Audit Chapter 17

Critical audit matters are included in a public company audit report with a(n): Adverse Opinion, Disclaimer of Opinion A. Yes Yes B. Yes No C. No Yes D. No No Option A Option B Option C Option D

Option D: No No

Which of the following ordinarily involves the addition of an emphasis-of-matter paragraph to an audit report of a nonpublic company? a. A consistency modification. b. An adverse opinion. c. A qualified opinion. d. Part of the audit has been performed by component auditors.

a. A consistency modification.

The primary responsibility for the adequacy of disclosure in the financial statements of a publicly-held company rests with the: a. partner assigned to the audit engagement. b. management of the company. c. auditor in charge of the field work. d. Securities and Exchange Commission.

b. management of the company.

If the auditors indicate in the report that the opinion is based, in part, on the report of component auditors who were responsible for the audit of part of the total financial statement data, the auditors are: a. in effect qualifying the opinion. b. properly indicating a division of responsibility, and the report should further indicate in an appropriate quantitative form the proportionate responsibility being assumed by each set of auditors. c. taking complete responsible for the work of the other auditors. d. abrogating responsibility to those users who rely on the CPA firm's reputation as a basis for relying on the reported financial statements.

b. properly indicating a division of responsibility, and the report should further indicate in an appropriate quantitative form the proportionate responsibility being assumed by each set of auditors.

For a continuing audit client, when a complete set of financial statements is presented on a comparative basis for two years, the auditors' opinion would refer to: a. Only the current year under audit. b. Either one or both years at the option of the auditors. c. Each of the two years plus the preceding year. d. Each of the years in the two-year period.

d. Each of the years in the two-year period.

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: a. An emphasis-of-matter paragraph to the auditors' report. b. A footnote to the financial statements. c. The body of the financial statements. d. The "summary of significant accounting policies" section of the financial statements.

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

An audit report on a public company is least likely to include a paragraph titled: a. Auditor responsibility b. Basis for Opinion. c. Critical Audit Matters. d. Opinion on the Financial Statements.

a. Auditor responsibility

The auditors include an emphasis-of-matter 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: a. Is appropriate and would not negate the unmodified opinion. b. Is considered a qualification of the opinion. c.Is a violation of generally accepted reporting standards if this information is disclosed in notes to the financial statements. d. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."

a. Is appropriate and would not negate the unmodified opinion.

Which of the following is not correct relating to an audit report for a public company? a. It includes the term "PCAOB Compliant" in the title. b. It refers to standards of the Public Company Accounting Oversight Board. c. It must include the city and state in which it was issued. d. It includes an additional paragraph indicating that the auditors have also issued a report on the client's internal control over financial reporting.

a. It includes the term "PCAOB Compliant" in the title.

In an audit report on combined financial statements, reference to the fact that a portion of the audit was performed by a component auditor is: a. Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms. b. Not in accordance with generally accepted auditing standards. c. A qualification that lessens the collective responsibility of both CPA firms. d. An example of a dual opinion requiring the signatures of both auditors.

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

Your audit of the Abbox Co. reveals that the firm's poor financial condition creates substantial doubt about its ability to continue as a going concern. Assuming that the financial statements have otherwise been prepared in accordance with generally accepted accounting principles and do include proper presentation of the matter, what disclosure should you make of the company's precarious financial position? a. You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes. b. You should issue an adverse opinion on the financial statements. c. You need not insist on any particular disclosure, since the company's poor financial condition is clearly indicated by the financial statements themselves. d. You should provide adequate disclosure and appropriately qualify your opinion because of the uncertainty.

a. You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes.

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: a. An unmodified opinion. b. A disclaimer of opinion. c. An "except for" opinion. d. An improper type of reporting.

d. An improper type of reporting.

A client company has changed its accounting practices during the year, materially affecting its financial statements so as to make them seriously misleading and not in conformity with generally accepted accounting principles. The CPAs examining these financial statements should: a. render an adverse opinion and give reasons. b. modify the opinion with respect to consistency and, in an emphasis-of-matter paragraph, explain the changes and their effects on the net income of the period. c. disclaim an opinion and give reasons. d. modify the opinion with respect to consistency, referring to explanatory notes of the financial statements to fulfill disclosure requirements.

a. render an adverse opinion and give reasons.

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

b. Auditors have accumulated sufficient appropriate evidence.

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

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

A nonpublic company's change in accounting principles that the auditors believe is not justified is likely to result in which of the following types of audit opinions? Qualified/Unmodified with Emphasis-of-Matter(1)YesYes(2)YesNo(3)NoYes(4)NoNo a. Option 1 b. Option 2 c. Option 3 d. Option 4

b. Option 2: Yes, No

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

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

If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows: a. The auditors may still issue an unmodified opinion. b. The auditors should issue a qualified report for the departure from generally accepted accounting principles. c. The auditors should issue a qualified report indicating a scope limitation in that no statement of cash flows is presented. d. The auditors should disclaim an opinion on the overall financial statements.

b. The auditors should issue a qualified report for the departure from generally accepted accounting principles.

Which of the following summarizes auditor reporting responsibility with respect to consistency? a. To give assurance that adequate disclosure will be made so that there will be comparability of financial statements between companies in the same industry. b. To give assurance that users will be informed of the lack of comparability of financial statements between periods due to changes in accounting principles. c. To give assurance that the comparability of financial statements between periods has not been materially affected by any type of change. d. To give assurance only that the same accounting principles have been applied to all similar transactions within each period presented.

b. To give assurance that users will be informed of the lack of comparability of financial statements between periods due to changes in accounting principles.

Jones, CPA, accepts a new client late in Year 5 and therefore had no opportunity to observe the physical inventory taken at December 31, Year 4. Jones found it impossible to obtain evidence by other auditing procedures as to the beginning inventories for Year 5. Jones observed the physical inventory at December 31, Year 5 and completed the audit satisfactorily. The report to be issued should: a. be unmodified. b. be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows. c. be qualified as to all of the statements. d. be a disclaimer of opinion.

b. be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows.

If the auditors believe that related party transactions are not adequately described in the notes to the financial statements, they should: a. disclaim an opinion. b. qualify their opinion or issue an adverse opinion. c. add an emphasis-of-matter paragraph to their unmodified opinion. d. consider more thoroughly the client's going concern status.

b. qualify their opinion or issue an adverse opinion.

Upon the advice of its auditors, Smith Company changed the method of computing depreciation from the straight-line method to an accelerated method with a material effect upon the financial statements. The auditors' report: a. must be qualified for the accounting change. b. should include an additional paragraph highlighting the accounting change. c. should contain modification of the opinion paragraph. d. should be a standard unmodified report.

b. should include an additional paragraph highlighting the accounting change.

An auditors' opinion exception arising from a limitation on the scope of the audit should be explained in: a. a note to the financial statements. b. the auditors' report. c. both a note to the financial statements and the auditors' report. d. the mandatory adjusting entry whenever such a scope limitation occurs.

b. the auditors' report.

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

c. A decision not to confirm accounts receivable.

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

c. A separate basis for modification paragraph (section).

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

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

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

c. Generally accepted accounting principles (United States)

Which of the following is not an acceptable financial reporting framework? a. Cash basis. b. International accounting standards basis. c. Generally accepted auditing standards basis. d. Tax basis.

c. Generally accepted auditing standards basis.

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated? Qualified/Adverse(1) Yes, Yes(2) Yes, No(3) No, Yes(4) No, No a. Option 1 b. Option 2 c. Option 3 d. Option 4

c. Option 3: No, Yes

When the matter is properly disclosed in the financial statements of a nonpublic company, the likely result of substantial doubt about the ability of the client to continue as a going concern is the issuance of which of the following audit opinions? Qualified/Unmodified with Emphasis-of-Matter(1) Yes, Yes(2) Yes, No (3) No, Yes(4) No, No Multiple Choice a. Option 1 b. Option 2 c. Option 3 d. Option 4

c. Option 3: No, Yes

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

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

A note to the financial statements of the First Security Bank indicates that the company self insures itself for the first $500,000 of liability to employees, with liability insurance for the remainder. Based upon this, one would expect the auditors' report to express: a. an adverse opinion. b. a disclaimer of opinion. c. a standard unmodified opinion. d. a qualified opinion.

c. a standard unmodified opinion.

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

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

When reporting on comparative financial statements where the financial statements of the prior period have been examined by a predecessor auditor whose report is not presented, the successor auditor should indicate in the report: a. The reasons why the predecessor auditor's report is not presented. b. The identity of the predecessor auditor who examined the financial statements of the prior year. c. Whether the predecessor auditor's review of the current year's financial statements revealed any matter that might have a material effect on the successor auditor's opinion. d. The type of opinion expressed by the predecessor auditor.

d. The type of opinion expressed by the predecessor auditor.

When an adverse opinion is expressed, the opinion paragraph should include a direct reference to: a. a note to the financial statements which discusses the basis for the opinion. b. the paragraph that describes management's responsibilities. c. the consistency or lack of consistency in the application of generally accepted accounting principles. d. a separate paragraph that discusses the basis for the opinion expressed.

d. a separate paragraph that discusses the basis for the opinion expressed.