ACCT 323 CH 17 Connect

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What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated? QualifiedAdverse (1)YesYes (2)YesNo (3)NoYes (4)NoNo

(1)YesYes

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. Unmodified with Emphasis-of-Matter (1)YesYes (2)YesNo (3)NoYes (4)NoNo

(2)YesNo

An audit report for a public client indicates that the financial statements were prepared in conformity with: -Generally accepted auditing standards (United States). -Standards of the Public Company Accounting Oversight Board (United States). -Generally accepted accounting principles (United States). -Generally accepted accounting principles (Public Company Accounting Oversight Board).

-Generally accepted accounting principles (United States).

After performing all necessary procedures, the predecessor auditors reissue a prior-period report on financial statements at the request of the client without revising the original wording. The predecessor auditors should: -Delete the date of the report. -Dual-date the report. -Use the reissue date. -Use the date of the previous report.

-Use the date of the previous report.

The term "except for" in an audit report is: -Used in an adverse opinion. -No longer considered appropriate. -Used in a qualified opinion. -Used for an unmodified opinion when an emphasis-of-matter paragraph is added.

-Used in a qualified opinion.

Which of the following is a "registration statement" that is filed with the SEC by a company planning to issue securities to the public? Form 8-K. Form S-1. Form 10-Q. Form 10-K.

Form S-1

A basis for modification paragraph for a nonpublic company is least likely to relate to which of the following types of opinion? Unmodified. Qualified. Adverse. Disclaimer.

Unmodified.

An audit client has refused to allow the auditors to perform an auditing procedure and there are no other effective alternate procedures available. The circumstance would normally result in the issuance of: -A disclaimer of opinion. -An adverse opinion. -A standard unmodified opinion with a qualified scope paragraph. -An unmodified report with an emphasis-of-matter paragraph.

a disclaimer of opinion

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. Unmodified with Emphasis-of-Matter (1)YesYes (2)YesNo (3)NoYes (4)NoNo

(3)NoYes

The auditors' report should be dated as of the date the: -Report is delivered to the client. -Auditors have accumulated sufficient appropriate evidence. -Fiscal period under audit ends. -Peer review of the working papers is completed.

-Auditors have accumulated sufficient appropriate evidence.

Which of the following is correct concerning a public company audit report with a disclaimer of opinion? -It must include in a section on critical audit matters the circumstances that led to the disclaimer. -The title of the Opinion section will be changed to Basis for Disclaimer of Opinion. -It will ordinarily be issued in situations in which financial statements are materially and pervasively misstated. -The paragraph describing the reason for the disclaimer will follow the opinion paragraph and will not include a title.

-The paragraph describing the reason for the disclaimer will follow the opinion paragraph and will not include a title.

Which of the following is not a difference between the audit report of a nonpublic and public company? -The public company report includes the word "Registered" in the title. -The public company report refers to standards of the PCAOB. -The public company report has an additional paragraph referring to the client's fraud prevention procedures.

-The public company report has an additional paragraph referring to the client's fraud prevention procedures.

1. Audit reports issued under GAAS ordinarily are signed with the name of the __________. 2.All nonpublic company audit reports that are qualified should contain a(n) __________ explaining the details of the qualification. 3.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. 4.The auditors issue a qualified opinion or a(n) __________ opinion, if they consider the disclosure in the client's financial statements to be inadequate. 5.If a scope limitation is so severe that a qualified opinion is inappropriate, the auditors should issue a(n) __________.

1. CPA firm 2. basis for modification paragraph (or basis for qualified opinion paragraph) 3. unqualified 4. adverse 5. disclaimer of opinion

In which of the following circumstances would an auditor of financial statements be most likely to express an adverse opinion? -The statements are not in conformity with FASB requirements regarding goodwill impairment. -Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue in existence. -The chief executive officer refuses the auditor access to minutes of board of directors' meetings. -Tests of controls show that the entity's internal control is so poor that it cannot be relied upon.

-The statements are not in conformity with FASB requirements regarding goodwill impairment.

Which of the following is a term used in public company audit reports? -Disclaimer of qualification. -Explanatory paragraph. -Other matter paragraph. -Unmodified opinion.

-Explanatory paragraph.

Which of the following is a general purpose financial reporting framework? -Generally accepted auditing standards. -Auditing Standards of the Public Company Accounting Oversight Board. -International Standards of Auditing. -International Financial Reporting Standards.

-International Financial Reporting Standards.

An audit report for a public client indicates that the audit was performed in accordance with: -Generally accepted auditing standards (United States). -Standards of the Public Company Accounting Oversight Board (United States). -Generally accepted accounting principles (United States). -Generally accepted accounting principles (Public Company Accounting Oversight Board).

-Standards of the Public Company Accounting Oversight Board (United States).

In which of the following circumstances will it be most likely that an adverse opinion is considered appropriate? -The auditor is not independent with respect to the enterprise being audited. -The statements are not in conformity with generally accepted accounting principles due to a departure from GAAP with an immaterial effect on the financial statements. -The statements are not in conformity with generally accepted accounting principles regarding pension plans. -A client-imposed scope limitation prevents the auditor from obtaining sufficient appropriate audit evidence.

-The statements are not in conformity with generally accepted accounting principles regarding pension plans.

1. Auditors have obtained sufficiently appropriate evidence to conclude that the financial statements are not materially misstated 2. Auditors have doubt about a company's ability to continue as a going concern 3. The client has elected to not follow GAAP 4. A material misstatement is considered pervasive 5. 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

1. unmodified opinion 2. unqualified opinion with an emphasis-of-matter paragraph 3. adverse 4. adverse 5. disclaimer

a. 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. b.The auditors decide not to make reference to the report of a component auditor that audited a portion of group financial statements. c.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. d. The 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. e. 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.

a. disclaimer b. Unmodified—standard c. qualified d. Unmodified—with an emphasis-of-matter paragraph. e. adverse

If group auditors make no reference to component auditors whose work they have relied on as a part of the basis for their report, the group auditors: -Are not required to investigate the professional reputation of the component auditors. -Are issuing an inappropriate report. -Are assuming responsibility for the work of the component auditors. -Are issuing a qualified opinion.

-Are assuming responsibility for the work of the component auditors.

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. -An adverse opinion. -A qualified opinion. -Part of the audit has been performed by component auditors.

-A consistency modification.

Which of the following is least likely to result in inclusion of an additional paragraph being added to an audit report? -The company is a component of a larger business enterprise. -An unusually important significant event. -A decision not to confirm accounts receivable. -A risk or uncertainty.

-A decision not to confirm accounts receivable.

When an adverse opinion is expressed on the financial statements of a nonpublic company, the opinion paragraph should include a direct reference to: -A note to the financial statements which discusses the basis for the opinion. -The auditor's responsibility section of the audit report which discusses the basis for the opinion rendered. -A separate basis for modification paragraph (section). -The consistency in the application of generally accepted accounting principles.

-A separate basis for modification paragraph (section).

Ray, an independent auditor, was engaged to perform an audit of the financial statements of Zena Incorporated one month after its fiscal year had ended. Although the inventory count was not observed by Ray, the auditors were able to obtain sufficient appropriate audit evidence by applying alternative auditing procedures. Rays audit report will probably contain: -A standard unmodified opinion. -An unmodified opinion and an emphasis-of-matter paragraph. -Either a qualified opinion or a disclaimer of opinion. -An "except for" qualification.

-A standard unmodified opinion.

A scope restriction is least likely to result in a(an): -Qualified opinion. -Disclaimer of opinion. -Adverse opinion. -Standard unmodified opinion.

-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. -A footnote to the financial statements. -The body of the financial statements. -The "summary of significant accounting policies" section of the financial statements.

-An emphasis-of-matter paragraph to the auditors' report.

When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should: -Issue an unmodified opinion with a basis for modification paragraph. -Withdraw from the engagement. -Issue an "except for" qualification or an adverse opinion. -Issue an "except for" qualification or a disclaimer of opinion.

-Issue an "except for" qualification or an adverse opinion.

a. 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 b.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. c.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. d.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. e.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.

a. Unmodified—standard b. Either qualified or adverse c. Either qualified or disclaimer d. Qualified e. either qualified or adverse

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. -Not in accordance with generally accepted auditing standards. -A qualification that lessens the collective responsibility of both CPA firms. -An example of a dual opinion requiring the signatures of both auditors.

-Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms.

1. Auditors may add an emphasis-of-matter paragraph that refers to a matter that is _________ presented or disclosed. 2.A going concern is to be evaluated for a period not to exceed _________ beyond the date of the financial statements. 3.If substantial doubt about a going concern exists, an ______ paragraph is the most common resolution. 4.An emphasis-of-matter paragraph always _______ the opinion paragraph. 5.Changes in accounting estimates ______ result in an explanatory paragraph.

1. appropriately 2. one year 3. emphasis of matter 4. follows 5. do not

1. Auditors _____ an opinion when they are unable to form an opinion. 2.Limitations on the scope of an audit may create a situation in which the auditors are unable to obtain sufficient ________. 3.Qualified opinions are issued when the financial statements are ________ misstated. 4.When there is significant doubt as to the ability to continue as a going concern, a(n) _________ paragraph may be added 5.A(n) _____ opinion is appropriate if a material misstatement is considered pervasive.

1. disclaim 2. evidence 3. materially 4. emphasis-of-matter 5. adverse

Which of the following accounting changes requires an emphasis-of-matter paragraph regarding consistency in a nonpublic company auditors' report? -A change in the estimated useful lives of a class of fixed assets. -A write-off of a patent because future benefits do not appear to exist. -A change from the straight-line method of depreciation to an accelerated method for a class of fixed assets. -A change in calculating bad debt expense from one percent to two percent of credit sales.

-A change from the straight-line method of depreciation to an accelerated method for a class of fixed assets.

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 unmodified opinion. -A disclaimer of opinion. -An "except for" opinion. -An improper type of reporting.

-An improper type of reporting.

When an auditor of a nonpublic company has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the date the financial statements will be released (1/26/X2), the auditor's responsibility includes: - Preparing prospective financial information to verify whether management's plans can be effectively implemented. -Projecting conditions and events from one year prior to this year's date (12/31/X0) to 12/31/X1. -Issuing an adverse or negative assurance opinion, depending upon materiality, due to the possible effects on the financial statements. -Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.

-Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.

CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the group auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct? -Such assumption of responsibility violates the profession's standards. -In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements. -In such circumstances, when appropriate requirements have been met, Firm A should issue an unmodified opinion on the financial statements but should make appropriate reference to Firm B in the audit report. -CPA firm A should normally qualify its audit report on the basis of the scope limitation involved when another CPA firm is involved.

-In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements.

The Rotter Company, a nonpublic company, changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading due to pervasive misstatements. The change (including its dollar effect) has been described in the notes to the 20X4 statements. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should: -Express an adverse opinion with the basis for modification paragraph disclosing the reason (the accounting change) for the opinion. -Express an unmodified opinion with an emphasis-of-matter paragraph and disclose the accounting change from 20X3 and its effect on the financial statements. -Disclaim an opinion and explain all of the reasons therefore. -Express an adverse opinion regarding the 20X4 financial statements, without a basis for modification paragraph since the reason will be included in the notes to the statements.

-Express an adverse opinion with the basis for modification paragraph disclosing the reason (the accounting change) for the opinion.

After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to: -Increase current dividend distributions. -Reduce existing lines of credit. -Increase ownership equity. -Purchase assets formerly leased.

-Increase ownership equity.

When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern, the auditor most likely would express a qualified or adverse opinion if: -The effects of the adverse financial conditions are likely to be negative. -Information about the entity's ability to continue as a going concern is not disclosed in the financial statements. -Management has no plans to reduce or delay future expenditures. -Negative trends and recurring operating losses appear to be irreversible.

-Information about the entity's ability to continue as a going concern is not disclosed in the financial statements.

Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? -Performing cutoff tests of sales transactions with customers with long-standing receivable balances. -Evaluating the entity's procedures for identifying and recording related party transactions. -Inspecting title documents to verify whether any real property is pledged as collateral. -Inquiring of the entity's legal counsel about litigation, claims, and assessments.

-Inquiring of the entity's legal counsel about litigation, claims, and assessments.

When an auditor does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should: -Issue an unmodified opinion, but disclose elsewhere in the report this departure from a customary procedure. -Issue an unmodified opinion with no reference to this omission. -Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables. -Issue an adverse opinion.

-Issue an unmodified opinion with no reference to this omission.

Morgan, CPA, is the group auditor for a multinational corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the component auditor, as well as the quality of the component auditor's audit. With respect to Morgan's report on the consolidated financial statements, taken as a whole, Morgan: -Must not refer to the audit of the component auditor. -Must refer to the audit of the component auditor. -May refer to the audit of the component auditor. -May refer to the audit of the component auditor, in which case Morgan must include in the audit report on the consolidated financial statements a qualified opinion with respect to the audit of the component auditor.

-May refer to the audit of the component auditor.

If the predecessor auditors do not reissue their audit report on comparative financial statements, the successor auditors should: -Express a qualified opinion on the comparative financial statements audited by the predecessor auditors. -Reproduce the predecessor auditors' report and include it with the new set of financial statements. -Have the client omit the comparative financial statements. -Refer to the report of the predecessor auditors.

-Refer to the report of the predecessor auditors.

An auditor of financial statements believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to: -Repurchase the entity's stock at a price below its book value. -Issue stock options to key executives. -Refinance debt to lower loan payments. -Accelerate the due date of an existing mortgage.

-Refinance debt to lower loan payments.

Which of the following is least likely to result in a qualification of the auditors' opinion due to a scope limitation? -Scope limitations imposed by the client. -Reliance placed upon the report of component auditors. -Inability to obtain sufficient appropriate audit evidence. -Inadequate accounting records.

-Reliance placed upon the report of component auditors.

Which of the following circumstances generally results in the issuance of a report that includes an opinion that is modified? -The auditor is unable to obtain the financial records of a foreign subsidiary which is material to the client. -The group auditors for the engagement are relying on the work of component auditors. -The financial statements are affected by a change in accounting principle due to a new FASB pronouncement. -The auditors have decided to emphasize the fact that the company has engaged in material amounts of related party transactions.

-The auditor is unable to obtain the financial records of a foreign subsidiary which is material to the client.

Under which of the following set of circumstances might the auditors disclaim an opinion? -The financial statements contain a departure from generally accepted accounting principles, the effect of which is material. -The group auditors decide to make reference to the report of component auditor who audited a subsidiary. -There has been a material change between periods in the method of application of accounting principles. -The auditors cannot observe ending inventory nor confirm accounts receivable and cannot obtain sufficient evidence using alternative procedures.

-The auditors cannot observe ending inventory nor confirm accounts receivable and cannot obtain sufficient evidence using alternative procedures.

Which of the following is least likely to result in an emphasis-of-matter paragraph being added to an unmodified auditor's report on the financial statements of a nonpublic client that sells jewelry through a retail store? -A decision by the auditor to emphasize that the client is a part of a larger organization. -Use of an unacceptable method to value inventory with results that differ materially from GAAP. -A change from FIFO to specific identification accounting for inventory. -A question as to whether the client will be able to remain a going concern.

-Use of an unacceptable method to value inventory with results that differ materially from GAAP.

A material departure from generally accepted accounting principles will result in auditor consideration of: -Whether to issue an adverse opinion rather than a disclaimer of opinion. -Whether to issue a disclaimer of opinion rather than a qualified opinion. -Whether to issue an adverse opinion rather than a qualified opinion. -Nothing, because none of these opinions is applicable to this type of exception.

-Whether to issue an adverse opinion rather than a qualified opinion.

(1) A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction contracts. (2)A change in the estimated service lives of previously recorded plant assets based on newly acquired information. (3)Correction of a mathematical error in inventory pricing made in a prior period. 4)A change from direct costing to full absorption costing for inventory valuation. (5)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. (6)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." (7)A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing.

1. Yes 2. No 3. yes 4. yes 5. yes 6. No 7. Yes

1.As discussed in Note XX to the financial statements, the Company adopted SFAS XXX as of December 31, 20XX. Our opinion is not modified with respect to this standard. 2. As discussed in Note XX to the financial statements, the Company is a defendant in a lawsuit. 3. he accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, but there is substantial doubt about its ability to continue as a going concern.

1. going concern opinion 2. auditor discretionary circumstances 3. principles not consistently applied

1. An emphasis-of-matter paragraph always follows the ______ paragraph. 2.Auditors are _____ required to perform procedures specifically designed to test the going concern assumption. 3.When items are identified that affect the going concern assumption, auditors must gather ________. 4.In addition to an emphasis-of-matter paragraph, auditors could issue a(n) _________ in a going concern situation. 5.A going concern evaluation should include evaluation of ________ from the balance sheet date.

1. opinion 2. not 3. evidence 4. disclaimer 5. one year

1. In auditing the long-term investments account, an auditor is unable to obtain audited financial statements for an investee located in a foreign country. The auditor concludes that sufficient appropriate audit evidence regarding this investment cannot be obtained. 2.Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. However, the financial statement disclosures concerning these matters are adequate. The auditor has decided not to issue a disclaimer of opinion. 3.A group auditor decides to take responsibility for the work of a component CPA who audited a wholly owned subsidiary of the entity and issued an unmodified opinion. The total assets and revenues of the subsidiary represent 17 percent and 18 percent, respectively, of the total assets and revenues of the entity being audited. 4.An entity changes its depreciation method for production equipment from straight-line to a units-of-production method based on hours of utilization. The auditor concurs with the change, although it has a material effect on the comparability of the entity's financial statements. 5.An entity discloses certain lease obligations in the notes to the financial statements. The auditor believes that the failure to capitalize these leases is a departure from generally accepted accounting principles and, although the possible effects on the financial statements of the misstatements are material, they could not be pervasive.

1. qualified/adverse and add a basis-for-modification paragraph prior to opinion paragraph 2. unmodified, Add an emphasis-of-matter paragraph—after opinion paragraph. 3. unmodified, issue standard report without alteration 4. unmodified, Add an emphasis-of-matter paragraph—after opinion paragraph. 5. qualified, Add a basis-for-modification paragraph—prior to opinion paragraph.


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