Chapter 12

"When component auditors are involved in the audit of group financial statements, the group auditors may issue a report that a. Refers to the component auditors, describes the extent of the component auditors' work, and expresses an unmodified opinion. b. Does not consider or evaluate the component auditors' work but expresses an unmodified opinion in a standard report. c. Places primary responsibility for the reporting on the component auditors. d. Names the component auditors, describes their work, and presents only the group auditors report

A Modification of the report to indicate the work of component auditors with an unmodified opinion is a viable reporting option.

How is the auditors' responsibility for expressing the opinion on financial statements disclosed in the standard (unmodified) report for a nonpublic company? a. Stated explicitly in the Auditor's Responsibility section b. Unstated but understood in the Auditor's Responsibility section c. Stated explicitly in the opinion paragraph d. Stated explicitly in the introductory paragraph

A The auditors' responsibility is explicitly stated in the Auditor's Responsibility section of the report.

"The auditors determined that the entity is suffering financial difficulty and its going-concern status is seriously in doubt. Assuming that the entity adequately disclosed this matter in the financial statements, the auditors must choose between which of the following auditors' report alternatives? a. Unmodified opinion with a reference to going-concern or disclaimer of opinion. b. Standard (unmodified) report or a disclaimer of opinion. c. Qualified opinion or adverse opinion. d. Standard (unmodified) report or adverse opinion."

A The choice between an unmodified opinion with reference to going-concern matters or a disclaimer of opinion depends on the auditors' perception of the magnitude of the uncertainty.

"If the auditors decide to present separate reports on the entity's financial statements and internal control over financial reporting, which of the following should be modified to refer to the other report?" Report on financial statements and report on internal control over financial reporting? a) yes yes b) yes no c) no yes d) no no

A The report on internal control over financial reporting would be modified to reference the report on the financial statements; in addition, the report on the financial statements would be modified to reference the report on internal control over financial reporting.

"R. Wolfe became the new auditor for Royal Corporation, succeeding C. Mason, who audited the financial statements last year. Wolfe needs to report on Royal's comparative financial statements and should disclose in the report an explanation about other auditors having audited the prior year: a. Only if Mason's opinion last year was qualified. b. To describe the prior audit and the opinion but not name Mason as the predecessor auditor. c. To describe the audit but not reveal the type of opinion issued by Mason. d. To describe the audit and the opinion and name Mason as the predecessor auditor"

B The predecessor auditors should be named only if their report is included.

"When auditors wish to issues an unmodified opinion but highlight that the entity changed its method of accounting for software development costs, they would most appropriately identify the change in accounting method in which of the following? a. The introductory paragraph. b. The opinion paragraph. c. An emphasis-of-matter paragraph. d. An other-matter paragraph"

C Emphasis-of-matter paragraphs discuss issues related to users' understanding of the financial statements, such as consistency.

If the opinion issued on prior years' financial statements is no longer appropriate and financial statements are presented in comparative form, the auditors' current report should a. Not reference the prior years' financial statements. b. Indicate that the opinion on the prior years' financial statements cannot be relied upon. c. Reference the type of opinion issued on the prior years' financial statements and indicate that the current opinion on these financial statements differs from that expressed in the prior years. d. Express the revised opinion on the prior years' financial statements without referencing the previously issued opinion.

C If a previously issued opinion is no longer appropriate, the auditors' report would reference the type of opinion issued as well as the fact that the current opinion differs from the opinion originally issued.

"Company A hired S&D CPA's, to audit the financial statements of Company B and deliver the report to Megabank. Who is the client? a. Megabank. b. Samson & Delilah. c. Company A. d. Company B."

C The client is the entity or individual that engages the auditor (in this case, Company A).

What is a consistency change? And how does it affect the audit opinion?

Consistency Change → client decides to move from one accounting principal to another (should be very rare) Impact → Must be justified and fully disclosed Adds a paragraph that directs the reader to tell them about the change in principle If they fail to justify/disclose it → could change the audit opinion Change in estimates, classifications, or formatting do not count

"Under which of the following conditions can a disclaimer of opinion never be issued? a. The entity's going-concern problems are highly material and pervasive. b. The entity does not allow the auditors access to evidence about important accounts. c. The auditors own stock in the entity. d. The auditors have determined that the entity uses the NIFO (next-in, first-out) inventory costing method"

D Auditors cannot disclaim an opinion when departures from GAAP exist and they have conducted a GAAS audit (qualified or adverse opinions are appropriate).

"Auditors found that the entity has not capitalized a material amount of leases in the financial statements. When considering the materiality of this departure from GAAP, the auditors would choose between which reporting options? a. Unmodified opinion or disclaimer of opinion. b. Unmodified opinion or qualified opinion. c. Unmodified opinion with an emphasis-of-matter paragraph or an adverse opinion. d. Qualified opinion or adverse opinion."

D Because this is a material departure from GAAP, the reporting options are to issue either a qualified or adverse opinion.

"When financial statements are presented in comparative form and another firm audited the prior years' financial statements (but the other firm's report is not presented with the financial statements), the auditors' report on the current-year financial statements should a. Disclaim an opinion on the prior years' financial statements. b. Not refer to the prior years' financial statements. c. Refer to any procedures performed by the current auditor to verify the opinion on the prior years' financial statements d. Refer to the report and type of opinion issued by the other firm on the prior years' financial statements."

D Both the report and type of opinion expressed on prior years' financial statements should be referenced in the report on the current year's financial statements.

"Which of the following is not included in the standard (unmodified) report on the financial statements? a. An identification of the financial statements that were audited. b. A general description of an audit. c. An opinion that the financial statements present financial position in accordance with GAAP. d. An emphasis-of-matter paragraph commenting on the effect of economic conditions on the entity."

D The standard (unmodified) report does not call for economic analysis or commentary in an emphasis-of-matter paragraph.

"When reporting under GAAS, certain statements are required in all auditors reports (explicitly) and others are required only under certain conditions (implicit). Which combination that follows correctly describes the auditors' responsibilities for reporting?" GAAP Consistency Going concern Opinion

Explicit Implicit Implicit Explicit

What is required with the going concern principle?

Going concern → a client in business will continue to stay in business If there are doubts → a paragraph must be made (emphasis of matter), only if it is extreme would a change of opinion be needed

What is required of auditors concerning other data presented in the same document?

Have to read all information and look for inconsistencies We have to figure out which one is right and determine how it affects the financial statements Add reasoning for concerns and explanations of inconsistencies

What is a disclaimer of opinion and where is it usually used?

Reasons for issuing a disclaimer: Scope limitation Lack of auditor independence Significant uncertainty and the auditor cannot form an opinion

Satyam Case - What did PwC do wrong?

They over relied on internal documents without external evidence for support, did not look at enough evidence in total Tried to defend themselves by saying that they could not possibly look at every transaction, did not find a reasonable assurance US firms talk about how great their international firms are, but when one of those fail, the global firm is quick to point out who is actually at fault and every firm is separate based on location

Types of opinions

Unmodified opinion (immaterial stuff is wrong but clean) Qualified opinion (material but not pervasive) Adverse opinion (pervasive wrongdoings) Disclaimer of opinion