Chapter 3 Audit

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

auditor is not appointed until after clients year-end

An audit of historical financial statements most commonly includes the

balance sheet, income statement, statement of cash flows, and the statement of changes in stockholders' equity.

The standard unmodified opinion audit report for a nonpublic entity must

be dated

When a qualified or adverse opinion is issued, the qualifying paragraph is inserted

between the scope and opinion

When an auditor is trying to determine how changes can affect consistency and and/or comparability, he should keep in mind that

changes that affect consistency require an explanatory paragraph if they are material.

When analyzing the various types of audit reports,

companies will generally make the appropriate changes to their accounting records to avoid a qualification by the auditor.

After the auditor determines whether any conditions exist which require a departure from a standard unmodified opinion audit report, the next step in the decision process is to

decide the materiality for each condition

The first step to be followed when deciding the appropriate audit report in a given set of circumstances is to

determine whether any conditions exists requiring a departure from a standard unmodified opinion audit report.

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)

disclaimer of opinion

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

disclaimer of opinion whenever materiality is in question

The term "explanatory paragraph" was replaced in the AICPA auditing standards with

emphasis of matter paragraph

Most auditors believe that financial statements are "presented fairly" when the statements are in accordance with GAAP, and that it is also necessary to

examine the substance of transactions and balances for possible misinformation.

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

february 8th, 2017

For the report containing a disclaimer for lack of independence, the disclaimer is in the

first and only paragraph

Under AICPA auditing standards, the primary auditor issuing the opinion on the financial statements is called the

group engagement partner

For departures from GAAP or scope restrictions, the auditor must decide if the potential effect on the financial statements is

immaterial, material or highly material

If the auditor lacks independence, a disclaimer of opinion must be issued

in all cases

Auditing standards require that the audit report must be titled and that the title must

include the word "independent"

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

included in a separate paragraph in the report

The separate report on internal control over financial reporting

includes a paragraph that addresses the inherent limitations of internal controls.

The unqualified opinion audit report for public entities includes the following three paragraphs:

introductory, scope and opinion

The standard unmodified audit report

is sometimes called a clean opinion

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?

issue a joint report signed by both CPA firms

In which situation would the auditor be choosing between "except for" qualified opinion and an adverse opinion?

lack of full disclosure within the footnotes

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

may refer to the examination of the other auditor

If there is a deviation in the statements' preparation in accordance with GAAP and another accounting principle was applied on a basis that was not consistent with that of the preceding year,

more than 1 modification should be included in the report

Misstatements must be compared with some measurement base before a decision can be made about materiality. A commonly accepted measurement base includes

net income, total assets, working capital

The auditor's responsibility section of the standard unmodified opinion audit report states that the audit is designed to

obtain reasonable assurance whether the statements are free of material misstatement.

If most or all users' decisions that are based on the financial statements are likely to be significantly affected, the materiality level is

pervasive

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

present the information in the audit report and to issue a qualified or an adverse opinion.

After the balance sheet date but prior to issuance of the auditor's report the auditor learns that the client's facility in a foreign country has been expropriated. Management refuses to disclose this information in a financial statement footnote or present pro-forma data as to the effect of the event. The auditor should

provide the information in the report and modify the opinion

If the phrase "except for" is present in the opinion paragraph of the audit report, the auditor has issued a(n)

qualified opinion

All of the following are causes for the addition of an explanatory paragraph under both AICPA and PCAOB standards except for

reports involving other auditors

The auditor's responsibility section of the standard unmodified opinion audit report states that the auditor is

responsible for the opinion on the financial statements

If the financial statements include an income statement and a balance sheet but exclude the statement of cash flows, the auditors

should have issued a qualified opinion due the departure from GAAP

When accounting principles are not consistently applied, and the materiality level is immaterial, the auditor will issue a(n)

standard unmodified opinion

In most audits, the auditor issues a(n)

standard unmodified opinion audit report

Which of the following is not explicitly stated in the standard unmodified opinion audit report?

the audit was conducted in accordance with GAAP

Which of the following scenarios does not result in a qualified opinion?

the auditor lacks independence with respect to the audited entity

The appropriate audit report date for a standard unmodified opinion audit report for a nonpublic entity should be

the date the auditor completed the auditing procedures in the field.

Which of the following is least likely to cause uncertainty about the ability of an entity to continue as a going concern?

the entity is suing a competitor for a minor patent infringement

All of the following would require an emphasis of matter paragraph except for

the lack of auditor independence

The audit report date on a standard unmodified opinion audit report indicates

the last day of the auditor's responsibility for the review of significant events that occurred after the date of the financial statements.

An adverse opinion is issued when the auditor believes

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.

The management's responsibility section of the standard unmodified opinion audit report for a nonpublic company states that the financial statements are

the responsibility of management

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

the scope of the audit has been restricted

To emphasize the fact that the auditor is independent, a typical addressee of the audit report could be

the shareholders or board of directors

Under PCAOB standard

the standard unmodified opinion audit report is referred to as an unqualified opinion audit report.

Examples of unmodified opinions which contain modified wording (without adding an explanatory paragraph) include

the use of other auditors

When an adverse opinion is issued, a scope paragraph would be

unchanged

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)

understanding of inventory

When there is a justified departure from GAAP which is considered material, the auditor should issue a(n)

unmodified opinion with an explanatory paragraph

the highest level of materiality exists when

users are likely to make incorrect decisions if they rely on the overall financial statements

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

users of the financial statements

The standard audit report for nonpublic entities refers to GAAS and GAAP in which sections?

GAAS- auditors responsibility GAAP- Managements responsibility and opinion paragraph

Which of the following is a correct statement regarding materiality?

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

When an auditor issues a qualified report due to a scope limitation an explanatory paragraph is normally added. Which, if any, of the following paragraphs are also modified?

NO- Introductory YES- scope YES- opinion

Indicate which changes would require an explanatory paragraph in the audit report

NO-Change in the estimated life of an asset NO-Variation in the format of financial statements

Auditing standards for public companies are established by the

PCAOB

An auditor determines the financial statements include at least a material departure from GAAP. Which type of opinion may be issued?

Qualified or Adverse

Which of the following is correct regarding IFRS?

Recent developments suggest that the SEC may be slowing down its efforts towards adopting IFRS any time soon.

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

1 year from the date of the financial statements

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?

1. A combined report on financial statements and internal control over financial reporting 2. Separate reports on financial statements and internal control over financial reporting

The introductory paragraph of the standard unmodified opinion audit report for a nonpublic company performs which functions?

1. The CPA has performed the audit 2. Lists financial statements being audited

No reference is made in the auditor's report to other auditors who perform a portion of the audit when

1. The other auditor audited an immaterial portion of the audit. 2. The other auditor is well known or closely supervised by the principle auditor. 3. The principle auditor has thoroughly reviewed the work of the other auditor.

A qualified opinion can be issued for which of the following?

1. When a limitation on the scope of the audit has occurred 2. When GAAP has not been used

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

1. an unmodified opinion audit report with an explanatory paragraph. 2. a disclaimer of opinion.

An auditor can express a qualified opinion due to a

1. departure from GAAP 2. Lack of sufficient evidence

When there is a lack of consistent application in accounting principles

1. the nature and impact of the change should be adequately disclosed. 2. the auditor should discuss the nature of the change and point the reader to the footnote that discusses the change. 3. the materiality of the change is evaluated based on the current year effect of the change.

Which of the following requires recognition in the auditor's opinion as to consistency?

The change from the cost method to the equity method of accounting for investments in common stock.

Which of the following are changes that affect the comparability of financial statements but not the consistency and therefore, do not have to be included in the auditor's report?

A) error corrections not involving principles B) changes in accounting estimates C) variations in the format and presentation of financial information

When the client fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the footnotes,

A) it is the auditor's responsibility to present the information in the audit report. B) the auditor should issue a qualified or an adverse opinion. C) the qualification is put in an added paragraph preceding the opinion.

More than one modification should be included in the audit report when

A) the auditor is not independent and the auditor knows that the company has not followed generally accepted accounting principles. B) there is substantial doubt about the going concern of the company and information about the causes of the uncertainties is not adequately disclosed in the footnotes. C) there is a scope limitation and there is substantial doubt about the company's ability to continue as a going concern.

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

When there is a scope restriction, what type of audit report can be issued?

A) unmodified opinion B) qualification of scope and opinion C) disclaimer of opinion

In which of the following circumstances would an auditor most likely express an adverse opinion?

The financial statements are not in conformity with the FASB statement on loss contingencies.

Which of the following is incorrect concerning scope limitations?

The most common circumstance imposed scope restriction is due to the client changing their auditors.

Which of the following is a correct statement regarding the standard unmodified opinion audit report?

The scope paragraph includes a statement that the auditor considers internal controls when designing the audit procedures performed.

Which of the following statements are true for the standard unmodified opinion audit report of a nonpublic entity?

The scope paragraph states that the auditor evaluates the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management.

Indicate which changes would require an explanatory paragraph in the audit report.

YES- Changes in reporting entities, such as the inclusion of an additional company in the combined financial statements NO- The CPA makes reference to the work of another auditor to indicate shared responsibility in an unqualified opinion.

Indicate which changes would require an explanatory paragraph in the audit report

YES- Correction of an error by changing from an accounting principle that is not generally acceptable to one that is generally acceptable YES- change from lifo to fifo

An auditor who issues a qualified opinion because sufficient appropriate evidence was not obtained should describe the limitations in an explanatory paragraph. The auditor should also modify the

YES- Scope paragraph YES- opinion paragraph NO- notes to the financial statements

Indicate which changes would require an explanatory paragraph in the audit report.

YES- The CPA concludes there is substantial doubt about the entity's ability to continue as a going concern. YES- Change from Fifo to Lifo

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 disclaimer of opinion

Which of the following modifications of the auditor's report does not include an explanatory paragraph?

a principal auditor accepts the work of another auditor

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 qualified opinion

When analyzing the various types of opinions that the auditor can issue,

a qualified opinion report can be used only when the auditor concludes that the overall financial statements are fairly stated.

A restriction on the scope of the auditor's examination requires

a qualifying paragraph preceding the opinion paragraph

misstatement in the financial statements can be considered material if knowledge of the misstatement will affect a decision of

a reasonable user of the financial statements

When a company's financial statements contain a departure from GAAP with which the auditor concurs, the departure should be explained in

a separate paragraph

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 standard unmodified opinion audit report is issued

When dealing with materiality and scope limitation conditions,

a unqualified opinion may still be issued depending on the materiality of the scope limitation

What category of audit report will be issued if the auditor concludes that the financial statements are not fairly presented?

adverse

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

an explanatory paragraph explaining the change