Chapter 12 - Audit

Auditors will issue an adverse opinion when

a violation of generally accepted accounting principles is sufficiently material and pervasive that a qualified opinion is not justified.

Auditors are required to reference consistency in their report when there are changes in

accounting principles.

If management fails to provide adequate justification for a change from one generally accepted accounting principle to another, the auditors should

add an additional paragraph and express a qualified or an adverse opinion on the entity's financial statements for lack of conformity with generally accepted accounting principles.

When component auditors are involved in the audit of group financial statements, the group auditors are required to

consider the independence and professional reputation of the component auditors in deciding how to utilize their work.

After considering management's plans, an auditor concludes that there is substantial doubt about a client's ability to continue as a going concern for a reasonable period of time. The auditor's responsibility includes

considering the adequacy of disclosure about the client's possible inability to continue as a going concern.

The group auditors decide not to refer to the audit of component auditors who audited a subsidiary of the group financial statements. After making inquiries about the component auditors' professional reputation and independence, the group auditor most likely would

contact the component auditors' and review the audit programs and working papers pertaining to the subsidiary.

When an entity will not permit inquiry of outside legal counsel, the auditors' report on the entity's financial statements will ordinarily contain a(n)

disclaimer of opinion

A report that acknowledges reliance on the reports of component auditors is a type of report modification known as a(n)

division of responsibility.

Zag Co. issues financial statements that present financial position and results of operations, but Zag omits the related statement of cash flows. Zag would like to engage Brown, CPA, to audits its financial statements without the statement of cash flows although Brown's access to all of the information underlying the basic financial statements would not be limited. Under the circumstances, Brown most likely would

explain to Zag that the omission requires a qualification of the auditors' opinion.

Auditors who are reporting on financial statements that contain a material departure from generally accepted accounting principles should include an additional paragraph and

express a qualified or adverse opinion.

Independent auditors must consider whether the entity has the ability to continue as a going concern. If a substantial doubt exists but disclosure is adequate and no other basis exists for modifying the report, the auditors would normally

express an unmodified opinion with an emphasis-of-matter paragraph describing the going-concern uncertainty.

When updating the report on prior-years' financial statements presented in comparative form, the auditors' responsibility for the prior-years' financial statements is

extended to the date of the updated audit report.

Charlie Company's comparative financial statements include the financial statements of the prior year that were audited by predecessor auditors whose report on those financial statements is not presented. If the predecessor's report was qualified, the successor auditors should

indicate in their report the substantive reasons for the qualification issued by the predecessor auditors.

An entity's comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was qualified, the successor should

indicate the substantive reasons for the qualification in the predecessor auditors' opinion.

An auditor may report on summary financial statements that are derived from a complete set of audited financial statements only if the auditor

indicates whether the information is fairly stated in all material respects in relation to the complete financial statements.

When disclaiming an opinion due to a client-imposed scope limitation, auditors should describe the nature of the scope limitation in an additional paragraph and modify the

introductory paragraph, Auditor's Responsibility section, and opinion paragraph

Reference in a group auditors' report to the fact that part of the audit of group financial statements was performed by component auditors most likely would be an indication of

involvement of component auditors in the audit of the group financial statements.

The auditors include an emphasis-of-matter paragraph in an otherwise unmodified report on the entity's financial statements to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph

is appropriate and would not otherwise affect the unmodified opinion.

When reporting on financial statements that include only summarized totals of account balances, the auditors' conclusion should state whether the information in the summary financial statements

is fairly stated, in all material respects, in relation to the complete financial statements.

Harris & Thompson were engaged to audit Smart Corp's comparative financial statements for the years ended December 31, Year 1 and Year 2. The Year 1 financial statements were presented in accordance with generally accepted accounting principles, but the Year 2 financial statements were determined to be materially misstated. As a result, Harris & Thompson should

issue an unmodified opinion on the Year 1 financial statements and a qualified opinion on the Year 2 financial statements.

Auditors most likely would issue a disclaimer of opinion on the entity's financial statements because of

management's refusal to furnish written representations.

SEC registrants' financial statements should be accompanied by all of the following reports except the

management's report on financial statements and related disclosures.

When auditors are engaged to examine an entity's financial statements but decide to issue a disclaimer of opinion because of a scope limitation, the report would not

modify the Auditor's Responsibility section to identify the basis for the disclaimer

When a circumstance-imposed scope limitation has a material but not pervasive effect on the sufficiency of the auditors' evidence, the auditors' report will

modify the opinion paragraph

When auditors qualify their opinion on the entity's financial statements because of inadequate disclosure, the auditors should describe the nature of the omission in an additional paragraph and modify

neither the introductory paragraph nor Auditor's Responsibility section

If the auditors obtains sufficient appropriate evidence on the entity's accounts receivable balance by alternative procedures because it is impracticable to confirm accounts receivable, the opinion on the entity's financial statements should be unmodified and would

not mention the alternative procedures.

When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditors should

not refer to consistency in the report.

The standard (unmodified) report issued in the audit of a nonpublic entity includes a(n)

opinion paragraph providing the auditors' conclusion as to the fair presentation of the financial statements.

Auditors should disclose the substantive reasons for expressing an adverse opinion on the entity's financial statements in an additional paragraph

preceding the opinion paragraph.

When reporting on comparative financial statements, auditors ordinarily should modify their previously expressed opinion on the prior-years' financial statements if the

prior-years' financial statements are restated to conform with generally accepted accounting principles.

The auditors have determined that there is substantial doubt about an entity's ability to continue as a going concern. When considering the appropriateness of management's disclosures and severity of the uncertainty, all of the following reports could be issued, except

qualified opinion based on a material and pervasive uncertainty

The auditors' report on the entity's financial statements included an additional paragraph disclosing a difference of opinion between the auditors and the entity for which the auditors believed an adjustment to the financial statements should be made. The opinion paragraph of the auditors' report should express a(n)

qualified opinion citing a departure from generally accepted accounting principles.

The auditors conclude that an entity's illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the overall materiality and pervasiveness of the effect of this illegal act on the financial statements, the auditors should express either a(n)

qualified opinion or an adverse opinion.

When financial statements contain a departure from GAAP, the auditors should explain the unusual circumstances in a separate paragraph and express an opinion that is

qualified or adverse, depending on the overall materiality and pervasiveness of the GAAP departure.

When audited financial statements are presented in a document containing other information, the auditors should

read the other information to determine that it is consistent with the audited financial statements.

When other information is presented in a document with audited financial statements, the auditors' report should

reference the other information only if inconsistencies or material misstatements are identified between this information and the financial statements.

When a predecessor auditor has examined the prior-years' financial statements presented in comparative format, the current auditors' report should

reference the predecessor auditors' report in an other-matter paragraph.

Situations in which auditors provide additional copies of a previous issued report or grant entities permission to use a previously issued report in a document containing financial statements after its original date are known as

reissued reports.

"As described in Note 5 to the financial statements, General Express changed its statistical method of computing product

report with a consistency modification.

The auditors conclude that there is a material inconsistency in the "other information" in an annual report to shareholders containing audited financial statements. If the auditors conclude that the financial statements do not require revision, but the entity refuses to revise or eliminate the material inconsistency, the auditors may

revise the report on the entity's financial statements to include an other-matter paragraph describing the material inconsistency.

Hart, CPA, is auditing the year 2 financial statements of Kell Co. Previously, Hart audited Kell's year 1 financial statements and expressed a qualified opinion due to a scope limitation. Hart decides to include an other-matter paragraph in the year 2 report because comparative financial statements are being presented for year 2 and year 1. This paragraph should indicate the

substantive reasons for the prior-year's qualification.

The issuance of a disclaimer of opinion generally indicates

the auditors cannot form an opinion on the fairness of presentation of the financial statements as a whole.

Auditors would not normally issue a qualified opinion on the entity's financial statements when

the auditors lack independence with respect to the audited entity.

Green, CPA, was engaged to audit the financial statements of Essex Co. after its fiscal year had ended. The timing of Green's appointment and the start of fieldwork made confirmation of accounts receivable by direct communication with the customers not feasible. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green's auditors' report most likely contained a(n)

unmodified opinion.

When a previously expressed opinion is updated from qualified to unmodified, the auditors' report on comparative financial statements should

update the previously expressed opinion and explain the reasons for the change, including a reference to the footnote describing the change.

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. The entity's financial statements adequately disclose its financial difficulties. Under these circumstances, the auditor's report is required to include an emphasis-of-matter paragraph that specifically uses the phrase(s).

"Except for the effects of such adjustments" - NO "Possible discontinuance of the entity's operations" - NO

Which of the following phrases would auditors most likely include in their report when expressing a qualified opinion on the entity's financial statements because of inadequate disclosure?

"Except for the omission of the information discussed in the preceding paragraph"

Which of the following statements is not included in the Auditor's Responsibility section of the standard (unmodified) report?

"In accordance with accounting principles generally accepted in the United States of America."

Which of the following statements is not included in the Auditor's responsibility section of the standard (unmodified) report on the entity's financial statements?

"We have audited the accompanying financial statements..."

Which of the following is an example of a material accounting change that requires recognition in an unmodified opinion on the entity's financial statements?

A change in the entity's form of reporting entity.

Holmes & Smith, LLP, were engaged to audit the financial statements of Sodolak Reality for the year ended December 31. During the engagement, Sodolak filed a lawsuit against Holmes & Smith, LLP. What effect, if any, will this lawsuit have on the auditors' report?

A disclaimer of opinion should be issued because the auditors' independence is impaired.

Material and pervasive departure from GAAP.

Adverse

A client has capitalizable leases but refuses to capitalize them in the financial statements. Which of the following reporting options does an auditor have if the amounts pervasively distort the financial statements?

Adverse opinion.

In which of the following should an auditors' report refer to the lack of consistency when there is a change in accounting principle that is significant?

An emphasis-of-matter paragraph following the opinion paragraph.

What is the major difference between a reissued report and an updated report?

An updated report considers information that has come to their attention since the date of the original report, while a reissued report does not consider this information.

When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the situation in the

Auditor's Responsibility section - NO Notes to the financial statements - NO

Audit provides a reasonable basis for an opinion.

Auditor's Responsibility section

Our responsibility is to express an opinion on these financial statements based on our audits.

Auditor's Responsibility section

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Auditor's Responsibility section

What is the auditors' responsibility for reporting on other information accompanying financial statements?

Auditors are required to report on other information only if it is misstated or inconsistent with the financial statements.

An auditor who is unable to form an opinion on a new client's opening inventory balances may issue an unmodified opinion on the current year's

Balance sheet only

How do auditors make the following representations when issuing the standard (unmodified) auditors' report?

Consistent application of accounting principles - Implicitly Use of judgment in selecting audit procedures - Explicitly

Which of the following is not an appropriate reporting option when component auditors are involved in the audit of group financial statements, assuming that the component auditors' work did not identify any issues affecting the group auditors' report?

Disclaim an opinion on the portion of the financial statements examined by the component auditors.

Holmes, CPA, assisted Williams Corporation in preparing its financial statements and gave Williams permission to use Holmes's name in communications containing these financial statements. If Holmes did not audit the financial statements, what type of opinion should be expressed?

Disclaimer of opinion because Holmes did not audit the financial statements.

During the year under audit, Forrest Corporation experienced significant losses due to a pervasive fraud scheme. Because of the lack of documentary evidence and inability to perform appropriate auditing procedures, the auditors were unable to determine the total amount of the loss. What type of report should the auditors issue?

Disclaimer or qualified opinion.

When auditors conclude that a material and pervasive departure from GAAP exists in an entity's financial statements, which of the following phrases would most likely be included in their report?

Do not present fairly in all material respects."

We have audited the accompanying financial statements of...

Introductory paragraph

Which of the following scope limitations would ordinarily be of most concern to the auditors?

Management's refusal to provide auditors with written representations.

Management is responsible for the preparation and fair presentation of these financial statements...

Managements responsibility section

Carson, LLP, audited Best Corporation's financial statements for the year ended December 31, Year 1. On February 15, Year 3, Carson gave Best permission to reissue the report previously issued on and dated March 1, Year 2. When is the cutoff date for Carson's responsibility on the reissued report?

March 1, Year 2.

The financial statements referred to above present fairly, in all material respects, the financial position of...

Opinion paragraph

Which of the following best reflects the auditors' reporting responsibility under generally accepted auditing standards?

Other Information Accompanying the Financial Statements - Exception Required Supplementary Information - Required

Departure from generally accepted accounting principles that is material but not pervasive.

Qualified

Material, but not pervasive, scope limitation. Difficulty: 1 Easy

Qualified

The entity has a lawsuit pending against them. It is probable that the entity will lose the suit. Management has not accrued the best estimate of the loss, but has provided information in the footnotes. It is not expected that this lawsuit will have a significant effect on the entity's ability to continue as a going concern.

Qualified opinion

The entity's management has not provided written representations requested by the auditors. The failure to provide these representations is considered to be a significant limitation

Qualified opinion or disclaimer of an opinion

If financial statements contain a material but non-pervasive departure from generally accepted accounting principles, the auditors should render a(n)

Qualified opinion with reference to departure.

Management determined it was probable that a pending litigation claim would result in a material loss. The loss was disclosed in the footnotes to the financial statements but was not accrued in the income statement. If the auditors believe an accrual should be made, what type of report should be issued?

Qualified or adverse opinion based on a departure from GAAP.

Which of the following situations would not result in auditors adding an additional paragraph to their report without modifying the introductory, scope, or opinion paragraphs of that report?

Reference to a departure from GAAP that is material, but not pervasive, to the financial statements.

Which of the following would not be communicated to users in the auditors' report on an entity's financial statements and related disclosures?

Specific details regarding the audit examination, such as the materiality threshold used to identify material misstatements.

Which of the following paragraphs or sections of the group auditors' report is modified to identify the extent of component auditor involvement in the audit of group financial statements?

The Auditor's Responsibility section.

In which of the following circumstances would a qualified opinion not be appropriate?

The auditors lack independence with respect to the audited entity.

When auditors lack independence, which of the following is true about the report on the entity's financial statements that should be issued?

The auditors should disclaim an opinion and should state specifically that they are not independent.

Which of the following best describes the auditors' responsibility when financial statements are presented in comparative format?

The auditors' report must refer to all financial statements presented in comparative form, regardless of whether they have been audited by the current auditors or predecessor auditors

On which of the following matters would it not be appropriate for the auditors to report using an other-matter paragraph?

The consistency of summary financial statements with the audited financial statements from which they were derived.

In which of the following circumstances may auditors issue the standard (unmodified) report on the entity's financial statements?

The entity changed accounting principles having an immaterial effect on the entity's financial position, results of operations, and cash flows.

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

The financial statements are not in accordance with generally accepted accounting principles regarding the capitalization of leases.

Under which of the following circumstances would a disclaimer of opinion on the entity's financial statements not be appropriate?

The financial statements fail to contain adequate disclosure of related-party transactions.

In which of the following situations would auditors ordinarily choose between expressing a qualified opinion or an adverse opinion on the entity's financial statements?

The financial statements fail to disclose information that is required by generally accepted accounting principles.

Which of the following guidelines should be followed when a disclaimer of opinion is issued?

The report should identify the financial statements accompanying the disclaimer of opinion.

Which of the following is true with respect to the auditors' report on summary financial statements?

The report will indicate whether the summary financial statements are fairly stated in relation to the full financial statements.

Which of the following situations would require auditors to add an other-matter paragraph to their report on comparative financial statements?

The updated opinion issued on prior-years' financial statements differs from the opinion originally issued on those financial statements.

In which of the following circumstances would auditors most likely add an emphasis-of-matter paragraph to the standard (unmodified) report without modifying the opinion on the entity's financial statements?

There is substantial doubt about the entity's ability to continue as a going concern

Emphasis of a matter, no GAAP departure.

Unmodified

Going-concern uncertainties that may have a material (but not pervasive) effect on the financial statements.

Unmodified

Harris is auditing the financial statements of Cole Corp., an energy company. The FASB requires that these financial statements must be accompanied by supplementary mineral reserve information. If this required information is materially misstated, what type of report should Harris issue?

Unmodified opinion with an other-matter paragraph disclaiming an opinion on the mineral reserve information.

The entity has a lawsuit pending against them. There is significant uncertainty about the outcome of the lawsuit, which could have a highly material impact on the viability of the entity. Management has provided adequate disclosure of the lawsuit in the footnotes

Unmodified opinion, emphasis-of-matter paragraph for a going-concern uncertainty or disclaimer of an opinion

The entity has a lawsuit pending against them. It is probable that the entity will lose the suit. Management has accrued the best estimate of the loss and provided adequate disclosure. It is not expected that this lawsuit will have a significant effect on the entity's ability to continue as a going concern.

Unmodified opinion, no modification

Based on recent analysis of usage, the entity has changed the useful life of its office equipment from five to four years. This change is reflected in the depreciation amounts computed for the current year.

Unmodified opinion, no modification.

Restrictions imposed by an entity prohibited the observation of physical inventories, which accounted for 35 percent of total assets. Alternative auditing procedures were not feasible, although the auditors were able to examine satisfactory evidence for all other items in the financial statements. The auditors would most likely express

a disclaimer of opinion on the entity's financial statements.