Chapter 12

In each of the circumstances listed below, indicate, by appropriate letter, which of the following types of opinions should be rendered on the entity's financial statements? A. Unmodified B. Qualified C. Adverse D. Disclaimer ___ 1. Departure from generally accepted accounting principles that is material but not pervasive. ___ 2. Going-concern uncertainties that may have a material (but not pervasive) effect on the financial statements. ___ 3. Emphasis of a matter, no GAAP departure. ___ 4. Material, but not pervasive, scope limitation. ___ 5. Material and pervasive departure from GAAP.

1) B 2) A 3) A 4) B 5) C

For each of the sentences or phrases below, indicate, by letter, in which section of the standard (unmodified) report on the entity's financial statements the sentence or phrase would appear. A. Introductory paragraph B. Management's Responsibility section C. Auditor's Responsibility section D. Opinion paragraph ___ 1. Our responsibility is to express an opinion on these financial statements based on our audits. ___ 2. The financial statements referred to above present fairly, in all material respects, the financial position of... ___ 3. We have audited the accompanying financial statements of... ___ 4. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. ___ 5. Management is responsible for the preparation and fair presentation of these financial statements...

1) C 2) D 3) A 4) C 5) B

Listed below are words and phrases from the auditors' standard (unmodified) report on the entity's financial statements. For each of the words and phrases indicate by letter in which paragraph of the standard (unmodified) report they should appear: A. Introductory paragraph B. Management Responsibility section C. Auditor's Responsibility section D. Opinion paragraph ___ 1. Audit provides a reasonable basis for an opinion. ___ 2. The financial statements present fairly, in all material respects. ___ 3. Auditors' responsibility is to express an opinion. ___ 4. Auditors perform the audit to obtain reasonable assurance. ___ 5. Financial statements are in accordance with accounting principles generally accepted in the United States of America. ___ 6. Responsibility of the entity's management for the financial statements. ___ 7. Results of its operations and its cash flows. ___ 8. Conducted our audits in accordance with the auditing standards generally accepted in the United States of America. ___ 9. Management is responsible for the design, implementation, and maintenance of internal control. ___ 10. We have audited the accompanying financial statements.

1) C 2) D 3) C 4) C 5) D 6) B 7) D 8) C 9) B 10) A

For each of the situations below, indicate, by letter, the type of report most likely to be issued. A. Unmodified opinion, no modification. B. Unmodified opinion, emphasis-of-matter paragraph for consistency. C. Unmodified opinion, emphasis-of-matter paragraph for a going-concern uncertainty. D. Qualified opinion. E. Disclaimer of opinion. ___ 1. 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 accompanying the financial statements. ___ 2. 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. ___ 3. 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. ___ 4. 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. ___ 5. 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 on the scope of the auditors' work.

1) C or E 2) A 3) D 4) A 5) D or E (most likely E)

Shown below are a number of situations that may be encountered during the audit examination. For each, indicate how the auditors' standard (unmodified) report would be modified (each reporting situation may result in more than one modification to the auditors' standard (unmodified) report). A. Modification to introductory paragraph. B. Modification to Management's Responsibility section. C. Modification to Auditor's Responsibility section. D. Modification to opinion paragraph. E. Additional paragraph added to report. F. No modifications to the standard (unmodified) report are necessary. ___ 1. Departure from GAAP that does not materially affect the financial statements. ___ 2. Inability of auditors to confirm accounts receivable with customers; while the scope limitation is material, the auditors still believe an opinion may be expressed on the entity's financial statements. ___ 3. Group auditors decide to refer to the work of component auditors in their report. ___ 4. Entity has changed from FIFO to LIFO accounting for inventories. ___ 5. Auditors wish to highlight an event that occurred following the date of the financial statements. ___ 6. Departure from GAAP that has a material, but not pervasive, effect on the financial statements. ___ 7. Group auditors decide to assume full responsibility for the work of component auditors and not refer to component auditors' work in their report. ___ 8. Scope limitation that precludes auditors from expressing an opinion. ___ 9. Auditors would like to disclose potential going-concern uncertainties in their report (these uncertainties have been appropriately disclosed in the entity's financial statements and related disclosures). ___ 10. Departure from GAAP that has a material and pervasive effect on the financial statements.

1) F 2) D, E 3) C, D 4) E 5) E 6) D, E 7) F 8) A, C, D, E 9) E 10) D, E

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? A. "Do not present fairly in all material respects." B. "Except for the effects of the departure from generally accepted accounting principles, as discussed in the preceding paragraph." C. "We were engaged to audit the accompanying financial statements." D. "As a result of the departures discussed in the following paragraph."

A. "Do not present fairly in all material respects."

Which of the following statements is not included in the Auditor's Responsibility section of the standard (unmodified) report? A. "In accordance with accounting principles generally accepted in the United States of America." B. "We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion." C. "An audit also includes evaluating the appropriateness of accounting policies used..." D. "Those standards require that we plan and perform the audit to obtain reasonable assurance..."

A. "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? A. "We have audited the accompanying financial statements..." B. "Those standards require that we plan and perform the audit..." C. "The procedures selected depend upon the auditor's judgment..." D. "An audit involves performing procedures to obtain audit evidence about the amounts and disclosures..."

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

What is the major difference between a reissued report and an updated report? A. 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. B. An updated report can be presented along with the entity's financial statements, but a reissued report cannot be presented along with the entity's financial statements. C. An updated report will express a different opinion on the prior-years' financial statements that that originally expressed by the auditors, while a reissued report will express the same opinion. D. An updated report will not express an opinion other than an unmodified opinion, while a reissued report can express an unmodified opinion, qualified opinion, adverse opinion, or disclaimer of opinion.

A. 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.

Which of the following best reflects the auditors' reporting responsibility under generally accepted auditing standards? Other Information Required Accompanying the Supplementary Financial Statements Information A. Exception Required B. Exception Exception C. Required Required D. Required Exception

A. Exception Required

When auditors lack independence, which of the following is true about the report on the entity's financial statements that should be issued? A. The auditors should disclaim an opinion and should state specifically that they are not independent. B. The auditors should disclaim an opinion but not mention that they are not independent. C. The auditors should issue an unmodified opinion with an other-matter paragraph stating that they are not independent. D. The auditors should issue a qualified opinion with an other-matter paragraph stating that they are not independent.

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

In which of the following circumstances may auditors issue the standard (unmodified) report on the entity's financial statements? A. The entity changed accounting principles having an immaterial effect on the entity's financial position, results of operations, and cash flows. B. The auditors wish to emphasize a matter regarding the financial statements. C. The auditors reference component auditors who examined a subsidiary of group financial statements. D. The auditors have not been able to audit a substantial portion of the balance sheet because of a circumstance-imposed scope limitation.

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

Under which of the following circumstances would a disclaimer of opinion on the entity's financial statements not be appropriate? A. The financial statements fail to contain adequate disclosure of related-party transactions. B. The entity refuses to permit its attorney to furnish information requested in an attorney letter. C. The auditors are engaged after the date of the financial statements and are unable to observe physical inventories or apply alternative procedures to verify their balances. D. The auditors are unable to determine the amounts associated with illegal acts committed by the entity's management.

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

Which of the following guidelines should be followed when a disclaimer of opinion is issued? A. The report should identify the financial statements accompanying the disclaimer of opinion. B. The report should be addressed to the client and specific users who originally retained the auditors. C. If the disclaimer is due to a lack of independence, the report should indicate the specific reasons for the auditors not being independent. D. The report should include a reference to any auditing procedures performed prior to issuing the disclaimer.

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

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? A. Unmodified opinion with an other-matter paragraph disclaiming an opinion on the mineral reserve information B. Adverse opinion on the financial statements and mineral reserve information due to the misstatement C. Unmodified opinion on the financial statements with an other-matter paragraph expressing an adverse opinion on the mineral reserve information D. Qualified opinion on the financial statements and mineral reserve information due to the misstatement

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

If management fails to provide adequate justification for a change from one generally accepted accounting principle to another, the auditors should A. 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. B. disclaim an opinion on the entity's financial statements because of uncertainty. C. disclose the matter in an additional paragraph but not modify the opinion paragraph on the entity's financial statements. D. neither modify the opinion on the entity's financial statements nor disclose the matter because both principles are generally accepted accounting principles.

A. 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 A. consider the independence and professional reputation of the component auditors in deciding how to utilize their work. B. identify the extent of component auditors' involvement if they choose not to rely on the component auditors' work. C. identify the component auditors by name in their report to appropriate limit their liability for the component auditors' work. D. disclaim an opinion on the portion of the financial statements examined by the component auditors.

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

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) A. disclaimer of opinion. B. qualified opinion referencing a departure from generally accepted accounting principles. C. unmodified opinion with an additional paragraph. D. adverse opinion.

A. disclaimer of opinion.

Auditors who are reporting on financial statements that contain a material departure from generally accepted accounting principles should include an additional paragraph and A. express a qualified or adverse opinion. B. not modify the opinion paragraph as long as the departure is adequately disclosed in a footnote. C. disclaim an opinion on the financial statements. D. express a qualified opinion or disclaimer of opinion.

A. express a qualified or adverse opinion.

How do auditors make the following representations when issuing the standard (unmodified) auditors' report? Use of judgment in Consistent application of selecting audit accounting principles procedures A. implicitly explicitly B. explicitly implicitly C. implicitly explicitly D. explicitly explicitly

A. implicitly explicitly

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 A. indicate in their report the substantive reasons for the qualification issued by the predecessor auditors. B. request the entity to reissue the predecessor's report on the prior-years' statements. C. issue an updated comparative report on the entity's financial statements, indicating the involvement of component auditors. D. express an opinion only on the current-year's financial statements and make no reference to the prior-years' financial statements or opinion.

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

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 A. involvement of component auditors in the audit of the group financial statements. B. the portion of the group statements audited by the component auditors not being considered material. C. group auditors' recognition of the component auditors' competence, reputation, and professional certification. D. different opinions the auditors are expressing on the components of the financial statements that each audited.

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

When a circumstance-imposed scope limitation has a material but not pervasive effect on the sufficiency of the auditors' evidence, the auditors' report will A. modify the opinion paragraph. B. modify the Auditor's Responsibility section and opinion paragraph. C. modify the introductory paragraph, Auditor's Responsibility section, and opinion paragraphs. D. modify the introductory and opinion paragraphs and omit the Auditor's Responsibility section.

A. modify 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 A. prior-years' financial statements are restated to conform with generally accepted accounting principles. B. auditors were predecessor auditors who have been requested by a former client to reissue the previous report. C. prior-years' opinions were unmodified and the opinion on the current-year's financial statements is modified due to a lack of consistency. D. prior-years' financial statements are restated following an acquisition in the current year.

A. 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 A. qualified opinion based on a material and pervasive uncertainty. B. unmodified opinion with an emphasis-of-matter paragraph describing the uncertainty. C. adverse opinion based on inadequate disclosure of the uncertainty. D. disclaimer of opinion based on a material and pervasive uncertainty.

A. qualified opinion based on a material and pervasive uncertainty.

If financial statements contain a material but non-pervasive departure from generally accepted accounting principles, the auditors should render a(n) A. qualified opinion with reference to departure. B. adverse opinion with scope limitation reference. C. adverse opinion with reference to departure. D. disclaimer of opinion.

A. qualified opinion with reference to departure.

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 A. substantive reasons for the prior-year's qualification. B. reason that Hart continued to provide audit services, despite the previous scope limitation. C. consistency of application of accounting principles between year 2 and year 1. D. restriction on the distribution of the report.

A. substantive reasons for the prior-year's qualification.

The issuance of a disclaimer of opinion generally indicates A. the auditors cannot form an opinion on the fairness of presentation of the financial statements as a whole. B. the auditors have some uncertainties, but these uncertainties are not so material that they cannot form an opinion on the fairness of presentation of the financial statements as a whole. C. the auditors have observed a departure from generally accepted accounting principles but the departure is not of sufficient materiality to justify a qualified opinion. D. the auditors have observed a departure from generally accepted accounting principles that is so material and pervasive that a qualified opinion is not justified.

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

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 field work 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) A. unmodified opinion. B. unmodified opinion with an emphasis-of-matter paragraph. C. qualified opinion due to a scope limitation. D. qualified opinion due to a departure from generally accepted auditing standards.

A. unmodified opinion.

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. A change in the estimate of useful lives used to depreciate property, plant and equipment B. A change in the entity's form of reporting entity C. Management has changed from one generally accepted accounting principle to another but has not provided reasonable justification D. A change from an accounting principle that conforms with GAAP to one that does not

B. 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. The report should be modified to include an emphasis-of-matter paragraph describing the pending litigation. B. A disclaimer of opinion should be issued because the auditors' independence is impaired. C. The litigation will not have any impact on the report or auditors' independence unless Holmes & Smith are found guilty. D. A qualified or adverse opinion should be issued depending on the severity of the lawsuit.

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

What is the auditors' responsibility for reporting on other information accompanying financial statements? A. Because this information is not a fundamental part of the financial statements, the auditors have no reporting responsibility with respect to this information. B. Auditors are required to report on other information only if it is misstated or inconsistent with the financial statements. C. Auditors are required to provide reasonable assurance with respect to whether the other information is presented in accordance with generally accepted accounting principles. D. Auditors are required to express an opinion on whether the other information is presented in accordance with generally accepted accounting principles.

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

Which of the following scope limitations would ordinarily be of most concern to the auditors? A. The inability to observe inventories because auditors were appointed following the date of the financial statements B. Management's refusal to provide auditors with written representations C. The inability to obtain confirmation of year-end balances from customers because of different billing dates D. The use of the work of component auditors in the audit of group financial statements

B. Management's refusal to provide auditors with written representations

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? A. December 31, Year 1 B. March 1, Year 2 C. December 31, Year 2 D. February 15, Year 3

B. March 1, Year 2

An auditor may report on summary financial statements that are derived from a complete set of audited financial statements only if the auditor A. expresses an unmodified opinion on the audited financial statements from which the summary financial statements are derived. B. indicates whether the information is fairly stated in all material respects in relation to the complete financial statements. C. determines that the summary financial statements include all the disclosures necessary for the complete set of financial statements. D. presents the summary financial statements in comparative form with the prior-year summary financial statements.

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

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? A. The auditors did not observe the entity's physical inventory and are unable to become satisfied as to its balance by other auditing procedures. B. The financial statements fail to disclose information that is required by generally accepted accounting principles. C. The auditors are asked to report only on the entity's balance sheet and not on the other basic financial statements. D. Events disclosed in the financial statements cause the auditors to have substantial doubt about the entity's ability to continue as a going concern.

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

Which of the following is true with respect to the auditors' report on summary financial statements? A. Auditors can only issue a report on summary financial statements if they have expressed an unmodified opinion on the full financial statements. B. The report will indicate whether the summary financial statements are fairly stated in relation to the full financial statements. C. The report will express negative assurance on whether the summary financial statements are prepared in accordance with AICPA presentation guidelines. D. The report will express an opinion on whether the summary financial statements present the financial condition, results of operations, and cash flows in accordance with generally accepted accounting principles.

B. The report will indicate whether the summary financial statements are fairly stated in relation to the full 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? A. The auditors are asked to report on the balance sheet, but not on the other basic financial statements. B. There is substantial doubt about the entity's ability to continue as a going concern. C. Management's estimates of the effects of future events on the entity's financial condition, results of operations, and cash flows are unreasonable. D. Certain transactions cannot be tested because of management's records retention policy.

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

Restrictions imposed by an entity prohibited the observation of physical inventories, which accounted for 35% 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. a qualified opinion on the entity's financial statements, referring to a departure from generally accepted accounting principles. B. a disclaimer of opinion on the entity's financial statements. C. an unmodified opinion on the entity's financial statements with an additional paragraph. D. an unmodified opinion on the entity's financial statements with a modification of the Auditor's Responsibility section.

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

Auditors will issue an adverse opinion when A. a severe scope limitation has been imposed by the entity. B. a violation of generally accepted accounting principles is sufficiently material and pervasive that a qualified opinion is not justified. C. a qualified opinion cannot be rendered because the auditors lack independence. D. the entity's ability to continue as a going concern is subject to substantial doubt.

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

A report that acknowledges reliance on the reports of component auditors is a type of report modification known as a(n) A. qualification. B. division of responsibility. C. expansion of scope. D. scope limitation.

B. division of responsibility.

When updating the report on prior-years' financial statements presented in comparative form, the auditors' responsibility for the prior-years' financial statements is A. limited to the previously issued report date. B. extended to the date of the updated audit report. C. limited to 30 days after the date of the prior years' financial statements. D. extended to the updated report date only if information comes to the auditors' attention requiring modification of the previously expressed opinion.

B. extended to the date of the updated audit report.

Auditors should disclose the substantive reasons for expressing an adverse opinion on the entity's financial statements in an additional paragraph A. preceding the Auditor's Responsibility section. B. preceding the opinion paragraph. C. following the opinion paragraph. D. within the footnotes to the financial statements.

B. preceding the opinion paragraph.

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) A. unmodified opinion. B. qualified opinion citing a departure from generally accepted accounting principles. C. qualified opinion citing a scope limitation and lack of specific evidence. D. disclaimer of opinion.

B. 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) A. adverse opinion or a disclaimer of opinion. B. qualified opinion or an adverse opinion. C. disclaimer of opinion or an unmodified opinion with a separate emphasis-of-matter paragraph. D. unmodified opinion with a separate emphasis-of-matter paragraph or a qualified opinion.

B. qualified opinion or an adverse opinion.

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 A. additional use reports. B. reissued reports. C. subsequent use reports. D. updated reports.

B. reissued reports.

Auditors would not normally issue a qualified opinion on the entity's financial statements when A. an accounting principle at variance with generally accepted accounting principles is used. B. the auditors lack independence with respect to the audited entity. C. a scope limitation prevents the auditors from completing an important auditing procedure. D. the entity has undertaken a change in accounting principle with which the auditor does not agree.

B. the auditors lack independence with respect to the audited entity.

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? A. "Subject to the departure from generally accepted accounting principles, as described above." B. "With the foregoing explanation of these omitted disclosures." C. "Except for the omission of the information discussed in the preceding paragraph." D. "Does not present fairly in all material respects."

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

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? A. The Auditor's Responsibility section B. The opinion paragraph C. An emphasis-of-matter paragraph following the opinion paragraph D. An emphasis-of-matter paragraph before the opinion paragraph

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

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? A. Unmodified opinion with an other-matter paragraph limiting the level of assurance provided by Holmes B. Qualified opinion with an additional paragraph indicating a circumstance-imposed scope limitation C. Disclaimer of opinion because Holmes did not audit the financial statements D. Homes is not required to issue a report or opinion in this situation

C. 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? A. Qualified or adverse opinion B. Disclaimer or adverse opinion C. Disclaimer or qualified opinion D. Unmodified opinion with an other-matter paragraph

C. Disclaimer or qualified opinion

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? A. Reference to a change in the method of accounting mandated by the issuance of a new accounting standard. B. Reference to a going-concern uncertainty facing the entity. C. Reference to a departure from GAAP that is material, but not pervasive, to the financial statements. D. Reference to an acquisition made by the entity during the most recent fiscal year.

C. 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? A. Whether the financial statements are presented in accordance with GAAP, or another applicable financial reporting framework B. Unusual aspects of the audit examination, such as the involvement of component auditors in the audit of group financial statements C. Specific details regarding the audit examination, such as the materiality threshold used to identify material misstatements D. Other matters affecting the client, such as substantial doubt about the entity's ability to continue as a going concern

C. 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? A. The introductory paragraph B. The Management's Responsibility section C. The Auditor's Responsibility section D. The opinion paragraph

C. The Auditor's Responsibility section

On which of the following matters would it not be appropriate for the auditors to report using an other-matter paragraph? A. A material inconsistency between other information and the financial statements B. Procedures performed related to supplementary mineral reserve information required by the Financial Accounting Standards Board C. The consistency of summary financial statements with the audited financial statements from which they were derived D. An updated opinion on comparative financial statements that differs from the opinion originally issued by the auditors

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

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 A. identify management's responsibility for the financial statements. B. refer to any scope limitation in an additional paragraph. C. modify the Auditor's Responsibility section to identify the basis for the disclaimer. D. indicate that the auditors were engaged to audit the financial statements.

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

In which of the following circumstances would auditors be most likely to express an adverse opinion? A. The chief executive officer refuses to provide the auditors access to minutes of board of directors' meetings. B. Tests of controls show that the entity's internal control is so ineffective that it cannot be relied upon. C. The financial statements are not in accordance with generally accepted accounting principles regarding the capitalization of leases. D. Information comes to the auditors' attention that raises substantial doubt about the entity's ability to continue as a going concern.

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

Which of the following situations would require auditors to add an other-matter paragraph to their report on comparative financial statements? A. An unmodified opinion is issued in the current year while a qualified opinion was issued in prior years. B. A qualified opinion is issued in the current year because of a scope limitation; because this limitation was not encountered in prior years, the opinion issued in those years was unmodified. C. The updated opinion issued on prior-years' financial statements differs from the opinion originally issued on those financial statements. D. The auditors' unmodified opinion issued on prior-years' financial statements is still considered to be appropriate.

C. The updated opinion issued on prior-years' financial statements differs from the opinion originally issued on those 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 A. income statement only. B. statement of cash flows only. C. balance sheet only. D. statement of changes in shareholders' equity only.

C. balance sheet only.

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 A. disclaiming an opinion on the financial statements due to the indications of possible financial difficulties. B. indicating to the client's audit committee whether management's plans for dealing with the adverse effects of the financial difficulties can be effectively implemented. C. considering the adequacy of disclosure about the client's possible inability to continue as a going concern. D. issuing a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements.

C. 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 A. document in the engagement letter that the group auditors assume no responsibility for the component auditors' work. B. obtain written permission from the component auditors to omit the reference in the group auditors' report. C. contact the component auditors' and review the audit programs and working papers pertaining to the subsidiary. D. add an additional paragraph to the group auditors' report indicating that the subsidiary's financial statements are not material to the consolidated financial statements.

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

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 A. add an other-matter paragraph to the standard (unmodified) report that justifies the omission. B. refuse to accept the engagement as proposed because of the client-imposed scope limitation. C. explain to Zag that the omission requires a qualification of the auditors' opinion. D. prepare the statement of cash flows as an accommodation to Zag and express an unmodified opinion.

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

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 A. introductory paragraph. B. introductory paragraph and Auditor's Responsibility section. C. introductory paragraph, Auditor's Responsibility section, and opinion paragraph. D. Auditor's Responsibility section and opinion paragraph.

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

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 A. issue a qualified opinion on the comparative financial statements as a whole. B. issue an unmodified opinion on the Year 1 financial statements and disclaim an opinion on the Year 2 financial statements. C. issue an unmodified opinion on the Year 1 financial statements and a qualified opinion on the Year 2 financial statements. D. reissue the previous opinion on the Year 1 financial statements and withdraw from the engagement.

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

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 A. disclose the fact that alternative procedures were used due to client-imposed scope limitation. B. disclose in the opinion paragraph that confirmation of accounts receivable was impracticable. C. not mention the alternative procedures. D. include an other-matter paragraph that discloses the performance of alternative procedures.

C. 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 A. refer to the change in an emphasis-of-matter paragraph. B. explicitly concur that the change is preferred. C. not refer to consistency in the report. D. refer to the change in the opinion paragraph.

C. not refer to consistency in the report.

When other information is presented in a document with audited financial statements, the auditors' report should A. state that the auditor read the other information for inconsistencies and misstatements with the financial statements and identified no discrepancies. B. provide limited assurance as to whether the other information is presented in accordance with generally accepted accounting principles. C. reference the other information only if inconsistencies or material misstatements are identified between this information and the financial statements. D. be expanded to express an opinion that the other information is consistent with the financial statements and not materially misstated.

C. 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 A. make no reference to the predecessor auditors' report. B. reference the predecessor auditors' report in the introductory paragraph, Auditor's Responsibility section, and opinion paragraph. C. reference the predecessor auditors' report in an other-matter paragraph. D. disclaim an opinion on the prior-years' financial statements.

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

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? A. Qualified opinion B. Unmodified opinion C. Disclaimer of opinion D. Adverse opinion

D. Adverse opinion

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? A. Issue a standard (unmodified) report that does not reference any involvement by the component auditors. B. Identify the component auditors by name and present their report along with the group auditors' report. C. Refer to the component auditors' work and disclose the extent of their work in the group auditors' report. D. Disclaim an opinion on the portion of the financial statements examined by the component auditors.

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

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 following phrase(s). "Possible "Except for the effects discontinuance of the of such adjustments" entity's operations" A. Yes Yes B. Yes No C. No Yes D. No No

D. No No

When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the situation in the Auditor's responsibility Notes to the financial section statements A. Yes Yes B. Yes No C. No Yes D. No No

D. No No

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? A. Standard (unmodified) report B. Unmodified opinion with an emphasis-of-matter paragraph C. Qualified opinion based on a circumstance-imposed scope limitation D. Qualified or adverse opinion based on a departure from GAAP

D. Qualified or adverse opinion based on a departure from GAAP

In which of the following circumstances would a qualified opinion not be appropriate? A. A scope limitation prevents the auditors from completing an important auditing procedure. B. The entity has failed to properly disclose going-concern uncertainties. C. An accounting principle at variance with generally accepted accounting principles is used. D. The auditors lack independence with respect to the audited entity.

D. The auditors lack independence with respect to the audited entity.

Which of the following best describes the auditors' responsibility when financial statements are presented in comparative format? A. The auditors' report must only refer to the current year's financial statements. B. The auditors' report must only refer to the prior years' financial statements if they were audited by the current auditor. C. The auditors' report must only refer to the prior years' financial statements if they were audited by either the current auditors or predecessor auditors. D. 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.

D. 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.

Auditors are required to reference consistency in their report when there are changes in A. accounting estimates. B. the format of the Statement of Cash Flows. C. the classification of financial statement amounts. D. accounting principles.

D. accounting principles.

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 A. disclaim an opinion. B. express an adverse opinion. C. qualify the opinion. D. express an unmodified opinion with an emphasis-of-matter paragraph describing the going-concern uncertainty.

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

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 A. issue an updated comparative report indicating the involvement of component auditors. B. explain to the client that comparative financial statements may not be presented under these circumstances. C. express an opinion only on the current year's financial statements and make no reference to the prior-years' statements. D. indicate the substantive reasons for the qualification in the predecessor auditors' opinion.

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

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 A. is considered a qualification of the opinion. B. violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements. C. necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation." D. is appropriate and would not otherwise affect the unmodified opinion.

D. 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 A. is complete with respect to disclosures required by the SEC. B. is fairly stated, in all material respects, in accordance with generally accepted accounting principles. C. is consistent, in all material respects, with the prior-years' summary financial statements. D. is fairly stated, in all material respects, in relation to the complete financial statements.

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

Auditors most likely would issue a disclaimer of opinion on the entity's financial statements because of A. inadequate disclosure of material information. B. the omission of the Statement of Cash Flows. C. a material departure from generally accepted accounting principles. D. management's refusal to furnish written representations.

D. management's refusal to furnish written representations.

SEC registrants' financial statements should be accompanied by all of the following reports except A. auditors' report on internal control over financial reporting. B. management's report on internal control over financial reporting. C. auditors' report on financial statements and related disclosures. D. management's report on financial statements and related disclosures.

D. management's report on financial statements and related disclosures.

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 A. the introductory paragraph and Auditor's Responsibility sections. B. the introductory paragraph only. C. the Auditor's Responsibility section only. D. neither the introductory paragraph nor Auditor's Responsibility section.

D. neither the introductory paragraph nor Auditor's Responsibility section.

The standard (unmodified) report issued in the audit of a nonpublic entity includes a(n) A. management's responsibility section providing a general description of an audit conducted in accordance with the applicable auditing standards. B. introductory paragraph identifying the responsibility of management and auditors in the financial reporting process. C. internal control paragraph indicating the effectiveness of the entity's internal control over financial reporting. D. opinion paragraph providing the auditors' conclusion as to the fair presentation of the financial statements.

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

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 A. unmodified. B. qualified. C. adverse. D. qualified or adverse, depending on the overall materiality and pervasiveness of the GAAP departure.

D. 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 A. perform inquiry and analytical procedures to ascertain whether the other information is reasonable. B. add an emphasis-of-matter paragraph to the auditors' report without modifying the opinion on the financial statements. C. perform the appropriate substantive procedures to corroborate the other information. D. read the other information to determine that it is consistent with the audited financial statements.

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

"As described in Note 5 to the financial statements, General Express changed its statistical method of computing product warranty expense for the year ended December 31, 2014..." is an illustration of a A. consistency change requiring a qualified opinion. B. scope limitation. C. departure from generally accepted accounting principles. D. report with a consistency modification.

D. 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 A. issue a qualified opinion on the entity's financial statements, citing a departure from generally accepted accounting principles. B. consider the matter closed since the other information is not included in the audited financial statements. C. issue an adverse opinion on the entity's financial statements due to inadequate disclosure. D. revise the report on the entity's financial statements to include an other-matter paragraph describing the material inconsistency.

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

When a previously expressed opinion is updated from qualified to unmodified, the auditors' report on comparative financial statements should A. not modify the previously expressed opinion or refer to factors affecting the opinion on the prior-years' financial statements. B. update the opinion expressed on the prior-years' financial statements but provide no explanation for the updated opinion. C. not modify the previously expressed opinion but include a reference to the footnote describing the factors affecting the opinion on the prior-years' financial statements. D. update the previously expressed opinion and explain the reasons for the change, including a reference to the footnote describing the change.

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