Auditing Chapter 17, Chapter 17, ATG 457 CH 17, HW - Chapter 17, Chapter 17, Auditing Chapter 17

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Which of the following is not an acceptable financial reporting framework? (A) Cash basis. (B) Generally accepted auditing standards basis. (C) Tax basis. (D) International accounting standards basis.

(B) Generally accepted auditing standards basis.

The primary responsibility for the adequacy of disclosure in the financial statements of a publicly-held company rests with the: (A) auditor in charge of the field work. (B) Securities and Exchange Commission. (C) partner assigned to the audit engagement. (D) management of the company.

(D) management of the company.

A client changed the depreciable life of certain assets from 10 years to 12 years. The auditor concurs with the change.

1. Unmodified—standard.

A client changed the method it uses to calculate postemployment benefits from one acceptable method to another. The effect of the change is immaterial this year but is expected to be material in the future.

1. Unmodified—standard.

A client changed the salvage value of certain assets from 5 percent to 10 percent of original cost. The auditor concurs with the change.

1. Unmodified—standard.

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.)

1. Unmodified—standard.

A client uses the specific identification method of accounting for valuable items in inventory, and LIFO for less valuable items. The auditor concurs that this is a reasonable practice.

1. Unmodified—standard.

A company has not followed generally accepted accounting principles in the recording of its leases. The amounts involved are immaterial.

1. Unmodified—standard.

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.

1. Unmodified—standard.

A client's financial statements follow GAAP except that they do not include a note on a significant related party transaction.

7. Qualified or adverse.

In auditing the long-term investments account of a new client, an auditor finds that a large contingent liability exists that is material to the consolidated company. It is probable that this contingent liability will be resolved with a material loss in the future, and this amount is reasonably estimable as $2,000,000. Although no adjusting entry has been made, the client has provided a note to the financial statements that describes the matter in detail and includes the $2,000,000 estimate in that note.

7. Qualified or adverse.

A lawyer who refuses to provide appropriate information for a case that has been settled creates this circumstance for the auditor. a. scope limitation b. uncertainty c. lack of opinion

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.

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

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

Match the audit report with its description. a. Make reference to component auditors b. Make no reference to component auditors 1. Group auditor takes full responsibility for the entire audit 2. Shared responsibility opinion between the group auditor and the component auditor

A - 2, B - 1

Which of the following accounting changes requires an emphasis-of-matter paragraph regarding consistency in a nonpublic company auditors' report? A change in the estimated useful lives of a class of fixed assets. A write-off of a patent because future benefits do not appear to exist. A change from the straight-line method of depreciation to an accelerated method for a class of fixed assets. A change in calculating bad debt expense from one percent to two percent of credit sales.

A change from the straight-line method of depreciation to an accelerated method for a class of fixed assets.

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

A consistency modification.

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

A decision not to confirm accounts receivable.

Substantial doubt about the client's ability to continue as a going concern exist. This substantial doubt is not properly disclosed in the financial statement notes. The auditor will not issue a disclaimer of opinion.

A qualified opinion/ An adverse opinion.

The financial statements contain a departure from generally accepted accounting principles.

A qualified opinion/ An adverse opinion.

The financial statements reflect a change from one generally accounting principles to another generally accepted accounting principle. The auditor does not consider the new principle preferable to the previous one.

A qualified opinion/ An adverse opinion.

independent registered

A standard audit report for a public company mist include " report of ___ ___ Public Accounting Firm" in the title

Auditors evaluate changes in accounting principles to determine if: (Select all that apply) a. Method of accounting for effect of change is in conformity with GAAP b. Management has justified the new accounting principle is preferable c. Accounting principle is consistent with the prior year d. Newly adopted principle is generally accepted

A, B, D

Modified opinions are required when there is: (Select all that apply) a. Departure from GAAP b. Component auditors that audit a subsidiary c. Scope limitation d. Change in accounting principle

A, C

For scope limitations that have a material but not pervasive effect on the FS, auditors should issue a report that includes modifications to: (Select all that apply) a. opinion paragraph b. auditor's responsibility paragraph c. management's responsibility d. additional basis for modification paragraph

A, D

A(n) _____ opinion is appropriate if a material misstatement is considered pervasive.

Adverse

A(n) __________ opinion states the FS are not presented in conformity with GAAP.

Adverse

Report Type: 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 & pervasive.

Adverse

The client has changed from LIFO to FIFO for inventory valuation purposes; the auditors do not concur with this change. The effect is considered material and pervasive.

Adverse

A scope restriction is least likely to result in a(an): Qualified opinion. Disclaimer of opinion. Adverse opinion. Standard unmodified opinion.

Adverse opinion.

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. A footnote to the financial statements. The body of the financial statements. The "summary of significant accounting policies" section of the financial statements.

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

Assume that the opinion paragraph of an auditors' report begins as follows: "With the explanation given in Note 6, . . . the financial statements referred to above present fairly . . ." This is: An unmodified opinion. A disclaimer of opinion. An "except for" opinion. An improper type of reporting.

An improper type of reporting

The auditors wish to emphasize in the report a subsequent event described in the notes to the financial statements.

An unmodified opinion with an additional paragraph (e.g., emphasis of a matter paragraph)./ An unmodified opinion with an additional paragraph (e.g., emphasis of a matter paragraph).

The financial statements reflect a change from one generally accounting principles to another generally accepted accounting principle. The auditor considers the new principle preferable to the previous one.

An unmodified opinion with an additional paragraph (e.g., emphasis of a matter paragraph)./ An unmodified opinion with an additional paragraph (e.g., emphasis of a matter paragraph).

The company changed the lives of some of its fixed assets—the auditor finds the new lives reasonable.

An unmodified opinion, standard form/ An unmodified opinion, standard form.

A 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 a. Yes Yes b. Yes No c. No Yes d. No 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).

To evaluate consistent application of GAAP when reporting on only the current period, auditors should consider the current period under audit and: a. preceding five periods b. preceding period c. preceding two periods

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 emphasis-of-matter paragraph highlighting the accounting change. c. should be a standard unmodified report. d. should contain modification of the opinion paragraph.

Sufficient appropriate audit evidence is obtained when: (Select all that apply) a. the engagement letter is obtained from management b. FS are prepared c. all audit documentation has been reviewed

B, C

Disclosure requirements come from pronouncements issued by: (Select all that apply) a. PCAOB b. FASB c. AICPA d. GASB

B, D

When auditors determine a change in accounting principle is not appropriate, the auditors can issue: (Select all that apply) a. Unmodified opinion with emphasis of matter paragraph b. Qualified opinion c. Disclaimer of opinion d. Adverse opinion

B, D

If auditors have substantial doubt about a company's ability to continue as a going concern and management's disclosures are materially inadequate, the appropriate report is a(n): (Select all that apply) a. Disclaimer of opinion b. Adverse opinion c. Unmodified opinion with an emphasis of matter d. Qualified opinion

B, D (inadequate disclosure = departure from GAAP)

An emphasis-of-matter paragraph for all but group audits should be included where in relation to the opinion paragraph? a. included in opinion paragraph b. before opinion paragraph c. following opinion paragraph

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

Auditors that are unable to obtain sufficient appropriate audit evidence can issue a(n): (Select all that apply) a. Unmodified opinion b. Adverse opinion c. Qualified opinion d. Disclaimer of opinion

C, D

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

CPA firm

The Basis for Opinion section should begin with a statement that the financial statements are the responsibility of management. (Correct or Incorrect)

Correct

The change in accounting principles should not be referred to in the opinion paragraph—delete that sentence. (Correct or Incorrect)

Correct

Publicly owned companies are required to include in their annual reports: a. statements of retained earnings for the last two years b. statements of cash flows for the last two years c. statements of income for the last two years d. balance sheets for each of the last two years

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 consistency or lack of consistency in the application of generally accepted accounting principles. c. the paragraph that describes management's responsibilities. d. a separate paragraph that discusses the basis for the opinion expressed.

5. "As discussed in Note 4 to the financial statements, in 20X5 the entity elected to change the estimated life of a number of its plant assets. We concur with this change."

Delete entire paragraph.

4. "and subject to the accounting change described in the Emphasis of Matter paragraph"

Delete the text.

¨It is acceptable to express an unqualified opinion on one statement while expressing a qualified or adverse on the others

Different Opinions on Different Financial Statements (B/S, I/S,etc)

Auditors _____ an opinion when they are unable to form an opinion.

Disclaim

Type of Report: Auditors determine that the possible effects on the financial statements of the inability to obtain sufficient evidence (i.e. a scope limitation) could be both material and pervasive.

Disclaimer

Type of Report: The scope of the auditors' examination is restricted and material and pervasive.

Disclaimer

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.

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 adverse

Report Type: 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

Report Type: 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

T or F: The auditors are not allowed to change their opinion on financial statements that were reported on in prior years.

False

The Change in Accounting Principles paragraph should include the dollar effect of the change. (Correct or Incorrect)

Incorrect

The report's title is incorrect as it should not include the word "independent." (Correct or Incorrect)

Incorrect

The sentence should state generally accepted auditing standards of the PCAOB. (Correct or Incorrect)

Incorrect

This disclosure also must include the name of the engagement partner. (Correct or Incorrect)

Incorrect

When critical matters exist, the two related paragraphs (this and the following paragraph) should immediately follow the opinion paragraph. (Correct or Incorrect)

Incorrect

When an auditor does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should: Issue an unmodified opinion, but disclose elsewhere in the report this departure from a customary procedure. Issue an unmodified opinion with no reference to this omission. Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables. Issue an adverse opinion.

Issue an unmodified opinion with no reference to this omission.

A change in the estimated service lives of previously recorded plant assets based on newly acquired information. (Yes or No)

A change in the estimated service lives of previously recorded plant assets based on newly acquired information. Should the audit report include an emphasis-of-matter paragraph on consistency?

A going concern is to be evaluated for a period not to exceed _________ beyond the date of the financial statements.

One year

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) Yes Yes (2) Yes No (3) No Yes (4) No No Option 1 Option 2 Option 3 Option 4

Option 2

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 Option 1 Option 2 Option 3 Option 4

Option 3

only be reported for the period being audited

PCAOB required that critical audit matters (CAMs):

Auditors should use separate __________ to describe emphasis-of-matter items and basis for modifications of the audit report.

Paragraphs

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

Report Type: The auditors believe that the F.S. have been presented in conformity with GAAP in all respects, except that a loss contingency that should be disclosed through a note to the F.S. is not included. While they consider this a material omission, they do not believe it pervasively affects the F.S.

Qualified

Type of Report: The financial statements contain a material departure from generally accepted accounting principles.

Qualified

Type of Report: The scope of the auditors' examination is restricted and material.

Qualified

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 Opinions/ Report Alteration)

Qualified or disclaimer/ Add a basis-for-modification paragraph—prior to opinion paragraph.

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 Opinions/ Report Alteration)

Qualified/ Add a basis-for-modification paragraph—prior to opinion paragraph.

¨GAAP departures that are Material (but not pervasive) ¨Change in accounting principles where auditors disagree and they are material ¨Scope limitations that are not pervasive

Qualified/Modified

2. "Sam Best, President"

Replace with "Board of Directors of Keystone"

1. "Certified Public Accountant's Report"

Replace with "Independent Auditor's Report"

7. "February 6, 20X6."

Replace with "January 31, 20X6, except for Note 7, as to which the date is February 2, 20X6."

¨Report covers both years ¨Can express different opinions on different years ¨If prior period audited by another (predecessor) CPA firm ¡Current year opinion only covers years the CPA firm audited. ¡For financial statements audited by predecessor auditor either: úPredecessor auditor reissues report with original date, or úCurrent auditor refers to report of other auditor.

Reporting on Comparative Financial Statements

3. "Basis for Qualified Opinion: The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. If these lease obligations were capitalized, property would be increased by $3,500,000, long-term debt by $3,500,000, and retained earnings by $500,000 as of December 31, 20X5. Additionally, net income would be increased by $500,000 and earnings per share would be increased by $1.12 for the year then ended."

Retain the original text.

6. "Adams, Barnes & Co."

Retain the original text.

Client changed salvage values for number of fixed assets. Salvage values are realistic. What type of report is appropriate to issue?

Standard unmodified report; just a change in estimate

The unmodified standard audit report of a nonpublic company does not explicitly state that: The financial statements are the responsibility of the company's management. The audit was conducted in accordance with accounting principles generally accepted in the United States of America. The auditors believe that the audit provides a reasonable basis for their opinion. An audit includes evaluating the appropriateness of accounting policies used.

The audit was conducted in accordance with accounting principles generally accepted in the United States of America.

properally disclose info required by GAAP

The purpose of notes to fin statements is to

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

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

A PCAOB public company audit report indicates that the audit was performed in accordance with PCAOB standards. T/F

True

T or F: The term material may be defined as "sufficiently important to influence decisions made by reasonable users of financial statements.''

True

T/F: A standard unmodified audit report does not mention consistency of application of accounting principles.

True

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 Opinions/ Report Alteration)

Unmodified/ Add an emphasis-of-matter paragraph—after opinion paragraph.

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—standard report

If auditors encounter a scope limitation but perform alternative procedures and obtain sufficient appropriate audit evidence, auditors should issue a(n) __________ report.

Unqualified

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 or No)

Yes

Should an emphasis-of-matter paragraph on consistency be included in the report? Correction of a mathematical error in inventory pricing made in a prior period.

Yes

Unmodified? Additional paragraph? Reliance upon component auditors.

Yes, no

Unmodified? Additional paragraph? A change to an accounting principle that the auditor considers desirable.

Yes, yes

Unmodified? Additional paragraph? The emphasis-of-matter.

Yes, yes

A change to an accounting principle that the auditor considers desirable.

Yes/ Yes

Emphasis of a matter

Yes/ Yes

Reliance upon component auditors

Yes/No

scope

a qualified opinion is issued when auditors are unable to obtain suff appropriate audit evidence on which to base the opinion bc of an___ limitation

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

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

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: an adverse opinion. a disclaimer of opinion. a standard unmodified opinion. a qualified opinion.

a standard unmodified opinion.

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

a. qualify their opinion or issue an adverse opinion.

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

-Financial statements do not present fairly the financial position, results of operations, and cash flows of client in conformity with GAAP -Material and pervasive departures from GAAP -Auditor believes departure causes financial statements taken as a whole to be misleading

adverse opinion

standard

auditors cannot issue the ___ report for an audit if there are material departures from GAAP in the fin statements.

- newly adopted principle is generally accepted -the method of accounting for the effect of the change is in conformity w/ GAAP -the disclosures related to the change are adequate -management has justified that the new acc principle is preferable

auditors evaluate changes in accounting principles to determine if:

adverse

auditors issue an___ opinion when the fin stat are not fairly presented in conformity with GAAP

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

b. Auditors have accumulated sufficient evidence.

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

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

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

A 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: Y/N Unmodified w/ EOM: Y/N a. Yes & Yes b. Yes & No c. No & Yes d. No & No

b. Yes & No

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 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. c. be unmodified. d. be qualified as to all of the statements.

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.

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

basis for modification paragraph (or basis for qualified opinion paragraph)

Which of the following is least likely to result in inclusion of an emphasis-of-matter paragraph in 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.

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

c. Generally accepted auditing standards basis.

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.

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

c. management of the company.

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. 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. b. modify the opinion with respect to consistency, referring to explanatory notes of the financial statements to fulfill disclosure requirements. c. disclaim an opinion and give reasons. d. render an adverse opinion and give reasons.

d. render an adverse opinion and give reasons.

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. should be a standard unmodified report. b. must be qualified for the accounting change. c. should contain modification of the opinion paragraph. d. should include an additional emphasis-of-matter paragraph highlighting the accounting change.

d. should include an additional emphasis-of-matter paragraph highlighting the accounting change.

¨Scope limitations that are material and pervasive ¨Significant Going concern issues

disclaimer

-Auditor has no opinion -Issued whenever the auditor is unable to form an opinion as to fairness of financial statements -Circumstances resulting in a disclaimer are those in which the possible misstatements are material and pervasive. --Multiple uncertainties may also lead to a disclaimer -Not an alternative to adverse opinion

disclaimer of opinion

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

disclaimer of opinion

GAAP assumes that a company is a going concern. - assumption that the company will continue to operate for a reasonable period of time how long is reasonable period of time? year from the days of issuance of the FS

emphasis of matter- going concern

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

expressing an opinion

basis... opinion

for a nonpublic company a qualified departure from GAAP requires an___ for modification paragraph and changes to the ___ paragraph.

standard unmodified report

group auditors that make no ref to the component auditors should issue an:

component

group financial statements are those of a company that consists of more than one ___

-qualified opinion -adverse opinion

if auditors have substantial doubt about a company's ability to continue as a going concern and managements disclosure are materially inadequate the appropriate audit report is an

GAAP

in the US, fin. statements are most frequently prepared following this general purpose framework

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

management of the company.

1) Material departure from GAAP in the client's financial statements 2) Material scope limitation 3) Conditions, although not departures from GAAP, about which the readers of the financial statements should be informed

modification of the auditors standard report

A disclaimer of opinion states that due to a significant scope limitation, the auditors were unable to form an opinion or did not form an opinion on the financial statements.

modified opinion-disclaimer

An adverse opinion states that the financial statements are not presented fairly in conformity with generally accepted accounting principles.

modified opinions- adverse

A qualified opinion states that the financial statements are presented fairly in conformity with generally accepted accounting principles "EXCEPT FOR" the effects of some matter.

modified opinions-qualified

disclaimer of

multiple uncertainties that cause the auditor to conclude its not possible to form an opinion on the fin statements may make an ___ opinion appropriate

disclaimer of

multiple uncertainties that cause the auditors to conclude it's not possible to form an opinion of the financial statements may make an ___ opinion appropriate.

Who can define Pervasive? Pervasive: Inclusive...all throughout. (Can't just tear off the mold and eat the bread.) •Not confined to specific accounts or items on the FS •Fundamental to users •Could be a substantial proportion of the FS

pervasive

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: in effect qualifying the opinion. 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. taking complete responsible for the work of the other auditors. abrogating responsibility to those users who rely on the CPA firm's reputation as a basis for relying on the reported financial statements.

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.

bal sheet for each of the last 2 years

publicly owned companies are required to include in their annual reports:

-Departure from GAAP --Immaterial - unmodified --Material - qualified --Material and pervasive—Adverse -Misstatements become pervasive when any one of the following applies: --Not confined to specific accounts. --f confined, they represent a substantial proportion of the financial statements. --In relation to disclosures, they are fundamental to users' understanding of the financial statements.

qualified opinion-departure from GAAP

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

qualify their opinion or issue an adverse opinion.

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: render an adverse opinion and give reasons. 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. disclaim an opinion and give reasons. modify the opinion with respect to consistency, referring to explanatory notes of the financial statements to fulfill disclosure requirements.

render an adverse opinion and give reasons.

- management must evaluate whether there is substantial doubt about the company's ability to continue is existence for a reasonable period of time. - auditor is not required to perform procedures specifically designed to test going concern assumptions but must evaluate the assumption

requirements for emphasis of matter: going concern

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: must be qualified for the accounting change. should include an additional paragraph highlighting the accounting change. should contain modification of the opinion paragraph. should be a standard unmodified report.

should include an additional paragraph highlighting the accounting change.

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: must be qualified for the accounting change. should include an additional paragraph highlighting the accounting change. should contain modification of the opinion paragraph. should be a standard unmodified report.

should include an additional paragraph highlighting the accounting change.

-the fin statements are prepared -all audit doc has been reviewed

sufficient appropriate audit evidence is obtained when:

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

the auditors' report.

auditors have responsibility to perform procedures through that date

the date of the audit report is significant bc:

material and pervasive

the decision on whether a scope limitation results in a qualified or disclaimer of opinion on whether misstatements or possibly misstatements are both ___ and ___

the standards of the PCAOB

the standard audit report for audits of public companies should reference

independent

the title for a standard unmodified report for a nonpublic company must include the word ___ to describe the auditors relationship to the client

period

to evaluate consistent application of GAAP when reporting on only the current period, auditors should consider the current period under audit and the preceding:

UM-standard report this report may be issued only when the auditors have obtained sufficient appropriate audit evidence to conclude the fin statements are not misstated and there is no need to alter the report

types of reports with unmodified opinions

unmodified opinion- w/ an emphasis of matter paragraph to emphasize a matter that is appropriately presented in the financial statements. ex: going concern matter or a change in accounting principle

types of reports with unmodified opinions

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

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

update

-adverse opinion -qualified opinion

when auditors determine a change in accounting principle is not appropriate, the auditors can issue an:

going concern

when auditors have concern about a company's ability to continue as an ___ ___, they should consider whether managements plans for dealing with the conditions are likely to mitigate the problem.

unmodified ... standard

when the auditors have obtained suff appropriate audit evidence to conclude the fin statements, taken as a whole, are not materially misstated and there is no need to disclose additional info, they will issue an ___ opinion using an ___ report

the auditors

whose responsibility is the audit report

An auditors' opinion exception arising from a limitation on the scope of the audit should be explained in: (A) both a note to the financial statements and the auditors' report. (B) the auditors' report. (C) a note to the financial statements. (D) the mandatory adjusting entry whenever such a scope limitation occurs.

(B) the auditors' report.

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 need not insist on any particular disclosure, since the company's poor financial condition is clearly indicated by the financial statements themselves. (B) You should issue an adverse opinion on the financial statements. (C) You should provide adequate disclosure and appropriately qualify your opinion because of the uncertainty. (D) 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.

(D) 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.

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.)

10. Other.

An auditor reporting on group financial statements decides not to take responsibility for the work of a component auditor who audited a 70 percent owned subsidiary and issued an unqualified opinion. The total assets and revenues of the subsidiary are 5 percent and 8 percent, respectively, of the total assets and revenues of the entity being audited.

10. Other.

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.

7. Qualified or adverse.

An auditor was hired after year-end and was unable to observe the counting of the year-end inventory. She is unable to apply other procedures to determine whether ending inventory and related information are properly stated.

8. Qualified or disclaimer.

The audit report should be signed with the name of: a. CPA firm b. Individual partner in charge of the audit c. managing partner of firm

The scope of the auditor's examination is restricted and the auditor is NOT ABLE to effectively apply other procedures.

A qualified opinion/ A disclaimer opinion.

Auditors may add an emphasis-of-matter paragraph that refers to a matter that is _________ presented or disclosed.

Appropriately

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated? Qualified Adverse a. Yes Yes b. Yes No c. No Yes d. No No

If substantial doubt about a going concern exists, an ______ paragraph is the most common resolution.

Emphasis of matter

T or F: A disclaimer of opinion may be used as a way to avoid expressing an adverse opinion.

False

T or F: The unique nature of modified opinions makes them desirable to most clients.

False

The auditors are not allowed to change their opinion on financial statements that were reported on in prior years. T/F

False

A standard unmodified audit report does not mention consistency of application of accounting principles. T/F

True

Type of Report: Auditors have doubt about a company's ability to continue as a going concern.

Unmodified opinion with emphasis of matter paragraph

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.

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

management

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 includes an additional paragraph indicating that the auditors have also issued a report on the client's internal control over financial reporting. (C) It refers to standards of the Public Company Accounting Oversight Board. (D) It must include the city and state in which it was issued.

(A) It includes the term "PCAOB Compliant" in the title.

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

(A) a separate paragraph that discusses the basis for the opinion expressed.

What is the objective of auditor reporting responsibilities 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 only that the same accounting principles have been applied to all similar transactions within each period presented. (D) To give assurance that the comparability of financial statements between periods has not been materially affected by any type of change.

(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 qualified as to all of the statements. (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 unmodified. (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 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) taking complete responsible for the work of the other auditors. (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) abrogating responsibility to those users who rely on the CPA firm's reputation as a basis for relying on the reported financial statements. (D) 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.

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) 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. (B) render an adverse opinion and give reasons. (C) modify the opinion with respect to consistency, referring to explanatory notes of the financial statements to fulfill disclosure requirements. (D) disclaim an opinion and give reasons.

(B) render an adverse opinion and give reasons.

A note to the financial statements of the First Security Bank indicates that the company self insures itself for the first $100,000 of liability to employees, with liability insurance for the remainder. Based upon this, one would expect the auditors' report to express: (A) a disclaimer of opinion. (B) a qualified opinion. (C) a standard unmodified opinion. (D) an adverse opinion.

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

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) should be a standard unmodified report. (B) should contain modification of the opinion paragraph. (C) must be qualified for the accounting change. (D) should include an additional emphasis-of-matter paragraph highlighting the accounting change.

(D) should include an additional emphasis-of-matter paragraph highlighting the accounting change.

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.

1. Unmodified—standard.

In auditing the long-term investments account of a new client, an auditor finds that a large contingent liability exists that is material to the consolidated company. It is probable that this contingent liability will be resolved with a material loss in the future, but the amount is not estimable. Although no adjusting entry has been made, the client has provided a note to the financial statements that describes the matter in detail.

1. Unmodified—standard.

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.

2. Unmodified with an emphasis-of-matter paragraph.

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.

2. Unmodified with an emphasis-of-matter paragraph.

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.

2. Unmodified with an emphasis-of-matter paragraph.

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.

3. Qualified.

An auditor discovered that a client made illegal political payoffs to a candidate for president of the United States. The auditor was unable to determine the amounts associated with the payoffs because of the client's inadequate record-retention policies. Although there is no likelihood that the financial statements are pervasively misstated, they may be materially misstated. The client refuses to disclose the payoffs in a note to the financial statements.

3. Qualified.

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.

4. Adverse.

A company has not followed generally accepted accounting principles in the recording of its leases.

7. Qualified or adverse.

A company valued its inventory at current replacement cost. Although the auditor believes that the inventory costs do approximate replacement costs, these costs do not approximate any GAAP inventory valuation method.

7. Qualified or adverse.

An auditor discovered that a client made illegal political payoffs to a candidate for president of the United States. The auditor was unable to determine the amounts associated with the payoffs because of the client's inadequate record-retention policies. The client has added a note to the financial statements to describe the illegal payments and has stated that the amounts of the payments are not determinable.

8. Qualified or disclaimer.

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

Auditors retained after the client has taken its beginning inventory count who are unable to obtain sufficient appropriate audit evidence relating to beginning inventory should issue and unmodified opinion on the BS and this opinion on the statement of income, retained earnings, and CF: a. disclaimer of opinion b. qualified opinion c. adverse opinion

For auditors that are reporting on two periods, consistency of GAAP application should be evaluated between the current period and: a. preceding two periods b. preceding period only c. preceding five periods

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 as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows. b. be unmodified. c. be qualified as to all of the statements. d. be a disclaimer of opinion.

The PCAOB audit report includes an additional paragraph indicating: a. auditors also have issued a report on the client's internal control over financial reporting b. more detailed discussion of the responsibility of auditors in PCAOB audit c. auditors are independent of client and board of directors

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 need not insist on any particular disclosure, since the company's poor financial condition is clearly indicated by the financial statements themselves. c. You should issue an adverse opinion on the financial statements. d. You should provide adequate disclosure and appropriately qualify your opinion because of the uncertainty.

Match the type of circumstance with its description. a. Scope limitation b. Uncertainty 1. Audit evidence should be available for an item but it is not 2. Audit evidence for an item will become available at a future date

A - 1, B - 2

Match the form with the purpose. a. S-1 through S-11 b. 10-Q c. 10-K 1. Registration statements for companies planning to issue securities to the public 2. Annual filing of audited FS 3. Quarterly filing of financial information unaudited but reviewed by auditors

A - 1, B - 3, C - 2

Inventory is valued at sales prices which the auditors find, although reasonable, different from the lower of cost or market valuation system.

A qualified opinion/ An adverse opinion.

Which of the following is not explicitly included in an audit report for a nonpublic company? A statement that the auditor believes that the audit provides a reasonable basis for expressing negative assurance. A statement that the auditor's responsibility is to express an opinion on the financial statements. A statement that the financial statements are the responsibility of management. A title with the word "independent."

A statement that the auditor believes that the audit provides a reasonable basis for expressing negative assurance.

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. What type of audit report should be used?

Adverse

Type of Report: A material misstatement is considered pervasive.

Adverse

Type of Report: The client has elected to not follow GAAP.

Adverse

Type of Report: The financial statements contain a material and pervasive departure from generally accepted accounting principles.

Adverse

¨GAAP departures that are material and pervasive ¨Change in accounting principles where auditors disagree and they are material and pervasive

Adverse

Substantial doubt about the client's ability to continue as a going concern exist. This substantial doubt is properly disclosed in the financial statement notes. The auditor will not issue a disclaimer of opinion.

An unmodified opinion with an additional paragraph (e.g., emphasis of a matter paragraph)./ An unmodified opinion with an additional paragraph (e.g., emphasis of a matter paragraph).

The scope of the auditors' examination is restricted and the auditor is able effectively to apply other procedures.

An unmodified opinion, standard form/ An unmodified opinion, standard form.

When performing an audit, the auditors gather evidence to obtain reasonable assurance that the statements are in conformity with GAAP

Audit Report

Which of the following would most likely be an appropriate addressee for an auditor's report? (In order of appropriateness)

Audit committee --> BOD --> Shareholders

"As discussed in Note XX to the FS, the company is a defendant in a lawsuit."

Auditor discretionary circumstances

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

Auditors have accumulated sufficient appropriate evidence.

Auditors who want to restrict the use of a nonpublic company's audit report to management, the board of directors and shareholders should: a. include an emphasis of matter paragraph describing the restriction b. include an other-matter paragraph describing the restriction c. modify audit opinion to restrict use of it

For a client who corrects a material misstatement in the prior year's FS and discloses the correction in the notes, auditors should issue: a. disclaimer opinion b. unmodified opinion with an emphasis of matter paragraph c. qualified opinion with emphasis of matter paragraph

If a client changes depreciation methods but the change is immaterial, the auditor should issue: a. Unmodified opinion with an emphasis of a matter paragraph b. Unmodified opinion c. Qualified opinion d. Disclaimer of opinion

Multiple uncertainties that cause the auditor to conclude it is not possible to form an opinion on the FS, the auditors should issue: a. adverse opinion b. disclaimer of opinion c. qualified opinion d. unmodified opinion

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

This type of opinion is most appropriate for the situation in which the auditor wants to emphasize a matter not presented or disclosed in the FS. a. Unmodified opinion on group FS b. Unmodified opinion with an other-matter paragraph c. Unmodified opinion with an emphasis-of-matter paragraph d. Standard unmodified report

What is the objective of auditor reporting responsibilities 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 only that the same accounting principles have been applied to all similar transactions within each period presented. d. To give assurance that the comparability of financial statements between periods has not been materially affected by any type of change.

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. modify the opinion with respect to consistency, referring to explanatory notes of the financial statements to fulfill disclosure requirements. b. disclaim an opinion and give reasons. c. render an adverse opinion and give reasons. d. 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.

A scope limitation that does not allow the auditors to obtain sufficient appropriate audit evidence for a substantial portion of the FS should result in: a. qualified opinion b. adverse opinion c. disclaimer of opinion

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).

Auditors who want to emphasize significant client transactions with related parties can issue: a. qualified opinion b. qualified opinion with an emphasis of matter paragraph c. unmodified opinion with an emphasis of matter paragraph d. disclaimer of opinion

For comparative FS, the auditor can issue an opinion that covers both years if: a. the audit opinion was unmodified in the prior year b. predecessor auditors issued an unmodified opinion on the prior year c. the prior year was audited by the firm

For departures from GAAP due to omission of information that is material and pervasive, auditors should issue a(n): a. unmodified opinion b. qualified opinion c. adverse opinion

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

In the US, FS are most frequently prepared following this general-purpose framework. a. Tax basis b. GAAS c. GAAP d. IFRS

Modifications to the audit report for a departure from GAAP that is material but not pervasive include a qualification of the opinion paragraph and an additional basis for modification paragraph: a. after the opinion b. anywhere in the report c. before the opinion

When the matter is properly disclosed in the financial statements, 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 a. Yes Yes b. Yes No c. No Yes d. No No

Which of the following accounting changes requires an emphasis of matter paragraph regarding consistency in auditor's report? a. Useful life b. Write off of patent c. Change in depreciation from straight-line to accelerated d. Change in calculating bad debt expense from 1% to 2%

Group auditors need to obtain an understanding of whether __________ auditors are competent.

Component

When an auditor of a nonpublic company has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the date the financial statements will be released (1/26/X2), the auditor's responsibility includes: Preparing prospective financial information to verify whether management's plans can be effectively implemented. Projecting conditions and events from one year prior to this year's date (12/31/X0) to 12/31/X1. Issuing an adverse or negative assurance opinion, depending upon materiality, due to the possible effects on the financial statements. Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.

Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.

The point should say communicated to the audit committee. (Correct or Incorrect)

Correct

The report also must be addressed to the board of directors. (Correct or Incorrect)

Correct

The report should be dated as of February 12, the date on which sufficient appropriate audit evidence was obtained. (Correct or Incorrect)

Correct

A note to the financial statements of the First Security Bank indicates that the company self insures itself for the first $100,000 of liability to employees, with liability insurance for the remainder. Based upon this, one would expect the auditors' report to express: a. a qualified opinion. b. a disclaimer of opinion. c. an adverse opinion. d. a standard unmodified opinion.

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.

FS disclosures regarding the firm's going concern status include all of the following except: a. pertinent conditions and events giving rise to substantial doubt b. management's evaluation and plan for dealing with the conditions c. possible discontinuance of operations d. audit procedures performed to identify and review going concern status

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. abrogating responsibility to those users who rely on the CPA firm's reputation as a basis for relying on the reported financial statements. c. taking complete responsible for the work of the other auditors. d. 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.

Disclaimer

Report Type: Client-imposed restrictions significantly limit the scope of the auditor's procedures, and they are unable to obtain sufficient appropriate evidence - the possible effects on the F.S. of undetected misstatements, if any, could be both material & pervasive.

Disclaimer

Changes in accounting estimates ______ result in an explanatory paragraph.

Do not

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

Report Type: Slade Company has material investments in stocks of subsidiary companies. Stocks ofthe subsidiary companies are actively traded in the market. Management insists that allinvestments be carried at original costs, and the CPA firm is satisfied that the originalcosts are accurate. The CPA firm believes that the client will never ultimately realize asubstantial portion of the investments because the market value is much lower than thecost; the client has fully disclosed the facts in notes to the financial statements.

Either qualified or adverse

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

When there is significant doubt as to the ability to continue as a going concern, a(n) _________ paragraph may be added.

Emphasis of matter

Limitations on the scope of an audit may create a situation in which the auditors are unable to obtain sufficient ________.

Evidence

The Rotter Company, a nonpublic company, changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading due to pervasive misstatements. The change (including its dollar effect) has been described in the notes to the 20X4 statements. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should: Express an adverse opinion with the basis for modification paragraph disclosing the reason (the accounting change) for the opinion. Express an unmodified opinion with an emphasis-of-matter paragraph and disclose the accounting change from 20X3 and its effect on the financial statements. Disclaim an opinion and explain all of the reasons therefore. Express an adverse opinion regarding the 20X4 financial statements, without a basis for modification paragraph since the reason will be included in the notes to the statements.

Express an adverse opinion with the basis for modification paragraph disclosing the reason (the accounting change) for the opinion.

A USA nonpublic company audit report indicates that the audit was performed in accordance with "generally accepted accounting principles." T/F

False

A qualified opinion for a departure from GAAP ordinarily indicates that a portion of the financial statements do not follow GAAP and disclaims an opinion on the other parts of the financial statements. T/F

False

A qualified opinion is appropriate when a departure from generally accepted accounting principles is material enough to deserve mention in the auditors' report, but not material enough to call for expression of a disclaimer of opinion. T/F

False

A scope limitation during an audit will result in either a qualified or adverse opinion, depending upon the pervasiveness of the misstatement T/F

False

Audit reports for group audit engagements are considered to be qualified reports. T/F

False

Emphasis-of-matter paragraphs in nonpublic company audit reports are potentially appropriate in all reports except those with unmodified opinions. T/F

False

If a company is faced with any uncertainty such as the prospect of a strike, the auditors should issue a qualified or adverse opinion. T/F

False

T or F: A "Basis for Qualified Opinion" section is ordinarily placed immediately following the introductory paragraph in audit reports with qualified or adverse opinions.

False

T or F: A USA nonpublic company audit report indicates that the audit was performed in accordance with "generally accepted accounting principles."

False

T or F: A scope limitation during an audit will result in either a qualified or adverse opinion, depending upon the pervasiveness of the misstatement.

False

T or F: Audit reports for group audit engagements are considered to be qualified reports.

False

T or F: Emphasis-of-matter paragraphs are potentially appropriate in all reports except those with unmodified opinions.

False

T or F: If a company is faced with any uncertainty such as the prospect of a strike or the possible imposition of wage and price controls, the auditors should issue a qualified or adverse opinion.

False

T or F: The auditors should generally issue a qualified opinion if circumstances involved make it impossible for them to observe the physical inventory or to confirm accounts receivable, even when sufficient appropriate audit evidence has been gathered using alternate procedures.

False

T or F: When a client omits notes to audited financial statements, the auditor should add an emphasis-of-matter section to the report indicating such omission and issue an unmodified report.

False

T/F: A USA nonpublic company audit report indicates that the audit was performed in accordance with "generally accepted accounting principles."

False

T/F: Audit reports for group audit engagements are considered to be qualified reports.

False

T/F: If a company is faced with any uncertainty such as the prospect of a strike or the possible imposition of wage and price controls, the auditors should issue a qualified or adverse opinion.

False

T/F: The auditors are not allowed to change their opinion on financial statements that were reported on in prior years.

False

T/F: The auditors should generally issue a qualified opinion if circumstances involved make it impossible for them to observe the physical inventory or to confirm accounts receivable, even when sufficient appropriate audit evidence has been gathered using alternate procedures.

False

The auditors should generally issue a qualified opinion if circumstances involved make it impossible for them to observe the physical inventory or to confirm accounts receivable, even when sufficient appropriate audit evidence has been gathered using alternate procedures. T/F

False

The unique nature of modified opinions makes them desirable to most clients. T/F

False

When a client omits notes to audited financial statements, the auditor should add an emphasis-of-matter section to the report indicating such omission and issue an unmodified report. T/F

False

T or F: A qualified opinion is appropriate when a departure from generally accepted accounting principles is material enough to deserve mention in the auditors' report, but not material enough to call for expression of a disclaimer of opinion.

False - Adverse

An emphasis-of-matter paragraph always _______ the opinion paragraph.

Follows

Form AP must be filed with the PCAOB with ___ days of the date the audit report is first included in a doc filed with the SEC.

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

Generally accepted accounting principles (United States).

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

Generally accepted auditing standards basis.

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

Generally accepted auditing standards basis.

When auditors have concern about a company's ability to continue as a(n) __________ __________, they should consider whether management's plans for dealing with the conditions are likely to mitigate the problem.

Going concern

"The accompanying consolidated FS have been prepared assuming the company will continue as a going concern, but there is substantial doubt about its ability to continue as a going concern."

Going concern opinion

-auditors resp section - opinion section

In a shared resp report, the sections of the audit report that should be modified are the:

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? Such assumption of responsibility violates the profession's standards. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements. 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. CPA firm A should normally qualify its audit report on the basis of the scope limitation involved when another CPA firm is involved.

In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements.

The title for a standard unmodified report for a nonpublic company must include the word __________ to describe the auditors relationship to the client.

Independent

When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should: Issue an unmodified opinion with a basis for modification paragraph. Withdraw from the engagement. Issue an "except for" qualification or an adverse opinion. Issue an "except for" qualification or a disclaimer of opinion.

Issue an "except for" qualification or an adverse opinion.

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

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

Qualified opinions are issued when the financial statements are ________ misstated.

Materially

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." (Yes or No)

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." Should the audit report include an emphasis-of-matter paragraph on consistency?

Should an emphasis-of-matter paragraph on consistency be included in the report? A change in the estimated service lives of previously recorded plant assets based on newly acquired information.

Should an emphasis-of-matter paragraph on consistency be included in the report? 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."

Unmodified? Additional paragraph? A departure from GAAP.

No, yes

Unmodified? Additional paragraph? A scope limitation.

No, yes

A departure from GAAP

No/Yes

A scope limitation

No/Yes

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

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

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 Option 1 Option 2 Option 3 Option 4

Option 3

"As discussed in Note XX to the FS, the company adopted SFAS XXX as of December 31, 20XX. Our opinion is not modified with respect to this standard."

Principles not consistently applied

When a client declines to disclose essential information in the financial statements or notes, the auditor of the financial statements should: Provide the information in the audit report, if practicable, and qualify the opinion because of a limitation on the scope of the audit. Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP. Issue a disclaimer of opinion because the client has interfered with the auditor's function of assessing the adequacy of disclosure. Issue an unmodified opinion, but inform the reader by including the omitted information in the audit report.

Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.

Report Type: London Company has material investments in stocks of subsidiary companies. Stocks ofthe subsidiary companies are not actively traded in the market, and the CPA firm'sengagement does not extend to any subsidiary company. The CPA firm is able todetermine that all investments are carried at original cost, but has no real idea of marketvalue. Although the difference between cost and market could be material, it could nothave a pervasive effect on the overall financial statements.

Qualified

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

scope limitations * imposed by circumstances ** important accounting records destroyed * due to nature audit **engaged too late in yr to observe clients beginning inventory * imposed by client **client refused to allow auditors to send confirmations to customers ** often results in a disclaimer or opposed to a qualification

Scope Limitations(Qualified or Disclaimer Opinions)

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

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

If group auditors make no reference to component auditors whose work they have relied on as basis for their report. Auditors are doing what?

Taking responsibility for the work

auditors also have issued a report on the clients internal control over fin reporting

The PCAOB audit report includes an additional paragraph indicating:

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

A change in accounting principle from one generally accepted accounting principle to another normally would not prevent the issuance of an unmodified audit opinion, provided the effects of the change are set forth in a note to the financial statements and the change is justified. T/F

True

A qualified opinion that is issued because of a departure from generally accepted accounting principles should contain a separate section explaining the departure and its effects. T/F

True

An adverse opinion is an opinion that the financial statements are not presented fairly in accordance with generally accepted accounting principles. T/F

True

For most American corporations, a Form S-1 must be filed with the SEC if a U.S. company is planning to issue securities to the public. T/F

True

No emphasis-of-matter paragraph is added to a nonpublic company audit report when the group auditor chooses not to rely upon the component auditor. T/F

True

Substantial doubt about a nonpublic client's ability to remain a going concern ordinarily results in a report with an unmodified opinion with an emphasis-of-matter paragraph or a disclaimer of opinion when the doubt is properly disclosed in the financial statements. T/F

True

T or F: A PCAOB public company audit report indicates that the audit was performed in accordance with PCAOB standards.

True

T or F: A change in accounting principle from one generally accepted accounting principle to another normally would not prevent the issuance of an unmodified audit opinion, provided the effects of the change are set forth in a note to the financial statements and the change is justified.

True

T or F: A qualified opinion that is issued because of a departure from generally accepted accounting principles should contain a separate section explaining the departure and its effects.

True

T or F: A standard unmodified audit report does not mention consistency of application of accounting principles.

True

T or F: An adverse opinion is an opinion that the financial statements are not presented fairly in accordance with generally accepted accounting principles.

True

T or F: For most American corporations, a Form S-1 must be filed with the SEC if a U.S. company is planning to issue securities to the public.

True

T or F: No emphasis-of-matter paragraph is added to an audit report when the group auditor chooses not to rely upon the component auditor.

True

T or F: Substantial doubt about a client's ability to remain a going concern ordinarily results in a report with an unmodified opinion with an emphasis-of-matter paragraph or a disclaimer of opinion when the doubt is properly disclosed in the financial statements.

True

T/F: An adverse opinion is an opinion that the financial statements are not presented fairly in accordance with generally accepted accounting principles.

True

The term material may be defined as "sufficiently important to influence decisions made by reasonable users of financial statements.'' T/F

True

A situation in which conclusive audit evidence concerning the ultimate outcome cannot be gathered because the outcome will occur in the future is called a(n) __________.

Uncertainty

Type of Report: Auditors have obtained sufficiently appropriate evidence to conclude that the financial statements are not materially misstated.

Unmodified

Report Type: 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 - emphasis-of-matter paragraph (auditors concur, material but inventory is not a huge part of assets)

The auditors decide not to make reference to the report of a component auditor that audited a portion of group financial statements. What type of audit report should be used?

Unmodified - standard

Report Type: The auditors decide not to make reference to the report of a component auditor that audited a portion of group financial statements.

Unmodified - standard report (does not affect the opinion)

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. What type of audit report should be used?

Unmodified - with an emphasis-of-matter paragraph

Report Type: 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 Standard Report

Type of Report: The auditors wish to emphasize in the report a material and pervasive subsequent event described in the notes to the financial statements.

Unmodified opinion with an emphasis of a matter paragraph

Type of Report: The auditors wish to emphasize in the report a material subsequent event described in the notes to the financial statements.

Unmodified opinion with an emphasis of a matter paragraph

Type of Report: The financial statements reflect a change from one generally accounting principles to another generally accepted accounting principle. The auditor considers the new principle preferable to the previous one. It has a material and pervasive effect.

Unmodified opinion with an emphasis of a matter paragraph

¨Going concern issues that are disclosed ¨Change in accounting principles where auditors agree with the change ¨Related parties ¨Matters that auditors wish to emphasize

Unmodified with Emphasis of a Matter Paragraph

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 Opinions/ Report Alteration)

Unmodified/ Add an emphasis-of-matter paragraph—after opinion paragraph.

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 Opinions/ Report Alteration)

Unmodified/Issue standard report without alteration.

The auditors decide not to make reference to the report of a component auditor that audited a portion of group financial statements.

Unmodified—standard.

Unmodified—with an emphasis-of-matter paragraph.

¨Immaterial GAAP departures are passed on...issue unqualified opinion ¨Change in estimates (like useful lives) ¨Normal business risks...can still issue unqualified opinion ¨Changes in classification—change where expenses were coded between years

Unqualified/Unmodified (no modifications)

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

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

Yes

A change from direct costing to full absorption costing for inventory valuation. (Yes or No)

Yes

A change from direct costing to full absorption costing for inventory valuation. Should the audit report include an emphasis-of-matter paragraph on consistency?

Yes

A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing. (Yes or No)

Yes

A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing. Should the audit report include an emphasis-of-matter paragraph on consistency?

Yes

A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction contracts. (Yes or No)

Yes

A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction contracts. Should the audit report include an emphasis-of-matter paragraph on consistency?

Yes

Correction of a mathematical error in inventory pricing made in a prior period. (Yes or No)

Yes

Correction of a mathematical error in inventory pricing made in a prior period. Should the audit report include an emphasis-of-matter paragraph on consistency?

Yes

Should an emphasis-of-matter paragraph on consistency be included in the report? 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

Should an emphasis-of-matter paragraph on consistency be included in the report? A change from direct costing to full absorption costing for inventory valuation.

Yes

Should an emphasis-of-matter paragraph on consistency be included in the report? A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing.

Yes

Should an emphasis-of-matter paragraph on consistency be included in the report? A change from the completed contract method to the percentageofcompletion method of accounting for longterm construction contracts.

Yes

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? 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. You should issue an adverse opinion on the financial statements. You need not insist on any particular disclosure, since the company's poor financial condition is clearly indicated by the financial statements themselves. You should provide adequate disclosure and appropriately qualify your opinion because of the uncertainty.

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.

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? 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. You should issue an adverse opinion on the financial statements. You need not insist on any particular disclosure, since the company's poor financial condition is clearly indicated by the financial statements themselves. You should provide adequate disclosure and appropriately qualify your opinion because of the uncertainty.

a. A consistency modification.

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

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.

-a risk or uncertainty -significant related party transactions described in a note to the financial statements - the company is a component for a larger business enterprise -accounting matters affecting comparability(other than changes in accounting principles) of financial statements w/ those of the proceeding yr.

additional emphasis of matter situation- auditors discretionary

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.

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: be unmodified. be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows. be qualified as to all of the statements. be a disclaimer of opinion.

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

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: be unmodified. be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows. be qualified as to all of the statements. be a disclaimer of opinion.

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. Generally accepted accounting principles (United States).

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated? Qualified: Y/N Adverse: Y/N a. Yes & Yes b. Yes & No c. No & Yes d. No & No

c. No & Yes

When the matter is properly disclosed in the financial statements, 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: Y/N Unmodified w/ EOM: Y/N a. Yes & Yes b. Yes & No c. No & Yes d. No & No

c. No & Yes

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

c. the auditors' report.

Assume that the opinion paragraph of an auditors' report begins as follows: "With the explanation given in Note 6, . . . the financial statements referred to above present fairly. . ." This is: 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.

company changed accounting principles resulting in a material effect on the financial statements being reported on in accepting the change the auditors should evaluate whether -the newly adopted principle is generally accepted -the method of accounting for the effect of the change is in conformity with GAAP -the disclosure related to the change are adequate -management has justified that the new accounting principle is preferable

emphasis of a matter -lack of consistency

- negative cash flow from operations -defaults on loan agreements -adverse financial ratios - work stoppages -legal proceedings -loss of a key franchise, customer, or supplier - an uninsured catastrophe

emphasis of a matter- going concern conditions indicative of going concern?

As discussed in Note 1 to the Consolidated Financial Statements, the Company changed its method for testing goodwill for impairment. They changed the method as a result of the adoption of the amendments to the FASB Accounting Standards Codification resulting from Accounting Standards Update No. 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." Our opinion is not modified with respect to this matter.

emphasis of matter paragraph- lack of consistency

auditors opinion is not modified w/ respect to the matter NOTE: Ordinarily an unmodified opinion with an emphasis-of-matter paragraph is issued. Alternatively, a disclaimer of opinion may be issued.

Auditing Chapter 17, Chapter 17, ATG 457 CH 17, HW - Chapter 17, Chapter 17, Auditing Chapter 17

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