Ch 17 HW
A client's financial statements follow GAAP, but the auditor wishes to emphasize in his audit report a significant related party transaction that is adequately described in the notes to the financial statements.
Unmodified with an emphasis-of-matter paragraph.
A company has not followed generally accepted accounting principles in the recording of its leases. The amounts involved are immaterial.
Unmodified-standard
The auditors decide not to make reference to the report of a component auditor that audited a portion of group financial statements.
Unmodified-standard
Which of the following ordinarily involves the addition of an emphasis-of-matter paragraph to an audit report of a nonpublic company? -Part of the audit has been performed by component auditors -A qualified opinion -An adverse opinion -A consistency modification
A consistency modification
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. -A risk or uncertainty. -An unusually important significant event. -The company is a component of a larger business enterprise.
A decision not to confirm accounts receivable.
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. The notes to the financial statements do not adequately disclose the substantial doubt situation, and the auditor believes the omission fundamentally affects the users' understanding of the financial statements.
Adverse
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
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: -The "summary of significant accounting policies" section of the financial statements. -An emphasis-of-matter paragraph to the auditors' report. -A footnote to the financial statements. -The body of the financial statements.
An emphasis-of-matter paragraph to the auditors' report.
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 "except for" opinion. -A disclaimer of opinion. -An unmodified opinion. -An improper type of reporting.
An improper type of reporting.
The auditors' report should be dated as of the date the: -Report is delivered to the client. -Fiscal period under audit ends. -Peer review of the working papers is completed. -Auditors have accumulated sufficient appropriate evidence.
Auditors have accumulated sufficient appropriate evidence.
The Basis for Opinion section should begin with a statement that the financial statements are the responsibility of management.
Correct
The change in accounting principles should not be referred to in the opinion paragraph—delete that sentence.
Correct
The point should say communicated to the audit committee.
Correct
The report also must be addressed to the board of directors
Correct
The report should be dated as of February 12, the date on which sufficient appropriate audit evidence was obtained.
Correct
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
An audit report for a public client indicates that the financial statements were prepared in conformity with: -Generally accepted auditing standards (United States). -Generally accepted accounting principles (Public Company Accounting Oversight Board). -Generally accepted accounting principles (United States). -Standards of the Public Company Accounting Oversight Board (United States).
Generally accepted accounting principles (United States).
Johnson & Barkley, CPAs, audited the consolidated financial statements of Jordan Company (a public company) for the year ended December 31, 20X7. The report's title is incorrect as it should not include the word "independent."
Incorrect
The Change in Accounting Principles paragraph should include the dollar effect of the change.
Incorrect
The sentence should state generally accepted auditing standards of the PCAOB.
Incorrect
This disclosure also must include the name of the engagement partner.
Incorrect
When critical matters exist, the two related paragraphs (this and the following paragraph) should immediately follow the opinion paragraph.
Incorrect
What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated? -Qualified -Adverse
No, Yes
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
No, Yes
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: -A qualification that lessens the collective responsibility of both CPA firms. -An example of a dual opinion requiring the signatures of both auditors. -Not in accordance with generally accepted auditing standards. -Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms.
Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms.
An audit report for a public client indicates that the audit was performed in accordance with: -Generally accepted auditing standards (United States). -Generally accepted accounting principles (United States). -Standards of the Public Company Accounting Oversight Board (United States). -Generally accepted accounting principles (Public Company Accounting Oversight Board).
Standards of the Public Company Accounting Oversight Board (United States).
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.
Unmodified—with an emphasis-of-matter paragraph.
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 an adverse opinion rather than a qualified opinion. -Whether to issue a disclaimer of 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.
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
Yes, No
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. The notes to the financial statements adequately disclose the situation. The auditor has decided not to issue a disclaimer of opinion.
unmodified with an emphasis-of-matter paragraph
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
An auditor was hired after year-end and was unable to observe the counting of the year-end inventory. However, she was able to apply other procedures and determined that ending inventory and related information are properly stated.
unmodified-standard
A client's financial statements follow GAAP except that they do not include a note on a significant related party transaction.
Qualified or adverse
An auditor was hired after year-end and was unable to observe the counting of the year-end inventory. She is unable to apply other procedures to determine whether ending inventory and related information are properly stated.
Qualified or disclaimer
A client is issuing two years of comparative financial statements. The first year was audited by another auditor who is not being asked to reissue her audit report. (Reply as to the successor auditors' report.)
Other
An auditor reporting on group financial statements decides not to take responsibility for the work of a component auditor who audited a 70 percent owned subsidiary and issued an unqualified opinion. The total assets and revenues of the subsidiary are 5 percent and 8 percent, respectively, of the total assets and revenues of the entity being audited.
Other
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
An auditor discovered that a client made illegal political payoffs to a candidate for president of the United States. The auditor was unable to determine the amounts associated with the payoffs because of the client's inadequate record-retention policies. Although there is no likelihood that the financial statements are pervasively misstated, they may be materially misstated. The client refuses to disclose the payoffs in a note to the financial statements.
Qualified
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 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
A client is issuing two years of comparative financial statements. The first year was audited by another auditor who is being asked to reissue her audit report. (Reply as to the successor auditors' report.)
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
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 company has not followed generally accepted accounting principles in the recording of its leases.
Qualified or adverse
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
In auditing the long-term investments account of a new client, an auditor finds that a large contingent liability exists that is material to the consolidated company. It is probable that this contingent liability will be resolved with a material loss in the future, and this amount is reasonably estimable as $2,000,000. Although no adjusting entry has been made, the client has provided a note to the financial statements that describes the matter in detail and includes the $2,000,000 estimate in that note.
Qualified or adverse
An auditor discovered that a client made illegal political payoffs to a candidate for president of the United States. The auditor was unable to determine the amounts associated with the payoffs because of the client's inadequate record-retention policies. The client has added a note to the financial statements to describe the illegal payments and has stated that the amounts of the payments are not determinable.
Qualified or disclaimer
An auditor reporting on group financial statements decides to take responsibility for the work of a component auditor who audited a 70 percent owned subsidiary and issued an unmodified opinion. The total assets and revenues of the subsidiary are 5 percent and 8 percent, respectively, of the total assets and revenues of the entity being audited.
unmodified-standard
In auditing the long-term investments account of a new client, an auditor finds that a large contingent liability exists that is material to the consolidated company. It is probable that this contingent liability will be resolved with a material loss in the future, but the amount is not estimable. Although no adjusting entry has been made, the client has provided a note to the financial statements that describes the matter in detail.
unmodified-standard