Chapter 17 Auditors' Reports

Which of the following accounting changes requires an Emphasis of Matter section regarding consistency in a nonpublic company auditors' report?

A change from LIFO to FIFO for inventory valuation purposes

The auditor's responsibility relating to a GAAS audit is for ______________ on the financial statements.

expressing an option

Responsibility for the preparation and fair presentation of the financial statements rests with the __________

management

Which of the following will result in an Emphasis of Matter section (paragraph) as to consistency in a nonpublic company auditor's report, regardless of whether the item is fully disclosed in the financial statements?

A change from an unacceptable accounting principle to a generally accepted one

Which of the following is least likely to result in an additional paragraph being added to an audit report?

A decision not to confirm accounts receivable. Explanation An emphasis-of-matter paragraph is appropriate when an auditor wishes to emphasize a matter concerning the financial statements, but not a matter concerning the scope of the audit engagement. An emphasis-of-matter paragraph is not appropriate since confirming accounts receivable relates to the scope of the audit.

Select the type of audit report the auditors generally should issue in the situations presented below. Type of audit report may be used once, more than once, or not at all. 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 Explanation Because the auditor does not concur with the change it is a departure from GAAP. Because the amount is material and pervasive, an adverse opinion is appropriate.

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. Explanation The auditor communicates through the auditors' report. Note that the client will include a discussion of the related party transactions in a note to the financial statements.

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 improper type of reporting. Explanation This phrase does not give the reader of the report a clear-cut indication of the auditors' opinion. The phrase appears to modify the opinion paragraph, but is not forceful enough to constitute qualifying language.

The auditors' report should be dated as of the date the:

Auditors have accumulated sufficient appropriate evidence. Explanation The audit report should be dated no earlier than when the auditors have accumulated sufficient appropriate evidence. This date is often the last day of fieldwork.

All nonpublic company audit reports that are qualified should contain a(n) _______________ explaining the details of the qualification

Basis for qualified opinion section (paragraph)

Audit reports issued under GAAS ordinarily are signed with the name of the ____________

CPA firm

Select the type of audit report the auditors generally should issue in the situations presented below. Type of audit report may be used once, more than once, or not at all. 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 Explanation Because the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive, a disclaimer is appropriate.

If a scope limitation is so severe that a qualified opinion is inappropriate, the auditors should issue a(n) _____________

Disclaimer of opinion

When the auditor is unable to determine the amounts associated with noncompliance with a law by client personnel due to a scope limitation, the auditor should issue a(an):

Disclaimer of opinion

An audit report for a public client indicates that the financial statements were prepared in conformity with:

Generally accepted accounting principles (United States). Explanation An audit report for a public client indicates that the financial statements are presented in conformity with generally accepted accounting principles (United States). The PCAOB does not issue accounting standards.

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?

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.

Critical audit matters are most likely to include those matters that:

Involve challenging, subjective or complex auditor judgment. Explanation By definition critical audit matters involve challenging, subjective or complex auditor judgment. While material weaknesses (Are material weaknesses in internal control) and significant risks (Involve significant risks) will often be considered critical audit matters, not all are, and the answers are less complete than answer (Involve challenging, subjective or complex auditor judgment).

The auditors include an Emphasis of Matter section (paragraph) in a nonpublic company audit report with an unmodified opinion in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise. The inclusion of this paragraph:

Is appropriate and wound note negate the unmodified opinion

When financial statements of a nonpublic company are affected by a material departure from generally accepted accounting principles, the auditors should:

Issue an "except for" qualification or an adverse opinion

Auditors report on the consistency of application of accounting principles. Assume that the following list describes changes that have a material effect on a client's financial statements for the current year. Required: For each of the following situations, state whether the audit report should include an emphasis-of-matter (explanatory) paragraph on consistency. Situation: A change in the estimated service lives of previously recorded plant assets based on newly acquired information.

No

Auditors report on the consistency of application of accounting principles. Assume that the following list describes changes that have a material effect on a client's financial statements for the current year. Required: For each of the following situations, state whether the audit report should include an emphasis-of-matter (explanatory) paragraph on consistency. Situation: 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."

No

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. Explanation Reference to the work of a component auditor is not, in itself, a qualification of the group audit report. This reference does not lessen the auditors' collective responsibility. Rather, it merely divides this responsibility among two or more CPA firms.

Select the type of audit report the auditors generally should issue in the situations presented below. Type of audit report may be used once, more than once, or not at all. 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 Explanation A lack of disclosure leads to either a qualified opinion or an adverse opinion. Since the effect is material, but not pervasive, a qualified opinion is appropriate.

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 - No Unmodified with an Additional Paragraph - Yes Explanation Substantial doubt about a client's ability to continue as a going concern results in either an unqualified report with an additional paragraph (or, less frequently, a disclaimer of opinion). A qualified report is not appropriate.

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated?

Qualified - No Adverse - Yes Explanation When a misstatement is pervasive, an adverse opinion is appropriate.

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: Yes Unmodified with Emphasis-of-Matter: No Explanation When an unjustified change in accounting principles occurs, either a qualified or adverse opinion is appropriate as this represents a departure from generally accepted accounting principles. An adverse opinion is appropriate, but not a disclaimer of opinion.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: A client changed the salvage value of certain assets from 5 percent to 10 percent of original cost. The auditor concurs with the change.

Report: Unmodified. This is a change in estimate that does not result in addition of an emphasis-of-matter paragraph on consistency.

An audit report for a public client indicates that the audit was performed in accordance with:

Standards of the Public Company Accounting Oversight Board (United States). Explanation An audit report of a public client indicates that the audit was performed in accordance with standards of the Public Company Accounting Oversight Board (United States).

Select the type of audit report the auditors generally should issue in the situations presented below. Type of audit report may be used once, more than once, or not at all. The auditors decide not to make reference to the report of a component auditor that audited a portion of group financial statements.

Unmodified (unqualified)—standard Explanation When no reference is made to the component auditors an unmodified report is issued.

Items 1 through 5 present various independent factual situations an auditor might encounter in conducting an audit of a nonpublic company. For each situation, assume: The auditor is independent. The auditor previously expressed an unmodified opinion on the prior year's financial statements. The nonpublic audit client is presenting single-year (not comparative) financial statements. The conditions for an unmodified opinion exist unless contradicted in the factual situations. The conditions stated in the factual situations are material. No report modifications are to be made except in response to the factual situation. The Report Alteration part of the problem only addresses the need to add an additional section or a paragraph to an existing section. Other parts of the audit report may be affected that are not examined in this question. Required: Below are the types of opinions the auditor ordinarily would issue and report modifications (if any) relating to an additional paragraph or section that would be necessary. Select as the best answer for each situation (items 1 through 5) the type of opinion and alterations, if any, the auditor would normally select. For each situation (items 1 through 5) also provide the report alteration under PCAOB standards for audits of public companies. 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.

Type of Opinion: Unmodified Alteration for Nonpublic Report: Issue unmodified report without alteration Alteration for Public Report: Issue unmodified report without alteration Explanation (A,M) A report with an unmodified opinion and no alterations is appropriate in circumstances in which a group auditor takes responsibility for the work of a component auditor. (M)

A material departure from generally accepted accounting principles will result in auditor consideration of:

Whether to issue an adverse opinion rather than a qualified opinion. Explanation When the auditors take exception to the application of accounting principles in the client's financial statements, they will issue either a qualified or adverse opinion, depending on whether the misstatement is considered pervasive.

Auditors report on the consistency of application of accounting principles. Assume that the following list describes changes that have a material effect on a client's financial statements for the current year. Required: For each of the following situations, state whether the audit report should include an emphasis-of-matter (explanatory) paragraph on consistency. Situation: 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.

Yes

The auditors issue a qualified opinion or a(n) ___________ opinion, if they consider the disclosure in the client's financial statements to be inadequate.

adverse

When financial statements contain a material departure from generally accepted accounting principles, the auditors qualify their opinion, or they issue a(n) _____________ opinion depending on the materiality of the departure.

adverse

When a nonpublic client elects to change accounting principles from one acceptable principle to another acceptable principle and the auditors agree the change is desirable, they should issue a report with a(n) ______________ opinion.

unmodified

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.

unqualified

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 unmodified opinion

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Reply as to the type(s) of opinion possible for the scenario. In addition: >Unless stated otherwise, assume the matter involved is material. >If the problem does not state that a misstatement (or possible misstatement) is pervasive, assume that it may or may not be pervasive (thus, the appropriate reply may include two possible reports). >Do not read more into the circumstance than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditors wish to emphasize a particular matter. Report Types may be used once, more than once, or not at all. 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.

Either qualified or adverse Explanation A qualified or an adverse opinion is necessary. The CPA firm has acquired sufficient appropriate evidence to the effect that the investments in stock of subsidiary companies are overstated. Note disclosure does not compensate for improper balance sheet presentation.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Reply as to the type(s) of opinion possible for the scenario. In addition: >Unless stated otherwise, assume the matter involved is material. >If the problem does not state that a misstatement (or possible misstatement) is pervasive, assume that it may or may not be pervasive (thus, the appropriate reply may include two possible reports). >Do not read more into the circumstance than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditors wish to emphasize a particular matter. Report Types may be used once, more than once, or not at all. 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.

Either qualified or adverse Explanation Either a qualified or an adverse opinion is required. Valuation of properties at appraised values is not in accordance with generally accepted accounting principles. Since the difference between appraised value and cost is significant, an unmodified (unqualified) opinion would not be appropriate.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Reply as to the type(s) of opinion possible for the scenario. In addition: >Unless stated otherwise, assume the matter involved is material. >If the problem does not state that a misstatement (or possible misstatement) is pervasive, assume that it may or may not be pervasive (thus, the appropriate reply may include two possible reports). >Do not read more into the circumstance than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditors wish to emphasize a particular matter. Report Types may be used once, more than once, or not at all. 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.

Either qualified or disclaimer Explanation A scope restriction results in either a qualified opinion or a disclaimer of opinion. Because we have no information on whether a possible misstatement could pervasively misstatement the financial statements, either type of opinion is possibly appropriate.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Reply as to the type(s) of opinion possible for the scenario. In addition: >Unless stated otherwise, assume the matter involved is material. >If the problem does not state that a misstatement (or possible misstatement) is pervasive, assume that it may or may not be pervasive (thus, the appropriate reply may include two possible reports). >Do not read more into the circumstance than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditors wish to emphasize a particular matter. Report Types may be used once, more than once, or not at all. 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.

Qualified Explanation Because the misstatements could be material, but could not pervasively misstate the financial statements, a qualified opinion is appropriate.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: 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.

Report: Adverse. The lack of disclosure creates a departure from GAAP. Because effects are pervasive (fundamental to users' understanding of the financial statements is a characteristic of pervasiveness), an adverse opinion is appropriate.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: 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.

Report: Other In this situation the auditor's responsibility section and the opinion sections have additional wording added, but there is no emphasis-of-matter paragraph in what remains a report with an unmodified opinion.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: 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.)

Report: Other The successor auditor reports on year 2. But an other-matter paragraph is added indicating (1) the prior-period statements were audited by other auditors, (2) the date and type of report issued and, (3) if the report was other than unmodified, the reasons therefore.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: 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.

Report: Qualified or adverse Because the auditor does not concur with the change, it is treated as a departure from GAAP.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: A client's financial statements follow GAAP except that they do not include a note on a significant related party transaction.

Report: Qualified or adverse This is a departure from GAAP. No information is provided on whether the omission is considered pervasive.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: 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.

Report: Qualified or adverse. Although the auditor believes that the costs approximate replacement costs, they depart from GAAP.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: 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.

Report: Qualified or adverse. Because the amount is estimable, an adjusting entry should be recorded; since it was not, a departure from GAAP exists.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: A company has not followed generally accepted accounting principles in the recording of its leases.

Report: Qualified or adverse. This is a departure from GAAP.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: 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.

Report: Qualified or disclaimer. This is a scope limitation because of the inadequate record retention policies and the auditor's inability to perform other procedures.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: 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.

Report: Qualified or disclaimer. This is a scope limitation.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: 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.

Report: Qualified. Because the auditor does not concur with the change in estimate, it is treated as a departure from GAAP. A qualified report is appropriate because the misstatements are not considered pervasive.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. 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 that 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.

Report: Qualified. The lack of disclosure results in a departure from GAAP. Because the effect is less than pervasive, a qualified opinion is appropriate.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates term-39pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: 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.

Report: Unmodified A change in accounting principles with an immaterial effect (even if expected to become material in the future) does not result in addition of an emphasis-of-matter paragraph on consistency.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: 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.

Report: Unmodified Because the amount is not estimable, no adjusting entry can be recorded. The auditor might choose to emphasize this matter, but the problem's background rules out this treatment.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: A company has not followed generally accepted accounting principles in the recording of its leases. The amounts involved are immaterial.

Report: Unmodified Because the amounts involved are immaterial, no audit report modification is necessary.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: 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.

Report: Unmodified Because the auditor takes responsibility for the work of the component auditor, there is no mention of the component auditor.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: During the audit of a public company the auditors identified a critical audit matter. Sufficient appropriate audit evidence was gathered to indicate the related account was properly stated. The audit report to be issued includes a Critical Audit Matters section that properly describes the matter. Reply as to additional modifications required.

Report: Unmodified No modification is needed beyond the description in the Critical Audit Matters section.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: 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.

Report: Unmodified with an additional paragraph (e.g., emphasis-of-matter or explanatory). This is a situation in which there is substantial doubt about a client's going concern and a disclaimer has been ruled out.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: 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.

Report: Unmodified with an additional paragraph (e.g., emphasis-of-matter or explanatory). This is an emphasis-of-matter situation.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: 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.

Report: Unmodified with an additional paragraph (e.g., emphasis-of-matter or explanatory). This situation involves a lack of consistency.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: A client changed the depreciable life of certain assets from 10 years to 12 years. The auditor concurs with the change.

Report: Unmodified. A proper change in estimate does not require an emphasis-of-matter paragraph.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: 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.)

Report: Unmodified. A report with an unmodified opinion is issued on the second year by the successor auditor. The predecessor auditor's report on the first year is reissued and included.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: 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.

Report: Unmodified. Because the auditor has satisfied herself through performing other procedures, a report with an unmodified opinion is appropriate.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). Do not read more into the circumstances than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all. Situation: 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.

Report: Unmodified. Consistency is a between periods concept; using different inventory valuation methods such as here is acceptable and does not result in an emphasis-of-matter paragraph on consistency.

Under which of the following set of circumstances might the auditors disclaim an opinion?

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

Which of the following is not a difference between the audit report of a public and nonpublic company?

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

Items 1 through 5 present various independent factual situations an auditor might encounter in conducting an audit of a nonpublic company. For each situation, assume: The auditor is independent. The auditor previously expressed an unmodified opinion on the prior year's financial statements. The nonpublic audit client is presenting single-year (not comparative) financial statements. The conditions for an unmodified opinion exist unless contradicted in the factual situations. The conditions stated in the factual situations are material. No report modifications are to be made except in response to the factual situation. The Report Alteration part of the problem only addresses the need to add an additional section or a paragraph to an existing section. Other parts of the audit report may be affected that are not examined in this question. Required: Below are the types of opinions the auditor ordinarily would issue and report modifications (if any) relating to an additional paragraph or section that would be necessary. Select as the best answer for each situation (items 1 through 5) the type of opinion and alterations, if any, the auditor would normally select. For each situation (items 1 through 5) also provide the report alteration under PCAOB standards for audits of public companies. 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.

Type of Opinion: Qualified Alteration for Nonpublic Report: Add a paragraph to the Basis for Opinion section. Alteration for Public Report: Add a paragraph to the Opinion section. Explanation (B,L) Departures from generally accepted accounting principles result in either a qualified opinion or an adverse opinion, based on the pervasiveness of misstatements. Given that the situation suggests that the misstatement cannot be pervasive, a qualified opinion is appropriate. A paragraph is added to the basis for opinion paragraph (which is renamed basis for qualified opinion). (K) A public company audit report with a modified opinion includes the additional paragraph in the Opinion section, following the opinion paragraph.

Items 1 through 5 present various independent factual situations an auditor might encounter in conducting an audit of a nonpublic company. For each situation, assume: The auditor is independent. The auditor previously expressed an unmodified opinion on the prior year's financial statements. The nonpublic audit client is presenting single-year (not comparative) financial statements. The conditions for an unmodified opinion exist unless contradicted in the factual situations. The conditions stated in the factual situations are material. No report modifications are to be made except in response to the factual situation. The Report Alteration part of the problem only addresses the need to add an additional section or a paragraph to an existing section. Other parts of the audit report may be affected that are not examined in this question. Required: Below are the types of opinions the auditor ordinarily would issue and report modifications (if any) relating to an additional paragraph or section that would be necessary. Select as the best answer for each situation (items 1 through 5) the type of opinion and alterations, if any, the auditor would normally select. For each situation (items 1 through 5) also provide the report alteration under PCAOB standards for audits of public companies. 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.

Type of Opinion: Qualified or disclaimer Alteration for Nonpublic Report: Add a paragraph to the Basis for Opinion section. Alteration for Public Report: Add a paragraph to the Opinion section. Explanation 1. (F,L) A situation in which an auditor is unable to obtain audited financial statements for an investee represents a scope restriction. Scope restrictions lead to either a qualified opinion or a disclaimer of opinion. A decision as to whether the auditors should qualify or disclaim the opinion is dependent upon whether pervasive misstatements are possible. A paragraph is added to the basis for opinion paragraph (which is renamed basis for qualified opinion or basis for disclaimer of opinion). (K) A public company audit report with a modified opinion includes the additional paragraph in the Opinion section, following the opinion paragraph.

Items 1 through 5 present various independent factual situations an auditor might encounter in conducting an audit of a nonpublic company. For each situation, assume: The auditor is independent. The auditor previously expressed an unmodified opinion on the prior year's financial statements. The nonpublic audit client is presenting single-year (not comparative) financial statements. The conditions for an unmodified opinion exist unless contradicted in the factual situations. The conditions stated in the factual situations are material. No report modifications are to be made except in response to the factual situation. The Report Alteration part of the problem only addresses the need to add an additional section or a paragraph to an existing section. Other parts of the audit report may be affected that are not examined in this question. Required: Below are the types of opinions the auditor ordinarily would issue and report modifications (if any) relating to an additional paragraph or section that would be necessary. Select as the best answer for each situation (items 1 through 5) the type of opinion and alterations, if any, the auditor would normally select. For each situation (items 1 through 5) also provide the report alteration under PCAOB standards for audits of public companies. 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.

Type of Opinion: Unmodified Alteration for Nonpublic Report: Add a section at a point following the Basis for Opinion section. Alteration for Public Report: Add a section immediately following the Opinion section. Explanation (A,J) Substantial doubt about an entity's ability to continue as a going concern leads to either an unqualified opinion with an emphasis-of-matter paragraph, or a disclaimer. Because the problem indicates a disclaimer will not be issued, only an unqualified opinion with an emphasis-of-matter paragraph is appropriate. A section is added at an appropriate point after the Basis for Opinion section. (I) In public company audit report a Going Concern section is placed immediately following the Opinion section.

Items 1 through 5 present various independent factual situations an auditor might encounter in conducting an audit of a nonpublic company. For each situation, assume: The auditor is independent. The auditor previously expressed an unmodified opinion on the prior year's financial statements. The nonpublic audit client is presenting single-year (not comparative) financial statements. The conditions for an unmodified opinion exist unless contradicted in the factual situations. The conditions stated in the factual situations are material. No report modifications are to be made except in response to the factual situation. The Report Alteration part of the problem only addresses the need to add an additional section or a paragraph to an existing section. Other parts of the audit report may be affected that are not examined in this question. Required: Below are the types of opinions the auditor ordinarily would issue and report modifications (if any) relating to an additional paragraph or section that would be necessary. Select as the best answer for each situation (items 1 through 5) the type of opinion and alterations, if any, the auditor would normally select. For each situation (items 1 through 5) also provide the report alteration under PCAOB standards for audits of public companies. 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.

Type of Opinion: Unmodified Alteration for Nonpublic Report: Add a section at a point following the Basis for Opinion section. Alteration for Public Report: Add a section immediately following the Opinion section. Explanation (A,J) When an auditor agrees with a change in accounting principles, a lack of consistency results in an unmodified opinion with an emphasis-of-matter paragraph (section) at an appropriate point following the Basis for Opinion section. (I) In public company audit report a paragraph indicating a lack of consistent application of accounting principles is placed immediately following the Opinion section.

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Reply as to the type(s) of opinion possible for the scenario. In addition: >Unless stated otherwise, assume the matter involved is material. >If the problem does not state that a misstatement (or possible misstatement) is pervasive, assume that it may or may not be pervasive (thus, the appropriate reply may include two possible reports). >Do not read more into the circumstance than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditors wish to emphasize a particular matter. Report Types may be used once, more than once, or not at all. 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.

Unmodified Explanation An unmodified should be issued.

Select the type of audit report the auditors generally should issue in the situations presented below. Type of audit report may be used once, more than once, or not at all. 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 (unqualified)—with an additional section (paragraph) (e.g., Emphasis of Matter, Explanatory) Explanation Since the auditor concurs that the change is desirable, an unmodified opinion with an emphasis-of-matter (explanatory, per PCAOB) paragraph is appropriate.

Auditors report on the consistency of application of accounting principles. Assume that the following list describes changes that have a material effect on a client's financial statements for the current year. Required: For each of the following situations, state whether the audit report should include an emphasis-of-matter (explanatory) paragraph on consistency. Situation: A change from direct costing to full absorption costing for inventory valuation.

Yes

Auditors report on the consistency of application of accounting principles. Assume that the following list describes changes that have a material effect on a client's financial statements for the current year. Required: For each of the following situations, state whether the audit report should include an emphasis-of-matter (explanatory) paragraph on consistency. Situation: A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing.

Yes

Auditors report on the consistency of application of accounting principles. Assume that the following list describes changes that have a material effect on a client's financial statements for the current year. Required: For each of the following situations, state whether the audit report should include an emphasis-of-matter (explanatory) paragraph on consistency. Situation: A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction contracts.

Yes

Auditors report on the consistency of application of accounting principles. Assume that the following list describes changes that have a material effect on a client's financial statements for the current year. Required: For each of the following situations, state whether the audit report should include an emphasis-of-matter (explanatory) paragraph on consistency. Situation: Correction of a mathematical error in inventory pricing made in a prior period.

Yes

If the auditors have examined the prior year's financial statements presented for comparative purposes, they should _________ their opinion for any new information.

update