Audit Ch 3 MC
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.
Answer: D.
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
Answer: D.
When a company's financial statements contain a departure from GAAP with which the auditor concurs, the departure should be explained in A) the scope paragraph. B) an introductory paragraph. C) the opinion paragraph. D) a separate paragraph.
Answer: D.
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.
Answer: D.
Assume you are the partner in charge of the 2016 audit of Becker Corporation, a private company. The audit report has not yet been prepared. In each independent situation following (1-8), indicate the appropriate action (a-g) to be taken. The possible actions are as follows: a. Issue an unmodified opinion audit report. b. Qualify both the scope and opinion paragraphs. c. Qualify the opinion paragraph. d. Issue an unmodified opinion with an explanatory paragraph. e. Issue an unmodified opinion with revised wording (no explanatory paragraph). f. Issue an adverse opinion. g. Disclaim an opinion. The situations are as follows: ________ 1. Becker Corporation carries its property, plant, and equipment accounts at current market values. Current market values exceed historical cost by a highly material amount, and the effects are pervasive throughout the financial statements. ________ 2. Management of Becker Corporation refuses to allow you to observe, or make, any counts of inventory. The recorded book value of inventory is highly material. ________ 3. You were unable to confirm accounts receivable with Becker's customers. However, because of detailed sales and cash receipts records, you were able to perform reliable alternative audit procedures. ________ 4. One week before the end of fieldwork, you discover that the audit manager on the Becker engagement owns a material amount of Becker's common stock. ________ 5. You relied upon another CPA firm to perform part of the audit. Although you were the principal auditor, the other firm audited a material portion of the financial statements. You wish to refer to (but not name) the other firm in your report. ________ 6. You have substantial doubt about Becker's ability to continue as a going concern. ________ 7. Becker Corporation changed its method of computing depreciation in 2016. You concur with the change and the change is properly disclosed in the financial statement footnotes. ________ 8. Ten days after the balance sheet date, one of Becker's buildings was destroyed by a fire. Becker refuses to disclose this information in a footnote to the financial statements, but you believe disclosure is required to conform with GAAP. The amount of the uninsured loss was material, but not highly material.
Answer: 1. F. 2. G. 3. A. 4. G. 5. E. 6. D or G. 7. D. 8. C.
An entity changed from the straight-line method to the declining-balance method of depreciation for all newly required assets. This change has no material effect on the current year's financial statements but is reasonable certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n): 1. unmodified opinion 2. qualified opinion 3. unmodified opinion with explanatory paragraph 4. qualified opinion with explanatory paragraph regarding consistency
Answer: 1.
The date of the CPA's opinion on the financial statements of the client should be the date of the: 1. completion of all important audit procedures 2. closing of the client's books 3. finalization of the terms of the audit engagement 4. submission of the report to the client
Answer: 1.
An auditor who qualified an opinion because of an insufficiency of audit evidence should refer to the scope limitation in the: 1. Auditor's responsibility paragraph: Y Opinion paragraph: N Note to the financial statements: Y 2. Auditor's responsibility paragraph: N Opinion paragraph: Y Note to the financial statements: N 3. Auditor's responsibility paragraph: Y Opinion paragraph: Y Note to the financial statements: N 4. Auditor's responsibility paragraph: Y Opinion paragraph: Y Note to the financial statements: Y
Answer: 2.
As compared to an unmodified opinion, an opinion qualified due to a material departure from generally accepted accounting principles would: 1. include an extra paragraph, following the opinion paragraph 2. indicate that, except for the problem noted, the financial statements are fairly presented 3. include a slight modification to the introductory paragraph 4. include a slight modification to the auditor's responsibility paragraph
Answer: 2.
The auditor's report contains the following: "We did not audit the financial statements of EZ, Inc., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 27 percent and 29 percent, respectively, of the consolidated totals. This statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ, Inc., is based solely on the report of the other auditors." These sentences: 1. assume responsibility for the other auditor 2. indicate a division of responsibility 3. require a departure from an unmodified opinion 4. are an improper form of reporting
Answer: 2.
An adverse opinion and a disclaimer of opinion: 1. may be used interchangeably 2. both require modification of the introductory paragraph 3. result in the auditor's withdrawal from the engagement 4. indicate situations in which there are material departures from the standards
Answer: 4.
When the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern, the appropriate audit report could be I. an unmodified opinion audit report with an explanatory paragraph. II. a disclaimer of opinion. A) I only B) II only C) I or II D) Neither I nor II
Answer: C.
If a principal auditor decides to refer in his or her report to the audit of another auditor, he or she is required to disclose the: 1. name of the other auditor 2. nature of the inquiry into the other auditor's professional standing and extend of review of the other auditor's work 3. reasons for being unwilling to assume responsibility for the other auditor's work 4. portion of the financial statements audited by the other auditor
Answer: 4.
When the financial statements are fairly stated but the auditor concludes there is substantial doubt about whether the client can continue in existence, the auditor should issue a(n): 1. adverse opinion 2. qualified opinion only 3. unmodified opinion 4. qualified opinion with explanatory paragraph
Answer: 4.
Which of the following is not a required element of a standard unmodified opinion audit report issued in accordance with AICPA auditing standards? 1. A title that emphasizes the report is from an independent auditor 2. The city and state of the audit firm issuing the report 3. A statement explaining management's responsibilities for the financial statements 4. The signature of the engagement partner
Answer: 4.
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.
Answer: A.
Indicate which changes would require an explanatory paragraph in the audit report. A) The CPA concludes there is substantial doubt about the entity's ability to continue as a going concern: Y Change from FIFO to LIFO: Y B) The CPA concludes there is substantial doubt about the entity's ability to continue as a going concern: N Change from FIFO to LIFO: N C) The CPA concludes there is substantial doubt about the entity's ability to continue as a going concern: Y Change from FIFO to LIFO: N D) The CPA concludes there is substantial doubt about the entity's ability to continue as a going concern: N Change from FIFO to LIFO: Y
Answer: A.
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.
Answer: A.
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
Answer: A.
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.
Answer: A.
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.
Answer: A.
To emphasize the fact that the auditor is independent, a typical addressee of the audit report could be A) Company Controller: N Shareholders: Y Board of Directors: Y B) Company Controller: N Shareholders: N Board of Directors: Y C) Company Controller: Y Shareholders: Y Board of Directors: N D) Company Controller: Y Shareholders: N Board of Directors: N
Answer: A.
When accounting principles are not consistently applied, and the materiality level is immaterial, the auditor will issue a(n) A) standard unmodified opinion. B) unmodified opinion with an explanatory paragraph. C) adverse opinion. D) disclaimer opinion.
Answer: A.
Which of the following is false concerning the principal CPA firm's alternatives when issuing a report when another CPA firm performs part of the audit? A) Issue a joint report signed by both CPA firms. B) Make no reference to the other CPA firm in the audit report, and issue the standard unqualified opinion. C) Make reference to the other auditor in the report by using modified wording (a shared opinion or report). D) A qualified opinion or disclaimer, depending on materiality, is required if the principal auditor is not willing to assume any responsibility for the work of the other auditor.
Answer: A.
Which of the following is least likely to cause uncertainty about the ability of an entity to continue as a going concern? A) The entity is suing a competitor for a minor patent infringement. B) The entity has lost a major customer. C) The entity has significant recurring operating losses. D) The entity has working capital deficiencies.
Answer: A.
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.
Answer: B.
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
Answer: B.
If the scope restriction imposed by the client is so material that the overall fairness of the financial statements is in question, the auditor should issue a(n) A) standard unmodified opinion. B) disclaimer of opinion. C) adverse opinion. D) unmodified opinion with revised wording in the scope paragraph.
Answer: B.
In most audits, the auditor issues a(n) A) modified opinion audit report. B) standard unmodified opinion audit report. C) scope limited audit report. D) adverse audit report.
Answer: B.
When there is a justified departure from GAAP which is considered material, the auditor should issue a(n) A) standard unmodified opinion. B) disclaimer of opinion. C) unmodified opinion with an explanatory paragraph. D) adverse opinion.
Answer: C.
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.
Answer: B.
Indicate which changes would require an explanatory paragraph in the audit report. A) Change in the estimated life of an asset: Y Variation in the format of the financial statements: Y B) Change in the estimated life of an asset: N Variation in the format of the financial statements: N C) Change in the estimated life of an asset: Y Variation in the format of the financial statements: N D) Change in the estimated life of an asset: N Variation in the format of the financial statements: Y
Answer: B.
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.
Answer: B.
The term "explanatory paragraph" was replaced in the AICPA auditing standards with A) going concern paragraph. B) emphasis-of-matter paragraph. C) departure from principles paragraph. D) consistency paragraph.
Answer: B.
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.
Answer: B.
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.
Answer: B.
When there is uncertainty about a company's ability to continue as a going concern, the auditor's concern is the possibility that the client may not be able to continue its operations or meet its obligations for a "reasonable period of time." For this purpose, a reasonable period of time is considered not to exceed A) six months from the date of the financial statements. B) one year from the date of the financial statements. C) six months from the date of the audit report. D) one year from the date of the audit report.
Answer: B.
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.
Answer: B.
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.
Answer: B.
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
Answer: B.
A CPA may wish to emphasize specific matters regarding the financial statements even though an unqualified opinion will be issued. Normally, such explanatory information is A) included in the scope paragraph. B) included in the opinion paragraph. C) included in a separate paragraph in the report. D) included in the introductory paragraph.
Answer: C.
Auditing standards for public companies are established by the A) SEC. B) FASB. C) PCAOB. D) IRS.
Answer: C.
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.
Answer: C.
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.
Answer: C.
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.
Answer: C.
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.
Answer: C.
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.
Answer: C.
Whenever an auditor issues an audit report for a public company, the auditor can choose to issue a report in which of the following forms? I. A combined report on financial statements and internal control over financial reporting II. Separate reports on financial statements and internal control over financial reporting A) I only B) II only C) either I or II D) neither I nor II
Answer: C.
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.
Answer: C.
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.
Answer: C.
William Gregory, CPA, is the principal auditor for an international corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Gregory is satisfied with the independence and professional reputation of the other auditor, as well as the quality of the other auditor's examination. With respect to his report on the consolidated financial statements, taken as a whole, Gregory A) must not refer to the examination of the other auditor. B) must refer to the examination of the other auditor. C) may refer to the examination of the other auditor. D) must refer to the examination of the other auditors along with the percentage of consolidated assets and revenue that they audited.
Answer: C.
A company has changed its method of inventory valuation from an unacceptable one to one in conformity with generally accepted accounting principles. The auditor's report on the financial statements of the year of the change should include A) no reference to consistency. B) a reference to a prior period adjustment in the opinion paragraph. C) an explanatory paragraph that justifies the change and explains the impact of the change on reported net income. D) an explanatory paragraph explaining the change.
Answer: D.
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.
Answer: D.
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.
Answer: D.
An auditor determines the financial statements include at least a material departure from GAAP. Which type of opinion may be issued? A) Disclaimer: Y Qualified: N Adverse: N B) Disclaimer: N Qualified: Y Adverse: N C) Disclaimer: Y Qualified: N Adverse: Y D) Disclaimer: N Qualified: Y Adverse: Y
Answer: D.
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.
Answer: D.
For departures from GAAP or scope restrictions, the auditor must decide if the potential effect on the financial statements is A) immaterial. B) material. C) highly material. D) any of the above.
Answer: D.
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.
Answer: D.
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.
Answer: D.
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
Answer: D.
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.
Answer: D.
No reference is made in the auditor's report to other auditors who perform a portion of the audit when I. The other auditor audited an immaterial portion of the audit. II. The other auditor is well known or closely supervised by the principle auditor. III. The principle auditor has thoroughly reviewed the work of the other auditor. A) I and II B) I and III C) II and III D) I, II and III
Answer: D.
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.
Answer: D.
The standard audit report for nonpublic entities refers to GAAS and GAAP in which sections? A) GAAS: Auditor's responsibility GAAP: Auditor's responsibility B) GAAS: Auditor's responsibility GAAP: Introductory paragraph C) GAAS: Management's responsibility and Opinion paragraph GAAP: Management's responsibility and Introductory paragraph D) GAAS: Auditor's responsibility GAAP: Management's responsibility and Opinion paragraph
Answer: D.
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.
Answer: D.
When there is a lack of consistent application in accounting principles A) the nature and impact of the change should be adequately disclosed. B) the auditor should discuss the nature of the change and point the reader to the footnote that discusses the change. C) the materiality of the change is evaluated based on the current year effect of the change. D) all of the above.
Answer: D.
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.
Answer: D.
Which of the following modifications of the auditor's report does not include an explanatory paragraph? A) A qualified report is due to a GAAP departure. B) The report includes an emphasis of a matter. C) There is a very material scope limitation. D) A principal auditor accepts the work of an other auditor.
Answer: D.
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
Answer: D.
