient Evidence Yes No No B) Departure from GAAP Lack of Consistency Lack of Sufficient Evidence No Yes No C) Departure from GAAP Lack of Consistency Lack of Sufficient Evidence Yes No Yes D) Departure from GAAP Lack of Consistency Lack of Sufficient Evidence Yes Yes Yes
: C Terms: Qualified opinion Diff: Easy Objective: LO 3-5 AACSB: Reflective
12) Which of the following scenarios does not result in a qualified opinion? A) A scope limitation prevents the auditor from completing an important audit procedure. B) Circumstances exist that prevent the auditor from conducting a complete audit. C) The auditor lacks independence with respect to the audited entity. D) An accounting principle at variance with GAAP is used.
: C Terms: Qualified opinion Diff: Moderate Objective: LO 3-5 AACSB: Reflective
8) Management has recorded prepaid insurance as an asset in the previous year. This year, to reduce record-keeping costs, it expenses insurance. If the amount is immaterial to the financial statements, A) a disclaimer opinion is issued. B) a a qualified opinion is issued. C) a standard unmodified opinion audit report is issued. D) no audit report can be issued.
: C Terms: Standard unmodified opinion audit report Diff: Moderate Objective: LO 3-6 AACSB: Reflective
12) The auditor's responsibility section of the standard unmodified opinion audit report states that the auditor is A) responsible for the financial statements and the opinion on them. B) responsible for the financial statements. C) responsible for the opinion on the financial statements. D) jointly responsible for the financial statements with management.
: C Terms: Standard unqualified audit report for a nonpublic entity; eight parts of the report Diff: Easy Objective: LO 3-1 AACSB: Reflective
8) The standard unmodified opinion audit report for a nonpublic entity must A) have a report title that includes the word "CPA." B) be addressed to the company's stockholders and creditors. C) be dated. D) include an explanatory paragraph.
: C Terms: Standard unqualified audit report for a nonpublic entity; eight parts of the report Diff: Easy Objective: LO 3-1 AACSB: Reflective
14) The appropriate audit report date for a standard unmodified opinion audit report for a nonpublic entity should be A) the date the financial statements are given to the Board of Directors. B) the date of the financial statements. C) the date the auditor completed the auditing procedures in the field. D) 60 days after the date of the financial statements as required by the SEC.
: C Terms: Standard unqualified audit report for a nonpublic entity; eight parts of the report Diff: Moderate Objective: LO 3-1 AACSB: Reflective
2) An adverse opinion is issued when the auditor believes A) some parts of the financial statements are materially misstated or misleading. B) the financial statements would be found to be materially misstated if an investigation were performed. C) the auditor is not independent. D) the overall financial statements are so materially misstated that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP.
: D Terms: Adverse opinion Diff: Easy Objective: LO 3-5 AACSB: Reflective
3) An audit of historical financial statements most commonly includes the A) balance sheet, statement of retained earnings, and the statement of cash flows. B) income statement, the statement of cash flows, and the statement of net working capital. C) statement of cash flows, balance sheet, and the statement of retained earnings. D) balance sheet, income statement, statement of cash flows, and the statement of changes in stockholders' equity.
: D Terms: Audit of historical financial statements Diff: Moderate Objective: LO 3-2 AACSB: Reflective
5) The audit report date on a standard unmodified opinion audit report indicates A) the last day of the fiscal period. B) the date on which the financial statements were filed with the Securities and Exchange Commission. C) the last date on which users may institute a lawsuit against either the client or the auditor. D) the last day of the auditor's responsibility for the review of significant events that occurred after the date of the financial statements.
: D Terms: Audit report date on standard unqualified report Diff: Easy Objective: LO 3-1 AACSB: Reflective
1) What category of audit report will be issued if the auditor concludes that the financial statements are not fairly presented? A) disclaimer B) qualified C) standard unmodified opinion D) adverse
: D Terms: Audit reports in various situations Diff: Easy Objective: LO 3-2 AACSB: Reflective
1) Which of the following is a correct statement regarding the standard unmodified opinion audit report? A) The format of the audit report for public and nonpublic entities are identical. B) The auditor's responsibility paragraph includes a statement that the auditors are responsible for selecting the appropriate accounting principles. C) The audit report includes the name of the lead partner on the audit. D) The scope paragraph includes a statement that the auditor considers internal controls when designing the audit procedures performed.
: D Terms: Audit reports issued for financial statements of private company; Scope paragraph; Generally accepted auditing standards Diff: Moderate Objective: LO 3-1 AACSB: Reflective
1) As a result of management's refusal to permit the auditor to physically examine inventory, the auditor must depart from the unmodified opinion audit report because A) the financial statements have not been prepared in accordance with GAAP. B) the scope of the audit has been restricted by circumstances beyond either the client's or auditor's control. C) the financial statements have not been audited in accordance with GAAS. D) the scope of the audit has been restricted.
: D Terms: Auditor must depart from unmodified opinion audit report; Management refusal to permit the auditor to physically examine inventory Diff: Easy Objective: LO 3-5 AACSB: Reflective
6) When a client fails to follow GAAP, the audit report can be unmodified, qualified, or adverse depending on the materiality. What factors affect materiality that an auditor should consider? A) the dollar amount in comparison to a base B) if the misstatement can be measured C) the nature of the item D) All the above are factors an auditor should consider regarding materiality.
: D Terms: Client fails to follow GAAP; Materiality Diff: Moderate Objective: LO 3-6 AACSB: Reflective
9) If the phrase "except for" is present in the opinion paragraph of the audit report, the auditor has issued a(n) A) adverse opinion. B) disclaimer of opinion. C) unqualified opinion. D) qualified opinion.
: D Terms: Departure from unqualified audit report Diff: Moderate Objective: LO 3-5 AACSB: Reflective
15) Which of the following statements is true? I. The auditor is required to issue a disclaimer of opinion in the event of a material uncertainty. II. The auditor is required to issue a disclaimer of opinion in the event of a going concern problem. A) I only B) II only C) I and II D) Neither I nor II
: D Terms: Disclaimer of opinion Diff: Challenging Objective: LO 3-5 AACSB: Reflective
8) If the auditor lacks independence, a disclaimer of opinion must be issued A) if the client requests it. B) only if it is highly material. C) only if it is material but not pervasive. D) in all cases.
: D Terms: Disclaimer when auditor lacks independence Diff: Moderate Objective: LO 3-5 AACSB: Reflective
17) When the client fails to make adequate disclosure in the body of the statements or in the related footnotes, it is the responsibility of the auditor to A) inform the reader that disclosure is not adequate, and to issue an adverse opinion. B) inform the reader that disclosure is not adequate, and to issue a qualified opinion. C) present the information in the audit report and issue an unqualified or qualified opinion. D) present the information in the audit report and to issue a qualified or an adverse opinion.
: D Terms: Inadequate disclosure Diff: Challenging Objective: LO 3-5 AACSB: Reflective
2) Misstatements must be compared with some measurement base before a decision can be made about materiality. A commonly accepted measurement base includes A) net income. B) total assets. C) working capital. D) all of the above.
: D Terms: Misstatements and materiality Diff: Moderate Objective: LO 3-6 AACSB: Reflective
4) An auditor determines the financial statements include at least a material departure from GAAP. Which type of opinion may be issued? A) Disclaimer Qualified Adverse Yes No No B) Disclaimer Qualified Adverse No Yes No C) Disclaimer Qualified Adverse Yes No Yes D) Disclaimer Qualified Adverse No Yes Yes
: D Terms: Opinion , GAAP departure Diff: Moderate Objective: LO 3-5 AACSB: Reflective
10) When analyzing the various types of opinions that the auditor can issue, A) an adverse opinion must contain the phrase "except for" in the opinion paragraph. B) an adverse opinion can only be issued when there is a lack of knowledge by the auditor. C) a disclaimer of opinion can be issued for material or immaterial misstatements. D) a qualified opinion report can be used only when the auditor concludes that the overall financial statements are fairly stated.
: D Terms: Qualified opinion Diff: Moderate Objective: LO 3-5 AACSB: Reflective
6) In which situation would the auditor be choosing between "except for" qualified opinion and an adverse opinion? A) The auditor lacks independence. B) A client-imposed scope limitation C) A circumstance-imposed scope limitation D) Lack of full disclosure within the footnotes
: D Terms: Qualified opinion and adverse opinion Diff: Moderate Objective: LO 3-5 AACSB: Reflective
4) The auditor's responsibility section of the standard unmodified opinion audit report states that the audit is designed to A) discover all errors and/or irregularities. B) discover material errors and/or irregularities. C) conform to generally accepted accounting principles. D) obtain reasonable assurance whether the statements are free of material misstatement.
: D Terms: Scope paragraph of standard unqualified audit report states Diff: Easy Objective: LO 3-1 AACSB: Reflective
6) The standard audit report for nonpublic entities refers to GAAS and GAAP in which sections? A) GAAS GAAP Auditor's responsibility Auditor's responsibility B) GAAS GAAP Auditor's responsibility Introductory paragraph C) GAAS GAAP Management's responsibility and Opinion paragraph Management's responsibility and Introductory paragraph D) GAAS GAAP Auditor's responsibility Management's responsibility and Opinion paragraph
: D Terms: Standard unqualified audit report for nonpublic entities; GAAS and GAAP Diff: Challenging Objective: LO 3-1 AACSB: Reflective
19) An audit provides a guarantee that a material misstatement will not exist in the financial statements.
: FALSE Terms: Audit and reasonable assurance Diff: Moderate Objective: LO 3-1 AACSB: Reflective
26) The audit report is normally addressed to the company's president or chief executive officer.
: FALSE Terms: Audit report normally addressed Diff: Easy Objective: LO 3-1 AACSB: Reflective
7) An auditor will issue a disclaimer when he concludes that the financial statements are not fairly presented.
: FALSE Terms: Audit reports in various situations Diff: Moderate Objective: LO 3-2 AACSB: Reflective
25) In the scope paragraph of the audit report issued for financial statements of a nonpublic company, the auditor expresses an opinion about the internal controls of the company.
: FALSE Terms: Audit reports issued for financial statements of private company; Scope paragraph; Generally accepted auditing standards Diff: Easy Objective: LO 3-1 AACSB: Reflective
29) The phrase "auditing standards generally accepted in the United States of America" can be found in the opinion paragraph of a standard unmodified opinion report for a nonpublic company.
: FALSE Terms: Auditing standards generally accepted in the United States; Opinion paragraph in standard unqualified report for public company Diff: Moderate Objective: LO 3-1 AACSB: Reflective
24) Client imposed restrictions on the audit always require a disclaimer of opinion.
: FALSE Terms: Disclaimer of opinion; Client-imposed restrictions on audit Diff: Moderate Objective: LO 3-5 AACSB: Reflective
23) When an auditor discovers a highly material GAAP violation in the financial statements and the client refuses to correct it, the auditor should issue a disclaimer of opinion.
: FALSE Terms: Disclaimer of opinion; Highly material GAAP violation in the financial statements and client refuses to correct it Diff: Moderate Objective: LO 3-5 AACSB: Reflective
22) The introductory paragraph of the auditor's report states that the auditor is responsible for the preparation, presentation and opinion on financial statements.
: FALSE Terms: Introductory paragraph of auditor's report Diff: Easy Objective: LO 3-1 AACSB: Reflective
14) As misstatements become more pervasive, the likelihood of issuing a disclaimer rather than a qualified opinion increases.
: FALSE Terms: Materiality level and type of opinion Diff: Moderate Objective: LO 3-6 AACSB: Reflective
19) A qualified opinion audit report is issued when all auditing conditions have been met, no significant misstatements have been discovered, and it is the auditor's opinion that the financial statements are fairly stated in accordance with GAAP.
: FALSE Terms: Qualified opinion audit report Diff: Easy Objective: LO 3-5 AACSB: Reflective
25) An auditor should issue a qualified opinion with an explanatory paragraph whenever there is a material uncertainty affecting the financial statements.
: FALSE Terms: Qualified opinion with explanatory paragraph Diff: Moderate Objective: LO 3-5 AACSB: Reflective
30) The phrase "Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material error" is included in the auditor's opinion section of an audit report.
: FALSE Terms: Standard unqualified audit report for a nonpublic entity; eight parts of the report Diff: Moderate Objective: LO 3-1 AACSB: Reflective
21) Users of the financial statements rely on the auditor's report because of the absolute assurance the report provides.
: FALSE Terms: Users of financial statements rely on auditor's report Diff: Easy Objective: LO 3-1 AACSB: Reflective
23) The audit report date is the date the auditor completed audit procedures in the field.
: TRUE Terms: Audit report date Diff: Easy Objective: LO 3-1 AACSB: Reflective
6) Financial statement users are normally much more concerned about a disclaimer than an unmodified opinion audit report that contains an additional-emphasis-of-matter paragraph.
: TRUE Terms: Audit reports in various situations Diff: Easy Objective: LO 3-2 AACSB: Reflective
24) The scope paragraph of the auditor's responsibility section of the audit report issued for financial statements of a nonpublic company should refer to auditing standards generally accepted in the United States of America.
: TRUE Terms: Audit reports issued for financial statements of private company; Scope paragraph; Generally accepted auditing standards Diff: Easy Objective: LO 3-1 AACSB: Reflective
28) The date of the auditor's report is indicative of the last day of the auditor's responsibility for the review of significant events occurring after the balance sheet date.
: TRUE Terms: Date of auditor's report indicates auditor's responsibility Diff: Moderate Objective: LO 3-1 AACSB: Reflective
20) Auditors should issue a disclaimer of opinion when there is a highly material client-imposed scope restriction.
: TRUE Terms: Disclaimer of opinion; Client-imposed scope restriction Diff: Moderate Objective: LO 3-5 AACSB: Reflective
27) The phrase "accounting principles generally accepted in the United States of America" can be found in the opinion paragraph of a standard unmodified opinion report.
: TRUE Terms: Generally accepted accounting principles; Opinion paragraph of standard unqualified report Diff: Easy Objective: LO 3-1 AACSB: Reflective
15) It is typically more difficult to evaluate the materiality of potential misstatements resulting from a scope limitation than for failure to follow GAAP.
: TRUE Terms: Materiality level and type of opinion Diff: Moderate Objective: LO 3-6 AACSB: Reflective
11) Materiality is essential when an auditor considers his/her determination of the appropriate report for a given set of circumstances.
: TRUE Terms: Materiality; Appropriate report Diff: Easy Objective: LO 3-6 AACSB: Reflective
12) A pervasive exception is one that affects different parts of the financial statements.
: TRUE Terms: Pervasive exception Diff: Easy Objective: LO 3-6 AACSB: Reflective
13) An item with a "psychological" effect (e.g., where the item maintains an increasing earnings trend) is a qualitative factor that may affect the auditors decision regarding materiality.
: TRUE Terms: Psychological effect; Materiality Diff: Challenging Objective: LO 3-6 AACSB: Reflective
21) Whenever an auditor issues a qualified report, he or she must use the term "except for " in the opinion paragraph.
: TRUE Terms: Qualified report; Except for in opinion paragraph Diff: Moderate Objective: LO 3-5 AACSB: Reflective
22) A qualified report can take the form of a qualification of both the scope and the opinion or of the opinion alone.
: TRUE Terms: Qualified report; Scope limitation Diff: Moderate Objective: LO 3-5 AACSB: Reflective
20) AICPA auditing standards provide uniform wording for the auditor's report to enable users of the financial statements to understand the audit report.
: TRUE Terms: Uniform wording for auditor's report Diff: Easy Objective: LO 3-1 AACSB: Reflective
16) An audit report prepared by Garrett and Brown, CPAs, is provided below. The audit for the year ended December 31, 2016 was completed on March 1, 2017, and the report was issued to Javlin Corporation, a private company, on March 13, 2017. List any deficiencies in this report. Do not rewrite the report. We have examined the accompanying financial statements of Dalton Corporation as of December 31, 2016. These financial statements are the responsibility of the company's management. Management's Responsibility for the Financial Statements: Management is responsible for the preparation and fair presentation of the financial statements in accordance with generally accepted auditing standards; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from all misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to give an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted throughout the world. Those standards require that we plan and perform the audit to obtain absolute assurance about whether the financial statements are free of misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on management's judgment, including the assessment of the risks of material misstatement of the income statement, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the auditor's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies and the accuracy of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present accurately the financial position of Javlin Corporation as of December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Garrett and Brown, CPAs March, 2017
: The audit report contains the following deficiencies: • The report title is missing. The title must include the word independent. • The audit report address is missing. The report should be addressed to stockholders and the board of directors. • The introductory paragraph should refer to an "audit," not an "examination." • The introductory paragraph should list the financial statements that were audited. • The introductory paragraph refers to the wrong company. • The introductory paragraph should not state that the financial statements are the responsibility of management. This belongs in the next section- management's responsibility. • The management's responsibility section should state that the financial statements are in accordance with "accounting principles generally accepted in the Unites States of America" not in accordance with generally accepted auditing standards." • The management's responsibility section should state that the financial statements are free from "material misstatement", not free from "all misstatement." • The auditor's responsibility section should state that our responsibility is to "express" an opinion, not "give" an opinion. • The auditor's responsibility section should state the audit was conducted in accordance with "auditing standards generally accepted in the United States of America", not "throughout the world." • The auditor's responsibility section should state that the audit was planned and performed to obtain "reasonable" assurance, not "absolute "assurance. • The auditor's responsibility section should state that the financial statements are free of "material misstatements," not simply "misstatement." • The scope paragraph of the auditor's responsibility section should state that the procedures selected depend on the "auditor's" judgment, not "management's" judgment. • The scope paragraph of the auditor's responsibility section should state risk of material misstatement in the "financial statements," not the "income statement." • The scope paragraph of the auditor's responsibility section should state the auditor considers internal control relevant to management's preparation, not the auditor's preparation. • The scope paragraph of the auditor's responsibility section is missing the sentence "Accordingly, we express no such opinion." This should be placed right before the last sentence. • The scope paragraph of the auditor's responsibility section should state "reasonableness" of significant accounting estimates," not "accurate." • The auditor's opinion section should state that the financial statements present "fairly, in all material respects," not present accurately. • The auditor's opinion section should include "and the results of their operations and cash flows for the year then ended." • The audit report should be dated March 1, 2017. Terms: Audit report deficiencies Diff: Challenging Objective: LO 3-1 AACSB: Analytic
5) There are four conditions that must be met before an auditor can issue a standard unmodified opinion audit report for the audit of a private company. Please discuss each of these five conditions.
: The four conditions that justify issuing a standard unmodified report are: • All statements-balance sheet, income statement, statement of changes in stockholder's equity, and statement of cash flows-are included in the financial statements. • Sufficient appropriate evidence has been accumulated, and the auditor has conducted the engagement in a manner that enables him or her to conclude that the audit was performed in accordance with auditing standards. • The financial statements are presented fairly in all material respects in accordance with U.S. generally accepted accounting principles or other appropriate accounting framework. This also means that adequate disclosures have been included in the footnotes and other parts of the financial statements. • There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report. Terms: Conditions for standard unqualified report for audit of private company Diff: Moderate Objective: LO 3-2 AACSB: Reflective
17) Describe the standard unmodified opinion audit report to be issued for an audit of a private company. Begin by specifying the eight parts of the report, and then discuss the contents of each part.
: The parts of the standard unmodified opinion audit report are as follows: • Report title. The title must include the word "independent." Examples of appropriate titles are "independent accountant's opinion," or "report of independent auditor." • Report address. The report is usually addressed to the company's stockholders or board of directors. It should not be addressed to company management. • Introductory paragraph. This paragraph states that an audit was performed to distinguish the report from a compilation or review report. It also lists the financial statements that were audited, including the notes to the financial statements as well as the balance sheet dates and the accounting periods for the income statement and statement of cash flows. The wording of the financial statements in the report should be identical to those used by management on the financial statements. • Management's Responsibility section. This section states that the statements are the responsibility of management. This responsibility includes selecting the appropriate accounting principles and maintaining internal control over financial reporting sufficient for preparation of financial statements that are free of material misstatements due to fraud or error. • Auditor's Responsibility section. This section contains three paragraphs: The first paragraph states that (1) the auditor's responsibility is to express an opinion on the financial statements, (2) the audit was conducted in accordance with auditing standards generally accepted in the United States of America, and (3) the audit is designed to obtain reasonable assurance about whether the statements are free of material misstatement. The second paragraph is called the scope paragraph and describes the scope of the audit and the evidence accumulated. This paragraph indicates that the procedures depend on the auditor's judgment and includes an assessment of the risk of material misstatements in the financial statements. It also indicates that the auditor considers internal control relevant to the preparation and fair presentation of the financial statements in designing the audit procedures performed, but this assessment of internal control is not for the purpose and is not sufficient to express an opinion on the effectiveness of the entity's internal control. The last sentence of the paragraph indicates that the audit includes evaluating the accounting policies selected, the reasonableness of accounting estimates, and the overall financial statement presentation. The third paragraph indicates the auditor believes that sufficient appropriate evidence has been obtained to support the auditor's opinion. • Opinion paragraph. This paragraph states the auditor's conclusions based on the results of the audit. It states that in the auditor's opinion the financial statements present fairly, in all material respects, the financial position of the company as of a certain date, and the results of their operations and cash flows for the year(s) then ended, in accordance with accounting principles generally accepted in the United States of America. • Signature and address of CPA firm. Typically, the name of the CPA firm, and not the name of an individual auditor, is used. • Audit report date. The audit report is normally dated as of the last day of fieldwork. Terms: Standard unqualified audit report for a nonpublic entity; eight parts of the report Diff: Challenging Objective: LO 3-1 AACSB: Reflective
18) There are three conditions necessitating a departure from an unqualified audit report. Name, discuss and state the appropriate audit report for each of these three conditions.
: The three conditions requiring a departure from an unqualified report are: • Scope Restrictions. A scope restriction can be imposed by the client or due to circumstances beyond the auditor's or client's control. In either case the scope restriction prevents the auditor from accumulating sufficient evidence to reach a conclusion regarding whether financial statements are stated in accordance with GAAP. The type of opinion, depending upon materiality, would be either a qualified or a disclaimer of opinion report. • GAAP Departures. In this situation the financial statements are not prepared in accordance with GAAP. Accordingly, the auditor would issue a qualified opinion if the GAAP violation were moderately material, or an adverse opinion if the GAAP violation were highly material. • Auditor lacks independence. Independence is ordinarily determined by the AICPA Code of Professional Conduct. When the auditor is not independent, the only report the auditor can issue is a disclaimer of opinion. Terms: Conditions necessitating a departure from an unqualified audit report Diff: Moderate Objective: LO 3-5 AACSB: Reflective
10) Discuss how materiality affects audit reporting decisions.
: When determining the appropriate audit report to issue, the auditor considers three levels of materiality for a given condition. These three levels are (1) immaterial, (2) material without overshadowing the financial statements as a whole, and (3) so material and so pervasive that overall fairness of the statements is in question. For conditions involving a GAAP violation, the materiality level of the violation influences whether an unmodified, qualified, or adverse opinion is issued. For conditions involving a scope restriction, the materiality of the restriction influences whether a standard unmodified opinion report, a report with a qualified scope and opinion , or a disclaimer report is issued. Terms: Materiality effect on audit reporting decisions Diff: Easy Objective: LO 3-6 AACSB: Reflective
