Ch 17 Auditors Report
Which of the following ordinarily involves the addition of an emphasis-of-matter paragraph to an audit report of a nonpublic company?
A consistency modification. A consistency modification results in an emphasis-of-matter paragraph. Qualified and adverse opinions include a basis for modification paragraph. When a report refers to component auditors no additional paragraph is added.
Which of the following is least likely to result in inclusion of an additional paragraph being added to an audit report?
A decision not to confirm accounts receivable.
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 Because the auditor does not concur with the change it is a departure from GAAP. Because the amount is material and pervasive, an adverse opinion is appropriate.
A material misstatement is considered pervasive
Adverse opinion
The client has elected to not follow GAAP
Adverse opinion
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. The auditor communicates through the auditors' report. Note that the client will include a discussion of the related party transactions in a note to the financial statements.
Assume that the opinion paragraph of an auditors' 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. This phrase does not give the reader of the report a clear-cut indication of the auditors' opinion. The phrase appears to modify the standard opinion paragraph, but is not forceful enough to constitute qualifying language.
After completing a financial statement audit, the auditor needs to assess the situation to determine the proper type of report to issue. Expressing an independent opinion on the fairness of financial statements is an attestation service most frequently provided by auditors. The opinion is expressed in the auditors' report.
Audit reports can be unmodified or modified. A report with an unmodified opinion may be a "standard report" or can include an emphasis-of-matter paragraph. A modified report can have an extra explanatory paragraph in connection with a qualified opinion, adverse opinion, or disclaimer of opinion.
The auditors' report should be dated as of the date the:
Auditors have accumulated sufficient appropriate evidence. The audit report should be dated no earlier than when the auditors have accumulated sufficient appropriate evidence. This date is often the last day of fieldwork.
Auditors determine that the possible effects on the financial statements of the inability to obtain sufficient evidence (i.e. a scope limitation) could be both material and pervasive
Disclaimer of opinion
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. Because the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive, a disclaimer is appropriate.
An emphasis-of-matter paragraph always _______ the opinion paragraph.
Do not Changes in estimates do not require an explanatory paragraph.
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 believe 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 lower than the cost; the client has fully disclosed the facts in notes to the financial statements.
Either qualified or adverse
A change in the estimated service lives of previously recorded plant assets based on newly acquired information.
Emphasis-of-Matter Paragraph on Consistency Added? - No
A change to including the employer's share of FICA taxes as "Retirement benefits" on the income statement. This information was previously included with "Other taxes."
Emphasis-of-Matter Paragraph on Consistency Added? - No
A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits.
Emphasis-of-Matter Paragraph on Consistency Added? - Yes
A change from direct costing to full absorption costing for inventory valuation.
Emphasis-of-Matter Paragraph on Consistency Added? - Yes
A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing.
Emphasis-of-Matter Paragraph on Consistency Added? - Yes
A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction contracts.
Emphasis-of-Matter Paragraph on Consistency Added? - Yes
Correction of a mathematical error in inventory pricing made in a prior period.
Emphasis-of-Matter Paragraph on Consistency Added? - Yes
Auditors report on the consistency of application of accounting principles. Assume that the following list describes changes that have a material effect on a client's financial statements for the current year.
For each of the following situations, state whether the audit report should include an emphasis-of-matter (explanatory) paragraph on consistency.
An audit report for a public client indicates that the financial statements were prepared in conformity with:
Generally accepted accounting principles (United States). An audit report for a public client indicates that the financial statements are presented in conformity with generally accepted accounting principles (United States). The PCAOB does not issue accounting standards.
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. Reference to the work of a component auditor is not, in itself, a qualification of the group audit report. This reference does not lessen the auditors' collective responsibility. Rather, it merely divides this responsibility among two or more CPA firms.
A client changed the depreciable life of certain assets from 10 years to 12 years. The auditor does not concur with the change. Confined to fixed assets and accumulated depreciation, the misstatements involved are not considered pervasive.
Qualified
The auditors believe that the financial statements have been presented in conformity with generally accepted 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 A lack of disclosure leads to either a qualified opinion or an adverse opinion. Since the effect is material, but not pervasive, a qualified opinion is appropriate.
What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated?
Qualified - No Adverse - Yes When a misstatement is pervasive, an adverse opinion is appropriate.
When the matter is properly disclosed in the financial statements of a nonpublic company, 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?
Qualified - No Unmodified w/ emphasis of matter - Yes Substantial doubt about a client's ability to continue as a going concern results in either an unqualified report with explanatory language (or, less frequently, a disclaimer of opinion). A qualified report is not appropriate.
A nonpublic company's change in accounting principles that the auditors believe is not justified is likely to result in which of the following types of audit opinions?
Qualified - Yes Unmodified w/ EOM - No When an unjustified change in accounting principles occurs, either a qualified or adverse opinion is appropriate as this represents a departure from generally accepted accounting principles. An adverse opinion is appropriate, but not a disclaimer of opinion.
See Chapter 17 HW #17....there are a lot of examples
See Chapter 17 HW #17....there are a lot of examples
See Chapter 17 HW #18
See Chapter 17 HW #18
See chapter 17 homework #16
See chapter 17 homework #16
When issuing financial statements and their related opinion, the auditor needs to assess the situation to determine the proper type of report to issue. Auditors express an unmodified opinion when they are able to obtain sufficient and appropriate audit evidence that the financial statements as a whole are free of material misstatement. Under certain circumstances, however, auditors may add an emphasis-of-matter paragraph that refers to a matter appropriately presented See ch 17 homework #23
The emphasis-of-matter paragraph follows the opinion paragraph and states that the auditor's opinion is not modified, but that the matter is to be emphasized. See ch 17 homework #23
Auditors have obtained sufficiently appropriate evidence to conclude that the financial statements are not materially misstated
Unmodified opinion
Auditors have doubt about a company's ability to continue as a going concern
Unmodified opinion with an emphasis of matter paragraph
A client changed its depreciation method for production equipment from the straight-line method to the units-of-production method based on hours of utilization. The auditor concurs with the change.
Unmodified with an emphasis-of-matter paragraph.
The auditors decide not to make reference to the report of a component auditor that audited a portion of group financial statements.
Unmodified—standard When no reference is made to the component auditors a standard unmodified report is issued.
Bowles Company is engaged in a hazardous trade 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
A client changed the depreciable life of certain assets from 10 years to 12 years. The auditor concurs with the change.
Unmodified—standard.
A client changed the method it uses to calculate postemployment benefits from one acceptable method to another. The effect of the change is immaterial this year but is expected to be material in the future.
Unmodified—standard.
A client changed the salvage value of certain assets from 5 percent to 10 percent of original cost. The auditor concurs with the change.
Unmodified—standard.
A client uses the specific identification method of accounting for valuable items in inventory, and LIFO for less valuable items. The auditor concurs that this is a reasonable practice.
Unmodified—standard.
he client has changed from LIFO to FIFO for inventory 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 Since the auditor concurs that the change is desirable, an unmodified opinion with an emphasis-of-matter paragraph is appropriate.
A material departure from generally accepted accounting principles will result in auditor consideration of:
When the auditors take exception to the application of accounting principles in the client's financial statements, they will issue either a qualified or adverse opinion, depending on whether the misstatement is considered pervasive.
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(n) _____ opinion is appropriate if a material misstatement is considered pervasive.
adverse Auditors issue an adverse opinion when the deficiencies in the financial statements are both material and pervasive.
Auditors may add an emphasis-of-matter paragraph that refers to a matter that is _________ presented or disclosed.
appropriately Auditors may want to emphasize a matter even though it is appropriately presented.
Auditors _____ an opinion when they are unable to form an opinion.
disclaim Auditors issue a disclaimer of opinion when they do not have enough evidence to issue an opinion.
When there is significant doubt as to the ability to continue as a going concern, a(n) _________ paragraph may be added.
emphasis of matter An emphasis-of-matter paragraph may be added when there is signficant doubt as to the ability of the entity to continue as a going concern.
If substantial doubt about a going concern exists, an ______ paragraph is the most common resolution.
emphasis-of-matter The emphasis-of-matter paragraph comes after the opinion paragraph.
Limitations on the scope of an audit may create a situation in which the auditors are unable to obtain sufficient ________.
evidence Scope limitations may prevent the auditors from obtaining sufficient evidence. When auditors cannot obtain sufficient evidence, they may need to issue a disclaimer.
The auditor's responsibility relating to a GAAS audit is for __________ on the financial statements.
expressing an opinion
Responsibility for the preparation and fair presentation of the financial statements rests with the __________.
management
Qualified opinions are issued when the financial statements are ________ misstated.
materiality When the financial statements are materially misstated, a qualified opinion may be issued.
A going concern is to be evaluated for a period not to exceed _________ beyond the date of the financial statements.
one year
When a nonpublic client elects to change accounting principles from one acceptable principle to another acceptable principle and the auditors agree the change is desirable, they should issue a report with a(n) __________ opinion.
unmodified
A(n) __________ opinion is an opinion that the financial statements of a public company fairly present financial position, results of operations, and cash flows, in conformity with generally accepted accounting principles.
unqualified
If the auditors have examined the prior year's financial statements presented for comparative purposes, they should __________ their opinion for any new information.
update
A company has not followed generally accepted accounting principles in the recording of its leases. The amounts involved are immaterial.
Unmodified—standard.
Which of the following is least likely to result in inclusion of an additional paragraph being added to an audit report?
An emphasis-of-matter paragraph is appropriate when an auditor wishes to emphasize a matter concerning the financial statements, but not a matter concerning the scope of the audit engagement. An emphasis-of-matter paragraph is not appropriate since confirming accounts receivable relates to the scope of the audit.
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
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
A company valued its inventory at current replacement cost. Although the auditor believes that the inventory costs do approximate replacement costs, these costs do not approximate any GAAP inventory valuation method.
Qualified or adverse
A client changed its depreciation method for production equipment from the straight-line to a units-of-production method based on hours of utilization. The auditor does not concur with the change.
Qualified or adverse.
A company has not followed generally accepted accounting principles in the recording of its leases.
Qualified or adverse.