Chapter 12: Reports on Audited Financial Statements (Connect Practice)

Which of the following statements is not true with respect to the auditors' report on ICFR?

The report will be dated as of the date of the financial statements.

Assume that the audit team encountered the following separate situations when deciding on the report to issue for the current-year financial statements for a nonissuer. 1. The audit team decided that sufficient appropriate evidence could not be obtained to complete the audit of significant investments the entity held in a foreign entity. 2. The entity failed to capitalize lease assets and obligations but explained them fully in the notes to the financial statements. These lease obligations meet the criteria for capitalization under ASC 840. 3. The entity is defending a lawsuit on product liability claims. (Customers allege that power saw safety guards were improperly installed.) All facts about the lawsuit are disclosed in the notes to the financial statements, but the audit team believes the entity should record a loss based on a probable settlement mentioned by the entity's attorneys. 4. The entity hired the audit team after taking inventory on December 31. The accounting records and other evidence are not reliable enough to enable the audit team to have sufficient evidence about the proper inventory amount. 5. The FASB requires the energy company to present supplementary oil and gas reserve information outside the basic financial statements. The audit team finds that this information, which is not required as a part of the basic financial statements, has been omitted. 6. The auditors are group auditors of the parent company, but they reviewed the component auditors' work and reputation, and decided not to take responsibility for the work of the component auditors on three subsidiary companies included in the consolidated financial statements. The component auditors' work amounts to 32 percent of the consolidated assets and 39 percent of the consolidated revenues. 7. The entity changed its depreciation method from units of production to straight line, and its audit team believes the straight-line method is the more appropriate method in the circumstances. The change, fully explained in the notes to the financial statements, has a material effect on the year-to-year comparability of the comparative financial statements. 8. Because the entity has experienced significant operating losses and has had to obtain waivers of debt payment requirements from its lenders, the audit team decides that there is substantial doubt that the entity can continue as a going concern. The entity has fully described all problems in a note in the financial statements and the audit team believes that, while material, the uncertainty is not serious enough to warrant a disclaimer of opinion. Required: a. What kind of opinion should the auditors express in each separate case? b. What other modification(s) or addition(s) to the standard (unmodified) report is (are) required for each separate case?

(a) 1. Qualified or disclaimer of opinion 2. Qualified or adverse opinion 3.Qualified or adverse opinion 4.Qualified or disclaimer of opinion 5.Unmodified opinion 6.Unmodified opinion 7.Unmodified opinion 8.Unmodified opinion b) 1. Opinion Section (Modified); Basis for Opinion Section (Modified); Management's Responsibility for the Financial Statements Section (Not modified); Responsibilities for Audits of the Financial Statements Section (Modified (disclaimer only)); Additional Section or Paragraph (Additional paragraph in basis for opinion section). 2. Opinion Section (Modified); Basis for Opinion Section (Modified); Management's Responsibility for the Financial Statements Section (Not modified); Responsibilities for Audits of the Financial Statements Section (Not Modified); Additional Section or Paragraph (Additional paragraph in basis for opinion section). 3. Opinion Section (Modified); Basis for Opinion Section (Modified); Management's Responsibility for the Financial Statements Section (Not modified); Responsibilities for Audits of the Financial Statements Section (Not Modified); Additional Section or Paragraph (Additional paragraph in basis for opinion section). 4. Opinion Section (Modified); Basis for Opinion Section (Modified); Management's Responsibility for the Financial Statements Section (Not modified); Responsibilities for Audits of the Financial Statements Section (Modified (disclaimer only)); Additional Section or Paragraph (Additional paragraph in basis for opinion section). 5. Opinion Section (Not Modified); Basis for Opinion Section (Not Modified); Management's Responsibility for the Financial Statements Section (Not modified); Responsibilities for Audits of the Financial Statements Section (Not Modified); Additional Section or Paragraph (Other-matter paragraph). 6. Opinion Section (Modified); Basis for Opinion Section (Not Modified); Management's Responsibility for the Financial Statements Section (Not modified); Responsibilities for Audits of the Financial Statements Section (Not Modified); Additional Section or Paragraph (Not included). 7. Opinion Section (Not Modified); Basis for Opinion Section (Not Modified); Management's Responsibility for the Financial Statements Section (Not modified); Responsibilities for Audits of the Financial Statements Section (Not Modified); Additional Section or Paragraph (Emphasis-of-matter paragraph). 8. Opinion Section (Not Modified); Basis for Opinion Section (Not Modified); Management's Responsibility for the Financial Statements Section (Not modified); Responsibilities for Audits of the Financial Statements Section (Not Modified); Additional Section or Paragraph (Going concern section).

Which of the following situations would not ordinarily require auditors to modify the Opinion Section of the report on the financial statements of a non-issuer?

A change from one generally accepted accounting principle to another.

Which of the following is not included in the standard (unmodified) report on the financial statements?

An emphasis-of-matter paragraph commenting on the effect of economic conditions on the entity.

When auditors wish to issue an unmodified opinion but highlight that the entity changed its method of accounting for software development costs, they would most appropriately identify the change in accounting method in which of the following?

An emphasis-of-matter paragraph.

If audit teams are unable to apply an auditing procedure to an account balance or class of transactions, the audit team should first:

Attempt to determine whether alternative auditing procedures are available and can be applied.

Which of the following statements is not true with respect to the audit examinations and reports for issuers and nonissuer?

Auditors are required to express an opinion on internal control in the audit of nonissuers but not in the audit of issuers.

If auditors examine all years presented in comparative form, which of the following best describes their responsibility for prior years' financial statements in their current report?

Auditors should consider whether information has come to their attention that might affect their previous opinion on the prior years' financial statements.

Which report would not be appropriate for a public accounting firm to provide on the ICFR for issuers?

Disclaimer of opinion—significant deficiencies exist.

Which of these situations would require auditors to include an emphasis-of-matter paragraph about consistency to an otherwise unmodified opinion?

Entity changed its inventory costing method from FIFO to LIFO.

A material weakness in ICFR is a situation in which

It is reasonably possible that a material misstatement would not be detected on a timely basis.

In which of the following instances would a qualified opinion be an appropriate option?

Option *Scope Limitation - Yes *GAAP Departure - Yes

In the standard audit report under GAAS, some responsibilities are required to be stated in the report ("explicit"), while other responsibilities are implied ("implicit"). Which combination below correctly identifies the auditors' responsibilities as explicit or implicit?

Option A 1.GAAP - Explicit 2.Consistency - Implicit 3.Going concern - Implicit 4.Opinion - Explicit

If the auditors decide to present separate reports on the entity's financial statements and ICFR in the audit of an issuer, which of the following should be modified to refer to the other report?

Option A (Report on F/S: Yes; Report on ICFR: Yes)

Which of the following sections of the standard report on the financial statements of a nonissuer would be modified in response to a material departure from GAAP?

Option B *Basis for Opinion - Yes *Auditor's Responsibilities - No

The concepts of materiality and pervasiveness are important to audit teams in examinations of financial statements and expressions of opinion on these statements. Required: Consider how the materiality and pervasiveness of each issue below affect the opinion expressed. For each issue you should identify the nature of the issue, the appropriate opinion if the issue is material but not pervasive, and the appropriate opinion if the issue is material and pervasive. (A)The entity prohibits confirmation of accounts receivable, and sufficient and appropriate evidence cannot be obtained using alternative procedures. (B)The entity is a gas and electric utility company that follows the practice of recognizing revenue when it is billed to customers. At the end of the year, amounts earned but not yet billed are not recorded in the accounts or reported in the financial statements. (C)The entity leases buildings for its chain of transmission repair shops under terms that qualify as capital leases under ASC 840. These leases are not capitalized as leased property assets and lease obligations. (D) The entity has lost a lawsuit in federal district court. The case is on appeal in an attempt to reduce the amount of damages awarded to the plaintiffs. No loss amount is recorded.

Part a. - Nature of issue (scope limitation); Material but not pervasive (qualified opinion); Material and Pervasive (disclaimer of opinion). Part b. - Nature of issue (departure from GAAP); Material but not pervasive (qualified opinion); Material and Pervasive (adverse opinion). Part c. - Nature of issue (departure from GAAP); Material but not pervasive (qualified opinion); Material and Pervasive (adverse opinion). Part d. - Nature of issue (departure from GAAP); Material but not pervasive (qualified opinion); Material and Pervasive (adverse opinion).

The audit team found that the entity has not capitalized a material amount of leases in the financial statements. When considering the materiality of this departure from GAAP, the auditors would choose between which reporting options?

Qualified opinion or adverse opinion.

When financial statements are presented in comparative form and another firm audited the prior years' financial statements (but the other firm's report is not presented with the financial statements), the auditors' report on the current-year financial statements should:

Refer to the report and type of opinion issued by the other firm on the prior years' financial statements.

If the opinion issued on prior years' financial statements is no longer appropriate and financial statements are presented in comparative form, the auditors' current report should?

Reference the type of opinion issued on the prior years' financial statements and indicate that the current opinion on these financial statements differs from that expressed in the prior years.

How is the auditors' responsibility for expressing the opinion on financial statements disclosed in the standard (unmodified) report for a nonissuer?

Stated explicitly in the Auditor's Responsibility for the Audit of the Financial Statements Section.

Which of the following information would be included in the Basis for Opinion section of the auditors' report on ICFR if the report is presented separately from the auditors' report on the entity's financial statements of an issuer?

Statements identifying the responsibility of the auditors and management for ICFR.

Under which of the following conditions can a disclaimer of opinion never be issued?

The audit team has determined that the entity uses the NIFO (next-in, first-out) inventory costing method.

Which of the following would not be addressed in an emphasis-of-matter or other-matter paragraph?

The financial statement effects of a material departure from generally accepted accounting principles.

Which of the following is not an element or statement included in the Basis for Opinion Section of a standard (unmodified) report on the financial statements of an issuer?

The tenure of the auditor.

R. Wolfe became the new auditor for Royal Corporation, succeeding C. Mason, who audited the financial statements last year. Wolfe needs to report on Royal's comparative financial statements and should disclose in the report an explanation about other auditors having audited the prior year:

To describe the prior audit and the opinion but not name Mason as the predecessor auditor.

The audit team determined that the entity is suffering financial difficulty and its going-concern status is seriously in doubt. Assuming that the entity adequately disclosed this matter in the financial statements, the auditors must choose between which of the following report alternatives?

Unmodified opinion with a reference to going-concern or disclaimer of opinion.

When a predecessor auditor has examined comparative financial statements and that report is not presented with the successor auditor's report, the successor auditor should:

indicate that comparative year(s) were examined by the predecessor auditor and disclose the type of opinion issued.

When component auditors are involved in the audit of group financial statements, the group auditors may issue a report that:

refers to the component auditors, describes the extent of the component auditors' work, and expresses an unmodified opinion.